Why the Supremes Need to Scrap Obamacare's Federal Exchange Subsidy

The court's job is to enforce the law as written, not fix it


Last week's oral arguments for King vs. Burwell, the latest legal challenge to Obamacare before the Supreme Court, confirmed one thing: The law, as written, is a complete mess. The justices might be tempted to take it upon themselves to straighten it out to avoid disrupting coverage for millions of Americans, but that's really not their job. The Obama administration will no doubt disagree, but the most appropriate—and the least political—course for the justices would be to overrule the contested portion of the law and let Congress rewrite it.

At issue in the lawsuit is the legality of the billions of dollars in subsidies that the Internal Revenue Service is doling out through federal exchanges in about 35 states that refused to set up their own exchanges. The challengers claim that the law explicitly limits these subsidies to state, not federal, exchanges. As evidence, they point to Section 1311 of the Affordable Care Act, which states that subsidies should flow through exchanges "established by the State"—not "for the State" or "within the State" or myriad similar constructions. The logic behind this, they note, was to give states an incentive to establish their own exchanges, saving Uncle Sam the herculean task of doing so in 50 states. Also, the administration was eager to avoid the impression that it was engineering a federal takeover of the health care system, something that might well have scared away enough legislators to derail the law, given that it squeaked through narrowly on a strict party line.

The administration hotly disputes this. It notes that Section 1311 can't be interpreted in isolation from the broader purpose and structure of the law. Federal exchanges that are barred from handing out subsidies are doomed to fail, they point out, hardly something Congress could have intended. Why? Because they would attract only sick patients, especially since the cost of coverage on them is fairly high—thanks to Obamacare's mandates requiring insurance companies to offer guaranteed coverage, regardless of pre-existing conditions. Hence, young and healthy patients, despite being mandated to purchase coverage, could well decide to simply pay a penalty and sit it out, sending the exchange into an adverse selection death spiral as coverage prices rise, driving more healthy people out of the market.

But regardless of which interpretation the court upholds, it runs into massive federalism problems.

Many states hate the law's penalties on their employers more than they love its subsidies. However, the penalties only get triggered when subsidies become available within their borders and uninsured workers who purchase coverage avail of them. Hence, so long as a state refuses to set up its own exchange and Section 1311 bars the federal government from handing out subsidies through its own exchange, they can shield their resident employers. Forcing a state to accept subsidies, they insist, would run afoul of the Constitution's commitment to federalism.

However, there are also states that have opted for a federal exchange because they simply didn't want the headache of having to set up their own. If Uncle Sam now withholds subsidies, it'll make coverage unaffordable for many of their residents, to be sure. But the bigger problem is that it'll send their exchanges into a death spiral even as their individual market has been completely upended, leaving anyone who doesn't have employer-sponsored coverage literally nowhere to go.

Indeed, making federal subsidies conditional on a state setting up its own exchange is also unconstitutionally coercive, the administration insists. It is precisely the kind of thing that the court said Uncle Sam can't do in the last

rtcosmin / Foter / CC BY-NC-SA

challenge to ObamaCare, NFIB vs. Sebelius, when it barred the administration from withholding all, not just additional, Medicaid funding from states that refused to expand the program as per its bidding. "Our reading is the pro-federalism ruling," noted Solicitor General Donald Verrilli, who argued the administration's case.

Ordinarily, when disputes over the proper reading of a statute arise, the Supremes opt for the reading that is most consistent with the Constitution—or least constitutionally problematic. But in this case, each side claims to be more constitutionally consistent than the other, so this rule doesn't offer a way out.

Courts also tend to defer to administrative agencies' interpretation of statutes—something called Chevron deference. But New York University law professor Richard Epstein has pointed out that the problem with applying Chevron deference in this case is that the court would have to ignore a straightforward reading of the statutory text that a future (possibly Republican) administration might well legitimately invoke. This would potentially put the court in the position of having to go along with "wide partisan variance" in interpreting the statute, shredding the rule of law.

But the only reason the court is confronting this huge mess, as Justice Antonin Scalia pointed out, is the unorthodox parliamentary tactics that ObamaCare supporters had to deploy in order to ram it through Congress. Because Democrats lost their supermajority in the Senate after the initial bill was passed, they didn't want to bring up for a re-vote a cleaned-up version that had gone through the normal reconciliation process in conference.

So, in essence, the administration is asking the court to hand it a victory that it couldn't obtain through the normal legislative process. Should the justices go along, they would not only be endorsing the administration's end run around Congress, but also putting an unelected branch of government in the position of effectively writing—or at least rewriting—the laws.

This is not their job. The least intrusive thing for the court to do would be to overrule the federal exchange subsidies and advise the administration to go back to Congress to clean up the mess. Republicans have every reason to make the rewrite as painless as possible for as many Americans as possible. In fact, they are claiming they already have a plan to avoid major coverage disruptions, and there is no reason the court shouldn't take them at their word.

In any case, subjecting the law to the rough and tumble of politics can hardly produce an outcome worse than the current mess.

This column originally appeared in The Week.