No Spoof

View the Full Web Memo Here

By the end of June, the Supreme Court will rule on the issue of Obamacare insurance exchange subsidies in King v. Burwell, a case that could have significant ramifications for the Affordable Care Act (ACA). In implementing the law, the Internal Revenue Service (IRS) made individuals purchasing health insurance on both state and federally facilitated exchanges eligible for tax credits to offset part of the cost of the insurance. That rule violates the plain text of the Act, which makes such subsidies available only for insurance purchased on exchanges established by the states.

At the Supreme Court’s March 4 hearing on the case, Justice Anthony Kennedy asked whether the denial of subsidies might constitute federal coercion of the states:

[F]rom the standpoint of the dynamics of Federalism … there is something very powerful to the point that if [the challenger’s] argument is accepted, the States are being told either create your own Exchange, or we’ll send your insurance market into a death spiral.

Oklahoma Attorney General Scott Pruitt, in a Wall Street Journal op-ed, responded to Justice Kennedy as follows:

In other words, Justice Kennedy was asking, if Congress did in fact condition ObamaCare’s tax credits on a state having set up an exchange, does that amount to an unconstitutional coercion of the states? In short: no.

Pruitt cited a January 2012 letter by insurance and health officials from seven states—Kentucky, Maine, New Mexico, North Dakota, Tennessee, Utah and Virginia—that asked the U.S. Department of Health and Human Services (HHS) for a formal legal opinion explaining the federal government’s authority to administer tax credits for insurance premiums on federally facilitated exchanges.

As the letter indicates, these states questioned whether the IRS had the power to issue tax credits in states that decided not to set up their own exchanges. But five of these states—Virginia, Maine, North Dakota, Tennessee, and Utah—nonetheless decided not to set up their own exchanges.

Pruitt’s point is especially clear when one considers the background to that letter, as described in my November 2014 CEI paper, “Beyond Gruber: How HHS Flip-Flopped on Federal Exchange Subsidies.” For two years after Obamacare’s enactment, HHS helped several states set up their own exchanges, but did almost nothing to establish the federal one. In particular, HHS moved quickly after the law was passed to help state governments develop the tax credit calculators needed to make tax credits available through state-based exchanges. Meanwhile, for nearly two years, it developed its own HealthCare.gov website without any effort to offer tax credits on the federal exchange or to develop a tax credit calculator for its site.

It was only after many states appeared to be leaning against setting up exchanges that the Obama administration changed course and began claiming that the Affordable Care Act allows tax credits for both state and federally facilitated exchanges. Only then did HHS begin developing a tax credit calculator for HealthCare.gov.

But as the deadline for states to set up their own exchanges drew near, they still needed a determination as to whether their residents would receive tax credits through federally facilitated exchanges if the states did not set up their own exchanges. This led to a standoff, as states did not want to decide whether to set up exchanges until they knew HHS’ decision, while HHS did not want to decide the federal exchange subsidy issue until it knew the states’ decisions. It was against this background that in January 2012 the seven states wrote to HHS, requesting a formal opinion on federal exchange tax credits.

Was the letter serious or a prank? On March 16, Ian Millhiser of the Center for American Progress (CAP) attempted to discredit this letter, claiming it was “satirical,” a “prank,” “joke,” and “spoof,” because it closely resembled a letter HHS had sent to the states requesting information on their plans for state exchanges. Millhiser claims that “no state questioned the legality of these tax credits during an Internal Revenue Service rulemaking process.” He appears to base these allegations primarily on statements by a “state official who signed the letter, who spoke to ThinkProgress [CAP’s blog] on condition of anonymity.” And more recently, the Huffington Post claimed that Alabama state officials never realized that the state might be giving up subsidies when it decided against setting up its own exchange.

However, a close examination of the development of the letter shows that the signing states had serious questions about the availability of subsidies through federal exchanges, and that the letter was a careful effort by them to get answers from HHS.

Shortly after Millhiser made his claims, I requested from the Utah Department of Health all records related to the seven-state letter. I received more than 20 emails written by or to Norman K. Thurston, who was Director at the Utah Department of Health when the letter was written. According to these emails, Thurston initiated, drafted, coordinated and sent the letter on behalf of Utah and the six other states. (See email 1 in the appendix.)

These emails, several of which are excerpted and numbered in the appendix for easy reference, show a serious and coordinated effort by numerous states to obtain the same type of information from HHS regarding federally established exchanges as they had requested for state-established exchanges. They sought comparable information regarding the state and federal exchanges because of, as the states’ letter put it, the “complex nature of the policy decision process at the state level” between the two options. Notably, the states explicitly asked HHS to explain what authority it had to administer tax credits on federally established exchanges.

A few highlights from Thurston’s email exchanges demonstrate the seriousness of the letter. Highlights are referenced by the number of the individual email as it appears in the appendix:

• An initial email outlining the concept of the letter was made available by Thurston to most if not all of the states (2).
• The letter was not quickly thrown together but rather was developed, revised and finalized over a period of several weeks, beginning in late November and ending in early January.
• States were becoming increasingly concerned that HHS had “not provided ANY details to the states about the federal model” (5).
• Seven states signed the letter, and according to one email, officials in at least seven other states supported it to some extent—Arizona, Idaho, Ohio, South Carolina, South Dakota, West Virginia, and Wisconsin (6). Other states also took an interest in it. One executive at the Kansas Insurance Department, for example, said: “[W]e had a call with several HHS people on Monday afternoon and told them we were totally in support of the issues raised in your memo” (7).
• Virginia’s signature is particularly noteworthy because it is directly at odds with a Supreme Court amicus brief filed by 22 states and the District of Columbia in support of HHS. That brief stated: “[C]onspicuously absent is evidence that States contemplated the dramatic consequence of depriving their residents of tax credits …” Virginia was the lead state on the brief, but its position is directly contradicted by its signature on the Jan. 2012 letter (1, 8).
• The emails confirm that the states’ letter was based, in part, on a letter that HHS first sent to them. However, the states’ letter was not as a “spoof” of that letter, but rather “a fairly polite request that CMS [the federal Centers for Medicare and Medicaid Services] put forward a plan to tell us the same information about the federal exchange that they are requesting from us on the state exchanges” (9, 5).

The states were not the only ones with questions. On March 1, 2012, a few weeks after the states sent their letter, then-HHS Secretary Kathleen Sebelius testified before the House Subcommittee on Health of the Energy and Commerce Committee. Rep. Joseph Pitts (R-Penn.) submitted several questions to Sebelius, for inclusion in the hearing record, regarding HHS authority to allocate subsidies on federal exchanges. Her answers did little more than reference the IRS. Regardless of whether one views her answers as satisfactory, the fact that she was questioned about the federal exchange subsidies makes it clear they were already an issue for many of the states at that time.

Conclusion. Several states and Members of Congress continued to question the validity of federal exchange tax credits. Some commenters now argue that this question never really came up. But it did, and it is up to the Supreme Court to finally answer it.

>> View the January 2012 letter sent from seven states to HHS requesting a formal opinion on federal exchange tax credits here.

>> View Scot Vorse’s previous report Beyond Gruber: How HHS Flip-Flopped on Federal Exchange Subsidies here.