Why the Federalism Teachings from the 2012 Obamacare Case Weaken the Challengers’ Case in King v. Burwell


In an essay for this website a few weeks ago, my fellow columnist and friend Mike Dorf wrote about how the Obamacare statute (Act) might be in danger in the King v. Burwell case pending at the Supreme Court today because of things various Justices felt and said in the 2012 Obamacare case, National Federation of Independent Business v. Sebelius (National Federation). Mike focused particularly on the views expressed by four dissenting Justices in 2012 that the so-called individual mandate exceeded Congress’s powers and that the whole Obamacare statute was constitutionally invalid. I agree with Mike that the National Federation case is very relevant to the current dispute, but I see important ways in which Obamacare is less vulnerable, rather than more vulnerable, to the statutory challenge brought today because of what was said and done at the Court two years ago.

Background on the King v. Burwell and National Federation Cases

As Mike ably explained, the King v. Burwell lawsuit currently in front of the Justices asks whether a provision in the Obamacare law that permits federal tax credits to be given to qualified persons who purchase health insurance on an exchange “established by the State” also permits tax credits for individuals who purchase insurance on the so-called federal exchange that was set up (pursuant to the Act’s provisions) by the federal government in those states that chose not to set up exchanges themselves. According to the plaintiffs in King, federal tax credits are not available under the Act to citizens of states that did not set up Obamacare exchanges, because Congress wanted tax-credit eligibility to operate as an incentive for states to set up exchanges so that the federal government wouldn’t have to undertake the work.

Although the question is one of statutory construction, rather than constitutional authority, it has momentous implications; if federal tax credit subsidies are not available on the federal exchange, then a great many uninsured folks will remain uncovered, and a great many healthy individuals will be left out of the insurance market pools that experts say must be large and robust for Obamacare to work.

The question in King primarily comes down to the statutory meaning of the term “established by the State,” in the context of a large and complicated statute that uses this and similar terms in many different places, and that also directs the federal government, in those states that decline to erect exchanges, to set up “such” exchanges itself. I agree with Mike that the best reading of the complicated, interlocking statute—as a whole and in light of sensible canons of statutory construction—indicates that subsidies are available on federal exchanges, and that at the very least the Obama Administration is reasonable in embracing and acting on such an interpretation.

As Mike points out, however, Obamacare has many detractors, both on and off the courts, and some Justices may be looking for ways to avoid giving workable effect to the ambitious statute. Specifically, Mike analyzes the possibility that the four Justices who dissented in the 2012 National Federation case (Justices Scalia, Kennedy, Thomas, and Alito) might, notwithstanding the principle of stare decisis, stick to their 2012 stance—that the individual mandate runs afoul of the Tenth Amendment and the whole statute must be jettisoned—and continue to reject any application of Obamacare.

The scenario Mike posits is certainly plausible; stare decisis principles are pretty malleable and seem to be frequently ignored by many if not all of the Justices (albeit in different cases) in disputes involving the Tenth Amendment and other constitutional questions. Nonetheless, I am more sanguine than Mike about whether the four 2012 dissenters will brush aside stare decisis cautions and use their 2012 views to block Obamacare today, for two reasons.

First, a crucial bloc of the Supreme Court (with Justice Kennedy being a key member) in the famous 1992 Planned Parenthood v. Casey case involving the continuing vitality of Roe v. Wade, observed that when the Court, in the absence of “the most compelling reason,” overrules a “watershed” decision “under [political] fire,” it runs the risk of “subvert[ing] the Court’s own legitimacy beyond any serious question.” The National Federation ruling was a “watershed” moment for the Court, Obamacare remains “under [heavy] fire,” and a Supreme Court U-turn on Congress’s power to enact the law could be understood by many as a concession to the political pressure. Indeed, any 5-4 ruling next summer gutting Obamacare would no doubt be viewed by a wide swath of Americans first and foremost as a Republican-appointed Supreme Court doing the bidding for Republicans who don’t have the votes in Congress to repeal the divisive law.

Interestingly, this “don’t overrule under fire because to do so will damage institutional legitimacy” argument has more force here than it did even in Casey, because Roe itself was a decision that many analysts believed had the effect of undermining the Court’s legitimacy—insofar as Justice Blackmun’s majority opinion in Roe wasn’t tightly grounded in distinctively constitutional arguments—so that leaving Roe intact was not without legitimacy costs. Whatever one thinks of the National Federation ruling upholding Congress’s power to enact Obamacare, that ruling—because it deferred to rather than overrode the elected branches—has not opened the Court to the same kind of charge of sitting as an “unelected super-legislature” that Roe has.

My second reason for thinking the National Federation dissenters may have a somewhat tough time relying on their 2012 stance has to do with technical differences in stare decisis between constitutional interpretation cases and statutory construction decisions. Stare decisis is a rather flexible constraint in constitutional matters, whereas the Court has made clear that the bar for overruling a past decision that was construing a federal statute is particularly high (presumably because Congress can fix erroneous judicial constructions of statutes more easily than it can correct wrong-headed readings of the Constitution). As Mike pointed out, in the National Federation case, the dissenters thought that the mandate was unconstitutional, and “also thought that the entire law had to fall with the mandate.” That latter question—known in the business as “severability”—turned on how interlinked all the parts of the Act were, and whether any of the law could stand if the “pillar” (as the dissenters called it) of the mandate were invalidated.

The question of interrelationship between the various parts of Obamacare is ultimately a question of how best to read the statute and Congress’s intent. Five Justices in 2012 rejected the dissenters’ “pillar” reading, and although these five didn’t speak explicitly to the relationship between individual mandate in particular and the rest of the law, the majority certainly read the interrelatedness of the overall statute and Congress’s intent differently from how the joint dissenters did. So even if the four 2012 dissenters felt unbound by the National Federation Court’s ruling on whether the mandate exceeds federal authority, they would also (in order to block Obamacare because of the mandate today) have to explain why they should not obey the 2012 majority’s statutory interpretation on the question of severability. It would not be impossible for the 2012 dissenters to make some arguments here, but such arguments might look result-oriented when they minimize the effect of statutory stare decisis, ordinarily an uncontroversial topic.

How the National Federation Case Bolsters Obamacare Against the Current Challengers

There is another aspect of the National Federation case, an aspect on which seven Justices (including the joint dissenters) agreed, that bolsters rather than weakens Obamacare against its current challengers. I refer here to the Medicaid expansion part of the 2012 decision, in particular the Court’s holding that Congress could not “surprise[e]” states by enforcing terms of a Medicaid bargain that were not “unambiguously” declared when the Medicaid deal was offered to states decades ago. Because the statutory provision entitling Congress to make alterations or amendments to Medicaid could “reasonably” be “assume[d]” by states to mean that Congress can make “adjustments” but not “transform[ations], states were protected against substantial retroactive conditions Congress sought to attach.

National Federation is just the latest in a line of case in which the Court has noted that “legislation enacted pursuant to the spending power [when the federal government is offering money to states to promote the general welfare] is much in the nature of a contract,” and that the legitimacy of deals offered to states:

rests on whether the State voluntarily and knowingly accepts the terms of the “contract.” There can, of course, be no knowing acceptance if a State is unaware of the conditions or is unable to ascertain what is expected of it. Accordingly, if Congress intends to impose a condition on the grant of federal moneys, it must do so unambiguously. By insisting that Congress speak with a clear voice, we enable the States to exercise their choice knowingly. . .

The theory behind this requirement that Congress speak “unambiguously” and with a “clear voice” seems pretty straightforward (even though the Court has not spent a lot of ink elaborating it): Because states are worthy of special respect as important partners in our federal system, we want to minimize the risk that states accept or forgo federal moneys without an accurate sense of the consequences of their actions.

How does this play out in King? Well, even if the challengers are correct that the best reading of the phrase “established by the State,” in the context of a complicated 900-page statute, means that Congress did not intend for citizens of states that did not set up exchanges to be able to obtain the tax credits, it’s hard to believe that the statute puts states on clear notice of that consequence. The statute never explicitly says (in so many words) that a state that does not set up an exchange gives up tax credits for its residents. And this Congressional message—if it be a message—seems not to have been effectively communicated. After all, various judges in the D.C. and Fourth Circuits don’t read the statute the way the King challengers do. The I.R.S. hasn’t read the statute the way the challengers do. One of the architects of the challenge (who was presumably familiar with the big aspects of the law shortly after its enactment) is reported to have said he was “surprised” when he discovered the reading that he now embraces. Key members of Congress did not publicly communicate the reading of the statute the challengers assert at the time of enactment. I am aware of no journalist who offered that interpretation of the statute at the time it was passed and presented to the states.

And, most importantly, states do not seem to have said or done things that suggest they actually understood the statute the way the challengers do, at the time decisions were made about whether to set up an exchange in each state. (If there are states that took actions indicating they understood “the deal,” such actions should be highlighted.) The absence of state conduct suggesting awareness is particularly powerful, because as to the Medicaid expansion provisions that were litigated in National Federation, governors in states that declined the expansion did feel obligated to defend to their voters the decision to turn down federal money. No such explanations seem to have been offered by governors or legislators in states that decided not to set up exchanges about why turning down federal money was the right thing to do notwithstanding the cost. And one would certainly expect a lot of explanation if states understood they were giving up tax credits for their citizens.

Even the joint dissenters in National Federation, in describing the way exchanges would work, seemed not to see the deal the King plaintiffs say Congress offered. The dissenters observed that, in order to accomplish its statutory goal of near-universal coverage, “Congress provided a backup scheme” for those states that did not set up exchanges: “If a State declines to participate in the operation of an exchange, the Federal Government will step in and operate an exchange in that State.” The implication in this passage is that the Federal Government’s exchange would operate, as regards the goal of making insurance coverage more available, just as a state-established exchange would.

It is of course possible that the statute is “unambiguous” and “clear” in offering the deal the challengers assert, and that most everyone simply missed that clarity for months leading up to and following from the law’s enactment. That judges and Justices, and journalists, and law professors, and members of Congress, and governors and state legislators all failed to see this plain aspect of the statute does not mean that it is not there. To the extent that the Court’s doctrine does not require actual, subjective knowledge by states (a true meeting of the minds) as to what is expected of them, but rather only an easy ability to ascertain what the expectations are (a question Supreme Court cases don’t fully answer, as far as I am aware), then the fact that many reasonable people didn’t notice something doesn’t mean there wasn’t notice.

But even if the test focuses only on objective clarity—a plain statement of the contract terms so that states can know what they are getting into or turning down—it’s hard to see how the challengers’ reading of Obamacare can prevail. Can anyone really credibly argue that states were put on more clear notice of the loss of tax-credits by the use of the term “established by the State” alongside the federal power to create “such” exchanges in the context of an interlocking and convoluted statute than they were that Congress might make major changes to future Medicaid eligibility when Congress explicitly reserved for itself the power to “alter, amend or repeal any provision” of the Medicaid program (the term at issue in National Federation)? The challengers’ reading of the statute (even assuming it is the best overall reading) is clearly visible only in the way Waldo’s whereabouts are plain and clear after your child circles him with a highlighter on the page for you. If the deal Congress offered to states (according to the Obamacare challengers) was clearly presented in the statute, then we will have effectively overruled the “clear voice” requirement altogether, which is something a Court that is supposed to care about federalism should be loath to do.

In Part Two of this series, to be posted next Monday, I take up counterarguments and additional questions raised by this federalism defense of federal exchange tax credits, including: (1) Why this federalism argument might be particularly important; (2) Why this federalism argument doesn’t involve the same inquiry as so-called Chevron deference to administrative agency interpretation; and (3) Why federal tax credits to individual state citizens should be treated the same, for these purposes, as federal moneys given over to state coffers.

  • orwell

    If the court reads the statute to permit subsidies only where a state exchange is established, there seem to be two potential constitutional problems.
    First, if the subsidies are tax credits, then they would seem to violate the uniformity clause.
    Second, whether the subsidies are tax credits or spending, they are a level of coercion not seen before in a “cooperative federalism” program. The federal government is essentially offering bribes to the people of a state to coerce the sovereign to bend to the federal will. In all other federal-state programs the “contract” is between the federal government and the state with benefits and costs flowing directly between those parties. In this case, it is more like blackmail with the federal government saying to the state, “build the exchange or your people get no tax credits.” It is an interference by the federal government in the most basic relationship between the sovereign and the people of the state. That has never been done before and would seem to be unconstitutional on federalism grounds.

    • Joe Paulson

      The subsidies were set forth via a “uniform” rule that does not violate the constitutional provision. A uniform rule in practice might result in different states being affected somewhat differently, but that in itself does not violate the provision.

      The second ‘problem’ would deem lots of standard strings to spending unconstitutional. The states don’t have some “right” to tax breaks. “Blackmail” is a scary sounding word for the quid pro quo that is involved in lots of spending programs. Here it also is part of a reasonable overall program that promotes “general welfare” as well as smooths out a major complication in a large fraction of “interstate commerce” (the insurance market particularly). Simply put, it was “done before” and is legit.

      • orwell

        My apologies for the late response. The subsidies, if they are tax credits and if the Court construes the statute’s plain text to apply as written, operate differently in different states. Unless the Court finds that the distinction between plans offered under the federal exchange and plans offered under state exchanges, a distinction created by Congress, somehow justify offering credits in one place and not the other, the subsidy scheme would seem to be non-uniform taxation.

        Also, while it is true that tax reductions (more often in the form of a tax deduction, which also operate to reduce one’s taxes) are often dependent on state law to one degree or another, I think this is the first time payments from the federal government directly to a state’s residents are exclusively dependent upon the sovereign doing something that many of those sovereigns are not inclined to do. That interjects one sovereign (the federal government) in a hostile way into the internal relationship between the other sovereign (a state) and the other sovereign’s constituents. This is unique and quite corrosive on our federalist system.

        Plus the ACA leaves those state residents far worse off than if the ACA did not apply to them in the first place, which is why it is blackmail. I have always been a fan of JK Rowling’s Dumbledore (“Always use the proper name for things.”).

        The combination of three things, the ACA’s underwriting rules, the individual mandate and the tax credits conditioned upon a state establishing an exchange, operates an unconstitutional coercion upon the states, and the Court should so rule, much like it did with the penalty for a state’s failure to expand Medicaid. The remedy should be that none of the three elements that operate in combination to coerce the states should apply in any state refusing to establish an exchange.

  • John P

    Why is it i have read article after article speculating, posturing, and guessing at the political motives/possibilities behind the 5-Republican justices when it comes to this case, but not one questions the 4 Democratic ones? I just find it more telling that people have essentially acknowledged that regardless of the merits of the petition the 4-Democrat bloc will never waver in THEIR politically-motivated voting pattern. I think that’s a huge blow to the Court’s legitimacy but seems to get a pass time after time after time. What a shame.

    • RichardU

      That is why people get shocked when seven justices find Medicaid expansion in Obamacare is unconstitutional coercion.

    • Joe Paulson

      The problem is that the “problem” flagged by the litigation is specious and putting aside political opposition to ACA, little merit is present. Using standard principle, e.g., Scalia would laugh at the textual argument made. In some other case, you might be able to find such hypocrisy coming from the left, but sorry if the hypocrisy from the right being called out here comes off to you as unfair or something.

    • Max Herr

      You raise a valid concern, and it’s obvious what the answer is if you closely follow the varied “Verdict” columnists and their posts. The Left rules here, as it does in many of the public media outlets. The only thing left to the imagination is what Congress will actually be able to accomplish in its reconstituted form in 2015.

  • RichardU

    I wish laws just meant what they said so us normal folks, who are expected to obey said laws, can actually understand them. As a non-lawyer, it’s pretty weird to hear people say “by a state” only makes sense to read as “by the federal government” as it seems every lawyer says is the case. It kind of feels like you guys just make it up as you go along.

  • pvine

    If the ACA didn’t put states on clear notice that their residents would not get federal tax credits unless they established an exchange, they are on notice of that possibility given the cert. grant.

    Any bets on whether any of the 36 states that didn’t establish a state exchange are going to do so at this point? I would venture to guess that none of those states will establish a state exchange between now and the date the Court issues its opinion. Or, stated differently, the “no-clear-notice” argument strikes me as a red herring. Notice or no notice, the Red states without state exchanges don’t seem to give a hoot about whether their residents would lose tax credits. Rather, those states (following up on their refusal to expand Medicaid) are more concerned with destroying the ACA.

  • What a mess.

    I’m truly torn between what would be worse, court overturn or some mangled “bi-partisan” Frankenstein monster with a brain from “Abby Normal”.

    Regardless… as long as I am REQUIRED to purchase Health Care I will support ANYONE who will end the “mandate”.

    I’ve never been a “single issue voter” in the 30+ years I have been voting but I AM ONE NOW!

    I have only mild objection to “my” wages going toward someone else’s Health Insurance (not to be confused with Health “Care”) and only becase I am painfully aware of the theft & waste that inevitably takes place as my money goes from my familie’s needs to someone else’s.

    I would swallow hard and reluctantly support a new tax to cover the truly needy if we could have a Health Care system that wasn’t being bogged down by indefensible regulations like “no coverage across state lines” (for instance).

    But this is a fantasy… Obamacare has “fundamentally transformed” what was a politically influenced Health Care Systems into one that exists exclusively for political purposes.

    Under Obamacare, weather you happen to actually get “Health Care” or NOT …is just a side note.

    You have “Insurance”.

    • Joe Paulson

      If you don’t want to buy “health care” (when you get sick, stay sick?), you don’t have to. The issue here is “insurance” and if you don’t buy that, unless you don’t make enough money or some other reason (covering millions of people here), you get a tax break if you do. This is true for a range of things you are given a choice to do.

      Your wages do go to others health care — e.g., taxes are taken out for Medicaid and Medicare. I’m glad you are only mildly upset that taxes go to things like paying for the health care of little children who need it but don’t have the means otherwise to pay for it. The safety net being something present since ancient times in some fashion.

      Health care before and after the passage of PPACA was heavily regulated in a range of ways. The use of terms like “Obamacare” doesn’t change this. The new law did change certain things here, including helping many more people to get health care such as those under 27 on parents’ plans etc. This to some is not a bad thing.

  • Frank Willa

    The issue of the circumstances of applying the tax credit may not be as simple as the statutes’ words; I view it also as it plays out in the real world. It seems that in states that do establish an exchange the tax credit will apply. I hope that the court will consider what happens if someone from a state that has a state exchange moves mid-year to a state that does not and so there is the Federal exchange. The Healthcare.gov sites indicates that someone moving to another state mid-year must notify them and re-apply for coverage; will that year’s tax credit continue in force. Is there justifiable reliance on receiving the credit by that person that they will receive the tax credit for that whole of the year? The reverse scenario also presents a question that may shed light on whether the tax credit attaches to the state or the individual. If someone moves from a Federal exchange state, possibly no tax credit, to a state exchange state mid-year will they be excluded from the tax credit for the year, or will a pro-rata credit apply? Is this made clear in the ACA? What happens if a Federal exchange state changes its’ position and establishes a state exchange before the court’s decision; or a state dissolves its’ state exchange to leave it to a Federal exchange; will the effect of the courts’ decision require a pro-rata calculation, or a prospective timing of the effect of the decision? I hope the answer by the court is well reasoned and based in intellectual legal reasoning and not political ideology.