King vs. Burwell- Part 1: How We Got There

Technically speaking, the case recently taken by the Supreme Court- King vs. Burwell- is not a direct challenge to Obamacare.  If anything, the plaintiffs in this case are arguing for the Supreme Court to uphold the ACA as originally written.  The action is taken not against the law itself, but against an IRS interpretation gone wrong.

Section 1311 directs states to establish health care exchanges within their borders.  If any state fails to do so, the federal government is directed to establish an exchange within those states under Section 1321 of the Act.

Section 1401 authorizes federal tax subsidies (tax credits) for anyone who enrolls in these exchanges based on certain criteria: (1) their household income must fall within certain ranges, (2) they are not eligible for employer-provided insurance, (3) they are not eligible for any other government program like Medicaid, Medicare or SCHIP, and (4) they must enroll for coverage “through an Exchange established by the State.”  [Emphasis added]  Each of these criteria are clear-cut and explicitly stated in the law.  Hence, the law makes no provision for subsidies or tax credits for an exchange established by the federal government.

Further complicating the issue is the fact that merely having subsidies triggers penalties under the ACA.  Three things occur under Obamacare if a state does not establish an exchange.  First, subsidies are not available.  Second, employers within those states are exempt from the law’s employer mandate.  Third, a vast majority of the residents of that state are exempt from the individual mandate.  This is the obvious carrot and stick attempt to encourage states to establish exchanges, which was the wishful thinking of the proponents of Obamacare.  Likewise, they did the same with the Medicaid provisions- expand coverage and the federal government will fund that increased coverage up to a certain point and for so long.  Sounds great.  But, if you don’t expand coverage, the federal government will decrease their contribution in the future.  Here, the Supreme Court in the original challenges to the ACA struck down that provision.  The carrot could be used under Congress’ spending power, but not the stick since that would violate every tenet of federalism.

The three criteria listed above which make no provision for subsidies in federally established exchanges is actually the original interpretation of the law by the IRS.  Their original draft of the regulations noted that federal subsidies would be available only to tax payers who enrolled through state-established exchanges.  So what went wrong?

In November 2010 while the passage of Obamacare was still very much on the minds of voters, Republicans made sweeping advances at the state level winning many gubernatorial races and state legislatures.  In short, for various reasons, many states were NOT establishing health care exchanges.  Some reasons were political.  Others were practical.  For example, Delaware discovered they lacked the requisite population to spread risk in any pool without serious disruptions in the market and they never established an exchange.  Vermont failed to establish an exchange because they already had a single-payer system in place.  Other states, like Oregon and Maryland, found implementation almost impossible, yet plodded through with numerous complaints.  In the end, 36 states failed or refused to establish exchanges.

This caused panic on the Left because they realized that without state-established exchanges, the subsidies promised would be moot.  In March 2011, after intense consultations between the White House and Treasury Department, the IRS dropped their original draft regulations.

Five months later, the IRS announced that subsidies would be available for anyone who enrolled for health care coverage through the federal exchange.  Note that this is in direct opposition to their original interpretation of the ACA.  The only thing that changed were the 2010 midterm elections.  Unfortunately, by announcing the availability of tax credits (subsidies), the other baggage- namely, the employer and individual mandates- were also imposed on the states where the federal exchange had stepped in.  A subsequent Congressional investigation discovered that IRS officials at the time realized the ACA as written did not allow them to offer subsidies on the federal exchange, nor did they even research the legislative record or history- as the government now contends and uses as their best defense- when changing the rule.  Obviously, the change in the regulations was not based upon the law itself, but for political reasons.

In May 2012, the IRS finalized its rule.  The reason cited at the time stated that this new interpretation was based on the ACA’s goals.  It was not until late 2012 after being pressured in the courts and Congress that the IRS publicly stated any real, legal reason for their determination to allow subsidies on the federal exchange.  The result was that these valid criticisms of the IRS became legal action.

Oklahoma first challenged the rule change in Pruitt v. Burwell.  They argued that the availability of subsidies in that state which did not have a State exchange would trigger penalties against the state under the employer mandate.  In September 2014, the district court agreed with Oklahoma and stated the language of the ACA authorized measures only in those states that established their own exchanges.  In May, 2013 several employers and taxpayers from several states filed Halbig vs. Burwell in Federal District Court in DC.  They argued that the subsidies subjected them to penalties that Congress never intended.  A three-judge panel of that court agreed and the government immediately appealed for an en banc hearing before the entire DC Court, which was granted.

That argument WAS set for December 17th, but since the Supreme Court took the case, the DC court has since suspended proceedings.  The attempt to have en banc  review was a delaying tactic by the Obama administration to push a decision off until the 2015 Supreme Court term.  And the reason the Supreme Court took the case is attributable to the next legal action.

In September, 2013 individual taxpayers in Virginia- which had no state exchange- filed King vs. Burwell.  Within hours of the Halbig ruling in DC, the Fourth Circuit sided with the Federal government, but noted it was a close call.  Using the so-called Chevron deference, that court ruled that because the ACA is so ambiguous on this point, the courts must allow deference to the rule-making agency, the IRS in this case.  And finally, Indiana filed a challenge similar to those in the Pruitt case out of Oklahoma and the courts have yet to reach a decision there.

Interpretations that this case are an existential threat to Obamacare are somewhat misleading.  From a practical standpoint, they make more sense.  This case is less a constitutional challenge to Obamacare and more an attack on the rule-making powers of the IRS.  They do not alter any part of the ACA, but simply attempt to block an attempt by the IRS to expand Obamacare’s major taxing and spending provisions through rule making with no regard to the language in the law, nor any attempt by Congress to fix the wording of the law which two courts have now found to be unambiguous with likely a third also agreeing and a fourth saying, “Close call.”

If King prevails here, the challenge is more daunting for the future of Obamacare than if the Supreme Court simply struck down the entire law.  Without state cooperation in establishing exchanges, it becomes obvious why Obamacare has survived this long- the provision of billions of dollars of illegal subsidies granted through a politically motivated IRS rule.  Even if the Supreme Court upholds the subsidies but strikes down the penalties (employer and/or individual mandates), a major source of funding for those subsidies is removed which increases the price tag of Obamacare exponentially.  And like a house of cards, the entire scheme falls in on itself.

Next: How the Court can rule and the arguments.