Forget Hobby Lobby. The Bigger Legal Threat to Obamacare Still Has Life.

by Alec MacGillis | March 25, 2014

The Supreme Court oral arguments on the challenge by two businesses of the Affordable Care Act’s mandates on contraception coverage have gotten the most attention today, understandably so given the import of that case for future disputes pitting claims of religious freedom against duly legislated laws. But not far away, another court, the D.C. Circuit Court of Appeals, was hearing arguments in another case that, despite being generally viewed as a long-shot challenge, has the potential to have a far greater impact on the Affordable Care Act itself. If the contraception challenge succeeds, it just means that that one sliver of Obamacare is struck down. If this other challenge succeeds, both sides agree that it would blow up the entire law.

And given those stakes, it should cause the law’s supporters some disquiet that based on today’s arguments alone, two of the three judges on the panel—the two Republican appointees—appeared far more sympathetic to the arguments of the challengers.

As readers may recall from our previous coverage of this challenge, it revolves around an argument put forward in 2011 by Jonathan Adler, a law professor at Case Western University, and Michael Cannon, a health care analyst at the libertarian Cato Institute and a committed Obamacare foe. They argue that the law is being carried out in contravention with its text: The section decreeing that people will get federal subsidies to help them pay for private insurance plans says that the subsidies are available for those buying plans on new exchanges established by the states—and makes no explicit provision for subsidies for those buying plans in states where governors and state legislators left the creation of the exchange up to the federal government. The law’s challengers—represented in the D.C. Circuit case, Halbig vs. Sebelius, by lawyer Michael Carvin—say the limiting of subsidies to state-based exchanges was no mere drafting oversight but rather a deliberate attempt by Democrats who wrote the legislation to induce states to set up their own exchanges rather than rely on the federal government to do so.

The government and other defenders of the law counter that any confusion in the wording was inadvertent and that the rest of the law makes abundantly plain that the subsidies were intended to go to people buying plans in the exchanges regardless of whether they were established by the states or by the Department of Health and Human Services. They note that there is zero mention anywhere in the legislative history of the law’s drafting of the subsidies being used as an incentive for states to set up their own exchanges; if the subsidies were meant to be an inducement to the states, why weren't the law's authors and proponents actually, you know, advertising that inducement? And they point to other places in the law where it is plain that the subsidies were intended for people buying insurance on both state-run and federal-run exchanges, such as the requirement that both forms of exchanges report people’s insurance purchases to the Internal Revenue Service, which calculates the level of subsidy (technically a “refundable tax credit.”)

The stakes in the challenge are enormous—36 states have chosen not to set up their own exchanges, which means that if the courts side with the challengers, the millions of people who have bought coverage in those states (the vast majority of whom have receives subsidies to do so) would lose their subsidies and be left unable to afford coverage. This would in turn throw the individual insurance market into disarray as many of these people dropped their coverage—except, presumably, the sickest of people with the most incentive to keep it.

The challenge has lost twice at the federal trial court level, before a Reagan-appointed judge in Virginia and before Clinton-appointed Judge Paul Friedman in Washington, who ruled that the intent of the law was plain. “Plaintiffs' proposed construction in this case—that tax credits are available only for those purchasing insurance from state-run Exchanges—runs counter to this central purpose of the ACA: to provide affordable health care to virtually all Americans,” he wrote. “Such an interpretation would violate the basic rule of statutory construction that a court must interpret a statute in light of its history and purpose.” Under the challengers’ logic, he added, the exchanges administered by the federal government “would have no customers, and no purpose.”

But the two Republican-appointed judges hearing the appeal of Friedman’s ruling today were far more sympathetic to the challengers’ case. Especially receptive was Judge Raymond Randolph, a George H.W. Bush appointee who was harshly dismissive of administration lawyer Stuart Delery’s arguments, to the point of being openly derisive. Countering the administration’s argument that the challengers’ logic would lead to absurd conclusions within the law, Randolph shrugged and said, “There is an absurdity principle, but not a stupidity principle. If the legislation is just stupid, it’s not up to the court to save it.” He saw no way for the government to get around the line stating that the subsidies are to be available on state-established exchanges: “What we’ve got here is language that doesn’t seem to be malleable in any way, shape or form.” He rejected the administration’s point about the IRS reporting requirements for the exchanges buttressing its case by casting those requirements as being a lesser part of the law because they were in the supplementary package that was added to the law before its final passage under the budget reconciliation process, which he dismissed as a mere “amendment” to the law.

With the panel’s lone Democratic appointee clearly sympathetic to the administration’s case, the ruling will come down to Judge Thomas Griffith, a George W. Bush appointee who, while less mocking than Randolph, was also skeptical of the administration’s defense. He called the legislative history around the law a “wash” between the two sides, undermining the administration’s claim that the intent of Congress was abundantly clear. At the same time, he said the administration had a “special burden” to show that Congress intended federally-run exchanges to offer subsidies, given the “plain language” to the contrary in the line under dispute. “If [Congress doesn’t] legislate clearly enough, is it our job to fix the problem?” Griffith asked.

The ruling may not come for several months, and if the administration loses, it could seek a ruling by a full bench of the appeals court. Meanwhile, the Fourth Circuit Court of Appeals in Virginia will soon hear an appeal of the Reagan appointee’s ruling against the challenge, and there are still two trial-court level challenges pending in Oklahoma and Indiana. If the challengers start winning in one or more jurisdiction, it is not inconceivable that this case, too, could be headed up to the Supreme Court.

For now, though, the challengers were clearly feeling buoyed in Washington by their encouragement from Randolph and Griffith. And it was left to the law’s supporters to note how destructive and radical it would be for judges to upend a law that is now on the verge of getting six million people covered on the new exchanges, solely on the basis of sloppy wording in a single line of the legislation. “This [argument against the subsidies] was conjured up many months after [the law] was passed,” said Ron Pollack, head of Families USA, a pro-Obamacare advocacy group. “It’s a pretty awesome thing for a court now to say that millions should lose their subsidies. It’s a pretty heavy burden for a court to say we’re going to take away subsidies we’ve already provided, subsidies without which coverage is clearly unaffordable.”

Robert Weiner, a lawyer with Arnold & Porter who helped craft Pollack’s amicus brief to the court, held out hope that the tough questioning from Griffith was not a fatal sign. “It’s one thing to ask questions at arguments. He is a judge that is known for being sensible and I think when he reflects on it, he will come to a conclusion that is sensible,” he said. And common sense, he added, leaves no question that the law’s authors intended the subsidies to be available on all the exchanges,since that's the only way the law would actually expand coverage. "Congress," he said, "did not have a death wish for this legislation.”

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