ACA Debate: Can a Federal Exchange Provide Subsidies?

Politico, By J. Lester Feder –

July 16, 2012: The next shot in the legal war over the health reform law isn’t another lawsuit but an academic paper that says federal exchanges can’t give people subsidies to help pay for their coverage.

The paper, authored by Case Western Reserve University’s Jonathan Adler and the Cato Institute’s Michael Cannon, puts intellectual heft behind an argument that has been percolating among the law’s opponents.

And though the law’s supporters have dismissed it out of hand just as they dismissed the challenge to the individual mandate, the paper could be the start of a challenge that — if it’s successful — could do almost as much damage to the law.

If the courts were to accept Adler’s and Cannon’s argument, that could effectively enable states to kill federal exchanges by empowering them to cut off the subsidies. Without subsidies, the federal exchanges would not be economically viable because they couldn’t get as many people to sign up for coverage.

There’s a good deal of skepticism among legal scholars about Adler’s and Cannon’s argument. These scholars say there are good reasons to read the law as intending subsidies to be the same regardless of who’s administering the exchange. And the courts give wide latitude to federal agencies’ interpretations of a law.

And any challenge to the exchange subsidies would have to target the Internal Revenue Service’s interpretation of the law’s premium subsidies provisions. In a rule published in May, the IRS specifically said both federal and state exchanges can administer the subsidies.

That’s where Adler and Cannon use some of their toughest words — by basically calling the IRS a bunch of lawbreakers.

“The IRS rule is illegal,” Adler and Cannon contend. “It is not authorized by the text of the [Patient Protection and Affordable Care Act], nor can it be justified on other grounds.”

Their argument hinges largely on whether Congress intended federally administered exchanges to be completely equal to state-run exchanges.
Based on an analysis of the debate on the Senate bill — which became the basis of the law — and the legislative proposals that preceded it, they claim — Congress made a decision to build the law based on state cooperation. The federal government-run exchanges were meant as a “fallback, and were not intended to replace state-run exchanges.”

In fact, they write, Congress intentionally did not give the federal exchanges the power to administer subsidies because it wanted these dollars to be a sweetener to persuade states to set up exchanges themselves.

“As an inducement to state officials, the Act authorizes tax credits and subsidies for certain households that purchase health insurance through an Exchange, but restricts those entitlements to Exchanges created by states,” they write.

The law’s supporters dismiss arguments like the one Adler and Cannon present in this paper, however, because they think it ignores the fact that federal lawmakers were always worried that the states wouldn’t go along with the law.

What good would a federal exchange be as a backstop against state intransigence, they say, if it wasn’t an equal substitute to a state-run exchange?

The law says “the federal exchange essentially stands in the shoes of the state exchange,” said Judy Solomon, the vice president for health policy at the Center on Budget and Policy Priorities

The law’s backers also say Adler’s and Cannon’s argument relies on a willful over-interpretation of an isolated passage of the law — the fact that it specifically authorizes subsidies only in “an Exchange established by the State under [section] 1311” — without considering other parts of the law that suggest a federally administered exchange is meant to be a full substitute for one run by a state.

They point to section 1321 of the Affordable Care Act, which says that if a state doesn’t set up a functioning exchange, “the secretary [of Health and Human Services] shall … establish and operate such Exchange within the State and the Secretary shall take such actions as are necessary to implement such other requirements.”

The phrase “such Exchange within the State” is key, according to the law’s supporters, because it means that a federal exchange is not a different legal animal. It may report to Washington instead of a state capital, but it’s still a “state exchange” for all intents and purposes.

“It’s still the state exchange,” said George Washington University’s Sara Rosenbaum. “Everybody’s over-reading the expression ‘federal exchange.’ … The challengers have so twisted the law as to entirely strip it of all of its reasonable meaning.”

Even critics of the law who think Adler and Cannon are correct in their reading of the statute are skeptical about whether there’s actually a viable way to challenge it in court.

“My own personal view is that [it] is a better reading of the law” not to allow subsidies in the federal exchanges, said former Bush HHS General Counsel Tom Ebenstein, one of Mitt Romney’s health advisers, in an interview earlier this month. But, he said, “I don’t know who would have standing” to challenge it in court.

The problem is that someone needs to prove they are harmed by federal exchange subsidies — taxpayers can’t just go to court to sue over the way their dollars are being spent.

Adler and Cannon offer a solution to this problem: The law penalizes employers who do not offer insurance if any of their employees get subsidies in an exchange. So that gives employers an opening, they say, to challenge the validity of federal exchange subsidies once they’ve been fined.

But they say it may be impossible to bring the suit until after an employer has actually been fined, which could be a few years away.

Source: John & Rusty Report via Word & Brown