Did Federalism Rescue Obamacare?

During last week’s oral argument in King v. Burwell, all eyes and ears were initially trained on Chief Justice Roberts—who broke ranks with his conservative colleagues three years ago to cast the fifth and decisive vote to sustain the Affordable Care Act (ACA or Obamacare) against a challenge to its constitutionality.

In King, the plaintiffs argue that a provision in the law providing subsidies to people required to purchase health insurance applies only in states where the state government itself has established the health insurance exchange, and thus makes such subsidies unavailable in the 34 states in which the federal government operates the exchange because the state chose not to establish one. Would Chief Justice Roberts once again save Obamacare, this time by accepting the government’s argument that, understood in context, the provision’s limitation of subsidies to persons who enroll in a health insurance plan on “an Exchange established by the State under” another provision of the ACA includes plans offered on exchanges established by the federal government standing in the shoes of the state?

After the oral argument, it is anyone’s guess how the Chief Justice is leaning. He asked few questions, and with one important exception, those he did ask related to the threshold jurisdictional question of standing.

But meanwhile, another conservative-leaning Justice emerged as the possible savior of Obamacare: Anthony Kennedy. Picking up on suggestions made in amicus curiae briefs, Justice Kennedy indicated that reading the ACA as the plaintiffs proposed might violate principles of federalism, i.e., states’ rights. Thus, in questioning Solicitor General Donald Verrilli, he floated the notion that the Court should “invoke the standard of constitutional avoidance”—under which an unclear statute that might be unconstitutional if read one way should be read a different way to avoid requiring the adjudication of a difficult constitutional question.

It did not take long for Obamacare’s enemies to fire back. Writing in the Wall Street Journal, Oklahoma Attorney General Scott Pruitt complained that Justice Kennedy was proposing to treat the states “like children that the federal government must paternalistically protect from the consequences of their choices by rewriting statutes.” To similar effect was Georgetown Law Professor Randy Barnett’s response on the Volokh Conspiracy blog on the Washington Post website. He also objected to the possibility that the Court might “rewrite one part of a statute to avoid” what the Justices think (erroneously in Barnett’s view) amounts to impermissible coercion on the states.

But both Pruitt and Barnett either misunderstood or deliberately mischaracterized the argument Justice Kennedy was considering. Neither the Solicitor General nor any of the federal government’s supporting amici suggested that the Court ought to rewrite any provision of the ACA. On the contrary, the Solicitor General argued—in his brief and orally—that understood properly in light of the context and purpose of the Act as a whole, the provision on which plaintiffs rely clearly permits subsidies on federally established exchanges. The notion that the canon of constitutional avoidance should be invoked to permit such subsidies is a backup argument in the event that the Supreme Court finds that the statute is unclear. The Court has frequently said that constitutional avoidance only operates to resolve unclear statutory text, not to override clear statutory text. Accordingly, the sound bites offered by Pruitt and Barnett are irrelevant to the actual issue.

Chevron Deference

Much of the briefing and the oral argument in King focused on the question of what the contested statutory language means. Does it mean that subsidies are plainly forbidden on federally established exchanges, as the plaintiffs argue? Or does it mean that subsidies are plainly permissible, as the federal government argues?

With each side saying that the statute clearly means the opposite of what the other side says it clearly means, a sensible inference is that the statute is in fact unclear. And that is exactly what the U.S. Court of Appeals for the Fourth Circuit—whose judgment is under review in King—said last summer. Finding that the statutory language was “subject to at least two different interpretations,” that court went on to apply the familiar rule of administrative law from the case of Chevron U.S.A., Inc. v. NRDC: the courts will defer to a federal agency’s reasonable interpretation of an unclear statute that it has responsibility for administering. The appeals court accepted the Internal Revenue Service’s determination that subsidies are available on federally established exchanges as reasonable, and accordingly rejected the challenge.

Yet during last week’s oral argument both Justice Kennedy and Chief Justice Roberts expressed concerns about the appeals court’s Chevron-based rationale.

Justice Kennedy worried that it would be a “drastic step” to permit the IRS to make a policy judgment involving billions of dollars of subsidies. That concern seems unfounded, however, because other statutes delegate considerably more power to federal agencies.

For example, federal law delegates control over monetary policy to the Federal Reserve Board, which, during the aftermath of the recent financial crisis, lent over $3.5 trillion in an effort to keep interest rates low and increase the money supply. Even if one thinks that the Fed went to or past the limit of its authority in implementing extraordinary measures such as quantitative easing, there is no doubt that it has been given routine policymaking authority on a much larger dollar scale than anything undertaken by the IRS with respect to the ACA. Accordingly, Justice Kennedy’s worry about applying Chevron to the lower economic stakes of the ACA was misguided.

However, Chief Justice Roberts raised an important limitation of the Chevron approach. A ruling for the Obama Administration on the ground that its construction of the ACA is reasonable could leave room for a future Administration—a Republican president, say—to construe the ACA so as not to authorize subsidies on federally established exchanges. Solicitor General Verrilli tried gamely to suggest that such a construction would be unreasonable, but it would undoubtedly be risky for the ongoing vitality of the ACA beyond 2016 for the government to win on Chevron grounds.

Clear Statement Rule for Conditional Spending

Fortunately for the government, there are at least two other paths to a holding in its favor even if the Court finds the statutory language unclear—and neither of these other paths would put the federal subsidies at risk under a future Administration.

The plaintiffs argue in King that providing subsidies on state but not federal exchanges was a sensible means by which Congress sought to induce the states to establish their own exchanges. As a matter of pure statutory construction, the argument is dubious, because there is no evidence whatsoever that anybody in Congress thought that is what the contested provision was doing at the time the ACA was enacted. But beyond that difficulty, during the oral argument various Justices also suggested that the plaintiffs’ reading would violate constitutional principles of federalism.

One difficulty is that, as the Supreme Court stated in the 1987 case of South Dakota v. Dole, “if Congress desires to condition the States’ receipt of federal funds, it must do so unambiguously.” Applying that reasoning to the ACA, any ambiguity in the provision at issue in King should be resolved against the plaintiffs’ reading, since that reading would amount to a condition on states’ receipt of federal funds.

To be sure, Dole and other cases placing limits on conditional exercises of the federal spending power involve federal grants to the states themselves, whereas the ACA subsidies go to state taxpayers. The Court must be careful not to expand the conditional spending doctrine so far that every provision of federal law that affects the wealth of a state’s citizens counts as conditional spending subject to the requirements of Dole.

But if the Court takes the limits on conditional spending seriously, neither should the concern about borderline cases prevent it from addressing what—by the very terms of the plaintiffs’ argument—is an effort by Congress to circumvent Dole by denying subsidies to state citizens rather than to the states themselves. As Professor Vikram Amar argued in two insightful Verdict columns (here and here), failure to apply the conditional spending limits in King would open a very large loophole in those limits.

Unconstitutional Coercion

Moreover, there is a second federalism objection to the plaintiffs’ argument—that it would be impermissibly coercive of the states. In the 1992 case of New York v. United States, the Supreme Court read the Constitution as forbidding Congress from “commandeering” a state legislature by obligating it to enact a law. Thus, if the ACA simply ordered the states to establish health insurance exchanges, it would be plainly unconstitutional. Justice Kennedy and some of his colleagues wondered whether construing the ACA as proposed by the plaintiffs would not be tantamount to unconstitutional commandeering of state legislatures.

As a formal matter, the proposed reading would not amount to commandeering because the states would be given a choice. But the consequences for states that do not create exchanges would be so severe that the choice may be illusory.

Why? Because reading the federal subsidies to be unavailable on federally established exchanges would not relieve health insurance companies of their other obligations under the ACA. These include a prohibition on insurers denying or dropping coverage based on pre-existing conditions (the guaranteed coverage requirement) and the prohibition on charging higher premiums based on health status (community rating). Pre-ACA experience showed that states that attempted to implement guaranteed coverage and community rating requirements without a purchase mandate experienced “death spirals” in their health insurance markets: Healthy people did not buy insurance, knowing that if they needed medical attention, they could sign up once they got sick; as a result, only sicker (and older) people signed up for insurance at the outset, which meant that insurers had to charge extremely high premiums to cover costs, which further incentivized healthy people not to sign up, and so on. Taking away the subsidies would fatally undercut the individual mandate and thus induce death spirals in states with only a sickly federal exchange.

Justice Kennedy worried that the threatened death spirals effectively amounted to unconstitutional coercion. Picking up on a suggestion in an amicus brief in support of the government, he flatly told the plaintiffs’ lawyer that Congress could not say to a state that if it doesn’t authorize the building of highways the federal government wants, Congress will subject all traffic in the state to a 35-mile-per-hour speed limit. His implication was that threatening a death spiral would be similar.

Prior cases recognize that Congress has considerable power to “conditionally preempt” state law—that is, to tell a state to regulate pursuant to federal standards or get out of the way so that the federal government can do the job. The cooperative federalism provisions of the Clean Air Act work this way, for example. But in that instance, the federal regulation aims at combating air pollution. In last week’s oral argument, Justice Kennedy sensibly implied that Congress may not abuse the mechanism of conditional preemption by threatening states with concededly harmful regulation.

Accordingly, the limits on conditional preemption and the anti-commandeering rule provide a potent argument for the government: Because the plaintiffs’ proposal, if accepted, could very well render the ACA unconstitutionally coercive, the Court ought to construe the ACA to permit subsidies on federal exchanges.

Thus, three separate arguments offer the government the possibility of victory if the Court finds the ACA unclear. Attorney General Pruitt and Professor Barnett are right, of course, that if there is literally no wiggle room at all in the ACA’s language to allow for subsidies on federally established exchanges, then the Court cannot invoke any of the mechanisms for resolving ambiguity. But that is a gigantic “if,” one that requires the plaintiffs not only to win, but to win overwhelmingly on the statutory point. At least based on the views expressed by the Justices at last week’s argument, such an overwhelming victory looks to be beyond the plaintiffs’ reach.

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