DC Circuit Decision Isn't Just About Obamacare Subsidies: It Also Kills the Employer Mandate

There are some real-life occurrences that are so absurd that the phrase "you can't make this stuff up" comes readily to mind. Yet the July 22 decision of a divided three-judge DC Federal Circuit Court panel invalidating the Affordable Care Act's (ACA) premium tax credits for anyone purchasing insurance on a Federal Exchange proves that you can "just make this stuff up." Which is what the two-judge majority did in Halbig v. Burwell.

This case, and the Fourth Circuit's opposite ruling in King v. Burwell, concerned the IRS rule which made Federal insurance premium subsidies in the form of tax credits available under the Federal Exchanges established by the Department of Health and Human Services (HHS). The ACA provisions required HHS to set up such Exchanges for and in States that did not elect to do so, even though another section of the Act defining how subsidies would be calculated said that subsidies would flow through Exchanges 'established by the State.' Essentially, the DC judges decided the only possible interpretation of this apparent conflict was that the Federal Exchanges do not in fact stand in the shoes of the State Exchanges for subsidy purposes because they were not literally "established" by "the State." The Fourth Circuit held that the IRS was entitled to deference in resolving the ambiguity in the statute the other way, honoring the legal fiction that the Federal Exchanges are the equivalent of State Exchanges in order to allow such subsidies nationwide.

What these two Republican jurists on the DC Circuit invented was a version of the ACA that even their own political party never considered to be reality: namely, a statute that contains its own self-destruct poison pill that would invalidate the very provisions the GOP most detested: the employer mandate, the individual mandate, and the Federal subsidies. By these judges incredible reading of the entire statute, the ACA's only possible meaning was that:

(1) If all 50 States of the Union simply exercised their right not to establish an insurance Exchange, then no subsidies could be provided to low-and moderate-income individuals mandated to buy insurance. This means that they would likely be eligible for the exclusion from the individual mandate that applies when the premium for the cheapest policy available exceeds 8 percent of annual family income;

(2) Accordingly, employers with 50 or more employees that would ordinarily be subject to the mandate to provide health insurance meeting Federal standards or pay a significant penalty tax for each uncovered employee would likewise escape the mandate. The mandate is triggered if just one employee buys subsidized insurance on an Exchange -- an impossibility under the DC Circuit judges reading on the Act if the only Exchanges turned out to be the Federal version.

The majority on the DC panel made clear that such a broad reading was their intention by specifically observing that under the IRS rule in question "the individual and employer mandates" would have 'broader effect than they would have if credits were limited to State-established Exchanges' and that their decision to void the IRS rule would 'likely have significant consequences... for insurance markets more broadly' (see Halbig v. Burwell at pp. 8-9 and 41).

Likewise the GOP plaintiff seeking to overturn the IRS rule in King v. Burwell also expressly stated that denial of tax credits for individuals shopping on Federal Exchanges would 'throw a debilitating wrench' into the ACA's "internal economic machinery,'" resulting ultimately in an adverse-selection "death spiral" in States with Federally-run Exchanges (see King v. Burwell at p. 33).

But surely under this reading of the ACA, House Republicans would not have needed to conduct 40 votes to repeal in order to show their displeasure. Nor would they have had to try to shut down the entire Government as a ploy to force defunding the ACA. All they would have had to do to cut the heart out of ObamaCare would have been - and still would be -- to get 14 more States and DC to dismantle their Exchanges. Game over!

But the GOP never played that game, because they never once thought that was the game. Indeed, the apocalyptic vision of Obamacare's massive intrusion into the health care system and the economy as a whole, promulgated by the Republican Party consistently since the ACA's passage, is the best evidence that the DC Circuit majority opinion in Halbig v. Burwell indeed just made up its version of the Act out of whole cloth, as the dissent observed. If the entire Obamacare structure was subject to an automatic, self-enforcing veto by the States, it would mean that the ACA's mandates and subsidies would not be effective right now in 72 percent of the States and subject to the whim of State legislatures and governors in the other 28 percent at any time going forward.

Not only did the GOP -- the fiercest opponent of Obamacare -- never read the ACA the way the DC Circuit panel majority did, neither did the US insurance industry, their shareholders, nor HHS. Since the DC Circuit reading of the stature did not address or effect the various mandates the ACA imposes on insurers (like no lifetime caps, no pre-existing condition exclusions, no sexually-based premium differentials, etc.), the insurance industry would be stuck with those mandates without the compensating benefits of employer and individual mandates and Federal premium subsidies for their low-and-moderate-income customers.

Had the industry ever understood the statute in that way, their legion of lobbyists would have been up in arms. Harry and Louise of HillaryCare fame would have been back on every screen urging viewers to write to Congress to repeal this awful ACA burden on their friendly neighborhood insurance companies. But that obviously didn't happen. And likewise equity investors in insurance companies never read the ACA that way either, sending many health care insurers to all-time highs in the years since the passage of the ACA.

In the same vein, HHS could have saved itself all the bother of the botched launch of the Federal Exchange website and the huge political price paid by the President for that debacle. There would have been no need to launch it or fix it (and Kathleen Sebelius might still be Secretary of HHS), because under the DC Circuit panel decision, the Federal Exchanges contemplated by the ACA to stand in the place of State Exchanges if States elected not to set them up, would have had no power to sell subsidized insurance anyway. Why bother to create a Federal Exchange if it was essentially there only to serve those who could easily afford insurance on their own. Yet this is the version of ObamaCare the DC judges said was so patently clear there can be no other rational interpretation of the statute. Which means, I guess, that the entire Republican Party, the health insurance companies, their equity shareholders, HHS -- and even Justices of the U.S. Supreme Court who would have voided the ACA -- have been living in delusion for five years now.

As noted above, a unanimous panel of the Fourth Circuit Court of Appeals that ruled on the same day as the DC Court that the Federal Exchange subsidies can stand because deference should be shown to the IRS's interpretation of statutory language subject to multiple possible interpretations in order to achieve the Act's central purposes, ruling that it is "clear that widely available tax credits are essential to fulfilling the Act's primary goals and that Congress was aware of this importance when drafting the bill." This Court noted that even the dissenters in the only Supreme Court decision on the ACA saw that without the Federal subsidies, individuals would lose the main incentive to purchase insurance. Some insurers may be unwilling to offer insurance inside of exchanges. With fewer buyers and even fewer sellers, the exchanges would not operate as Congress intended and may not operate at all (see King v. Burwell, above at p. 33). No mention there of the putative Congressionally-intended "State veto" the DC Circuit found that somehow eluded Justices Alito, Kennedy, Scalia and Thomas!

The two GOP judges on the DC Circuit have had their fun. Now it's time to call in the adults on the DC Circuit and reverse this grotesque re-imagination of the purposes, intent and even the very language of the ACA. Insurance companies of America -- call your lawyers, because you are the ultimate losers here as well. Thanks to their lobbyists, the chances of a Congressional fix of this ruling, if it stands, might not be so hopeless after all.


Terry Connelly is the Dean Emeritus at the Ageno School of Business of Golden Gate University

Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.