William Levin: Obamacare death throes updated

We’ve written a few times about Halbig v. Sebelius, a case challenging the Obama administration’s operation of Obamacare on the 36 federally facilitated exchanges established for states that declined to set up their own. William Levin, a graduate of Yale Law School and former clerk on the D.C. Circuit, manages an investment banking firm. He previously commented for us on the case here.

Oral argument on the appeal pending before the D.C.Circuit Court of Appeals was held on March 25 and is accessible here. Paul Mirengoff provided his assessment of the oral argument here. Mr. Levin comments on the oral argument below:

The little case that could, Halbig v. Sebelius, is one of four lawsuits challenging the government’s authority to pay subsidies under Obamacare to anyone enrolled in the federal exchange. The case just took a giant step forward in oral argument last week before the D.C. Circuit Court of Appeals.

It appears highly likely the court, in a 2-1 ruling, will invalidate the IRS regulations permitting the federal subsidy, reversing District Judge Paul Friedman’s January 2014 opinion. That will set up a possible rehearing before the full D.C. Circuit court sitting en banc, followed by an inevitable Supreme Court review in the coming term, with a decision assured no later than June 2015 and possibly earlier given that federal funds are quite possibly being disbursed illegally.

Judge Harry Edwards’ vote is not in doubt. He termed the plaintiffs’ argument to restrict subsidies to the state exchanges as “preposterous.” He sees the case, plain and simple, as a lawyerly creation manufactured after the fact to “gut the statute.” In so doing, he joins the bandwagon of bloggers and commentators who have consistently dismissed this challenge as fanciful.

Yet the Obama administration is scared, and with good reason.

For starters, Judge Raymond Randolph is an assured vote that the ACA limits subsidies to state exchanges. The government’s argument presents an easy target. The key phrase–that a subsidy can only be paid to an exchange “established by the state”– is plain in meaning and used seven times in the statute, defeating any notion of mistake. The heart of the matter for Judge Randolph is that a state exchange must be administered as “an entity formed under state law.” Such an entity can come into existence only pursuant to state law, as run by state officials and paid for with state budgetary appropriations, in addition to any supplemental federal subsidies. Judge Randolph’s trenchant summary, “What we’ve got here is language that doesn’t seem to be malleable in any way, shape or form.”

In response, the government seeks to argue that the apparent ironclad meaning of a state exchange in reality is a “system of nested provisions,” wherein the federal government “stands in the shoes of, steps into the place of” a state exchange once the state has declined to go forward.

This argument leads directly to the principal line of questioning from Judge Thomas Griffith, the government’s lone hope for a swing vote. Who established the exchange at issue in the litigation in West Virginia? Answer from Judge Griffith: the federal government via Secretary Sebelius as head of Health and Human Services.

The pivotal statutory issue for Judge Griffith is not the type of exchange established by the feds, which under the ACA can duplicate a state exchange in its marketplace functions. It is the question of power and authority. An exchange established by a federal officer is a federal exchange. Contra the government, the federal health exchange does not “stand in the shoes” of the state and therefore the federal exchange is not eligible for subsidies.

The 2-1 reversal is assured as no other line of defense, including deference to agency discretion, legislative history, or arguments of irrationality, unreasonableness and violation of ACA purpose held any evident sway with either Judge.

The deeper problem looking ahead is that to win the case the administration will need to convince the Supreme Court that the staple of federal authority over the states, conditioning federal dollars on state compliance, is irrational. In form, the ACA statute is modeled no differently than the bedrock of the regulatory state, such as the Clean Water Act and the Water Quality Act. States implement environmental protection plans to avoid direct federal control.

In the case of the ACA, Congress sought to force the states to set up exchanges by expressly commanding that they “shall” establish an exchange. Since even Congress does not believe it can directly operate a state exchange, the only means to condition compliance with this command is to create an incentive in the form of hundreds of billions of dollars in free federal subsidies for individuals participating in the state exchange.

Legally, this provides the required final key to victory. Congress had a rational purpose in limiting the subsidy to the state exchange. It was the necessary and available incentive chosen by Congress to induce states to act. It also reflects a key political bargain that must be respected by the judiciary. As the price of the 60th decisive vote, Ben Nelson insisted on state-run exchanges, not a federal exchange.

The government raises two objections. First, it violates the intent of the statute to provide nationwide coverage. This response fails for a simple and unanswerable reason. It is the IRS regulations at issue that eliminated the state incentive by promising the subsidy would be available from the federal exchange. At a stroke, the agency action impermissibly dissolved the congressionally legislated pressure on the states. As summarized by plaintiffs’ counsel, Michael Carvin, “If the D.C. Government said you get $100 if you clear the sidewalk in front of your house of snow, or you get $100 if you don’t clear the sidewalk in front of your house of snow, there would be a whole lot of snow on the sidewalks.”

The second objection is that no legislative history or contemporary action by the states indicates an awareness that subsidies were being used as an incentive to create state exchanges, and would not be available in the federal exchange.

The answer, which will prove highly problematic for the government, is that in the context of the ACA legislation itself, Congress sought to condition Medicaid payments on expanded state eligibility standards. No legislative history exists there either and yet no one doubts that the statute conditioned payments, albeit in a manner ultimately determined in that particular context to be unconstitutional. Equally compelling, it turns out that the exact ACA statutory section in question, section 1311, was essentially copied in full from a parallel provision in the Health Coverage Tax Credit Act of 2002, which provided that no subsidy would be paid unless the state enacted specified laws. This is a version of Q.E.D. as used in high school geometry class.

There is an understandable and deep cynicism after the first Supreme Court Obamacare case that the Justices will put the law above politics. There is no assurance that this case will ultimately prove any different. But unlike in 2012, no constitutional doctrine is involved. The case presents a straightforward test of whether plain meaning has dispositive authority, that state means state not federal, in light of a Congressional decision to incentivize states to establish exchanges. In reaffirming that the statute limits subsidies to state exchanges, the Court will leave the resolution to the legislative process. It also turns out that under the ACA, the 36 states that declined to set up an exchange can reverse direction and decide to set up a state exchange in the future. The Court is not dooming Obamacare. The unlawful IRS regulations carry that burden.

Stay tuned.