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“SCOTUScare”: Supreme Court Guts Obamacare to Uphold Subsidies by Daniel Bier

The Supreme Court has voted 6-3 (with Chief Justice Roberts writing the majority opinion, joined by Justice Kennedy and the four liberal justices) to uphold the subsidies the IRS is distributing for health insurance plans purchased on the federal insurance exchange.

This ruling sets a dangerous precedent, and its reasoning is, as Justice Scalia wrote in his dissent, “quite absurd.”

There will no doubt be much written about the decision in the coming days, and almost all of it will mischaracterize the ruling as the Supreme Court “saving” the Affordable Care Act again.

This is a crucial error: The Court’s ruling guts the ACA and rewrites [it] in a way that is politically convenient for the president — again.

When the Patient Protection and Affordable Care Act was passed in 2010, the law was designed to work through a “cooperative federalism” approach. For example, the portion of the law expanding Medicaid, like the rest of Medicaid, would be a joint federal-state program, partly funded and regulated by the feds but administered by the states.

The part of the law meant to increase individually purchased insurance coverage was similarly designed to work through federal-state cooperation.

Each state would set up its own health insurance “exchange,” and the federal government would issue tax credits for qualified individuals who purchased policies on the state exchanges. The logic here is that the states are best suited to run exchanges for their residents, as they have particular and specialized knowledge about other state healthcare programs, state regulations on insurance, and their residents’ health needs.

But the law did not (and constitutionally could not) force state governments set up exchanges. So as a backstop, a separate section of the law allows the federal government to set up an exchange for residents in states that did not set up their own.

Here’s where it got problematic: The plain text of the law only authorizes tax credits for policies purchased on an “exchange established by the State.”

There’s no easy way around this fact. Nowhere does the ACA authorize subsidies for plans purchased on the federal exchange. None of this would have been an issue if every state had chosen to build an exchange, as the law’s authors anticipated.

But in reality, the ACA has been persistently unpopular, and only 14 states (and DC) had working exchanges. The details of the backstop provision suddenly became a lot more important as the residents of 36 states were cast onto the federal exchange.

Faced with uncooperative federalism, the Obama administration suddenly had a big political problem, and it would have been quite embarrassing for the law’s biggest benefit to evaporate just as the president was planning to run for reelection on it.

So 14 months after the bill was signed into law, the IRS issued a rule, by executive fiat, to issue subsidies on the federal exchange. Because the penalty for failing [to] purchase health insurance is based on the cost of insurance, including subsidies, relative to a person’s income, individuals and businesses in states without exchanges who would otherwise have been exempt from fines and mandates were now in violation.

Lawsuits followed, which argued the IRS’s decision to issue subsidies in states that had declined to create exchanges was against the law, and it had resulted in actual harm to them.

In one of the lower court rulings on this issue, the DC Circuit concluded that the law offered no clear basis for issuing subsidies through the federal exchange.

If Congress intended to issue subsidies through the federal exchange, it would have been perfectly easy for them to say so, in any number of sections. And if Congress intended to treat the federal exchange as though it were a State entity (as the ACA does with US territories’ exchanges), it knew how to do that too. Yet there is no section of the law that does this.

Some argued that this omission was a “drafting error,” a legislative slip-up. If so, it was one it made over and over again, in at least ten different sections. And, as Michael Cannon rather pointedly asks, if it was a drafting error, why didn’t the government make that case in court? Why didn’t the IRS make that claim when they issued the new rule?

The answer may be that the law meant what the law says. The scant legislative history on this question doesn’t show that Congress ever thought that subsidies were going to be disbursed through the federal exchanges. Perhaps the law’s authors simply didn’t think about it or did not consider the possibility that most states would refuse.

But, in fact, it is entirely plausible that the ACA’s authors intended to only offer subsidies to residents of states that created exchanges, as an incentive to states to build and run them.

The reasons why Congress wanted the states to run the exchanges are perfectly clear. But, apart from the possibility of losing the subsidies, there seems to be little reason for state governments to take the risk of building one of the notoriously dysfunctional exchanges if they could dump their citizens onto the federal exchange with no consequences.

Jonathan Gruber, an MIT economist who was involved in the design of the health care law, explicitly claimed that the law’s authors did this on purpose:

If you’re a state and you don’t set up an Exchange, that means your citizens don’t get their tax credits. … I hope 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, and that they’ll do it.

On the other hand, the government argued (and Roberts accepted) that the text of the law is ambiguous, and ambiguous phrases should be interpreted “in their context and with a view to their place in the overall statutory scheme,” the goal of which was to increase health insurance coverage.

Given that, Roberts concludes, we should construe “exchange established by the State” to mean any ACA exchange, whether Federal or State.

Roberts got to this reasoned, methodical, and preposterous conclusion by arguing that the plain meaning of the text would lead to “calamitous results” that Congress meant to avoid. To wit, that only allowing subsidies for plans purchased on state exchanges would cause a “death spiral” in the insurance market in states that refused to establish exchanges.

The ACA reform has three basic components: subsidies for insurance plans, the individual mandate to purchase insurance, and regulations requiring insurers to issue coverage to people with preexisting conditions (“guaranteed issue”) and banning them from charging higher premiums to sicker people (“community rating”).

The “death spiral” logic goes:

  • If states chose not to establish exchanges, their residents would not get subsidies;
  • If they couldn’t get subsidies, many people would be exempt from the insurance mandate;
  • If they were exempt, they could just wait until they got sick to buy insurance;
  • If they did that, insurers would have to accept them, under the guaranteed issue rule;
  • If that happened, the price of insurance would go up for everyone, under community rating;
  • If that happened, more healthy people would drop out of the insurance market, leaving insurers with a pool of ever sicker and more expensive patients (“adverse selection”), thus forcing insurers out of business and leaving even more people without insurance. And so on.

Hence, “death spiral.” In fact, this is exactly what happened in the 1990s in many states with guaranteed issue and community rating, before Massachusetts invented the mandate to force people to buy insurance and keep the pool of insured people relatively healthy.

But in the ACA, the mandate rests on the cost of insurance with subsidies, and (under the plain text of the law) the subsidies rest on the states establishing exchanges. If the subsidies go, fewer people will buy insurance, and the mandate crumbles, leading to a spiral of higher costs and fewer people insured.

Roberts concluded that this risk would have been unacceptable to Congress, arguing: “The combination of no tax credits and an ineffective coverage requirement could well push a State’s individual insurance market into a death spiral. It is implausible that Congress meant the Act to operate in this manner.”

This perceived implausibility, combined with the alleged ambiguity of the text, caused the Court to rule in favor of the subsidies:

Petitioners’ plain-meaning arguments are strong, but the Act’s context and structure compel the conclusion that Section 36B allows tax credits for insurance purchased on any Exchange created under the Act. Those credits are necessary for the Federal Exchanges to function like their State Exchange counterparts, and to avoid the type of calamitous result that Congress plainly meant to avoid.

The basic problem with Roberts’ decision is that the text isn’t ambiguous. It’s actually pretty clear, as he acknowledged. But the second issue is that Roberts has no strong basis for his speculations about what Congress thought was likely to happen with states or what risks it was willing tolerate.

If the ACA’s authors thought (as almost everyone did) that the states would get with the program and establish their own exchanges, there is no reason that they would have assumed a serious risk of a death spiral. In fact, Gruber suggested that was the plan all along: offer a carrot to the states (the subsidies) and a stick (the risk of screwing up their insurance market).

But more importantly, the “implausible” risk that Roberts bases his interpretation on is precisely what the ACA deliberately did to US territories by imposing guaranteed issue and community rating without an individual mandate.

The DC Circuit Court that ruled against the subsidies last year made exactly this point:

The supposedly unthinkable scenario … one in which insurers in states with federal Exchanges remain subject to the community rating and guaranteed issue requirements but lack a broad base of healthy customers to stabilize prices and avoid adverse selection — is exactly what the ACA enacts in such federal territories as the Northern Mariana Islands, where the Act imposes guaranteed issue and community rating requirements without an individual mandate.

This combination, predictably, has thrown individual insurance markets in the territories into turmoil. But HHS has nevertheless refused to exempt the territories from the guaranteed issue and community rating requirements, recognizing that, “[h]owever meritorious” the reasons for doing so might be, “HHS is not authorized to choose which provisions of the [ACA] might apply to the territories.”

But, it seems, the Supreme Court feels that is authorized to choose what provisions of the ACA should apply, on the grounds that doing so would make better policy, regardless of what the law actually requires.

This is essentially what Roberts did in the previous Obamacare ruling, in which he rewrote the individual mandate and the Medicaid portions of the law in order to make them pass constitutional muster.

In his scathing dissent, Justice Scalia noted,

Having transformed two major parts of the law, the Court today has turned its attention to a third. The Act that Congress passed makes tax credits available only on an “Exchange established by the State.”

This Court, however, concludes that this limitation would prevent the rest of the Act from working as well as hoped. So it rewrites the law to make tax credits available everywhere. We should start calling this law SCOTUScare.

… This Court’s two decisions on the Act will surely be remembered through the years. The somersaults of statutory interpretation they have performed (“penalty” means tax, “further [Medicaid] payments to the State” means only incremental Medicaid payments to the State, “established by the State” means not established by the State) will be cited by litigants endlessly, to the confusion of honest jurisprudence.

This decision is not disastrous because it “saved” Obamacare — it did no such thing: The Court gutted the law and let the Obama administration stuff it with whatever policy it thought best.

No, the ruling is a catastrophe because it establishes the principle that the president can unilaterally override the plain meaning of the law whenever he or she thinks that doing so will lead to a better outcome, one more in keeping with his or her policy goals.

As is often the case with elaborate government programs, things didn’t turn out the way that the planners expected. And, once again, the Supreme Court allowed the government to skate around both the Affordable Care Act and the law of unintended consequences.

This decision sanctifies the administration’s decision to defy Congress, circumvent the states, and flout the law. And as the authors of Obamacare knew, if you subsidize something, you’ll get more of it. Expect this ruling to stimulate more sloppy legislation, executive overreach, and subversion of the rule of law.


Daniel Bier

Daniel Bier is the editor of Anything Peaceful. He writes on issues relating to science, civil liberties, and economic freedom.

Jonathan Gruber’s Big, Benevolent Fraud by D.W. MacKenzie

Obamacare, the noble lie, and cognitive dissonance at MIT.

It seems that critics of the so-called Affordable Care Act (ACA ) have a new ally in our efforts to expose the deficiencies of the legislation: Jonathan Gruber.

This development comes as a surprise, because Gruber was the ACA’s primary architect. He has made public remarks that expose problems with the ACA’s adoption and future operation. However, Gruber still supports the ACA and labors under the idea that it can be fixed.

Gruber admits that the ACA is a kind of fraud — that is, it was deliberately written in a misleading way. The ACA was presented as a way to increase the affordability and accessibility of health care. In reality, the ACA is a transfer scheme.

If the ACA benefits Americans, why did it need to be misrepresented? According to Gruber, transparent spending and transparent taxing are impossible: “You just can’t do it.… Lack of transparency is a huge political advantage.… Basically, call it the stupidity of the American voter.”

The ACA was written to hide the fact that it is designed as a transfer from healthier, younger people to less healthy, typically older people.

Why is a lack of transparency severely problematic? Because bureaucrats and politicians are supposed to serve the public in modern social-democratic welfare states. But why would we expect bureaucrats and politicians to actually serve the public?

Some scholars have suggested that competition in democratic elections can push politicians to serve the public, and elected politicians will therefore keep a watchful eye on bureaucrats. This is called the “median voter theorem.”

The problem is that political competition fails to discipline people in the public sector when governance is opaque. A well-informed electorate is a necessary condition for effective political competition.

Gruber is probably correct in saying that passing the ACA required misinforming the electorate. However, the opaque governance that Gruber lauds opens the door for large-scale waste and abuse by special interests. Opaque governance and a misinformed, or uniformed, electorate make it virtually certain that the ACA will be administered inefficiently, whatever one thinks of its merits.

Indeed, a lack of information causes adverse selection problems whereby the most corrupt people make the greatest efforts to rise in politics and within bureaucracies. Opaque governance thus guarantees abuse of the ACA by public officials and special interests.

What makes Gruber’s remarks particularly worthy of criticism is that he is employed as an economist — and at a top university. Worse still, he teaches public finance and policy at MIT: he really should understand the importance of transparency. And he does. Gruber is the author of Public Finance and Public Policy, chapter nine of which covers the median voter theorem. So, Gruber does understand the necessity of political openness and an informed electorate for efficiency in the public sector. Efficiency requires more than an informed electorate, but it is a necessary condition.

Anyone who understands even the basics of the median voter theorem knows full well that transparency is strictly required for efficiency. Anyone who simultaneously believes that transparency and opaqueness are both necessary for good public policy has cognitive dissonance. Jonathan Gruber has unwittingly helped reveal the incoherence of the case for the ACA.

Gruber is an economist who fancied himself able to reengineer dynamic markets through social policy. His conceit as a social engineer is matched by his disrespect for the American electorate. He thought that an opaque political process and obscure legal language could keep people in the dark. On top of that, Gruber fathered lies because he knew voters would reject the ACA if they were aware of the wrenching changes the legislation would bring. As his lies became obvious, he blamed poor legal phrasing for the federal government’s inability to hide the costly consequences of his transfer scheme behind the subsidies in the federal exchange.

It’s the conceit of the “nudger” — the classic case of an elite policymaker who thinks he is smart enough to design what’s best for you, even if you’re too stupid to understand why and too ignorant to check up on him.

Didn’t Gruber realize such monumental legislation would be under tremendous scrutiny? Didn’t he realize the painful economic effects would be felt by real voters with common sense? And didn’t he realize that it would only take pulling back one of the curtains to expose the totality of this Wizard-of-Oz-like scheme?

Fortunately, it has gotten much easier for people to become informed about the real facts concerning the ACA, as well as other social programs. Citizens will never be well-informed about all of the backroom politics and the internal operations of bureaucracies. But we can at least learn about their true nature in the abstract — and with regard to the ACA in particular.

Perhaps most importantly, we can be on the lookout for those claiming to be wizards in Washington.

20141117_mackenziethumbABOUT D.W. MACKENZIE

D. W. MacKenzie is an assistant professor of economics at Carroll College in Helena, Montana.