Major Supreme Court challenge threatens to gut Obamacare

The question is whether the IRS usurped congressional power when it enacted a regulation authorizing distribution of billions of dollars in tax credits through health care exchanges set up by the federal government.

After narrowly surviving a bitter constitutional showdown in 2010, President Obama’s Affordable Care Act is once again in serious peril as the US Supreme Court prepares this week to take up a new legal challenge that threatens to gut Obamacare.

A decision in favor of the challengers could block tax credits and render health insurance unaffordable for more than 7 million of the 11 million Americans who have signed up for coverage on healthcare exchanges. That, in turn, might plunge the president’s health care reform effort into a death spiral, according to economists.

Oral argument is set for Wednesday.

The case, King v. Burwell (14-114), arises at a time when President Obama is increasingly taking aggressive executive action to advance his policy goals – often in open defiance of Congress.

It hasn’t always worked out for him.

Last June, the Supreme Court rejected an attempt by the president to unilaterally declare the Senate in recess so he could use his recess appointment authority to bypass Senate confirmation and place three new members on the National Labor Relations Board. All nine justices ruled against the president, including his own nominees to the high court.

Two weeks ago a federal judge in Texas issued an injunction blocking an attempt by the president to unilaterally grant protected status and work permits to as many as 5 million undocumented immigrants.

The question in Wednesday’s Supreme Court case is whether the IRS usurped power reserved to Congress when it enacted a regulation authorizing distribution of billions of dollars in tax credits through health care exchanges set up by the federal government.

The administration maintains that the Affordable Care Act (ACA) authorizes the IRS to pass such regulations. Challengers argue that only Congress is empowered to allocate and spend tax money in that way. 

Specifically, Wednesday’s high court case focuses on how tax credits are meant to be distributed to low- and moderate-income Americans to help them pay for health insurance.

The ACA includes a provision that appears to limit the receipt of tax credits to only those individuals who sign up for coverage on a healthcare exchange that has been established by a state.

That provision in the 2010 law would not have emerged as a problem had all of the 50 states agreed to participate in Obamacare, just as all 50 states participate in the federal Medicaid and Medicare programs. But that’s not what happened.

Only 16 states agreed to set up their own exchanges. The 34 other states declined. In each of those states, the Obama administration set up federal exchanges as a backstop.

Here’s the problem: If the ACA only authorizes tax credits to individuals who sign up “through an Exchange established by the State,” as the law says, what happens when people sign up through an exchange established by the federal government? Do they get tax credits too?

There is nothing in the 1,000-page statute explicitly authorizing tax credits to individuals who sign up through a federal exchange.

Recognizing this potential problem, the administration could have asked Congress to amend the ACA to make that authorization explicit. But by that time, Democrats had lost control of the House of Representatives.

Instead of going to Congress, officials at the IRS enacted a regulation in 2012 to clarify that “Exchange established by the State,” could also mean a federal exchange.

The new regulation enabled the federal government to distribute tax credits in the federal exchanges in 34 states just as the statute had clearly authorized the 16 state-established exchanges to do.

This was not merely a minor fix. The new rule authorized the potential expenditure of billions of dollars worth of tax credits that would enable millions of Americans to afford health insurance.

Those challenging that provision question whether the ACA – as written and passed by a Democrat-controlled Senate and House in 2009 and 2010 – authorizes the IRS to extend tax credits beyond state exchanges to exchanges set up by the federal government.

Allocating and spending billions in tax dollars is a job the constitution reserves to elected representative in Congress, the challengers argue, not IRS bureaucrats.

In defending the IRS regulation, US Solicitor General Donald Verrilli urges the justices not to focus exclusively on those five words in the statute: “Exchange established by the State.” Instead, he wants the court to appreciate the broad purpose of the ACA, which is to provide affordable healthcare coverage for all Americans, not just those in certain states that set up their own exchanges.

It would make no sense to limit tax subsidies to a handful of states, Verrilli argues in his brief. Such a limit, if enforced, would likely undermine the economic viability of the ACA and deprive millions of Americans of access to affordable health insurance, he said.

“The Act was debated, evaluated, and passed under the universal understanding that tax credits would be available in every state – including states with federally-facilitated exchanges,” Verrilli wrote in his brief.

The solicitor general says that the disputed phrase “Exchange established by the State” is a term of art that includes both an exchange set up by a state for itself as well as an exchange set up by the federal government on behalf of a state.

Michael Carvin, a Washington appellate lawyer representing those challenging the IRS regulation, said the administration is trying to rewrite history.

Although the Democrats controlled both the House and the Senate in 2010, liberal Democrats were unable to garner enough votes to enact a health care system run exclusively by the federal government, he says.

A handful of centrist Democrats wielding essential votes insisted that the program be structured similar to Medicare and Medicaid – with the states playing a key administrative role.

Under the American system of federalism, the national government cannot simply order states to do something. Instead, Congress had to create an incentive to induce states to join up and support Obamacare, Mr. Carvin said.

One mechanism was to offer the states a boatload of federal dollars to subsidize health insurance policies for state residents.

With that potential windfall, also came a threat. If a state refused to participate in Obamacare, state residents would receive no subsidies while residents in cooperating states would. The idea, Carvin says, was that no state official could possibly resist the lure of piles of free federal money.

Nonetheless, 34 states did exactly that.

The Obama administration argues that the authors of the ACA in Congress never sought to limit distribution of tax credits in federal exchanges.

Because the ACA was drafted behind closed doors and then rushed to passage, the legislative history remains murky with conflicting accounts of what happened.

Those challenging the law cite candid comments made by one of the intellectual architects of the ACA that they say support their view.

During a January 2012 conference, Jonathan Gruber, a professor and health care economist at Massachusetts Institute of Technology discussed how political pressure would provide a strong incentive for reluctant states to embrace Obamacare.

“I think what’s important to remember politically about this, is if you’re a state and you don’t set up an exchange, that means your citizens don’t get their tax credits,” Professor Gruber said in a videotaped analysis of the ACA.

Years later, as lawsuits challenging the tax credit provision gained momentum, Gruber backed away from those and other comments.

Carvin says the most glaring problem with the government’s position in the case is that it doesn’t explain why Congress didn’t simply write into the ACA that tax subsidies would be available through exchanges, both state and federal.

“Why would Congress say ‘Exchange established by the state’ when fewer words would better convey its supposed intent without the confusion arising from a counterintuitive ‘term of art’?,” Carvin asked in his brief.

The evidence suggests that no one involved in the legislative process anticipated that so many states would opt-out.

The challengers insist that the administration must comply with the explicit terms of the law, and not seek to rewrite them without Congress.

“If the rule of law means anything, it is that text is not infinitely malleable, and that agencies must follow the law as written – not revise it to ‘better’ achieve what they assume to have been Congress’s purposes,” Carvin wrote in his brief.

The solicitor general rejects this position. He says it makes no sense in a law designed to foster affordable healthcare coverage nationwide to allow only state exchanges to receive tax subsidies for low-income enrollees.

Verrilli argues that the provision must be examined in broad context and read consistent with the well-established goal of the legislation. He adds that the IRS was within its authority to issue a regulation to resolve any ambiguity in the statute.

“Even if the phrase ‘established by the State’… could plausibly bear the restrictive meaning petitioners ascribe to it, that is not its only plausible meaning,” Verrilli said. “To the contrary, the traditional tools of statutory interpretation confirm that [the administration’s] reading is at least a reasonable one warranting deference [by the high court].”

A decision is expected by late June.