6 Weak Arguments in the Administration's Obamacare Supreme Court Subsidies Brief

The administration's case is little more than a request for legal permission to rewrite the law.



Today, the Supreme Court will hear oral arguments in King v. Burwell, a case challenging the legality of the subsidies in the federally run exchanges set up under Obamacare. The core argument put forward by the plaintiffs is straightforward: The text of the law says that subsidies can only be obtained in an "Exchange established by the State." The federally run exchanges were not established by any state, and therefore the Internal Revenue Service rule allowing them in both state and federal exchanges must be undone.

The government's argument, on the other hand, is rather more complicated, and by necessity, leads to some awkward legal contortions—including the strange notion that an exchange established by the federal government is actually an exchange established by a state.  

Here are 6 of the weakest arguments from the administration's brief defending Obamacare's federal exchange subsidies.

1. Federal subsidies are justified because they are a critical part of Obamacare's policy scheme.

A significant portion of the administration's brief is devoted to explaining Obamacare's basic policy design: Lawmakers wanted to alter the individual insurance market by requiring that health insurance be sold to everyone and limiting the ways that insurers could charge based on preexisting conditions. But the experience of several states made it clear that these regulations alone caused a "death spiral" in which premiums rise and healthy people drop their insurance. To avoid this, Congress looked to Massachusetts, which, along with preexisting conditions rules, had put in place a mandate to maintain coverage. But as the government's brief says, "Subsidies must go 'hand in hand' with an individual mandate because Congress cannot 'mandate people having something they can't afford.'" In addition to the mandate and insurance rules, Massachusetts had subsidies too.

The insurance regulations, the mandate, and the subsidies, then, are critically linked. Wouldn't it be odd for Congress to have allowed for the creation of federal fallback exchanges which don't have the complete set? Or, as the government put it, "Had Congress actually intended to threaten States with death spirals if they declined to establish their own Exchanges, it would not have directed HHS to establish rump Exchanges that would be doomed to fail.

One problem with this argument is that it is largely beside the point. The general policy scheme underlying the law's coverage expansion does not give the government license to ignore the clear language of the statute.

But put that aside for a moment. The government's main point here is that, given the link between the mandate, the preexisting conditions rules, and the subsidies, it would be unthinkable for Congress to have intentionally set up a scheme whereby states in which the federal government set up the exchanges did not still have all three in effect.

Yet it's worth recalling that in lower court briefs, the government explained the relationship between the mandate, the insurance rules and the subsidies by citing Massachusetts Institute of Technology economist Jonathan Gruber. Gruber was arguably the most influential expert involved in designing the Massachusetts law, and who was also an influential adviser to both the White House and Congress on the federal law.

And in January 2012, Jonathan Gruber was recorded on video saying, in response to a question about what happens if a state opts out of creating an exchange and the federal government steps in, that states that choose not to set up their own exchanges lose access to subsidies under the law. Gruber was the chief proponent of the regulations/mandate/subsidies scheme, and even he found it to be compatible with a system that denied subsidies in states that did not establish their own exchanges.

2. Congress would not have threatened states with a drastic and disruptive consequence should they decline to establish exchanges on their own.

Along similar lines, the administration says that it is "implausible" to think that Congress would have "threatened the States with an unworkable regime that would deny their residents tax credits and roil their insurance markets unless the States established Exchanges for themselves."

It's actually quite plausible to think that Congress would have made such a threat, because that's how the law initially structured its Medicaid expansion: States were free to participate or not, because the federal government cannot coerce state action, but those who opted out ran the risk of having all federal Medicaid funds revoked. This threat was ruled impermissibly coercive by the Supreme Court in 2012 because nixing federal Medicaid funding would have been disastrous to state budgets and Medicaid programs.

The original structure of the law's Medicaid expansion makes it clear, then, that Congress was willing to threaten extremely disruptive, even "unworkable," actions against states that opted out of the law's major components.

3. Congress assumed that subsidies would be available in every state.

"During the months [the law] was under consideration," the administration's brief says, "Members of Congress consistently expressed their understanding that credits would be available through 'exchanges,' without limitation."

It's true that Congress assumed every state would have subsidies. But this is because virtually everyone, including Congress, assumed that every state would set up an exchange. As the challengers show in their brief, this was widely reported in the media. The Congressional Budget Office reports the administration often cites to suggest that every state would have subsidies also assumed that every state would participate in building an exchange. The assumption is also evident in the structure of the law, which allocated no money whatsoever to the creation of a federal exchange—while offering unlimited funds to states that chose to develop their own.

4. The administration's rulemaking process determined that subsidies were available through federally facilitated exchanges.

"Through notice-and-comment rulemaking," the government brief says, "Treasury concluded that tax credits are equally available on both state-run and federally-facilitated Exchanges…" The eventual IRS rule allowing subsidies—which take the form of tax credits—in the federal exchange is, of course, the source of the legal dispute.

Here the government's brief leaves out a few inconvenient details about the rule's history. According to a February 2014 report by the House Oversight Committee, an initial draft of the IRS rule from 2011 actually specified that subsidies were available in an "Exchange established by the State." But in March of that year, the phrase was removed and replaced with language allowing subsidies in federal exchanges as well. The same report notes that, following a meeting between Treasury and IRS officials discussing the rule (among other things), Treasury employees sent an email that "expressed concern that there was no direct statutory authority" to allow an exchange established by HHS to receive subsidies. In other words, even the bureaucrats in charge of making the rule were concerned that allowing subsidies in federal exchanges might not be justified.

5. An exchange set up by the federal government through the Department of Health and Human Services (HHS) under one section of the law is also an exchange "established by a State" under another section of the law.

According to the government's brief, the reason why the Treasury reached its conclusion about the availability of tax credits is because "an Exchange established by HHS for a particular State qualifies as an 'Exchange established by the State'" under the law and under the rule. This idea—that an HHS established exchange is legally a State established exchange—is central to the administration's argument, and it is repeated throughout the brief.

"Though run by HHS, each federally-facilitated Exchange is the same state-specific Exchange the State otherwise would have established," the brief says. When creating an exchange, the federal government stands in the shoes of the state, so that "for purposes of the Act, therefore, an Exchange created for a particular State by HHS is 'an Exchange established by the State'…"

This is, to put it mildly, a rather strained argument. If Congress meant to say that subsidies are allowed in both state-established exchanges and HHS-established exchanges, then wouldn't it have said so? On the contrary, the law defines "State" as one of the fifty states or the District of Columbia—notably leaving out the federal government.

In addition, the law allows for subsidies only through exchanges established by a state under section 1311 of the law, a section dealing with state-established exchanges. HHS can only establish exchanges through section 1321 of the law.

That distinction itself is notable. It suggests that the two forms of exchange are different, and that the difference is important rather than, as the administration argues, meaningless. As the challengers' brief says, "There is no legitimate way to construe the phrase 'an Exchange established by the State under section 1311' to include one 'established by HHS under section 1321.'"

The government's brief also attempts a version of this same argument by reading far too much meaning into the meaning of the word "such." It notes that the law says that if a state does not or cannot established an exchange for itself, "then HHS 'shall…established and operate such Exchange within the State," then argues that the use of the phrase "such Exchange" is intended to mean that an HHS-established exchange is "a statutory surrogate" for an exchange "established by a State."

This still doesn't make much sense. As the challengers argue, the word "such" is better understood as a describing the type of Exchange. But the IRS rule in question "makes subsidies turn not on the type of Exchange, but on who established it, and the word 'such' does not somehow require HHS to, impossibly, establish a state-established Exchange."

6. The phrase "established by the State" is merely a "term of art" that also means "established by HHS."

Here's what the administration brief says: "Contrary to petitioners' claim, that phrase is a term of art that includes both an Exchange a State establishes for itself and an Exchange HHS establishes for the State. [The law] therefore authorizes tax credits through the Exchanges in every State, not merely in States that establish Exchanges for themselves."

This argument, which only appeared when the case reached the Supreme Court, closely resembles the last one, and it is in some sense the crux of the government's case. Basically, it argues that the phrase "established by a State under Section 1311" also carries with it an unseen addendum: "…or established by HHS under Section 1321."

There is, of course, no mention of this secret addendum in the law, no provision under which the phrase "exchange established by a State" is defined as including an HHS-established exchange. On the contrary, as previously noted, the law defines "State" as one of the 50 states or the District of Columbia. And it fails to explain why, if a reference to one sort of exchange was in fact a reference to both, Congress made the distinction between the two, and, in the relevant part of the law, only pointed to one. 

What the administration's case amounts to is a request that the court ignore what Congress clearly said in the statute that it passed and assume that Congress meant something else, something that is not in the text of the law and something that is difficult to reconcile with what is.

The administration's argument, then, is not that the rule in question follows the law, but that the executive should be allowed to rewrite the law in accordance with how it would prefer the law to be, and that the highest court in the land should give its blessing when it does.