The Surprise Obamacare Ruling That Wasn’t

Since the Halbig v. Burwell decision came down from the U.S. Court of Appeals for the District of Columbia Circuit — which ruled that insurance subsidies could only legally be provided on state exchanges — there has been a lot of outrage from the liberal commentariat. The thrust of this outrage is that obviously no one ever intended to restrict subsidies only to state exchanges, because that is now endangering the whole program, and obviously, the law’s architects did not mean to endanger the whole program.

The response to this has been twofold. First, everyone at the time assumed that all the states would establish exchanges. Second, there was indeed a method to this madness: By limiting subsidies to the state exchanges, the government was providing the incentive needed to get all 50 states and the District of Columbia to go ahead and create those exchanges.

Michael Cannon and Jonathan Adler offered the most persuasive summary of this argument in a 2013 law review article:

The language in Sections 1401 and 1402 restricting credits and subsidies to state-created Exchanges is more than just consistent with the rest of the Act. It is integral to Section 1311’s directive that states ‘‘shall’’ create an Exchange. Because it likely creates a larger financial incentive than the Medicaid ‘‘maintenance of effort’’ requirement, it is the primary sanction imposed on states that do not establish Exchanges. It thus animates Section 1311’s ‘‘shall.’’ To ignore it as the IRS has would sap that directive of most of its force.

As noted above, the federal government cannot actually force states to create Exchanges, as this would constitute unconstitutional commandeering. The federal government can, however, utilize a combination of positive and negative incentives to induce state cooperation — in this case, subsidies for creating Exchanges and the threat of a federally run Exchange if a state does not create its own.

Such incentives are common. Various federal programs, including Medicaid, condition the receipt of federal funding on state acceptance of the federal government’s conditions. In this context, limiting the availability of tax credits to insurance purchased in state-run Exchanges can be seen as just one more inducement for state cooperation: the PPACA threatens states with the loss of tax credits for state residents if they do not create an Exchange.

This idea of using conditional tax credits to avoid the commandeering problem was also part of the health care reform debate well before PPACA supporters first introduced any legislation. In early 2009, Professor Jost wrote:

Congress cannot require the states to participate in a federal insurance exchange program by simple fiat. This limitation, however, would not necessarily block Congress from establishing insurance exchanges. Congress could invite state participation in a federal program, and provide a federal fallback program to administer exchanges in states that refused to establish complying exchanges. Alternatively it could exercise its Constitutional authority to spend money for the public welfare (the ‘‘spending power’’), either by offering tax subsidies for insurance only in states that complied with federal requirements (as it has done with respect to tax subsidies for health savings accounts) or by offering explicit payments to states that establish exchanges conforming to federal requirements.

Both the Finance bill and the HELP bill withheld subsidies from taxpayers whose state governments failed to establish an Exchange or otherwise failed to implement the bills’ requirements.

The PPACA’s closest antecedent was the Finance Committee-reported ‘‘America’s Healthy Future Act of 2009’’ (S. 1796). The relevant language in the PPACA is nearly identical to that of the Finance bill. Indeed, the four ways Section 1401 confines tax credits to state-run Exchanges appear almost verbatim in the Finance bill.

The HELP bill even more explicitly withheld credits in states that failed to implement its requirements, and it employed that strategy to encourage state cooperation even if the federal government created the Exchange.

Unfortunately, the record of congressional deliberation on this matter has been thin, perhaps because in the rush to get something passed, there wasn’t much congressional deliberation; many of the members of Congress who voted on the final bill undoubtedly had little idea what was in it other than “health care!” That has left room for both sides to claim they’re right.

Until now: Ryan Radia at the Competitive Enterprise Institute1 seems to have uncovered the closest thing we’re going to get to a smoking gun.

Jonathan Gruber, an economics professor at the Massachusetts Institute of Technology, is widely known as one of the architects of both Romneycare and Obamacare. He was paid almost $300,000 (no wait, $400,000) by the Barack Obama administration for “special studies and analysis” of the various health-care bills. His models of the economic effects of the bill were frequently cited by journalists and the administration. He claims to have helped write the part of the bill that deals with small-business tax credits. He was, in short, intimately involved in these efforts.

In January 2012, Gruber apparently gave a talk at some sort of conference at Noblis Inc., which, according to its webpage, is a "nonprofit science, technology, and strategy organization.” At that talk, Gruber made the following observation:

What’s important to remember politically about this is if you're a state and you don’t set up an exchange, that means your citizens don't get their tax credits — 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. I hope that that's a blatant enough political reality that states will get their act together and realize there are billions of dollars at stake here in setting up these exchanges. But, you know, once again the politics can get ugly around this.

Why is this so important? Because Gruber made this argument in January 2012. This was after the filing of Pruitt v. Sebelius (a Halbig-like case brought by Oklahoma’s state attorney general) but before the U.S. Supreme Court’s ruling on the constitutionality of the Affordable Care Act, and before all the other related cases were filed. At the time he gave this talk, Halbig’s argument was barely on the radar. Yet Gruber, one of the law’s architects, clearly had an understanding of the provision that liberals now say no one shared.

I’ve listened to Gruber’s whole presentation to make sure this wasn’t a poorly phrased snippet unfairly clipped out of context. It’s not. Gruber is succinctly stating the argument made by the plaintiffs in Halbig: that premium subsidies will not be available on federal exchanges, and that this is supposed to incentivize states to build their own exchanges.

To be sure, this was still two years after the law passed, and my understanding is that the court is not supposed to pay attention to post-facto statements about the law’s effect or intent. But unless this is some sort of elaborate hoax, I think this definitively puts to rest the notion that none of the bill’s architects could possibly have thought or intended that the law would have this effect. Gruber thought the law would have this effect — and if anyone would know, he would.

1 The Competitive Enterprise Institute is involved in the Halbig suit.

To contact the writer of this article: Megan McArdle at [email protected].

To contact the editor responsible for this article: Brooke Sample at [email protected].