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Halbig: Obamacare's big, new legal challenge, explained

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Obamacare protestors in front of the U.S. Supreme Court in March 2012
Obamacare protestors in front of the U.S. Supreme Court in March 2012
Alex Wong/Getty Images News

Halbig v. Burwell is arguably the Affordable Care Act's greatest existential threat since the Supreme Court case decided in 2012. But the administration just got a bit of good news: the decision issued by the DC Circuit  in July might be overturned this fall.

In the Halbig case, the DC Circuit ruled that Obamacare's subsidies were illegal in 36 states. And without subsidies, health reform could fall apart. That makes this court case a bigger deal than GOP efforts to repeal Obamacare. There have been over 40 repeal votes since the law was passed, but they've always been toothless: even if repeal made it through Congress, President Obama promised to veto any legislation that dismantled his signature legislation.

What is the case?

Three employers and four taxpayers (the plaintiffs) are suing the federal government over Obamacare.

The suit alleges that subsidies should only be available in states that set up their own insurance exchanges, based on the text of the Affordable Care Act. The government can still appeal, but if it ultimately loses the case at the Supreme Court, it's possible that federal subsidies will no longer be available to help make insurance affordable in over thirty states.

Due to what appears to many outside observers to have been poorly-crafted legislative language, Congress wrote a sentence that arguably provides subsidies exclusively to state-based exchanges and not to federally-facilitated ones, even while subjectively intending to provide subsidies in both cases. Yet, even though this is what many people who followed the legislation think happened — largely because the law was passed through an unorthodox budgetary process and never went to conference committee, where messy drafting gets cleaned up — neither side is asserting that there is a "mistake" in the way the law was written.

The government might be hesitant to argue that this lawsuit is premised on an error in how the law was drafted because it's possible that the court would hold the government to the text of the law — even if that text is flawed and contrary to Congress's original intent — so, framing it as an "error" could result in losing the suit.

Instead, the plaintiffs argue that Congress was deliberately establishing the subsidies as an incentive for the creation of state-based exchange while the government argues that the text of the law simply does not limit the subsidies to state-based exchanges.

The lawsuit was originally titled Halbig v. Sebelius. Sylvia Burwell recently succeeded Kathleen Sebelius as Secretary of Health and Human Services, so the case has been renamed Halbig v. Burwell.

Why is this case such a big deal?

In Obamacare's first year, 36 states defaulted to Healthcare.gov, the federally-coordinated exchange. An estimated 87 percent of individuals who enrolled through the website are receiving subsidies — the precise subsidies that this court case calls into question.

State_health_insurance_exchange_decisions(Note: Though initially intending to set up state exchanges, Idaho and New Mexico defaulted to Healthcare.gov bringing the total number of federally-facilitated and partnership marketplaces to 36, not 34.)

The success of the Affordable Care Act hinges crucially on the subsidies. The primary purpose of the law was to extend affordable health coverage to millions of Americans; the two main ways the law achieves this is through the Medicaid expansion and through subsidized coverage on the insurance exchanges.

Without subsidies, private insurance become unaffordable for many people who have already enrolled. The judicial process is still playing out, but according to recent analysis from the Robert Wood Johnson Foundation, this decision could affect over 7.3 million people expected to receive federal subsidies in 2016.

If the plaintiffs prevail and subsidies are withdrawn, healthy people would drop their coverage, and only the people who are very sick — and therefore very expensive to insure — would keep their plans.

This sets up the classic insurance "death spiral". By putting coverage out of financial reach for so many people, it would undermine the entire purpose of the Affordable Care Act.

Why is the DC Circuit's decision to hear the case "en banc" so important?

On July 22, the US Court of Appeals for the DC Circuit issued a ruling against the federal government that threatens health insurance subsidies in over 30 states. The government entered a request to have the case taken "en banc," meaning a 13-judge panel will rehear the case. This panel could overturn the decision issued by the three judges initially drawn to hear the case.

The larger panel is populated primarily with judges  appointed by Democrats: there are eight of them, compared to five appointed by Republicans. The three-judge panel that originally heard Halbig tipped conservative, with two Republican-appointed judges.

Liberal and conservative judges approach the law from different perspective, which can yield different outcomes. This is evident from the ruling in King v. Burwell, a case proceeding on the same issue in the US Court of Appeals for the Fourth Circuit. That ruling — which was issued by a panel of judges with a liberal bent — upheld the subsidies, contradicting the DC Circuit.

If the DC Circuit reverses Halbig en banc, it could diminish the odds that a case challenging the subsidies is taken up by the Supreme Court. With the decision reversed, the DC Circuit and the Fourth Circuit wouldn't be at odds — there would be no "circuit split."

"Where there is no circuit split, and where multiple lower courts have upheld a federal regulation, the Supreme Court rarely reviews cases," Jost said. "If they took this case, it would be an extraordinary political act."

En banc arguments will be heard by the DC Circuit on December 17.

What's the argument against subsidies on Healthcare.gov?

The Affordable Care Act provided for the creation of different types of insurance exchanges. Fourteen states and DC established "state-based" exchanges, which give them more flexibility and authority in controlling their Obamacare markets.

In the event that a state chose not to establish its own exchange, the Affordable Care Act dictates that the federal government would step in and create a "federally-facilitated" exchange. There's also a middle ground for partnership exchanges, where states and feds share authority. Healthcare.gov is the face of federally-facilitated and partnership exchanges.

These different types of exchanges were set up by different parts of the health law. But the part of the Affordable Care Act that authorizes the subsidies specifies that those subsidies are available to people "enrolled in through an Exchange established by the State under 1311" — the section that sets up state-based exchanges.

Because it's written that way, the plaintiffs argue that subsidies are only available on state-based exchanges, not on the Healthcare.gov exchanges used by the majority of states.

Why would the law prohibit states from getting subsidies unless they set up their own exchange?

To be clear, the administration is arguing that the law doesn't do this at all.

But the plaintiffs claim that the subsidies — in addition to making insurance more affordable for millions of Americans — were supposed to act as a carrot, encouraging states to set up their own exchanges. If a state set up its own exchange, its citizens would receive subsidies. If the state didn't, its citizens wouldn't.

What's the government's defense?

The government's primary defense hinges on a single word.

Word choice carries a lot of weight in legal interpretation. The part of the Affordable Care Act that creates federally-facilitated exchanges says that when a state doesn't set up its own marketplace, the federal government "shall establish and  operate such exchange". According to the administration, the word "such" implies that federal exchanges effectively step into the shoes of state exchanges.

Furthermore, the government argues, if it isn't obvious that the law intends federally-facilitated exchanges be functionally equivalent to state exchanges, then the law is at least ambiguous on the point.

You can't examine the part of the statute that sets up federally-facilitated exchanges in isolation; you have to look at it in the broader context of the reform law. Since affordable coverage is a core tenet of the law, to say that people in state and federal exchanges aren't equally entitled to tax credits would set the law at war with itself. That could be enough to call it ambiguous on its face.

When a law is ambiguous, the courts defer to the interpretation of the agency responsible for implementation. Obviously implementation has moved forward under the assumption that residents of every state are entitled to subsidies, regardless of what kind of exchange the state uses.

What do we actually know about what Congress intended?

The early bills that eventually became the Affordable Care Act were conflicted about whether exchanges should be coordinated at the state or federal level — the House bill called for a national marketplace, the Senate bill for state exchanges. But few legal scholars or health reform spectators lend credence to the claim that Congress intended to tie subsidies exclusively to state exchanges in the final legislation.

"No sentient being following the health care debate could argue, in good faith, that Obamacare’s architects intended for the federal government to set up exchanges without subsidies," wrote Jonathan Cohn in 2012. "It would completely subvert the law's intent."

Cohn, who closely tracked the health reform debate for over a year before the Affordable Care Act was passed, echoed his point earlier this month.

"Not once in the 16 months I reported on the formal congressional debate did any of the law's architects suggest they were thinking along these lines, he writes. "It wouldn’t make sense in the context of the law, which depends upon those subsidies to accomplish its primary goal. It's why assessments of Obamacare’s impact, including those from the Congressional Budget Office, assumed that residents of all states would have access to the tax credits."

Compare this to the Medicaid expansion: as the Affordable Care Act was originally written, states needed to expand the program or forfeit all federal Medicaid funding. This incensed conservative states. It incensed them so much that they brought a lawsuit against the federal government, claiming that expansion requirements were coercive — a lawsuit they won.

None of the states made noises suggesting that the law coerced them into building their own exchanges. "There was not a breath during the legislative debate suggesting that Congress meant to deprive citizens in states with federally-facilitated exchanges of tax credits," said Nicholas Bagley, a law professor at the University of Michigan.

What's next for the case?

Subsidies aren't going anywhere — yet.

The initial Halbig decision comes from three judges on the DC Circuit. The government asked the entire DC Circuit — 13 judges in total — to review the decision "en banc" — a request that was granted. The court skews to the left (there are eight Democratic appointees and only five Republican appointees) which bodes in the administration's favor. The en banc arguments are scheduled for December 17.

And the Supreme Court may or may not decide to hear the case in the future.

Plaintiffs in King v. Burwell, the case where the Fourth Circuit upheld subsidies, have appealed to the high court, but there's a good chance that the  justices will wait until the en banc rehearing plays out with Halbig before deciding whether or not to take up King.

When a "circuit split" exists — where two federal appeals courts disagree about the same legal challenge — there's a pressing reason for Supreme Court review, which makes it more likely. But when the court decisions don't contradict each other, the Supreme Court is less likely to get involved, unless they decide that there are "profound" consequences at stake.

Whether or not the Supremes will take up the subsidies challenge remains to be seen.