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Halbig And King: A Simple Case Of IRS Overreach



May 22nd, 2014

On March 25, a three-judge panel of the D.C. Circuit heard oral arguments in Halbig v. Sebelius, one of four lawsuits challenging the legality of implementing certain ACA provisions in the 34 states with federally established health insurance Exchanges. On May 14, a panel of the Fourth Circuit heard arguments in a related case, King v. Sebelius. Rulings in these cases could come at any time.

Washington & Lee University law professor Timothy Jost recently provided commentary on Halbig, King, and two similar cases. Since our research helped to generate these lawsuits, Health Affairs Blog invited us to respond, as we have responded to Jost’s previous commentary on this issue.

The ACA Authorizes Certain Provisions Only in States that Establish Exchanges

The Halbig cases, as we will call them, are simple and straightforward.

Prof. Jost has written, and we agree, that the statutory eligibility rules for the ACA’s premium-assistance tax credits “clearly say” that eligibility “depends on the applicant being enrolled in a qualified health plan ‘through an Exchange established by the State.’” The rules employ that restrictive phrase nine times, without deviation. Since the Act explicitly ties its cost-sharing subsidies, employer-mandate penalties, and (in many cases) individual-mandate penalties to the availability of these tax credits, it therefore also authorizes those provisions only in states that establish Exchanges. Congress simply did not authorize those spending and revenue measures in the 34 states that opted for a federal Exchange.

This condition was not a fluke or a drafting error. Congress routinely conditions individual entitlements to health-insurance subsidies (including refundable tax credits) on state cooperation with federal requirements – see, for example, Medicaid, the State Children’s Health Insurance Program (SCHIP), and the Health Coverage Tax Credit – and the remainder of the ACA and its legislative history are fully consistent with this condition. In the ACA’s legislative history, both Republicans and Democrats introduced legislation conditioning various subsidies on states establishing an Exchange. This brief provides examples.

Of note, the Health, Education, Labor, and Pensions Committee reported to the full Senate a bill that withheld subsidies from a state’s residents for four years if the state failed to establish an Exchange, and permanently withheld Exchange subsidies if the state failed to implement the bill’s employer mandate. The Finance Committee approved and reported to the full Senate the ACA’s language, which clearly, categorically, and permanently withholds tax credits in states that fail to establish an Exchange.

Before the House approved the ACA, a group of House Democrats actually complained about this feature. They likened the Senate-passed ACA’s Exchange provisions to another program that conditions individual entitlements on state action (SCHIP). They warned that hostile states could block their residents from receiving “any benefit” by refusing to establish an Exchange, just as some states denied their residents the benefits of the just-passed Children’s Health Insurance Program Reauthorization Act of 2009 by refusing to participate.

To help overcome such resistance, Prof. Jost and 50 other health policy experts wrote a letter to House Democrats. They agreed the ACA was “imperfect,” yet urged the House to pass it anyway. The House, including each member of the group that complained about the conditional nature of the ACA’s Exchange subsidies, then voted to enact the ACA, including that condition.

The Obama Administration Unilaterally Created a New Entitlement

Despite clear statutory language, in 2011 the Obama administration announced it would implement those subsidies and penalties in states that did not establish Exchanges. It cited no legal authority for its decision, which sparked instant and sustained criticism, from both the public and members of Congress. The nonpartisan Congressional Research Service wrote, “A strictly textual analysis of the plain meaning of the provision would likely lead to the conclusion that the IRS’s authority to issue the premium tax credits is limited only to situations in which the taxpayer is enrolled in a state-established Exchange.”

The administration persevered, and is currently spending billions of dollars to subsidize Exchange enrollees in 34 states — two-thirds of the country — with no legal authority. Those subsidies are an important reason why Exchanges have enrolled 8 million Americans, or whatever the real number is.

The Halbig CasesDo Not Challenge the ACA

The plaintiffs in the Halbig cases are as diverse as two state governments, several private employers, several individual taxpayers, and dozens of public-school systems. They allege that the implementation of these spending and revenue measures in states that did not establish Exchanges is subjecting them to penalties from which they are, by law, exempt.

The plaintiffs are not questioning the constitutionality of any part of the ACA. They are not asking the courts to alter a single jot or tittle of the statute. They are asking the courts to stop the Obama administration from rewriting the statute — to put an end to the unauthorized spending that is subjecting them to penalties that Congress likewise never authorized. The National Federation of Independent Business, the attorneys general of Kansas, Michigan, Nebraska, Oklahoma, Alabama, Georgia, West Virginia, and South Carolina, and various other groups have filed amicus briefs on behalf of the plaintiffs.

Defending the Indefensible

In the hope of finding some legal justification for its actions, the Obama administration and its supporters, including Prof. Jost, have gone on a fishing expedition in the ACA and its legislative history. They have come up dry. The administration’s counter-textual theory of congressional intent finds no support in the statute or legislative history.

But don’t take our word for it. Ask Prof. Jost to identify any statutory provisions or elements of the ACA’s legislative history that “clearly say” Congress intended the ACA to authorize tax credits in federal Exchanges. He cannot. He will instead cite parts of the statute and legislative history that might be compatible with an intent to offer tax credits in federal Exchanges, but that are equally or more compatible with the tax-credit eligibility rules that “clearly” express a contrary intent.

We emphasize: in nearly three years, the administration has not identified a single statutory provision or piece of legislative history indicating that Congress intended the ACA to authorize tax credits in federal Exchanges. Every statutory provision and piece of legislative history the administration’s cites in its defense is fully compatible with the statutory requirement that tax-credit recipients enroll “through an Exchange established by the State.”

The administration’s strongest argument is that Congress could have authorized tax credits in states that did not establish Exchanges, such as by deeming federally established Exchanges to be “established by the State.” But Congress did no such thing.

The Government’s Two Victories

If these cases are as clear as we say, you might ask, why have two federal district courts ruled against the plaintiffs? Good question.

In Halbig and King, two federal judges held that Exchanges established by the federal government are, somehow, “established by the State,” even though Congress never designated them as such. Those rulings are currently on appeal to the D.C. Circuit and 4th Circuit, respectively.

Challenges brought by the attorneys general of Oklahoma (Pruitt v. Sebelius) and Indiana (Indiana v. IRS, whose plaintiffs also include dozens of Indiana school districts) await district-court consideration. (Click here for all briefs and rulings in all four cases.)

Caveat Lector

Health Affairs readers should keep a few facts in mind when reading Prof. Jost’s commentary on this issue.

In mid-2011, when the administration proposed issuing subsidies through federal Exchanges, we were the first to criticize the proposal, and Jost was the first to defend it. From the beginning, he has been dismissive of our arguments to the point of questioning our motives. But he has had to change his story several times, retract claims that turned out to be incorrect, and make numerous concessions to our argument. A sampling:
.

  • In 2011, Jost wrote, “There is no coherent policy reason why Congress would have refused premium tax credits to the citizens of states that ended up with a federal exchange.” When we brought to his attention that in 2009, he himself had proposed, “offering tax subsidies for insurance only in states that complied with federal requirements” as a way for Congress to get states to implement either Exchanges or a public option without “commandeering” the states, Jost rediscovered his own “coherent policy reason.”
  • In 2011, Jost wrote, it “is obvious to anyone who understands the ACA” that this requirement is “a drafting error.” He later backtracked, “I agree with Cannon and Adler that the courts are unlikely to find the ‘established by the state’ language a ‘scrivener’s error.’”
  • Jost claimed that no one – especially not a state – could establish standing to challenge the disputed tax credits. A federal court disagreed, ruling Oklahoma had standing in its capacity as an employer.
  • Jost then claimed that only employers could challenge the tax credits, and even they could not do so before 2015. Federal courts disagreed, ruling that individual taxpayers also had standing.

To his credit, Jost has never retracted his admission that the tax-credit eligibility rules “clearly say” credits are authorized only through state-established Exchanges. That key concession is also worth keeping in mind.

Jost’s Latest Commentary

Jost’s commentary on the D.C. Circuit’s hearing in Halbig likewise relies on gratuitous and uncompelling inferences, makes claims that are contradicted by the statute, and reflects misunderstandings of the law and the facts.

Inferences. Even though the Supreme Court has written that “the best evidence of Congress’s intent is the statutory text,” and even though Jost concedes the ACA “clearly” restricts tax credits to states that establish Exchanges, he still claims Congress “obviously” intended to offer tax credits in states that did not. He again offers no statutory language or legislative history that supports this theory, only bad inferences.

For example, Jost claims (1) that a ruling for the Halbig plaintiffs “would do massive damage” to the ACA, and (2) that “Congress did not intend to create a law that would self-destruct.” From these claims, he infers that Congress could not have intended to confine tax credits to states that establish Exchanges. Logically speaking, if either (1) or (2) were untrue — if a ruling for the plaintiffs would not damage the ACA, or if Congress sometimes does create laws that self-destruct — then Jost’s inference falls apart.

As it happens, (1) is not necessarily true, and (2) is unquestionably false. If states respond to a ruling for the plaintiffs by establishing Exchanges, Halbig’s effect on the ACA would be minimal, and the rule of law would be upheld. Moreover, Congress routinely creates laws that produce unintended consequences, up to and including the law’s self-destruction. We need look no farther than elsewhere in the ACA for an example. When crafting that law’s long-term-care entitlement program (the “CLASS Act”), Congress quite intentionally included a solvency requirement that ultimately destroyed the program.

From his observations that “the provision was only discovered months after the legislation was passed” and “states did not consider it in deciding whether or not to establish exchanges,” Jost infers Congress did not intend what the law “clearly say[s].” Even if we ignore the fact that House Democrats were aware of this provision before they approved the ACA, Jost’s inference crumbles if there are other explanations for these observations that do not contradict the statute. As it happens, there are.

It is hardly strange that citizens would not learn about every feature of a 2,000-page bill until well after Congress passed it. We seem to recall then-House Speaker Nancy Pelosi saying something along those lines. Indeed, a congressional investigation found the IRS itself, which is charged with implementing this part of the statute, didn’t notice this feature for a full year after the ACA became law, and only became aware of it when it was raised by a former Justice Department official and reported in the media.

Finally, if states did not take this condition into account when making their decisions, the most likely reason is that the Obama administration told them it did not exist. It would be completely understandable for states to rely upon a duly promulgated federal regulation when making implementation decisions.

Misstating the law. Related to what states knew and when they knew it, Jost argues that if Congress had conditioned tax credits on states establishing Exchanges, “imposing such a severe penalty without clear notice is unconstitutional.” Aside from all the strained inferences — if states did not understand the law to work this way, then Congress must not have given “clear notice,” thus Congress must not have intended this condition, thus the condition must not exist — Jost badly misstates this important facet of the Supreme Court’s jurisprudence.

First, the Clear Notice Rule is not implicated where, as here, the text of a statute is clear. As Jost admits, the phrase “established by the State under Section 1311” is perfectly clear. Second, as noted above, insofar as states did not receive clear notice it is because the IRS issued a rule erasing the relevant condition. Had the IRS, instead, issued a rule following the plain text of the statute, there would be no question that states had clear notice when deciding whether or not to create exchanges.

Claims contradicted by statute. Jost writes, “States were asked to establish exchanges, but the ACA explicitly established a federal fallback exchange for states that declined to do so, with all of the powers of a state Exchange.” As Jost and the federal government have argued, federal exchanges established under Section 1321 “stand in the shoes” of state exchanges established under Section 1311.

Even if one accepts this argument, it is insufficient to justify the IRS rule. For even if a Section 1321 exchange is equivalent to a Section 1311 exchange, it is still not an exchange “established by the State” as the plain text of Section 1401 requires.

Ignoring Contrary Evidence. Jost writes, “There is not a hint in the voluminous legislative history of the law” that Congress intended to offer subsidies only through state-established Exchanges. Jost ignores the many examples noted above from the ACA’s legislative history where both Democrats and Republicans introduced legislation conditioning subsidies on states establishing Exchanges.

Jost likewise ignores the similarities between the ACA’s tax credits and Health Coverage Tax Credits, another refundable credit Congress conditioned on state action. “I can find no evidence,” he writes, “that Congress modeled the ACA premium tax credit structure after the HCTC program.” If so, he isn’t looking very hard.

HCTCs were introduced in 2002 by the same Senate Finance Committee chairman who wrote the ACA’s tax-credit eligibility rules. They reside almost right next to the ACA’s tax credits in the Internal Revenue Code (Sections 35 & 36B, respectively). Both the HCTC statute and the ACA use a concept called a “coverage month” to define when individuals are eligible for credits. The HCTC’s definition of “coverage months” denies credits to individuals unless their state enacts certain regulations; the ACA’s “clearly” denies credits to individuals unless their state establishes an Exchange.

The non-partisan Congressional Research Service writes, “The HCTC can be claimed for only 10 types of qualified health insurance specified in the statute, 7 of which require state action to become effective.” A judge on the Halbig panel concurred, noting that the HCTC statute “reads almost identically to the statute we [are] arguing about…citizens don’t get any subsidies…unless the state goes through a whole bunch of hoops and enacts a bunch of different laws, and so on and so forth, and if the state doesn’t do it then the people don’t get the money.”

Jost’s claim that “an individual’s receipt of a HCTC is not dependent on states doing anything” is simply mistaken.

Conclusion

Jost and the Obama administration have gone to great lengths to complicate matters, but the issue presented in Halbig is simple and straightforward. Section 1401 of the ACA only authorizes tax credits in exchanges “established by the State under Section 1311.” The IRS, in seeking to authorize tax credits in exchanges that are neither “established by the State” nor established “under Section 1311,” seeks a power Congress explicitly denied the agency. The agency’s actions exceed its authority and are illegal.

In the end, it is as simple as that.

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1 Trackback for “Halbig And King: A Simple Case Of IRS Overreach”

  1. The Halbig Freakout
    July 22nd, 2014 at 12:31 pm

1 Response to “Halbig And King: A Simple Case Of IRS Overreach”

  1. Paul Burns Says:

    Four of the six judges on the two panels that heard Halbig and King disagreed with your arguments. It’s only a matter of time before the D.C. Circuit does the same.

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