It's Not a Typo: Michael Cannon on Obamacare's Exchange Subsidy Provision


Cato Institute

When Obamacare goes back to the Supreme Court next year, the nine justices on the court will be hearing a case built in large part by Cato Institute Health Policy Director Michael Cannon.

For the last three years, Cannon has been working on a challenge, not to Obamacare, but to the way it has been implemented by the Obama administration, which has allowed insurance subsidies to be offered through exchanges run by the federal government despite clear legislative language saying that those subsidies are meant only for state-established exchanges. Cannon's 2012 paper on the IRS rule authorizing subsidies in federal exchanges, co-written with Case Western Reserve Law Professor Jonathan Adler, is the foundation of the legal argument the court will be hearing. 

Sarah Kliff of Vox.com interviewed Cannon about the challenge. It's worth reading in full, but I want to highlight two sections in full. 

In the first, Cannon explains why the section of the law in question is not just a minor typo, as several not-very-well-informed commenters have suggested:

Sarah Kliff: You and Adler initially thought that this was a glitch or a typo, that it was a drafting error where legislators were sloppy and forgot a word. But you've since become convinced that it was the intention of Congress to withhold subsidies from states that don't build exchanges. How did your viewpoint change on that?

Michael Cannon: We first thought that it was a mistake, that it was a drafting error. And it is still a glitch in the sense that it's a snag or something that complicates implementation. The reason I didn't initially think they wrote it this way was it would give states a lot of power to block the law.

But we started doing a lot of research into this, the most research that I think anyone has done. And if you look at the tax-credit eligibility rules, they are very tightly worded. It's not in one place, but in two places, it says that the credits are only available "through an Exchange established by the State." Then there are seven different cross-references to that language. They never mentioned any other type of exchange. They never mentioned exchanges generally. It's all very tightly worded to refer only to exchanges "established by the State."

Then if you look at the legislative history, you'll find that that was the language in the Finance Committee's bill and when it passed the Finance Committee. But that bill only had one of those explicit "Exchanges established by the State" phrases. They added the other one in Harry Reid's office while it was being merged with the HELP bill under the direction of the Senate leadership and White House staff — Peter Orszag and Valerie Jarrett and Nancy-Ann DeParle, and everyone else who was going in and out of that room. So this restriction was added to the statute in multiple places at multiple points in the drafting process.

The history and the repetition make it hard to argue that the language was just a fat-finger oopsy. I would also add that the law doesn't just say that subsidies are allowed in exchanges "established by the State." It also explicitly defines "State" as being one of the fifty states or the District of Columbia (conspicuously leaving out the federal government), and it also extends that phrase to say "established by the State under [Section] 1311 of the Patient Protection and Affordable Care Act." It refers to this section twice. Section 1311, notably, is the section that deals with state-run exchanges. There's a whole different section—1321—for federal exchanges, and that section isn't mentioned.

This was no mere typo, no careless wording error. It is how the law was purposefully and intentionally written. And this is the language that Congress voted to pass. 

In the interview, Cannon also addresses the question of whether he's to "blame" if the Supreme Court agrees with the challengers that the subsidies in the federal exchanges are illegal:

Sarah Kliff: What do you think of the people who put the blame on you? There are people who are going to say, if your case wins, "Why did you guys take away health coverage from millions of people?"

Michael Cannon: The first thing I'd say in response is, "If those subsidies are illegal, would you favor or oppose ending them?" So far, no one has said they would favor allowing the president to subsidize people illegally.

Then the question becomes, "Are they legal or are they not?" That's what we've been debating all this time. I'm convinced that they're illegal.

Then I ask, "If you were convinced the president was doing something illegal, what would you do?" Well, this is what I would do. This is what I'm doing. Any dislocation, any disruption, any harm that is caused by those people losing those subsidies, the responsibility for that falls at the feet of the president himself.

The question that matters here is whether or not the law is being implemented in a way that is legal under the statute. If the administration's implementation is illegal, then it needs to be stopped.  

A. Barton Hinkle wrote about the challenge yesterday. I went through the arguments at length over the summer