Bench Memos

Halbig v. Sebelius, Part Two: When ‘State’ Clearly Means ‘Federal’

This is the second in a series of posts about the Judicial Education Project’s amicus brief in support of the challengers in Halbig v. Sebelius. In Part One, I explained the background of the case and the central issue, namely, whether the IRS may extend the Affordable Care Act (ACA) tax subsidy to health plans purchased under a federally-run Exchange when the statute only says that the credit applies to an Exchange “established by the State.” As I noted last Friday, the IRS says that it may, and the challengers disagree.

The government’s explanation during the rulemaking process was, as such explanations typically are, very general. Aside from asserting that the credit is consistent with statutory language, legislative history, and the overall scheme, the IRS did not explain the precise source of its authority on this issue at the time.

The government’s challenge in this case is to convince the Court that the plain language of the statute means more than it says: that an exchange “established by the State” can also mean an exchange “established by the federal government because a State declined to establish an exchange.”

The government’s lifeline to escape its obvious problems with the text is a case that has become a cornerstone of administrative law: Chevron v. Natural Resources Defense Council.  This case establishes a regime whereby government agencies are given deference in their interpretations of the statutes they administer. 

The Chevron two-step process works like this.  First, a court decides whether a statutory term is ambiguous: whether Congress has “directly spoken to the precise question at issue.”  If the term has an unambiguous meaning – “if the intent of Congress is clear” – the court must give it effect.  If not, the court will proceed to step two of the analysis and defer to a permissible agency interpretation of the statute. 

Before the district court, the government suggested that the statutory language, taken the context of the entire ACA, was clear and required federally-run exchanges to be treated identically with the state exchanges they were “standing in the shoes of”.  The government went on to describe anomalies that would arise within the ACA from accepting the plain meaning of the phrase “established by the State,” invoking legislative history, the law’s purpose, and the ACA’s overall structure.

What is so impressive about the government’s position is that it declares that the case should be resolved at Chevron’s first step – i.e. the government claims the statute is unambiguous. This is truly remarkable: the government says the unambiguous meaning of the statute is that the text shouldn’t be read literally. 

The district court (in the person of Judge Paul J. Friedman, a Clinton appointee) agreed, holding that Section 1321 of the ACA not only allows the federal government to create an Exchange, but also to take the further step of standing in the shoes of “an Exchange established by the State under Section 1311” in all respects, thus allowing issuance of a tax subsidy.

Several consequences flow from the district court’s decision. First, the district court ensured that tax credits would flow to all health insurance purchasers buying their insurance from an Exchange, whether federal or state. This effectively means that the ACA gives no state any incentive to create an Exchange, a result at odds with the text and purpose of the ACA.

Second, by holding that the statute at issue is unambiguous, the district court comes to the head-scratching conclusion that the statute unambiguously means something contrary to its own text.  It would be one thing to make such a holding where the context throughout shows the literal reading to be absurd.  But the statutory context here actually provides good (if not unambiguous) support for the idea that Congress really meant to limit subsidies to State-created exchanges.  For examples, elsewhere in the ACA, Congress explicitly referred to federally-created exchanges with some frequency, and didn’t just lump them in with State-created exchanges.  Treating the terms differently indicates that the omission of federal exchanges from the tax credit language was neither accident nor oversight. Liberal commentators have suggested that the language at issue here was “an obvious drafting error,” but the tax subsidy provision has actually been amended several times since it was originally passed, and Congress never decided to “correct” its instructions.

Third, the district court effectively amended the statute to say “established by the State or by the federal government” by accepting the IRS’s rationale. But as I have noted before, the language of the statute that Congress actually passed, not the IRS’s post hoc rationalization of what would work better, is the best way to understand how the ACA is supposed to work. And that holds true even when a statute, like the ACA, is sloppily drafted, internally inconsistent, or incapable of effecting its stated goals.  As D.C. Circuit Judge Silberman noted recently, “’Emanations from the penumbra’ may once have served to justify constitutional interpretation, but it hasn’t caught on as legitimate statutory interpretation.” Well said.

These are problematic results, and they are sufficient for the Court of Appeals to reverse the district court’s holdings as a matter of law. But there’s much more to say about the stakes in the statutory interpretation issue, which will be the subject of my final post on Halbig v. Sebelius


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