Obamacare Subsidies Face Skeptical Appeals Court Judges

The Obama administration’s claim that its health-care overhaul allows financial aid to people who buy insurance through a federal exchange met skepticism from U.S. appeals court judges who suggested the law doesn’t provide for such subsidies.

The government’s argument that the court should look to Congress’s intent on the subsidies -- rather than at gaps in the statute opponents say make the payments illegal -- fell flat with U.S. Circuit Judge A. Raymond Randolph.

“What you’ve got is language that’s not malleable,” Randolph said today during a hearing in Washington. “An exchange established by the state” means “an exchange that’s established by the federal government?”

The dispute over whether federally funded discounts can be available to people using the federal exchange strikes at the financial heart of the Patient Protection and Affordable Care Act.

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With 36 states opting not to set up the marketplaces, many of the 17 million individuals eligible for assistance must rely on the federal marketplace to buy subsidized insurance.

If that’s lost, “it would mean that the effort to expand insurance coverage in the vast majority of the states would pretty much be halted,” according to Ron Pollack, executive director of the advocacy group Families USA.

Last Challenge

“It’s the last legal challenge that could derail this law,” Christopher Condeluci, who was on the Republican staff of the Senate Finance Committee when it crafted portions of the act, said before the hearing.

The challengers in today’s arguments contend the law says tax credits to help pay for insurance can only be dispensed through state exchanges.

Justice Department lawyer Stuart Delery, arguing for the government, said a broader reading makes clear that Congress meant to offer financial assistance to users of both state and federal exchanges.

U.S. Circuit Judge Thomas Griffith, nominated by Republican President George W. Bush, said a lack of “clear legislative history” made it hard to determine what Congress intended.

Michael Carvin, an attorney for the plaintiffs, who are individuals and business owners from six states that declined to set up exchanges, urged the judges to look at what lawmakers wrote and not “psychoanalyze” what they thought.

State Carrot

The language restricting subsidies to state exchanges was a carrot to persuade states to set them up, Carvin said.

U.S. Circuit Judge Harry Edwards told Carvin,“Your argument makes no sense.” Adding that he found no evidence that Congress sought to use the subsidies as an inducement, he said, “Who cares who set up the exchanges?”

The suit is an attempt to undermine the entire health-care law, said Edwards, appointed by Democratic President Jimmy Carter. “That’s what this case is about -- to gut the statute,” he said.

Randolph, an appointee of Republican President George H.W. Bush, appeared ready to do just that.

He described the law as “Janus-faced” and confusing.

“If the legislation is just stupid, I don’t see that it’s up to the court to save it,” Randolph said.

Parsing the language of the Affordable Care Act, Delery said the law directed the federal government to establish “such exchange,” not “an exchange,” meaning that Congress wanted it to have the attributes of a state marketplace.

Griffith asked Delery whether that was the sum of his argument.

Tax Credits

No, said Delery. From other portions of the law, it’s clear that Congress intended that “federal exchanges would be providing tax credits,” he argued.

Condeluci, the former Senate staffer, said much of the case against subsidies for federal exchange shoppers originates in “a drafting error” that left out references in key parts of the law to its section 1321. That section authorizes the federal government to establish a national marketplace.

“The four digits aren’t there, so should the court try to read into congressional intent that 1321 was supposed to be there?” said Condeluci, now a lawyer at Venable LLP. “Yes. That was the intent.”

‘Same Function’

When Delery argued that a federal exchange “provides the same function” as a state marketplace, Randolph replied “that is a leap, that is not an interpretation.”

So far, arguments against the delivery of tax credits through federal exchanges haven’t found traction in courts.

In Richmond, Virginia, U.S. District Judge James Spencer, an appointee of Republican President Ronald Reagan, found no support in the legislative history of the Obamacare law for the idea Congress intended to condition federal funds on state participation. His Feb. 18 dismissal of the case is on appeal.

Two other cases are pending in federal court in Indiana and Oklahoma.

In Washington, U.S. District Judge Paul Friedman, an appointee of Democratic President Bill Clinton, said there’s more than one reasonable way to interpret the challenged phrase “exchange established by the state” when it’s read in isolation. Taking a broader view, it’s clear Congress intended to make the subsidies available on both state and federal exchanges, he ruled on Jan. 15.

Friedman’s decision set up today’s arguments.

The case is Halbig v. Sebelius, 14-5018, U.S. Court of Appeals, District of Columbia (Washington). The Virginia case is King v. Sebelius, 13-cv-630, U.S. District Court, Eastern District of Virginia, (Richmond).

To contact the reporter on this story: Andrew Zajac in Washington at azajac@bloomberg.net

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net Fred Strasser, Mary Romano

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