The WasteWatcher: The Staff Blog of Citizens Against Government Waste

What a Week!

The WasteWatcher is the staff blog of Citizens Against Government Waste (CAGW) and the Council for Citizens Against Government Waste (CCAGW). For questions, contact blog@cagw.org.


Last week, important but opposing court opinions were released within hours of each other on two similar cases involving the Affordable Care Act (ACA), often referred to as Obamacare. The U.S. Court of Appeals for the D.C. Circuit released the opinion on Halbig v. Burwell, formally Halbig v. Sebelius, while the U.S. Court of Appeals for the Fourth Circuit released its opinion on King v. Burwell, formally King v. Sebelius. (Because former Health and Human Services Secretary Kathleen Sebelius resigned, newly-appointed Secretary Sylvia Burwell’s name is now used.)

You may have read what CAGW wrote about these cases in a prior blog.

First, a bit of background information. As you probably know, Obamacare has both state-run and federally-run health insurance exchanges. While certainly the congressional authors had hoped that all states would create their own Obamacare exchange, that did not happen. Only 17 states, including the District of Columbia, created their own exchanges. The remaining states either refused to participate or partnered with the federal government. Thus it is the citizens that take part in the federal exchange that would be most directly affected by any future Supreme Court ruling on this matter.

In both cases, the argument revolved around whether the Internal Revenue Service (IRS) had the authority to allow tax-payer funded subsidies for beneficiaries that participate in the federally-run healthcare exchange. The plaintiffs in Halbig v Burwell argued that the IRS could not, based on the language of the law and congressional legislative history. When the IRS wrote the rule allowing subsidies to be distributed to people in the federal exchange, the plaintiffs argued that decision harmed them because tax credit eligibility can trigger penalties on employers and individuals. The plaintiffs in King v Burwell gave similar arguments.

A February 6, 2014 legal brief by Bert Rein, William S. Consovoy, Michael Connolly, and Ilya Shapiro discussed Halbig v Burwell soon after the United States District Court for the District of Columbia had rejected the plaintiffs’ argument and the plaintiffs were in the process of appealing their case before the U.S. Court of Appeals for the D.C. Circuit.

Rein et al note that there are several “deductions, exemptions, and penalties to the federal tax code” to encourage people to buy health insurance.  They write that the “legislation’s Section 1311 provides a generous tax credit for anyone who buys insurance from an insurance exchange ‘established by the State’ – as an incentive for states to create the exchanges.”  When the “IRS issued a rule interpreting § 1311 as also applying to purchases from federal exchanges” the ruling harmed employers with 50 or more employees that have made a decision not to provide health insurance and are fined for every employee that receives a subsidy in a state exchange, in addition to the tax they must pay for not providing insurance.  The authors add, “the ruling also hurts some individuals, such as David Klemencic, a lead plaintiff in one of the lawsuits challenging the IRS’s tax-credit rule. Klemencic lives in a state, West Virginia, that never established an exchange, and for various reasons he doesn’t want to buy any of the insurance options available to him. Because buying insurance would cost him more than 8% of his income, he should be immune from Obamacare’s tax on the decision not to buy insurance.”

The brief’s authors say that when the IRS expanded the subsidy to people in the federal exchange, Klemenic could then afford to purchase insurance at an amount that was low enough to subject him to the tax for not purchasing insurance.  The authors write, “Klemencic and his fellow plaintiffs argue that they face these costs only because the IRS exceeded the scope of its powers by extending a tax credit not authorized by Congress.”

The D.C. Circuit agreed with the plaintiffs argument, writing, “Because we conclude that the ACA unambiguously restricts the section 36B subsidy to insurance purchased on Exchanges 'established by the State,' we reverse the district court and vacate the IRS’s regulation.”

But the U.S. Court of Appeals for the Fourth Circuit said the opposite in its King vs Burwell opinion.  “The plaintiffs contend that the IRS’s interpretation is contrary to the language of the statute, which, they assert, authorizes tax credits only for individuals who purchase insurance on state-run Exchanges.  For reasons [listed in the opinion] we find that the applicable statutory language is ambiguous and subject to multiple interpretations.  Applying deference to the IRS’s determination, however, we uphold the rule as a permissible exercise of the agency’s discretion.  We thus affirm the judgment of the district court.”

Soon after the D.C. Circuit announced its opinion, the Obama Administration declared it would seek an en banc review and would challenge the appeals court ruling.  “We believe that this decision is incorrect, inconsistent with congressional intent, different from previous rulings, and at odds with the goal of the law: to make health care affordable no matter where people live,” said a DoJ spokesperson according to Politico.

Whether the entire D.C. District Circuit takes up the matter is not known at this time but considering most of the judges are Democrat appointees, it is very probable.  If that is the case and they reverse the decision, then there is no conflict between the cases and the Supreme Court would not necessarily have to act.  But the plaintiffs in King v Burwell could also ask for an en banc review and perhaps have their decision reversed, creating conflict again.  Plus, there are two other cases winding their way through the courts that could create conflict concerning the IRS rule.  In any case, most pundits believe ultimately the Supreme Court will weigh in.

Why is Halbig and the other lawsuits so important?  Michael Cannon, of the Cato Institute, and Jonathan Adler, of the Center for Business Law and Regulation at Case Western Reserve University, and who brought the problem with the IRS rule to light, explained why in a Wall Street Journal op-ed on July 22:

Because the ruling forces the Obama administration to implement the Affordable Care Act as written, consumers in 36 states would face the full cost of its overpriced health insurance.  According to one brief filed in the case, overall premiums in those states would be double what they are under the administration’s rewrite, and typical enrollees would see their out-of-pocket payments jump sevenfold.  The resulting backlash against how ObamaCare actually works could finally convince even Democrats to reopen the statute.

At its heart, though, Halbig is not just about ObamaCare.  It is about determining whether the president, like an autocrat, can levy taxes on his own authority.

The president’s defenders often concede that he is doing the opposite of what federal law says.  Yet he claims that he is merely implementing the law as Congress intended.

Days after the Halbig opinion, some enlightening information came to the forefront that will make it difficult for the Obama administration to continue to defend their stance that subsidies are allowed in the federal exchange.  Jonathan Gruber, an economist at MIT, was the chief healthcare adviser to the Obama Administration and helped craft the law.  A video has surfaced, thanks to research by Ryan Radia at the Competitive Enterprise Institute, in which Gruber is giving a speech on January 18, 2012, to Noblis, a nonprofit science, technology, and strategy organization, about the healthcare law.  He states (scroll to 31:25) that people in the federal exchange will not get the tax credits or subsidies even though they help pay the taxes that support Obamacare.  He essentially says he hopes the elected leaders in the states will understand the political problems this scenario would create for them and understand the necessity to create a state-run exchange so their eligible citizens could get a subsidy.

Robert Pear in the July 25 New York Times reported that, “Mr. Gruber backed away from his comments on Friday.  But the remarks embarrassed the White House and could help plaintiffs in court cases challenging the payment of subsidies in 36 states that rely on the federal exchange.”

Pear writes, “In 2009 and 2010, Mr. Gruber was a paid adviser to the administration. The Department of Health and Human Services said in June 2009 that it had awarded a $297,000 contract to him “for technical assistance in evaluating options for national health care reform.” He also provided advice to Democrats in Congress and was an architect of the Massachusetts health care program, a precursor of the federal plan.”

Problem is, another Gruber tape has surfaced.

In addition to the Gruber remarks, which he said before he did not say them, there is a January 11, 2010 letter from Rep. Lloyd Doggett (D-Texas) to former-Speaker Nancy Pelosi (D-Calif), former-Majority Leader Steny Hoyer (D-Md), and the president.  He encourages them to adopt a national exchange, not just state-based exchanges. He says:

The House bill establishes a national insurance exchange, but allows states with the political will and the resources available to establish their own exchanges, as long as the state-based exchange meets the same strong standards as the national health insurance exchange. This approach protects existing state exchanges and allows innovation, while ensuring that consumers enjoy the same coverage and protections afforded in the national exchange...

As you know, the Senate bill does not establish a national health insurance exchange. Instead, each state is required to set up its own exchange. If the state does not set up the exchange, then the Secretary of Health and Human Services is required to set up an exchange for the state.

Doggett is particularly concerned about his home of Texas and believes it will not participate in creating an exchange and therefore a national exchange is needed.  He writes “millions of people will be left no better off than before Congress acted” if the Senate bill becomes law.

Of course, the Senate bill did become law.

If these cases make it to the Supreme Court and a majority of Justices believe that the law says what says and hold up Halbig v Burwell, then citizens in the federal exchange will no longer have access to taxpayer-funded subsidies.  Unless Congress acts, it could cause Obamacare to collapse.

Further information:

Here is a rundown from Jacob Huebert at the Illinois Policy Institute on what to expect in the courts regarding these cases.

If you are interested in following this issue more closely, Michael Cannon has a website about the various lawsuits, which he updates regularly.

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