Have Obamacare subsidies been put on life support?

Obamacare Takes a Body Blow

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of “The Up Side of Down: Why Failing Well Is the Key to Success.”
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This morning, a U.S. appeals court issued a ruling that could endanger, or even destroy, Obamacare. The case, Halbig v. Burwell, involved the availability of subsidies on federally operated insurance marketplaces. The language of the Affordable Care Act plainly says that subsidies are only available on exchanges established by states. The plaintiff argued this meant that, well, subsidies could only be available on exchanges established by states. Since he lives in a state with a federally operated exchange, his exchange was illegally handing out subsidies.

QuickTake Health Insurance Exchanges

The government argued that this was ridiculous; when you consider the law in its totality, it said, the federal government obviously never meant to exclude federally operated exchanges from the subsidy pool, because that would gut the whole law. The appeals court disagreed with the government, 2-1. Somewhere in the neighborhood of 5 million people may lose their subsidies as a result.

This result isn't entirely shocking. As Jonathan Adler, one of the architects of the legal strategy behind Halbig, noted today on a conference call, the government was unable to come up with any contemporaneous congressional statements that supported its view of congressional intent, and the statutory language is pretty clear. Members of Congress have subsequently stated that this wasn't their intent, but my understanding is that courts are specifically barred from considering post-facto statements about intent.

When you read through the ruling, it's easy to see the many ways in which the law's architects brought this on themselves. The law was highly complex, badly drafted and highly controversial. When a Republican won a special election for the Senate in Massachusetts (!), the Democrats had to push it through on a straight party-line vote with some adroit parliamentary maneuvering -- which gave them a health-care law, but one that was badly put together and couldn't be substantially amended. The gaping holes were patched with administrative fixes, like an Internal Revenue Service ruling that held federally established exchanges to be equivalent to an exchange established by the state. But the vast scale of the law meant that the administrative gymnastics that held it together might not be sustainable.

For example, the core of the government's case is that Congress cannot have meant to leave federal exchanges without subsidies, because without the subsidies, the insurance markets in states with federal exchanges would inevitably enter into a death spiral. And obviously Congress wouldn't do that.

The problem, as the justices point out in their brief, is that the government has done just that. Federal territories are subject to the mandates, but they don't get subsidies. So clearly the IRS and the Department of Health and Human Services think that, at least in some cases, Congress would and did enact exactly the system -- guaranteed issue, community rating, but no subsidies -- that the government lawyers are claiming they would never consider.

Courts are cautious about fatally damaging major laws, and if this ruling stands, it would be pretty damaging. Most of the people who bought new insurance on the exchanges qualified for subsidies; many of them will exit if the subsidies are withdrawn, and those most likely to exit are the young and healthy. Which brings us back to the specter of an insurance market death spiral in states with federal exchanges.

That's not a guaranteed outcome -- I'll write more about the possible permutations later today. But even if it's not guaranteed, it's certainly a risk. So this is a major ruling, which will potentially have major impact on a major law. And that itself is always a bit surprising. The Fourth Circuit reached the opposite result, in another ruling released today: "the court is of the opinion that the defendants have the stronger position, although only slightly."

So what happens next? In the short term, the case probably goes to an en banc hearing in front of the full appeals court, sometime in the fall, and then quite possibly to the Supreme Court. In the meantime, the administration says the subsidies will continue to flow, though it's not clear upon what they are basing that -- whether it expects a stay of the decision pending en banc review, or whether it is signaling their intention to ignore the ruling until the appeals are exhausted.

Much will depend on the courts: Does the case get en banc review, does that review rule for the government, and if so, will the plaintiffs be able to push an appeal all the way to the U.S. Supreme Court? Will the Supreme Court expose itself to more outrage from whichever side they rule against?

All that is unknown. We do know this much: this was a big blow for the government, and a potentially fatal one for the administration's signature legislative achievement.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor on this story:
James Gibney at jgibney5@bloomberg.net