The Obama administration is urging federal judges to save its health-care program from absurdity. It’s a little late for that.
The Obamacare law enacted in March 2010 authorizes the federal government to provide tax credits for people who buy health insurance on exchanges established by state governments. It repeatedly refers to exchanges “established by the State,” especially when discussing the tax credits. Because opposition to the law has run higher and longer than its supporters ever expected in early 2010, however, most states have not established exchanges.
The law authorizes the federal government to establish exchanges for states that refrain, but has no provision allowing tax credits to be offered to defray the costs of insurance policies offered on those federal exchanges. Without the tax credits, though, the policies will be prohibitively expensive for so many people that the law will not work.
So the Obama administration’s Internal Revenue Service decided that it would offer tax credits even on the federal exchange, which covers 36 states. The success of the program required going beyond the letter of the law — several hundred billion dollars beyond it over the next decade. That decision, in addition to being legally questionable, created some losers. Various taxes and penalties in the law come into effect only when tax credits are available. Employers will be subject to a penalty for not offering insurance, for example, only if their employees get tax credits on an exchange. What the IRS has done, then, is to declare that it is going to collect taxes that Congress has not authorized in law.
Several lawsuits have challenged the administration on this point. While it has won the early rounds of the cases, the D.C. Circuit Court of Appeals is now considering one of them. It could make it as far as the Supreme Court.
Jonathan Adler and Michael Cannon (the first a law professor at Case Western Reserve University, the second a health-policy analyst at the Cato Institute, both libertarians who have published often in NR) have made the case for the plaintiffs at length in Health Matrix, a journal of law and medicine. They want the courts to rule that the IRS must stop issuing tax credits, and also stop levying taxes and penalties that are tied to them, in the 36 states covered by the federal exchange.
Unlike the challenge to the individual mandate that the Supreme Court decided in 2012, these lawsuits do not question the scope of congressional power. Neither Adler nor Cannon nor any of the other people involved in the lawsuits denies that Congress had the legal power to extend tax credits to people getting insurance from a federal exchange. Congress could, for that matter, have stipulated in the law that for purposes of the law’s treatment of exchanges the federal government would be counted as a state; it did just that with respect to U.S. territories. Supporters of the lawsuit simply observe that Congress did not exercise its power in these ways. They are not challenging any provision of the Obamacare law. They say they are merely asking that the law be applied faithfully.
Fans of Obamacare — the program, that is, and not the text of the law itself — say that denying tax credits for the federal exchanges would spell its end. The basic argument of those fans is that Congress did not intend, and could not have intended, to let a tiny portion of a law render it unworkable. The New Republic quoted one of the lawyers who have backed the administration’s position in these cases: “Congress did not have a death wish for this legislation.” Democratic congressmen and all kinds of interest groups — the insurance companies, the American Hospital Association, AARP — have all filed briefs arguing similarly. So have various health scholars. They say that if judges follow their standard practice of avoiding interpretations of laws that yield absurd results, the IRS will be allowed to keep offering credits on the federal exchanges.
#page#During oral argument in the D.C. Circuit case, Judge A. Raymond Randolph suggested a different way of seeing the issue. “There is an absurdity principle, but there is not a stupidity principle. If the law is just stupid, I don’t think it’s up to the court to save it.”
If Obamacare had proven popular, though, withholding tax credits in states that stayed out of the exchanges would have been neither absurd nor stupid. It would have been an inducement to get the remaining holdout states to establish exchanges. As Adler and Cannon demonstrate, previous Senate bills tied the availability of tax credits to whether states established exchanges. What’s more, some of the legal briefs defending the IRS concede that previous bills put this condition on tax credits. This wasn’t some unthinkable error that somehow made it into the particular bill that ended up becoming law.
The sponsors of the legislation clearly did assume that states would establish exchanges. “By 2014, each state will set up what we’re calling a health-insurance exchange,” said President Obama weeks after signing the law. In August 2012, the New York Times corroborated the point: “When Congress passed legislation to expand coverage two years ago, Mr. Obama and lawmakers assumed that every state would set up its own exchange.’’
There’s another problem with the contention that Congress could not have intended a policy that would not work. The Obamacare law included something called “the Class Act,” which was supposed to help the disabled pay for long-term care. Critics warned that the program could not be viable as designed, so the law included a provision saying it would have to be projected to be solvent for 75 years to continue. The critics, it turned out, were right: The program could not establish solvency, and the administration had to abandon it and then agree to its formal repeal. In other words: Yes, it is entirely conceivable that Congress would enact a law that would prove unworkable; that it would enact a law that could be predicted to be unworkable; and that a specific provision of a law might doom it.
The AARP brief claims that “it is implausible, to say the least, that Congress intended to allow the entire Act to be cannibalized by a state’s choice not to establish its own Exchange.” All of the pro-IRS briefs say that allowing the states to block tax credits by refusing to establish an exchange would frustrate the law’s main goal of expanding coverage, which would be perverse.
Yet nobody disputes that the law allowed states to refuse to expand Medicaid, which also frustrates that goal. The law as enacted tried to get the states to go along with the expansion by denying all Medicaid funds to holdouts. The Supreme Court ruled that the federal government could not use such a blunt instrument: It could withhold some Medicaid funds but not all of them.
The withholding of tax credits from states without exchanges could similarly have been meant to induce them to establish them. In that case the lawmakers just overestimated how powerful an inducement it would be, and eventually the administration, facing a disaster for its policy and political ambitions, used the IRS to nullify the inducement altogether. The states called the feds’ bluff.
Here and there it has been speculated that the inducement could still work if the courts, by applying the law as written, re-create it. If the plaintiffs win, only in a minority of states will people who get insurance from exchanges receive federal help in paying for it. In 36 states people on the exchange will face big bills. That hardship and that disparity might lead these voters to demand that their state governments start an exchange after all — or that Congress amend the law so that they can get their subsidies.
Or the law could just collapse politically. Figuring out how the political system would react to its ruling is not, of course, the courts’ job. Getting the law right is. Congress cannot have intended to let the choices of the IRS cannibalize the rule of law.