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Below is a guest post by James Blumstein, university professor of constitutional law and health law and policy at Vanderbilt Law School and director of the Vanderbilt Health Policy Center. Blumstein is a noted health law and administrative law scholar who testified on the IRS tax credit rule in 2012. He also authored an amicus brief in NFIB v. Sebelius arguing that tying traditional Medicaid funding to state acceptance of the Medicaid expansion was unconstitutional that foreshadowed portions of the Supreme Court's analysis of that issue.
The pending Supreme Court case King v. Burwell calls into question the validity of an Internal Revenue Service regulation that provides for subsidies for income-qualified persons who purchase medical insurance on federally-run exchanges. The IRS regulation extends subsidies beyond those expressly provided for in the Affordable Care Act (ACA), which, on its own, authorizes subsidies on state-established exchanges but has no comparable provision regarding the provision of subsidies on federally-run exchanges.
The IRS regulation being challenged in King is of a piece with the overall Obama Administration strategy of unilaterally extending executive power. President Obama has not been cute about this, asserting his intent to use his "pen" to push the envelope of executive powers and his "phone" to announce and secure support for his unilateral initiatives. No sub rosa stealth there.
These unilateral executive-branch actions have triggered pushback. Most recently, a federal district court in Texas issued a preliminary injunction against the executive action that deferred deportation and provided legal status to certain persons not otherwise authorized by law to reside in the United States.
The King case should be viewed as part of this overall mosaic of executive-branch actions, which have been very strategic and, in the context of the ACA, have softened the impact of some of the ACA's harsher elements. In the context of King, the IRS has unilaterally extended federal subsidies beyond those expressly authorized in the ACA itself.
King therefore reflects a challenge to what is perhaps the most significant of the Obama Administration's executive actions in stretching the ACA.
This is what the case is about.
When Congress enacted the ACA, it provided for two types of marketplaces or exchanges where consumers could purchase and carriers could sell health insurance. Under Section 1311, states "shall" establish exchanges; that language is typically mandatory, not giving the states a choice. But somewhere in the drafting process, advocates realized that the federal government cannot just compel states to set up an exchange. That would violate the "anti-commandeering principle," which prohibits the federal government from ordering states around by mandating their participation in federal programs.
So, without rewording Section 1311, Congress adopted an "oops" provision in Section 1321. It requires the federal government to establish and operate an exchange if a state chooses not to do so—an option actually not in the law but a recognition that, by itself, the mandate in Section 1311 was unconstitutional. The retention of the mandatory language in Section 1311 and the role of Section 1321 as a federally-run back-up strongly suggest a preference by Congress for states to establish and run the exchanges.
While the federal government cannot force a state to set up an exchange, it can establish financial incentives that induce states to do so on their own. As it turned out, two-thirds of the states were savvy enough to realize that, economically and politically, it was not such a good idea to take on the onus of developing and operating an exchange. They would have to fund the exchanges and would take political responsibility if, as was the case, the exchanges did not work too well in their roll-out.
Some commentators who have examined the background have concluded that Congress decided to encourage states to set up exchanges by providing for federal subsidies for income-qualified consumers who purchase insurance on a state-run exchange, while not providing for such subsidies for consumers who use the federally-run exchanges. The thinking was that states would be likely to set up exchanges in order to allow their residents to qualify for federal subsidies. But a strong majority of states decided that the advantages were outweighed by the detriments.
In short, the ACA establishes two kinds of health insurance exchanges—state-run exchanges, with income-qualified purchasers eligible to receive a federal subsidy, and federally-run exchanges, with no federal subsidies provided for under the ACA.
The Obama Administration saw the lack of subsidies on federally-run exchanges as a problem to be overcome— a gap in the ACA that became more significant since many more states than anticipated were deciding not to run exchanges. That would mean no federal subsidies in two-thirds of the states—the ones served by federally-run exchanges.
So, the IRS wrote a regulation that, despite the provisions in the ACA itself, provided a subsidy for all income-qualified purchasers, even those on federally-run exchanges.
The issue in King seems pretty straight forward: There are two types of exchanges contemplated by the ACA, one established by states under Section 1311, and another established by the federal government under Section 1321. The statute only authorizes subsidies for the state-run exchanges. The IRS regulation challenged in King extends subsidies to both types of exchanges.
This should be a relatively easy, straightforward case, and would be but for its potential impact. But impact is a political issue that should be resolved by the responsible political branch—the Congress.
In King, the Court is being asked not to trump the political branches—the issue in the earlier constitutional challenge to the ACA's individual mandate. The Court is being asked to vindicate the right of Congress to determine whether the ACA, as drafted, got the policy right or not. And the fact that the political winds have shifted since ACA's enactment in 2010 only reinforces the propriety of the Supreme Court's reaffirming that the power to fill legislative gaps, if such gaps indeed exist, belongs to Congress, the legislative branch, not the IRS (the executive branch).
At bottom, then, this is a separation-of-powers case, with the Court having an opportunity to vindicate Congress' authority to legislate if the enacted law leads to results that the political branches deem problematic.
Recently, a federalism argument has also been injected into the analysis. The contention is that states did not receive adequate notice that, if they declined to establish an exchange, their residents would not qualify for subsidy.
That position derives from the Supreme Court's decision in 2012, which held that the ACA could not force states to expand Medicaid or face the loss of preexisting Medicaid funding. The Court held that states did not have adequate notice when they signed up for Medicaid that they would be required to expand the scope of coverage as mandated by the ACA.
The situation in King is altogether different. First, the ACA clearly provides notice to states that their decision to establish an exchange is a prerequisite for subsidies for their residents. Secondly, states are not foreclosed from establishing an exchange so as to allow their residents to qualify for a subsidy. There is no bait and switch as there was with expanded Medicaid. The state exchanges reflect an entirely new program. If a state misapprehended the stakes for not running an exchange, it can rectify that mistake now. As long as states can still set up an exchange, the alleged lack of notice to states about the consequences of not establishing an exchange can be remedied. King is nothing like the expanded Medicaid case in this regard, as far as the clear notice rule is concerned.
The lower court in King ruled for the government, basically on the theory that the ACA intended to subsidize those income-qualified purchasers who buy insurance on all exchanges. But the issue is not some abstract question of what Congress intended, but what Congress actually did. And about that there can be no serious dispute. The Supreme Court should rein in the IRS by invalidating its regulation to the contrary.
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