The Volokh Conspiracy

Last week, several small business owners and individuals filed suit challenging the legality of an IRS rule purporting to authorize tax credits for the purchase of qualifying health insurance policies in federal exchanges. The complaint is here. The suit is being coordinated by the Competitive Enterprise Institute and the plaintiffs are represented by Michael Carvin of Jones Day. Here’s coverage of the suit from BLT and the WSJ.

This suit presses the argument I have made with Michael Cannon in this recently published article in Health Matrix. It raises similar claims to another suit pending in federal district court in Oklahoma. For more on the issue, see these posts.

Yesterday was the deadline for states to tell the Department of Health and Human Services whether they wanted create their own health insurance exchanges. As the NYT reports, only 17 states have said they intend to create an exchange. Among the reasons states have given for refusing to cooperate is the lack of guidance from HHS and the reality that state exchanges will still have to play the federal government’s tune.

Pennsylvania seriously considered running its own exchange, but Gov. Tom Corbett said on Wednesday that he would not pursue the idea.

“State authority to run a health insurance exchange is illusory,” Mr. Corbett said. “In reality, Pennsylvania would end up shouldering all of the costs by 2015, but have no authority to govern the program.”

In Tennessee, state officials did a huge amount of planning for a state-run exchange. But Gov. Bill Haslam announced this week that he had decided against the idea because the Obama administration had failed to answer numerous operational questions.

Gov. Chris Christie of New Jersey cited similar concerns in vetoing legislation to establish a state-based exchange last week.

“New guidance continues to trickle out of Washington at an erratic pace,” Mr. Christie said.

The federal government faces a daunting challenge in trying to create exchanges in 30 or more states. Among the other problems, the PPACA did not provide HHS with any money to pay for the creation or operation of federal exchanges. Last year, HHS conceded this would require getting “creative.” One step HHS intends to take is imposing a 3.5 percent surcharge on the sale of insurance plans in federally run exchanges, but this still won’t be enough.

One oft-repeated response in the comments to my latest post reiterating the argument that the PPACA only provides tax credits for the purchase of qualifying health insurance in state-run exchanges is that this would produce an “absurd” results. This would be “absurd,” some claim, because the consequence of state refusal to create their own exchanges — the loss of tax credits and subsidies for the purchase of insurance — would undermine the goals of the Act. Further, some argue, it would be absurd to facilitate state opposition to the Act in this way. Yet it is indisputable that this is not the first time Congress has done this. Indeed, Congress did the precise same thing in other parts of the PPACA.

The most obvious example of Congress using this “absurd” tactic is the Medicaid expansion. Under the PPACA, as written, states that refused to participate in the Medicaid expansion would forfeit federal funding for the expansion as well as all federal support for the pre-existing Medicaid program. So not only did Congress threaten to withhold new benefits in unconsenting states, it also threatened to further undermine the PPACA’s goals by withdrawing existing Medicaid funding. In other words, if a state sought to undermine the PPACA by refusing to cooperate with the Medicaid expansion, this would trigger a sanction that would reduce health care coverage for needy populations — a result directly contrary to the stated goal of the PPACA. The Supreme Court ultimately concluded this deal was unconstitutional, but there is no question of what the statute sought to do.

Congress decided to pursue the PPACA’s goal of expanding coverage by enlisting states in the cause, and it sought to enlist states in the cause by providing states with incentives, including a threat to withhold funding for benefits to needy populations. Congress did not think any state would refuse this deal, but that’s the deal Congress offered. In the case of tax credits and subsidies for health insurance purchased in exchanges, Congress likewise thought that every state would create its own exchange rather than risk the combination of a federal exchange (what some viewed as a dreaded “federal takeover” at the time) and a loss of the tax credits. Further evidence that accepting this reading would not be “absurd,” as I noted in my prior post, is that prominent PPACA supporters, such as noted health law professor Tim Jost, expressly proposed that Congress pressure states into creating exchanges “by offering tax subsidies for insurance only in states that complied with federal requirements.” Other draft health care reform bills also threatened to withhold tax credits in unconsenting states. This approach may have been foolish or unwise, but that does not make it “absurd” for purposes of statutory interpretation.

The “absurd results” doctrine provides that a statute should not be read to mean something Congress could not have meant. It is not a license to rewrite a statute because Congress made a mistake or adopted a legislative provision based on mistaken assumptions about how others might respond. At the time the PPACA was passed, everyone thought that states would fall in line. PPACA supporters thought that once the law was passed, opposition and obstruction would dissipate. They were wrong, and this does not provide the IRS (or anyone else) to rewrite the statute through administrative fiat. In writing the statute as it did, Congress may have been playing high-stakes poker, but it can’t cancel the game just because some states have decided to call Congress’s bluff.

[Note: I fixed a garbled sentence in the penultimate paragraph.]

One component of the PPACA (aka Obamacare) provides for the creation of health insurance exchanges in each state in which consumers may purchase health insurance. The PPACA’s supporters anticipated that every state would create its own exchange, and the law provides for tax credits and subsidies for the purchase of qualifying health insurance plans in state-run exchanges. Yet as Michael Cannon and I pointed out the PPACA does not authorize tax credits and subsidies in exchanges run by the federal government. This is a potential problem because at least twenty states are refusing to create their own exchanges and are defaulting to the federal option. In response, the IRS issued a rule to authorize tax credits and subsidies in federal exchanges. The only problem, as Cannon and I explain at length in a forthcoming article in Health Matrix, the IRS rule is illegal. Now the rule is being challenged in court by Oklahoma in a suit legal analyst Stuart Taylor calls “by far the broadest and potentially most damaging of the legal challenges” to PPACA implementation, and more suits are likely.

The IRS defends its rule, but has had difficulty providing much by way of justification beyond vague references to congressional intent. Now comes my friend Samuel Bagenstos, at his Disability Law blog and Balkinization, arguing that Cannon and my arguments are “nonsensical” and “deeply legally flawed.” Bagenstos is a serious scholar, and his arguments are clever, but they do not sustain the case for the IRS rule.

Bagenstos’ central argument is similar one advanced by Tim Jost on the Health Affairs blog (and to which Cannon and I responded here). Essentially he argues that the PPACA makes federal fallback exchanges the legal equivalent of state-run exchanges and therefore any tax credits or subsidies authorized in the latter must be available in the former as well. Here is the argument as Bagenstos lays it out:

Although the tax-credit provision twice uses the phrase “Exchange established by the State under section 1311,” see 26 U.S.C. § 36B(b)(2)(A), (c)(2)(A)(i), that phrase does not have the exclusionary meaning Cannon attributes to it. That is because Section 1321 (codified at 42 U.S.C. § 18041) makes clear that, when a state fails to set up an exchange, the federally-operated exchange will stand in the shoes of the state exchange for purposes of Section 1311. Thus, Section 1311 provides that “[e]ach State shall” set up an exchange by January 1, 2014. 42 U.S.C. § 18031(b)(1). Section 1321 provides that if a state “will not have any required Exchange operational” by then — that is, an exchange required by Section 1311 — then the federal government “shall (directly or through agreement with a not-for-profit entity) establish and operate such Exchange within the State.” 42 U.S.C. § 18041(c)(1) (emphasis added). “[S]uch Exchange” in Section 1321 clearly refers to the “required exchange” — that is, the Section 1311 exchange. When the federal government operates an exchange pursuant to Section 1321, then, it is not operating some wholly foreign entity; it is operating the state exchange that Section 1311 required the state to set up but that the state failed to create. Because Section 1321 provides that a federally-operated exchange will stand in the shoes of a state-operated exchange created by Section 1311, there is no basis for denying participants in federally-operated exchanges the same tax credits obtained by participants in state-operated exchanges.

So, according to Bagenstos, when Section 1321 directs the federal government to create “such Exchange,” it is authorizing the federal Section 1321 exchange to operate as a Section 1311 exchange. As I said, it’s a clever argument, but it’s incomplete. Just because a federal exchange created under Section 1321 is subject to all the same requirements as a state exchange created under Section 1311 does not mean that tax credits available in a state exchange much be available in a federal exchange as well, particularly when the plain text of the statute provides otherwise.

First, Section 1311 expressly requires that an authorized Exchange must be “established by a State.” Section 1304(d) also expressly defines “state” as “each of the 50 States and the District of Columbia.” Later amendments to the PPACA also provide that Exchanges created by territories are to be treated as the equivalent of state-run Exchanges, but there is no such language concerning federally run Exchanges. But let’s set this aside and concede, for the sake of argument, that a Section 1321 Exchange is the equivalent (or “stands in the shoes”) of a Section 1311 Exchange. This is still not enough to sustain Bagenstos’s claim.

The eligibility requirements for the tax credits are laid out in Section 1401. This section repeatedly defines qualifying health insurance plans eligible for tax credits as those purchased “through an Exchange established by the State under section 1311.” We can read Section 1311 to incorporate Section 1321 as Bagenstos urges, but a federal Exchange is still not an Exchange “established by the State.” Bagenstos claims he has provided “the most plausible reading of the statutory text,” but to accept Bagenstos’s argument is to render this repeated language both redundant and surplusage. The “most plausible” reading of any statute is not one that requires the reader to ignore relevant statutory text or deprive it of any meaning, yet that is precisely what Bagenstos does.

Bagenstos goes on to argue that “nor is there any reason” why Congress would have conditioned the availability of tax credits on state cooperation. But of course there is. The authors of the Senate bill wanted states to create exchanges. The statute even purports to require states to do it. But Congress cannot tell states what to do. Thus it needed to provide them with an incentive to play along, and committing to create a federal exchange as a fallback is not much of a threat. So the Senate bill provides modest financial support for state creation of exchanges (but no money for oerating expenses) and threatens to withhold benefits – the tax credits and subsidies — in states that don’t comply. Where did the Senate get this idea? One possibility is our friend Tim Jost, who wrote in 2009 that Congress could try to induce states to create exchanges by, among other things, “by offering tax subsidies for insurance only in states that complied with federal requirements.” While less common than threatening to withhold funds (as was done with Medicaid) this approach is not unprecedented, and several of the pre-enactment Senate health care reform bills contained similar provisions explicitly designed to encourage state cooperation.

Bagenstos thinks the threat of withholding tax credits was unnecessary because the PPACA provides for a federal fallback exchange for noncompliant states, and this was enough to give the states a meaningful choice. But the PPACA’s authors did not want states to have such a choice, as indicated by the language of the bill, repeated statements that all states would (or would be required to) create their own exchanges, and the lack of any money in the bill to pay for creating federal fallback exchanges. The requirement that HHS create federal fallback exchanges in noncompliant states is hardly much inducement for state cooperation – and everyone knows it. Even when Congress puts a big pot of money on the table, as it did with the Medicaid expansion, states are reluctant to play along at their own expense. Conditional preemption is common in cooperative federalism statutes, but it is rarely sufficient to get states to toe the line. That’s why Congress sought to condition other funds on state participation on Medicaid’s expansion and why it would have been hopelessly naïve to believe that every state would create an Exchange – as PPACA advocates repeatedly claimed – without something else on the table. That something else is the availability of tax credits. The PPACA’s authors’ mistake was not in how they drafted the statute, but in believing they had done enough to get every state to create an exchange.

Bagenstos also takes issue with our reference to a colloquy in the Senate Finance Committee as further evidence that the Senate bill’s authors knew what they were doing. At a hearing, Senate Finance Chairman Max Baucus was asked to explain how the committee had jurisdiction to impose requirements on state-run health care exchanges. The answer, according to Sen. Baucus, was that the Committee could impose “conditions” on the receipt of tax credits. Precisely. Bagenstos argues “there is nothing the Finance Committee’s jurisdiction that required it to limit tax subsidies to participants in state-operated exchanges.” That’s true, but beside the point. If the Senate Finance Committee wanted to tell states how their exchanges were to be run, it needed a hook. That’s the role the conditional tax credits play. The Committee could write requirements for state-run exchanges because these requirements were “conditions” for receipt of tax credits.

In sum, the text of the PPACA is clear, as even some of our opponents have acknowledged. The alternative interpretation Bagenstos offers requires disregarding portions of the text and ignoring the statute’s history. Neither Bagenstos nor anyone else has been able to identify any statutory language or contemporaneous evidence from the legislative history that is inconsistent with Cannon and my account. There are lots of statements that tax credits would be available in every state, but even more comments that every state would create its own exchange, and the latter explains the former. The CBO scored the bill as if tax credits would be available in every state, but has admitted that it conducted no legal analysis of the Senate bill. Congress expected states would willingly create exchanges if given mild inducement, and the Senate bill was written accordingly. This was in error, but it does not justify rewriting the statute.

A final point: Bagenstos characterizes our paper as a “rearguard challenge to Obamacare,” implying the arguments were manufactured after the fact to “unravel” the Supreme Court’s NFIB decision. The suggestion is that these are arguments of convenience. Not so. Cannon and I raised these issues well before NFIB was argued, let alone decided. I first noted how the text of the PPACA limits tax credits to state-run exchanges in a talk at a health care reform conference in February 2011 (subsequently published that spring in the Kansas Journal of Law & Public Policy), without realizing how this language could affect PPACA implementation. Cannon and I also first collaborated on this issue in November 2011, before the IRS rule was finalized and before many thought judicial invalidation of the individual mandate (let alone the PPACA as a whole) was even a remote possibility. There are also larger issues at stake. Federal agencies only have that authority they have been delegated by Congress and are not authorized to rewrite statutes in response to changing political conditions. Therefore, just as I criticized the Bush EPA for taking liberties with the Clean Air Act, I am now criticizing the Obama IRS and HHS Administration for taking liberties with the PPACA.

For those who want more, Michael Cannon also responded to Bagenstos at the Cato@Liberty blog, prompting a rejoinder from Bagenstos here. For those who want more, Bagenstos and I will have the chance to debate this issue tomorrow during a Federalist Society teleforum. (Podcast to follow.) Cannon and I will also be posting a revised and updated draft of our paper on SSRN shortly.

The election may be over, but the work of “fact-checkers” continues. Last week, Politifact-Georgia waded into the debate over whether states should create health insurance exchanges with a fact check of my occasional co-author Michael Cannon of the Cato Institute. Specifically, Politifact evaluated the claim, made in this article, that:

operating an Obamacare exchange would be illegal in 14 states. Alabama, Arizona, Georgia, Idaho, Indiana, Kansas, Louisiana, Missouri, Montana, Ohio, Oklahoma, Tennessee, Utah, and Virginia have enacted either statutes or constitutional amendments (or both) forbidding state employees to participate in an essential exchange function: implementing Obamacare’s individual and employer mandates.

Politifact rated this claim as “false” because “federal law supersedes state law.” As the headline reiterated: “Experts say federal law trumps state law on ‘Obamacare exchange’ claim.” It’s certainly true that “federal law supersedes state law,” but it’s also irrelevant to the claim that state law precludes employees in these states from creating exchanges. Under the Supremacy Clause, validly enacted federal laws trump inconsistent state laws, but federal law cannot compel state officials to implement federal law. As the Supreme Court has made clear in numerous cases, and reiterated in NFIB v. Sebelius, the federal government may not commandeer state officials to implement a federal program. Therefore, federal law does not – indeed, cannot – compel Georgia (or any other state) to create a health insurance exchange and does not preempt a state law that prohibits state officials from doing so. Moreover, when asked, the one legal expert Politifact consulted told me she did not claim otherwise. More importantly, Cannon never claimed the federal government could not create an exchange in Georgia under federal law. Nonetheless, Politifact rated Cannon’s claim as “false.”

When challenged on the accuracy of the “fact check,” the author of the item, Eric Stirgus, wrote back:

It would have been helpful to us if Mr. Cannon had explained himself and provided any research he thought would have been useful during the reporting process. But he refused, citing a prior boycott of PolitiFact.

Mr. Cannon might have been trying to argue that state workers in places like Georgia are not compelled to participate in creating health care exchanges. But that argument is severely hampered by his beginning statement that “operating an Obamacare exchange would be illegal in 14 states.” It’s clearly not illegal. Had he omitted that phrase, he might have gotten a better rating on the Truth-O-Meter.

This response is quite disingenuous. Re-read the quote under examination above. Cannon did not “try” to argue “state workers in places like Georgia are not compelled to participate in creating health care exchanges.” He made that exact point in the second sentence of the quote under examination, when he noted state law “forbid[s] state employees” from implementing the federal law — the sentence conveniently omitted from Mr. Stirgus’s e-mail. In case there was any doubt, the whole point of the article from which the quote was taken was that states should not create health insurance exchanges and, in this very same article, Cannon noted that if states don’t create exchanges they will “default[] to a federal exchange.” So not only did Cannon not clam the state laws precluded the federal government from creating or operating an exchange, he actually noted that state failure to create an exchange could result in a federal exchange within the state. And as if that were not enough, in the original fact-check Stirgus cited from an e-mail Cannon sent to one of Stirgus’s colleagues at the Atlanta Journal-Constitution walking through his explanation of why Georgia law precluded Georgia’s creation of a health insurance exchange under the PPACA. Stirgus conveniently omitted mention of this too. It’s almost as if Stirgus was trying punish Cannon for refusing to cooperate in his fact check, but no professional journalist would do something like that when purporting to conduct a neutral “fact check.”

If Politifact had wanted to evaluate the substance Cannon’s actual claim, it would have considered the text of the Georgia law and analyzed whether it would, in fact, preclude state employees from implementing a health insurance exchange. It didn’t need a further response from Cannon to do this, as the basis of his claim was abundantly clear. I think Cannon makes a compelling case as the Georgia law prohibits even “indirect” implementation of health care mandates and state-run exchanges provide the trigger for enforcement of the employer mandate, but I am not an expert on Georgia law. At the very least it would seem that this claim is a debatable legal proposition. Yet Politifact never considered this issue. Down in Georgia, this is apparently what passes for a “fact check.”

Oklahoma Attorney General E. Scott Pruitt today filed an amended complaint in the state’s lawsuit against the Patient Protection and Affordable Care Act that, among other things, challenges the legality of an IRS rule that would authorize tax credits for the purchase of health insurance in federally run exchanges, and thereby expose Oklahoma employers to penalties should they fail to comply with the law’s employer mandate. Here’s AG Pruitt’s press release and an early news report. For background on the issues in this suit, see here.

In related news, Hobby Lobby filed suit against the so-called contraception mandate last week. With this filing, there are now over two-dozen suits pending against the requirement that employers include coverage for government-approved methods of contraception in health insurance plans offered to their employees. Whatever the outcome of the direct challenges to this policy, should Oklahoma’s claim that the IRS rule is illegal prevail, the contraception mandate would be unenforceable against employers in states without state-run exchanges. For this reason, I would not be surprised if some of the plaintiffs challenging the contraception mandate opt to challenge the IRS rule as well.

UPDATE: Oklahoma’s amended complaint is here.

The PPACA provides for tax credits and subsidies to help eligible taxpayers purchase health insurance in state-run health insurance exchanges. Although the text of the statute only provides for the issuance of credits in exchanges “established by a state,” the IRS has issued a regulation providing for the issuance of tax credits and subsidies in federally run exchanges as well. (More here and here.) This is significant because a substantial number of states are refusing to create their own exchanges, and the question could well end up in court.

As a normal matter, individuals lack standing to challenge the legality of favorable tax treatment given to someone else. In this case, however, employers in states with federal exchanges could sue to challenge the IRS rule because the issuance of tax credits will trigger penalties on employers under the so-called employer mandate. What about individuals? It turns out, some individuals in states that do not create their own exchanges may have standing to sue as well, as Michael Cannon and I explain in the revised version of our forthcoming paper in Health Matrix.

The reason some individuals could have standing to challenge the IRS rule is that the issuance of unauthorized tax credits in federal exchanges would expose them to tax penalties under the individual mandate. This is because liability for the individual mandate tax penalty is based upon the cost an individual has to pay for qualifying health insurance. If an individual’s “required contribution” exceeds 8 percent of household income, they are exempt from the penalty. By providing a tax credit and subsidies, the IRS rule reduces the cost of purchasing a qualifying health insurance plan, thereby exposing some individuals who do not wish to purchase health insurance to the tax penalty. Therefore, an individual who lives in a state that will not establish an Exchange by 2014 and that would otherwise qualify for the affordability exemption in the absence of tax credits would have standing to challenge the rule, provided that they earn between 100 and 400 percent of the federal poverty level, do not receive health insurance from their employer, and would be exposed to the tax penalty due to the availability of tax credits under the IRS rule. Given that several million Americans satisfy these criteria, I would not be surprised to see some file suit.

Today the House Committee on Oversight and Government Reform is holding a hearing on the Internal Revenue Service’s role in “Enforcing ObamaCare’s New Rules and Taxes.” Among the subjects of the hearing is a recent IRS rule authorizing tax credits and subsidies for the purchase of qualifying health insurance plans in federally-run exchanges. Although the plain text of the PPACA only authorizes tax credits in state-run exchanges, the IRS promulgated this rule to ensure the credits (and associated subsidies) are available nationwide. This rule will affect quite a few states because somewhere between 15 and 30 states (if not more) will fail to create exchanges by 2014. The rule is also illegal.

I have co-authored testimony for the hearing with Michael Cannon of the Cato Institute arguing that the IRS rule is not authorized by the PPACA. The testimony is largely based on our forthcoming article in Health Matrix. As we explain in the article, the rule is not authorized by the plain text of the PPACA, nor can it be justified by resort to the statute’s legislative history or congressional intent.

The most prominent critic of our position is Professor Tim Jost of Washington & Lee, who will also be testifying at the hearing. He criticized our position on the Health Affairs blog. Wednesday, Health Affairs posted our response. As we note, Jost has moderated and modified his position since he first critiqued our claim. More importantly, Jost fails to identify any statutory language or evidence from the legislative history that contradicts the plain text of the statute. Nor, for that matter, has the IRS. We’ll see if they have any more evidence in support of their position at the hearing.

The heart of Jost’s claim is that the PPACA’s supporters would have wanted tax credits to be available in every state. Perhaps so, but that’s not the bill that was enacted. They also believed every state would create their own exchanges (which explains why the CBO, among others, scored the bill as if every state would have an exchange). Had states acted as the PPACA’s supporters hoped and anticipated, there would be no issue. But the failure of states to fall in line hardly justifies the IRS’ effort to rewrite the statute after the fact.

For more on this issue, see my prior blog posts on the subject here, here, and here. See also some of the coverage our forthcoming paper has received, such as here and here.

UPDATE: A few comments in response to some of the queries and comments below.

First, I came upon this wrinkle in the law quite by accident, and well before the IRS proposed its rule, when preparing this article. I was not aware of the implications until much later.

Second, my interest in this sort of question — the scope of authority delegated to agencies — extends well beyond the PPACA. See, for instance, this article, which is quite relevant to the Chevron issues here.

Third, I oppose the IRS rule, first and foremost, because it is illegal. I was also critical of the Bush Administration for pursuing policies that conflicted with the relevant authorizing statutes (e.g. some of the Bush EPA’s illegal air pollution rules) even where I was sympathetic with some of the underlying policy preferences.

Fourth, it is misleading to say this is an effort, first and foremost, to eliminate tax credits. As out testimony and article note, for every $2 in tax credits allowed by the IRS rule, there are $8 in unauthorized appropriations (in the form of payments to insurance companies) and $1 in penalties imposed on employers. I have no opposition to the provision of tax credits for the purchase of health insurance — indeed, I like the idea of using such tax credits to eliminate the tax preference for employer-provided insurance — but I believe tax credits and outlays must be authorized by Congress, and neither was here. Some federal agency could unilaterally enact tax credits to the most deserving group imaginable on day one of a Romney administration, and if they weren’t authorized by Congress (and particularly if they triggered unappropriated outlays too), I’d be first in line to attack that policy as well.

Unless the Supreme Court decides to eliminate the Patient Protection and Affordable Care Act in its entirety, Florida v. Sebelius is not the end of health care reform litigation, but only the beginning. Lawsuits are already pending challenging everything from the contraception mandate to the black lung benefits provisions to the structure of the Independent Payment Advisory Board, as Reuters reported last week. More will follow.

In tomorrow’s USA Today, Cato’s Michael Cannon and I discuss another potential lawsuit that will be filed if the health care law survives: A challenge to the IRS rule providing tax credits and premium assistance for qualifiying health insurance plans sold on federally run exchanges. As I noted here and here, the text of the PPACA only authorizes tax credits and premium assistance for insurance plans purchased in state-run exchanges. If a state refuses to create an exchange, the federal government is supposed to create a “fallback” exchange, but the law does not provide for tax credits and premium assistance for insurance plans purchased on these “fallback” exchanges. The IRS rule tries to fix this by rewriting the statute, without any textual warrant. I discussed the rule in this Cato video.

The IRS rule may be illegal, but that doesn’t mean there will be a lawsuit. As a general rule, taxpayers lack standing to challenge the misuse of federal funds or preferential tax treatment given to others. Were tax credits and premium assistance the only consequence of the IRS rule, there would be no viable litigation. As the law is written, however, the IRS rule triggers other consequences that will provide a basis to challenge the rule. The PPACA contains an “employer mandate” that requires larger employers to provide minimum health coverage to their employees. Those who fail to do so must pay a financial penalty. This penalty is not automatic, however. Rather it is triggered by the issuance of a tax credit. So by expanding tax credit eligibility to federal exchanges, the IRS is exposing employers in states without their own exchanges to financial penalties, and this should be sufficient for an affected employer to file suit.

if and when a lawsuit is filed, I am reasonably confident the IRS rule will fall. The text of the statute is clear. When Michael Cannon and I first wrote about these provisions, and the then-proposed IRS fix, we considered the possibility that the PPACA’s text, however clear, was inadvertent. Having now had the opportunity to review the relevant legislative history, we are convinced the limitation of tax credits and premium assistance to state-run exchanges was intended as an incentive for states to create their own exchanges. The evidence in the record on this point is abundant and clear, which would explain why the IRS has had such a hard time citing any specific text or history in support of its rule.

As things turned out, a substantial number of states find the PPACA’s incentives insufficient, and are refusing to play along. The mistake PPACA supporters made was not in drafting the statute’s text but in assuming states would go along with the federal plan. This may mean the PPACA cannot be implemented as intended, but it would take more than that to justify the IRS rule.

UPDATE: Michael Cannon has more here.

As I discussed in this post, the IRS is proposing to give tax credits as premium assistance more broadly than is authorized by the text of the Patient Protection and Affordable Care Act (PPACA).  Specifically, the law only authorizes such premium assistance for health insurance purchased in state health care exchanges, but the IRS is proposing to provide such assistance for insurance plans purchased on federally run exchanges as well.  In today’s WSJ, the Cato Institute’s Michael Cannon and I argue the IRS lacks the authority to make this fix and expand on the implications of this glitch in the law.  Not only will it hamper the law’s ability to hold down health insurance costs borne by individuals, it could also frustrate enforcement of the employer mandate.

What happens if the IRS goes ahead with its proposed fix?  Would anyone have standing to challenge this violation of the law?  Normally the answer would be no, as no taxpayer would have standing to challenge an IRS decision to give preferential tax treatment to someone else.  But in this case standing is likely because, as discussed here, premium assistance is tied to the enforcement of the employer mandate in a way that would give a penalized employer standing to sue.  So if the IRA goes ahead, this is another PPACA issue that will end up in court.

The Internal Revenue Service is beginning to promulgate regulations to implement the tax-related provisions of the Affordable Care Act (aka “ObamaCare”). A proposed rule issued last month provides that eligible taxpayers may receive tax credits for the purchase of qualifying health insurance plans established by states under Section 1311 or by the federal government under Section 1321. The only problem is that this is not consistent with the actual text of the statute passed by Congress.

ACA Section 1401 provides that eligible taxpayers may receive income tax credits for purchase of insurance “through an Exchange established by the State under Section 1311.” Section 1311 calls upon states to establish health insurance exchanges. It does not provide for the federal government to create health care exchanges. Rather, a separate provision of the act, Section 1321, provides that if a state does not “elect” to create an exchange that meets federal requirements, the federal government shall then “establish and operate” an exchange. Thus, under a plain reading of the text, the ACA only provides for tax credits for state-run exchanges, and if states fail to create exchanges, there are no tax credits for insurance bought on a federally run exchange.

This is potentially significant for several reasons. The individual mandate requires all Americans to purchase health insurance. Even if the mandate is successful at reducing adverse selection, health insurance premiums are still expected to rise due to other provisions in the law.   Higher premiums could make it difficult for many Americans to comply with the mandate. For this reason, Congress not only called upon states to create exchanges, it also authorized tax credits to offset the cost of health insurance premiums for those with incomes between 100 and 400 percent of the poverty level.   But if these tax credits are only available for insurance purchased through state-based exchanges, many will be left high-and-dry in states that don’t create their own exchanges — and this could be a big problem. According to one recent report, only ten states had passed legislation to create qualifying exchanges through August 2011. (See also here.)

As David Hogberg reports in IBD, this has led some to believe the limitation of tax credits to state-based exchanges is a mistake. Under this theory, Congress meant to provide tax credits for any exchange-purchased insurance, because Congress wanted lower-income individuals to be able to purchase health insurance (and comply with the mandate). This may be true. As Vanderbilt’s James Blumstein tells IBD (and I discussed in this paper), the exchange-related provisions of the law were not written all-that-carefully. Nonetheless, federal agencies lack the authority to unilaterally revise statutory mistakes. (A point Cato’s Michael Cannon also makes here.)  Congress may have wanted to make tax credits more widely available — just as it may have wanted those making less than poverty-level income to be eligible for exchanges as well — but that is not what Congress did.

The IRS may be inclined to argue that the failure to include a reference to federally run exchanges or Section 1321 in Section 1401 was a “scrivener’s error” that should be disregarded. But this is a difficult argument to make in this case for several reasons. First, a “scrivener’s error” is supposed to be that – a purely clerical error that could be attributed to a failed transcription or something of that sort. An example would be mistaking the relevant subsection in a statutory cross-reference – say mistaking “(i)” for “(ii)” or “Section 36B(B)(I)(b)” for “Section 36(B)(I)(b),” or screwing up punctuation. The alleged error here is more significant, however. Not only did Congress forget to include any reference to Section 1321, it also expressly stated that the tax credits were for insurance purchased through “an Exchange established by the State.” So a legislator reviewing the relevant language could not claim that they did not realize the statutory cross-reference excluded federal exchanges because the clear text of the statute does as well. In other words, any legislator who actually bothered to read the bill before voting would have seen the limitation.

Another problem for the “scrivener’s error” argument is that it is usually dependent on showing that it is implausible, and not merely unlikely, that the statutory provisions were a mistake. As the Supreme Court explained in U.S. Nat. Bank of Oregon v. Independent Ins. Agents of America, Inc., 508 U.S. 439 (1993), this will be shown in the “unusual” case in which there is “overwhelming evidence from the structure, language, and subject matter of the law” that Congress could not have consciously adopted the language in the statute. Similarly, in Appalachian Power Co. v. EPA, 249 F.3d 1032 (D.C. Cir. 2001), the D.C. Circuit explained that:

We will not . . . invoke this rule to ratify an interpretation that abrogates the enacted statutory text absent an extraordinarily convincing justification because . . . the court’s role is not to correct the text so that it better serves the statute’s purposes, for it is the function of the political branches not only to define the goals but also to choose the means for reaching them. . . . Therefore, for the [agency] to avoid a literal interpretation . . ., it must show either that, as a matter of historical fact, Congress did not mean what it appears to have said, or that, as a matter of logic and statutory structure, it almost surely could not have meant it. [internal quotations and citations omitted]

Given what’s in the ACA, this is a showing that the IRS and HHS would have a hard time making. While it is certainly plausible – perhaps even likely – that many in Congress wanted tax credits for the purchase of health insurance to be broadly available, there is also ample evidence that the ACA was designed to induce states to create exchanges of their own. For example, Section 1311 directs states to create exchanges. Further, as Blumstein notes, under the ACA the federal government could sue to force a state to create an exchange. As in other policy areas, the federal government can’t force states to comply, so it uses a combination of positive and negative incentives – in this case, subsidies for creating exchanges and the threat of a federally run exchange if a state does not create one on its own. In this context, limiting the availability of tax credits to insurance purchased in state-run exchanges can be seen as just an added inducement. Much like the Clean Air Act threatens states with the loss of highway funds if they fail to adopt sufficiently stringent pollution control programs, the ACA as written threatens states with the loss of tax credits for state residents if they do not create an exchange. Such a policy may not be wise or fair – and may undermine the goal of getting more people insured – but it takes far more than that to justify ignoring a statute’s plain text.

Neither the IRS nor HHS has addressed these concerns as far as I’m aware, nor has anyone else. I’ll certainly do a follow-up post if such arguments are out there. I noted that the ACA’s text limits subsidies to state exchanges at a conference on health care reform and the states last fall, and no one suggested I was in error, but that does not mean I am right. It’s also possible there’s some other overlooked provision of the ACA that could be used to solve this problem. If so, I couldn’t find it, but I’ll also post an update if such a provision is found. In the meantime, the limitation of tax credits to those who purchase their insurance in state-run exchanges could be unwelcome news to those in the majority of states yet to create exchanges of their own.

I should also note that I have not addressed what would happen if the IRS were to just go ahead and finalize regulations providing for tax credits beyond those authorized by the ACA’s text. Under such a scenario, standing to challenge the IRS’ action in court would certainly be a big issue. As a general matter, there is no standing for a taxpayer to challenge a tax benefit conferred upon someone else. But the IRS, like all federal agencies, has an independent obligation to comply with the law, and I do not know of anyone who has argued that the IRS may create tax credits at will just because it thinks that’s what Congress meant to do and such actions are not easily challengable in court. Just imagine the sorts of mischief such a doctrine could unleash.