Is the Federal Government Really a State, if the IRS Says It Is?

Posted in: Constitutional Law

By July 4, the Supreme Court will have decided King v. Burwell. (Those of us who write about the most recent cases sometimes do not have a work-free July 4th weekend, but the Justices always do. The justices like a summer vacation longer than just a few weeks, so I can confidently predict we will know the answer before July 4, and most likely before the end of June.)

King v. Burwell involves the Patient Protection and Affordable Care Act [Pub. L. No. 111-148]—popularly called either the “ACA,” or “Obamacare” by both its opponents and its proponents. The litigation now before the Supreme Court is, on the surface, a simple issue of statutory interpretation. Only millimeters beneath the surface is a broader issue—how far will the courts go in allowing administrators to change the law by simply redefining terms that are not vague at all. This issue is peculiarly significant because the agency doing the redefining is the Internal Revenue Service. The first named defendant is Sylvia Burwell, the Secretary of Health and Human Services, but another defendant is the IRS, and it is the agency doing the redefining. No case has ever held that Congress could delegate to the IRS the power to raise or lower taxes.

The ACA, in Section 1311 [42 U.S.C. § 18031], provides that states shall create Health Benefit Exchange (“Health Exchanges”). If they meet certain criteria, they are “Qualified Health Exchanges.” The qualified Exchanges qualify for federal subsidies. Nonqualified exchanges do not.

The Court has consistently held that Congress does not have the constitutional power to order or commandeer states to enact particular laws. New York v. United States, 505 U.S. 144 (1992); Printz v. United States, 521 U.S. 898 (1997). While Congress cannot force a state to enact a qualified Health Exchange, it can use its taxing and spending power to “bribe” states by offering various incentives to states that enact and implement the kind of laws that Congress wants. That is what the ACA does.

It provides that if a state creates a qualified Health Exchange by January 1, 2014, then another section of the law—26 U.S.C. § 36B, in the Internal Revenue Code —offers generous subsidies. The subsidies are in the form of ‘‘premium assistance tax credits” and “refundable tax credits.” They not only reduce tax liability but also provide for federal money paid to private insurance companies.

Congress also created a fallback position: if a state refuses to set up a State Health Exchange, a different section of the ACA [42 U.S.C. § 18041(c)] authorizes the Secretary of Health and Human Services (HHS) to set up Federal Exchanges in those states that refuse to set up a State Exchange.

No provision of the ACA offers any tax subsidies or payments for federally created (as opposed to state created) Health Exchanges. That supports the carrot-and-stick approach to encourage states to create, implement, and maintain state Health Exchanges. In other words, if the state creates a Health Exchange, its citizens secure valuable tax benefits in addition to acquiring health insurance. If the state refuses to create, implement, and maintain a Health Exchange, that state’s citizens do not receive the financial benefits, but they will have to pay federal taxes that finance the subsidies that residents in other states (those with state-created Exchanges) will receive.

Besides to the financial incentives (carrots), the ACA has disincentives (sticks) to prod states to set up Health Exchanges. For example, the law penalizes states that do not create Exchanges by barring them from narrowing their state Medicaid programs until “an Exchange established by the State . . . is fully operational.” [42 U.S.C. § 1396a(gg)]

As one proponent of the law explained,

[I]f you’re a state and you don’t set up an exchange, that means your citizens don’t get their tax credits—but your citizens still pay the taxes that support this bill. So, you’re essentially saying [to] your citizens you’re going to pay all the taxes to help all the other states in the country.

Congress expected that all or most states would take this “bribe” because it gave an offer that was hard to refuse.

Nonetheless, some states—actually a lot of states, 34 of them — did not pick up the free federal subsidies (the carrots) and were willing to put up with the disincentives (the sticks). They simply refused to establish State Exchanges. It turned out that the ACA has not been as popular as its proponents believed it would be. Indeed, polls show that the more people learn about the law, the less favorably they view it. Moreover, many individuals have concluded that it is quite rational to not pay for health insurance until they get sick, because the fines are often not very much and the ACA does not allow insurance companies to refuse coverage because of preexisting medical conditions.

For those people who do want to purchase insurance, they are even less likely to do so if the federal subsidies do not exist, for the simple reason that the cost of health insurance (without subsidies) will be higher, often much higher. When 34 states refused to create Exchanges, the Administration did not seek to amend the law to extend the subsidies to the Federal Exchanges. Instead, the IRS simply announced that when Section 36B refers to Section 1311 and State Exchanges, there is some sort of ambiguity and it really means to refer to Sections 1311 and 1321 and Federal or State Exchanges. The IRS, in effect, defined “1311” to mean “1311 or 1321.” The IRS is defining sections of the law that another federal department implements.

Administration supporters claim that there was simply an obvious drafting error. That is hard to swallow. First, no section of the ACA defines “State” to include the federal government. Second, other provisions make clear that Congress knew how to draft language that treated a non-state as a “state” for purposes of any provision of the ACA.

For example, the ACA provides that territories of the United States (e.g., Guam) are “States,” for purposes of this law. Section 1323 states that if a “territory” creates an Exchange, it “shall be treated as a State” under this law. Another section, Section 1304(d), provides that Washington, D.C. is a “State” for purposes of the subsidy dealing with State Health Exchanges. “In this title, the term ‘State’ means each of the 50 States and the District of Columbia.” [42 U.S.C. § 18024).] However, no section of the law defines “State” to include the federal government.

An earlier version of the bill—one that Congress did not enact—provided that “any references in this subtitle to the Health Insurance Exchange . . . shall be deemed a reference to the State-based Health Insurance Exchange.” That would treat Federal Exchanges the same as State Exchanges. Congress did not enact that version. The fact that it considered but did not adopt such express language is evidence that Congress knew how to provide that the law would treat a State-created Exchange and a Federal Exchange the same.

Unelected administrators, hidden from public view, decide significant and controversial issues such as “net neutrality,” or whether they should regulate the Internet. Regulators (and the president who appoints them) can use complex regulations to reward political friends and burden political enemies. One of the complaints about the enactment of Obamacare was that the president issued “waivers” of various provisions—waivers that the statute did not authorize — that rewarded the president’s political supporters or undercut objections to the law. Recall that when the president announced that he was changing the effective date of certain provisions of the Affordable Care Act, Sen. Tom Harkin (D-Iowa), a supporter of the law, asked, “This was the law. How can they change the law?” Good question.

How the Supreme Court rules in King v. Burwell should tell us whether the trek towards government by administrators slows down or accelerates.

5 responses to “Is the Federal Government Really a State, if the IRS Says It Is?”

  1. Joe Paulson says:

    Many, including law professors with long detailed posts at Balkanization, explained that the “IRS” is not the point here. The LAW ITSELF “says” that the challengers here have a weak case.

    It is not some sort of “government by administrator” problem here. Find a better case. There surely is one to flag the alleged problems of the discretion of agencies. You do that cause little good, except to speak to the choir, than use this example.

    And, whatever was expected, there was a mechanism set up to deal with states that didn’t set up exchanges. Bad interpretation is bad generally. When it will deny people health insurance, which sometimes will lead to serious health consequences (including death), it is that much worse.

    • James Hurley says:

      The writer of this piece refers to health insurance or lack of it as possibly leading to serious health consequences (including death) and indicates these problems were corrected by the ACA. The fact is that before the ACA was enacted people without health insurance received health care either thru medicaid or free care at emergency rooms – or even if the problem caused hospitalization, it was provided. The ACA has caused serious problems for those who paid for their own insurance by increasing premiums cost and/or higher deductibles. Some proponents claim care through ERs is expensive, however I expect the cost to the government was less then the tax subsidies people receive under the ACA now. The ACA is another attempt for those who love socialism to implement that system on the American people.

      • Joe Paulson says:

        Medicaid provides general medical care (though only so much) to those financially eligible. ACA expanded this eligibility.

        People do not receive “free care” at emergency rooms if they aren’t financially needy. Emergency rooms that participate in Medicare are required under EMTALA to provide certain minimum care to stabilize. You are billed. If “hospitalization” is needed, this will cost a lot. And, by law, only limited care is actually required by federal law. Some won’t be able to pay & this money will be spread on to others as a loss. This increases costs.

        ACA is in place to restrain costs in various ways, including as above to deal with the issue of people who use health services only in cases of emergencies via emergency rooms w/o being insured. It has various aspects that are in place to restrain costs. Premiums were already rising. ACA is one method to address it. Over time, growing insurance pools etc. will work to address costs. But, for me, the human interest in health care, including for those previously denied coverage for pre-existing conditions or on the margins of Medicaid, is the best thing here. Being insured is a good thing & this law overall promotes it.

        Some with certain conditions were refused insurance. Others for various reasons decide not to insure because of short-sightedness. Subsidies also help those on the margins financially and don’t get it thru a job. In the long run, lack of insurance increases costs & harms health, since you do not go to the doctor as much, since uninsured, it costs more. ACA also does things like promote preventive health including contraceptives, which can reduce unwanted pregnancies and even reduce abortion. It expands the ability of parents to put kids on their plan etc. If you find all of this bad, fine, but to me it seems net to be a good thing for general well being.

        Medicare and Medicaid is a form of “socialism” too. In fact, even “the right” to go to an emergency room w/o having the means to pay is a form of socialism. Here, the insurance is largely being provided by the private sector, not the government. “Socialism” is being used as a buzzword.

        • James Hurley says:

          Mr. Paulson, the points you are making are well known to all who are paying attention. One point you make is that people who can afford emergency room care pay for it, however, those who cannot, and that includes hospitalization it is free and that was my point. There was no need for the ACA as it imposes burdens on those who were paying for insurance out of their own pockets. Even for those who have insurance through their employers are in a sense paying for it though taking less wages in lieu of insurance coverage. People who gave up some wage increases in lieu of medical coverage gain because they pay no taxes on the money the employer pays for the coverage and the employer is able to add the cost to business expenses.

          There are other points you make that also do not hold water.

  2. Andrew Lewis says:

    I am surprised to see this article here. This is not legal analysis or commentary. This is an advocacy piece wherein the author has taken a position based on political opinion, then reasoned teleologically to support it, ignoring all evidence or arguments to the contrary.

    And while advocacy pieces certainly have their place, I’m surprised that Justia is one of them.