Just when you thought it was safe to get back in the water, the judges in Washington took another big chomp out of the Affordable Care Act. No, not the Supreme Court - this time it was the U.S. Court of Appeals for the D.C. Circuit. In a 2-1 panel decision on partisan lines, the appeals court ruled that the tax subsidies for insurance coverage purchased from federal exchanges are illegal. The effect of the decision is to drastically undercut Obamacare by enabling all 36 states that don’t have their own exchanges to exempt millions of people from the individual mandate that they buy insurance.
Meanwhile, across the Potomac River, the U.S. Court of Appeals for the Fourth Circuit ruled the opposite way. It upheld the tax credits for state exchanges as a permissible exercise of Internal Revenue Service discretion to interpret an ambiguous statute. But the D.C. opinion is the one that counts - it’s the one that could send the U.S. health-care system into a death spiral.
The background to these cases is a little complicated, but bear with me. The Affordable Care Act required the states to set up exchanges to enable their citizens and some employers to purchase mandatory health plans. If the state does not set up the exchanges, the law empowers the federal government to do so itself. The purpose of the exchanges is, of course, to provide a venue for buying insurance to those people who are required by law to have a health-care plan, known as “the individual mandate.” For those who cannot afford to buy the insurance - those making between 100 percent and 400 percent of the poverty line - the law directed the IRS to provide tax subsidies. The point of the subsidies is to get enough people covered by the system to assure that it is viable, and that healthy people don’t opt out of coverage, leaving only the sick inside the system.
Two summers ago, the Supreme Court famously upheld the individual mandate. But 36 states chose not to create their own health exchanges. In their stead, the federal government established its own. The D.C. Circuit case, Halbig v. Sebelius, involves those federal exchanges.
In a stroke of legal creativity, anti-ACA activists noticed a flaw in the law authorizing the tax subsidies. Section 1311 (D) (1), the key provision, describes the exchanges for which the subsidies could be granted by saying that “an Exchange shall be a governmental entity or nonprofit entity that is established by a State.” The activists argued that this language means that the tax credits may only be made available for a state exchange, not a federally created one. If their interpretation is correct, then it would be illegal for the IRS to extend tax credits for coverage in the 36 states that lack a state exchange. If this happened, Obamacare critics hoped, the law itself could “crumble,” as one friend of the court brief put it.
Although a district court rejected their reading, Tuesday the D.C. Circuit accepted it. In his opinion, Judge Tom Griffith, a Republican appointee generally considered moderate, wrote that the language of section B-1 was plain and unambiguous. A state exchange, he insisted, could not mean a federal exchange created in lieu of a state one.
The great benefit of Griffith’s position is that it follows an intuitive literal reading of the statutory provision. Undoubtedly, the drafters of the law did badly when they failed to mention the possibility of a tax credit for a federal exchange explicitly. The probable reason is that nobody expected, when the law was being written, that states would choose not to have exchanges of their own. Of course it was a possibility - that’s why the law provided for the federal exchange option. But in drafting an enormously long and complex statute, Congress often failed to provide for every eventuality in clear terms.
The great drawback of Judge Griffith’s opinion, which was joined by Judge A. Raymond Randolph, another Republican appointee, is that it uses the statute to destroy itself. In a notably clear and blunt dissent, Judge Harry T. Edwards (disclosure: I clerked for him 16 year ago) explained why this was so. Edwards declared up front that the case involved a not-so-veiled attempt to “gut” the ACA. He then painstakingly showed that the statute is best understood as ambiguous. The chief reason for the ambiguity is that, as he put it, Congress could not have intended to give the states the effective power to destroy Obamacare simply by not creating their own exchanges. Under established precedents, if a statute is ambiguous, then the courts must defer to a reasonable interpretation proffered by the branch of government charged with implementing the law - here, the IRS. Edwards therefore concluded that the tax credits were indeed lawful.
It’s extremely unlikely that the D.C. Circuit will have the last word. The government will seek a hearing before the whole D.C. Circuit sitting en banc - that’s a strategic decision to be made by the solicitor general. But make no mistake, this case is going to the Supreme Court. There, the crucial question will be whose method of statutory interpretation will prevail: the strict textualism of Justice Antonin Scalia or the purpose-driven pragmatism of Stephen Breyer. The swing vote may well be Chief Justice John Roberts, who last time saved the individual mandate and kept the ACA alive. Oh, and politics may matter just a little bit, too.
In the meantime, the ACA is not yet quite dead. But there’s blood in the water, and the great whites in robes are circling.
Noah Feldman is a professor of constitutional and international law at Harvard and the author of six books, most recently “Cool War: The Future of Global Competition.”