Health exchanges, with a side of legalese

by Adrianna McIntyre

The Affordable Care Act survived individual mandate theatrics—by the grace of a single Supreme Court vote—and the contraception kerfuffle is ongoing. Is there another legal tussle on health reform’s horizon? Could be, and it involves the health insurance exchanges that are supposed to be up and running by October 1. The elaborate self-deliberation that follows is probably one of our wonkiest posts to date, so don’t say I didn’t warn you.

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Quick recap on exchanges: These are the online marketplaces where people will be able shop for insurance plans if their employer doesn’t offer coverage. Importantly, many people are poised to receive tax credits (also referred to as “subsidies”) to help pay for their insurance premiums; the credits are based on income and administered through the IRS. States had until mid-December to decide whether they wanted to independently run an exchange; that’s what 17 states and DC are doing. Last Friday was the deadline for the remaining states to choose between “partnership” or “federally facilitated” exchanges. Federally-facilitated exchanges will be run by HHS; partnership exchanges delegate some authority to the states while leaving “more complex duties” to HHS. The chart above, courtesy of the eternally helpful Advisory Board Company, breaks it all down: seven states opted into a partnership, and the remaining 26 will default to federal exchanges (thanks to Don Taylor and Dan Diamond for the correction: the graphic has been updated).

The problem? It’s been argued that only state-run exchanges qualify for the tax credits intended to make insurance affordable. Identified as a glitch by Michael Cannon and Jonathan Adler shortly after the Supreme Court decision, this received considerable press last November (see National Review Online, The New Republic, and The Wall Street Journal). If you’re like me and a glutton for punishment wonky enough to want something more detailed than op-eds, peruse Cannon and Adler’s 90-page paper on the matter. Just some light reading for your spare time.

The (much debated) argument goes like this: if the tax credits were created to nudge states into creating their own exchanges (or else face the ire of their citizens), they are limited to state-run exchanges. There are separate sections of the Affordable Care Act referring to the state exchanges (Section 1311) and federal exchanges (Section 1321). The part of the law that deals with tax credits only refers back to Section 1311 (state exchanges) and not at all to Section 1321. A “plain-language” interpretation—based on the text of the law itself, without considering ambiguities of Congressional intent—seems to indicate that credits would thus be withheld from federally-facilitated and partnership exchanges. For nuanced reasons I won’t get into here, blocking the tax credits would also partially block the individual mandate and entirely block the employer penalties for not providing insurance in states with federal exchanges. That deeply upsets the “three-legged stool” design of the health law.

So how have we dealt with this so far? The IRS issued a final rule stating that tax credits would be issued to all exchanges: state, federal, partnership, regional, whatever label you please. In eyes of the Treasury Department, this is “consistent with the intent of the law,” because Section 1321 uses the words “such Exchange” to refer back to the state exchanges of Section 1311. Am I saying that this whole ordeal might balance on two words? Yeah, pretty much. Whether or not the IRS had the authority to “interpret” the law is part of what’s at issue.

Congressional intent is the sticky wicket. The entire debate appears to hinge on whether Congress intended provide tax credits to federally-facilitated exchanges. If that’s what Congress intended, the IRS isn’t taking liberties in interpretation. If it’s not what they intended, we have problems, which is precisely what Cannon and Adler try to demonstrate in their paper. I take issue with a few of their points.

  • Senator Max Baucus – Cannon points to this C-SPAN clip of Sen. Baucus—a key architect of the ACA—asserting that the tail end of the video includes an admission that the law conditioned tax credits on state participation. I think I hear something different than he does. I hear that the federal government doesn’t have jurisdiction to change state coverage laws—what it does have is the authority to use taxing/spending power to incentivize individual citizens to shop on exchanges (of any type)—but if insurance companies want those citizens as customers, they have to comply with the conditions of the exchange.  According to Cannon, “These are the only comments anyone has unearthed from ObamaCare’s legislative history that bear directly on the question of whether Congress intended to authorize tax credits in federal Exchanges.” If the validity of tax credits in federally-facilitated exchanges boils down to Congressional intent, it’s going to be a thorny matter to prove on either side. 
  • Earlier versions of the law – In the absence of further footage or transcripts or other clear evidence of Congressional intent, Cannon and Adler (fairly) turn to earlier iterations of the bill that were more or less combined to create the ACA. Two antecedent bills are at issue: the “Finance bill” and the “HELP bill.”
    • The Finance bill has nearly identical language to the Affordable Care Act, and this fact is cited as evidence that “restricting tax credits to state-run exchanges was a deliberate policy choice.” I don’t find an argument rooted in this circular logic compelling; if one bill’s ambiguity merits 90 pages of legal rationale, pointing to an older version exact same ambiguity hardly serves to clarify.
    • The HELP bill also provided for state and federal exchanges, and had provisions that could explicitly withhold—or even revoke—tax credits from states that did not comply with certain requirements. However, the only time tax credits would be withheld from federal exchanges in the HELP bill was if the states refused to enact a provision related to state/local government employees. The ACA dropped that provision; I think it’s a stretch to say it dropped the intent to offer tax credits on federal exchanges. If anything, the HELP bill is evidence in favor of Congressional intent to provide tax credits on federal exchanges.

“Absurd results” defense aside—which claims that Congress couldn’t have intended this because it would encourage adverse selection and destabilize the insurance market, undermining all that the ACA holds dear—I don’t really see a massive federal incentive to encourage state-run exchanges over federally-facilitated ones. I get the arguments against a single national exchange: in brief, it would be a nightmare to set uniform standards given state regulation of insurance. But the biggest financial hurdle to state-level exchanges is start-up costs; surely it’s cheaper for HHS to design a single adaptable blueprint than provide unlimited funding for each state to start from scratch.  Secretary Sebelius is authorized to do exactly that.  As I see it, the Congressional incentive here was political; it’s an appeal to the federalist sensibilities of more conservative states who wouldn’t be able to stomach “government takeover” of their insurance markets—the very same states who are proving uncooperative and defaulting to federally coordinated exchanges.

I’m not a lawyer or a law student—just the proud owner of a well-highlighted health law casebook—so I don’t pretend to have the answers. I find the Jost and Bagenstos rebuttals compelling (due diligence: Cannon responds to those here and here), but I’d love to see a more full-throated legal defense; I’m hardly in a position to be citing or interpreting legal precedents myself.  Oklahoma has already filed a lawsuit over the exchanges, and employers and individuals may have standing to do so in 2014. According to a professor whose opinion I respect, the critics might have a better case than they’ve generally received credit for… so I’m settling in for a game of wait-and-see.

If you made it to the end of this, I probably owe you baked goods or something. Since most of our readers don’t live in Ann Arbor (and since you evidently enjoy this minutiae almost as much as me) I’ll leave you with this video debate between Cannon, Adler and Jost, which probably articulates point/counterpoint with more grace than my rambling here.

Adrianna is a graduate student in public policy and public health at the University of Michigan.
Follow her on Twitter @onceuponA or subscribe to the blog.


One thought on “Health exchanges, with a side of legalese

  1. 6291989 says:

    What an interesting article! It is a whole new level of wonkiness, but this is such an important issue! Without becoming too much of a nerd myself, I would like to comment on your take on the legislative interpretation that the courts will presumably be doing with respect to these issues:

    1) There are canons of construction that are meant to be used in discovering legislative intent. The use of textualism over purposivism would occur with a conservative majority, and the inquiry would end at the text of the statute, under which interpretation Cannon/Adler would likely win. It is only under a purposivist interpretation the Cannon/Adler interpretation would have to clear more than textual hurdles, as you indicated in your article. However,

    2) It is not necessary for the state (OK in this case) to demonstrate that no congressman who voted for the ACA interpreted the bill to mean that 1321 Exchanges were legally interchangeable with 1311 Exchanges, but only to show that some congressmen believed that they were NOT interchangeable, which was in fact the case as Cannon noted. Cannon/Adler show that there were questions about the constitutionality of the Exchanges on federalist grounds, and that Senators were persuaded to vote for the ACA with the understanding that states would have the ability to choose whether or not to participate. A strained reading of the Baucus transcript could go either way, but the general ambiguity demonstrates that there was no clear congressional understanding of the language, and in fact many congressmen never had the opportunity to even read all of it. With this in mind, the congressional record is not a strong place to begin an attempt to dismantle OK’s case.

    3) The Finance Committee’s decision NOT to change the language of the provision could be construed as an intentional choice NOT to make the language reflect the possibility that 1321 and 1311 Exchanges may be viewed as one and the same (which is a potentiality raised by the HELP bill). Cannon/Adler do not seem to be pointing to the older version itself as support for their interpretation, but to the lack of difference as an indication that congress had the opportunity and the knowledge to change the language and chose not to. The ambiguity is irrelevant- it is the lack of change that signals congressional intent. Furthermore, the use of the language from the Finance Committee bill supports Cannon/Adler’s interpretation because the language of that bill could only have been written to give the states full discretion as to whether to allow Exchanges in their state; the Finance Committee would not have had the jurisdiction to write such a bill otherwise.

    4) Similar to 3, the decision to drop the language of the HELP Committee bill providing tax credits for those in Federal Exchanges is evidence that the Senate was aware of potential conflicts, that it considered them, and still rejected the language extending the tax credit to those in Federally established Exchanges. Interpretive rules of acquiescence and a general reluctance to interpret law in a way that implies rejected proposed language would cut against interpreting the changes between the HELP bill and ACA in favor of giving the IRS power to extend tax credits to 1321 Exchanges. To believe that they kept language from the Finance Bill that did not include 1321 Exchanges, and dropped language that created similar incentives from the HELP bill seems to indicate that congress was conscious of the distinction between 1321 and 1311 exchanges, yet it proceeded to maintain the language about “State established” Exchanges, and not Federal Exchanges.

    5) Jost does make a strong case for interpreting 1321 as being legally interchangeable with 1311. He explained that, essentially, if the state doesn’t create a 1311 Exchange, HHS can create a 1311 Exchange through 1321, and so rules that apply to 1311 should apply to 1321. Both Jost and Adler/Cannon make strong arguments that the others interpretation leads to superfluous language, but the cut-and-paste manner the bill was written and the hurry with which it was passed easily explain some amount of extra language. These excuses do not, however, allow for text to become meaningless. In delegating authority to the IRS to provide tax credits, congress specifically referred to “state established 1311 Exchanges” as opposed to “federally established 1321 [1311 equivalent] Exchanges.”

    Statutory interpretation is obviously more of an art than a science, and is a platform from which judges may make decisions to suit their own ideas of justice (“saving constructions” anyone?), but the precedent and legislative history seem, to me at least, to support Cannon/Adler’s theory of the case. Of course, framing is everything, and it will be Pruitt’s job in the OK case to frame this question in such a way that these canons of construction come down in favor of acknowledging a meaningful distinction between 1321 and 1311 distinctions when it comes to delegating power to the IRS.

    Thanks for writing this thoughtful post. I will certainly be sharing it!

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