The “State Exchange” Case: The Federal Government Shouldn’t Win, but it Probably Will

Patrick Borchers is a contributing writer on Leavenworth St.

PatBorchers01This won’t come as a shock to most of you, but the so-called Patient Protection and Affordable Care Act (“ACA”) is a mess.

It’s not just that it’s a mess in that its mechanisms don’t match the stated goal of universal and affordable care. It’s a mess from a craftsmanship standpoint.

It’s been made messier yet by the Supreme Court. In 2012, the Supreme Court upheld the individual mandate on a tortured rationale. Most people thought that Justice Kennedy would be the swing vote in that case, but I was confident that he’d vote that the individual mandate was beyond Congress’s power. After listening to the tapes of the oral argument, the vote I was worried about was Justice Roberts’s and, as it turned out, with good reason.

Roberts managed to construe the individual mandate as a “tax” (an argument that the other eight Justices rejected) and joining with the Court’s four liberals (who said it was “commerce”) upheld the individual mandate.

The Court, however, struck down the mandatory Medicaid provision as being too coercive. The ACA as written would have required states to cover everyone up to 133% of the poverty line or lose all of their Medicaid funding. The Court ruled that states must be given a choice as to whether to accept the additional Medicaid funding offered and many, including Nebraska, have refused on the ground that even if Congress holds to its promise to cover 90% of the increased cost it will be ruinously expensive.

But buried in the ACA’s thousands of pages of text is a ticking time bomb and it has to do with the “exchanges” on which persons who don’t otherwise have coverage are to buy their policies. The ACA clearly gives states the choice of either creating their own exchange or allowing their residents to buy on the federally created exchange (the notoriously buggy site).

Part and parcel of the ACA’s redistributive economics is that persons between 100% and 400% of the federal poverty line are entitled to gradually diminishing subsidies the closer they get to the 400% ceiling. But the flawed Medicaid aspect of the law makes a mess out of the scheme. For states like Nebraska that have opted out, there are people who don’t qualify for Medicaid and are too poor to receive a subsidy.

But back to the exchanges.

Most states (34 at this point), including Nebraska, have opted not to create their own exchange. Then someone noticed something odd about the subsidies. The ACA says that the subsidies are available to those who are “enrolled in through an Exchange established by the State under section 1311.” But the federal exchange is created by a different provision, section 1321. And the federal exchange makes no mention of subsidies.

So it appears that under the plain language of the ACA the subsidies are only to go to those who signed up under a state exchange created under section 1311. Moreover, there are other apparent downstream consequences, such as the employer mandate disappearing in states that don’t have their own exchange.

The theory advanced by most commentators is that this was just a drafting boo boo born of the fact that the state and federal exchanges appeared in different versions of the bill and that nobody noticed the gap before it went to the President’s desk. However, the talkative Prof. Gruber (remember him of the “stupidity of the American voter” quote?) was filmed saying that it was an intentional strategy to force states to create their own exchanges.

The lower courts, predictably, arrived at conflicting results. The U.S. Court of Appeals for the Fourth Circuit (centered in Richmond, Virginia) applied what I call the “we know what you meant” theory of statutory interpretation and ruled that the subsidies extend to those who signed up on the federal exchange. The U.S. Court of Appeals for the District of Columbia applied what I call the “you’re stuck with what you wrote” theory of statutory interpretation and held that they did not.

A couple of weeks ago, the case was argued before the U.S. Supreme Court. The verbal gymnastics performed by the lawyer for the federal government, egged on by the Court’s four liberals, were something to behold. The government has at least three main theories as to why the subsidies should attach to the federal exchange. First, read “in context” Congress meant to extend the subsidies to the federal exchange, because otherwise the statute would unravel. Second, the reference to “state exchange” isn’t really that – it’s a reference to whatever exchange the state uses (never mind that stuff about “created under section 1311.”) Third, the statute is “ambiguous” and therefore administrative agencies (here the IRS) are entitled to “clarify” the statute through administrative regulations.

It’s clear beyond any doubt that the four liberals will vote with the government. In fact, they left so little chance for challengers’ lawyer to speak that Chief Justice Roberts gave him 10 extra minutes. If I had been the lawyer for the federal government, I think I might’ve just said “what she said,” pointing to Justice Kagan, who ran point for that wing, and sat down.

Conservatives Scalia and Alito pushed back mightily. Justice Scalia was nearly taunting the government’s lawyer daring him to cite to a case where the Supreme Court has “rewritten” a statute to make it make more sense. Justice Thomas, who doesn’t ask questions, is a good bet to vote with Scalia and Alito because Thomas has little patience for others’ mistakes.

Which brings us to Justices Roberts and Kennedy. Roberts, normally an aggressive questioner, didn’t say much. Kennedy was hard on both lawyers. At times he seemed worried that interpreting the statute to only extend subsidies to states with their own exchanges would be unduly coercive, like the Medicaid trap that Congress tried to build. At other junctures he was highly skeptical of the government’s argument that the statute was “ambiguous” and that the IRS could be trusted to fix it.

Roberts’s near silence is hard to interpret.

Predicting the outcome of these cases is difficult. On the one hand, I was very surprised that the Supreme Court agreed to hear the case. It seemed very likely that the full D.C. Circuit would reverse the three judge panel that read the statute literally, which avoid the split in the lower courts and allow the Supreme Court to stay out of it.

But the simple math is that the federal government clearly has four rock solid votes. The challengers have two in Scalia and Alito, and probably a third in Thomas. So the government only needs to get one of Kennedy and Roberts. I hope to be proved wrong, but I think the government will get the vote it needs.


  1. The ACA was always about increasing government’s scope and revenue stream, and nothing more. This will pass, and if I were a betting man, I’d bet that Roberts will cast the deciding vote.

  2. KHDS says:

    1. You have just conceded that the federal appellate courts are completely political on important issues. And you are right.

    2. A non-political court would vote unanimously and construe the statute according to its plain language. Government loses.

    3. I read the transcript. Kagan and Ginsberg were shameful.

  3. Doug Quinn says:

    The real problem is that all three branches of our federal government ignore their sworn adherence to the Constitution and do whatever they “feel” is “right” or “fair”. Or whatever advances their personal agenda.

  4. good post says:

    Obamacare being a “mess from a craftsmanship standpoint” springs from it being created by Democrats who think with heart not head. Democrats chide Republicans for being adept at business, math, and thrift, like snotty teenagers snark at parents for being responsible adults. That means the bigger problem isn’t just Obamacare but that everything that springs from Democratic Party thought is intrinsically workable. If any of their ideas work its by dumb luck.

    Here is a prime example. The 1913 crippling of the USA by Democrats, springing from Husker roots.

    President Woodrow Wilson in 1913 had a two-house Democrat Congress for the first time in 18 years. He signed into law the Un-American INCOME TAX and POPULAR ELECTION OF US SENATORS.

    Wilson was the leading Progressive Democrat who brought to fruition patently Un-American apportioned taxation and the stupidity of all federal lawmaking being entirely chosen by the dumbest people in America; with these initiatives having begun with the Populist OMAHA PLATFORM that morphed into Nebraska’s Democrat William J. Bryan and then into Wilson. — Thanks Nebraska. Your suicidal urge that made a Unicameral still stabs the USA today.

    Democrats love to love their own irrationality. That is masturbatory and sick.

    Take President Wilson. His grandpa settled in Ohio and hated slavery and yet Wilson’s father decided he loved Jesus and also loved owning black people. Wilson’s father moved to the south, bought a bunch of slaves, and set up a Sunday school for the blacks he owned like cattle. Woodrow Wilson’s earliest memory as a child was of him hating Abraham Lincoln worshiping Robert E. Lee.

    The Democratic Party has always loved owning human beings “for their own good” from Jefferson on. They feel that to govern people is to own them and whip them into right belief, just as Woodrow’s Dad’s slave Sunday school and Woodrow himself whipping of US citizens with the federal tyranny of the 17tth and 18th Amendments and then Wilson’s decree establishing the Federal Reserve out of tyranny and nepotism.

    Wilson created the unaccountable Federal Reserve Board and put at its head the Democratic National Committee’s Chairman William McAdoo, who was also Wilson’s own son-in-law. The Fed still has unaccountable power over the US economy. Think Adolph Hitler with a calculator.

  5. Broncobilly says:

    @good post: “Democrats chide Republicans for being adept at business, math, and thrift…” Thanks for the chuckle. Liberals chide you for a lot of things, but probably not “being adept.” Say your piece, but don’t turn a self-compliment into an imaginary compliment from your opponent. You think they’re inept, they think you’re inept.

  6. good post says:

    Bronco. The problem with talking about irrationality to the irrational, in this case the heart-over-head altruistic leftist, is like trying to explain colors to the blind. Or like them trying to explain art to the heartless moneygrubbers who tend to vote Republican. It seems stupid to say the irrational artists and greedy moneygrubbers aren’t adept as their respective aims. But sort all that out and you are left with whichever aim creates policy that provide maximum freedom and prosperity and safety. And is in the eye of the beholder.

    The few businessmen who gravitate to the Democratic Left have either like Gates and Buffett risen above normal human competition or they are people who simply do not recognize that competition is paramount in human nature. They see the cooperative side of people as paramount, which in dire circumstances tends to falls in the pinch to competition. Cooperation is vital. Civilization hangs on it. But it is not entirely safe or motiving for any individual. The key is to have the right mix of competition and altruism, of cooperation and self-interest. Again, eye of the beholder.

    That said, one size rarely fit all. There is a reason why Fine Arts majors are Democrats and Business majors Republicans. Those who can do math and must earn money and save it or lose it, the non-Gates of the real world, they tend to be for free market competition. They are adept at that.

  7. Anonymous says:

    good post, you are doing what quite a few on your side do. Generalize your opponents. Your caricature of Democrats is so far from reality that I wish I hadn’t wasted a minute to respond to it.

  8. E Hines says:

    Kennedy…seemed worried that interpreting the statute to only extend subsidies to states with their own exchanges would be unduly coercive….

    Kennedy was right. The statute’s plain language was intended to be a coercive as it could be: to browbeat the States into building their own exchanges. It’s a political cudgel rather than a directly fiscal one: build your exchange, or explain to your voters why you’re denying them Uncle Sugar’s largesse.

    Thirty-four States had the brains to see through the threat and the stones to face it down.

    Now we’ll see what Kennedy and Roberts have on their sticking places. Although with his utter distortion of the “fairly possible” principle in his ACA ruling in order to generate the outcome he’d determined beforehand, it seems clear to me how he’ll vote on this one.

    Eric Hines

Leave a Reply to KHDS Cancel reply

Your email address will not be published.