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Understanding 'Pennhurst': The legal doctrine that could save Obamacare

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On Wednesday, the Supreme Court will hear oral arguments in King v. Burwell, court case that threatens to topple Obamacare — a court case three years in the making.

The King case centers on whether Obamacare's insurance subsidies are available in all 50 states. If the decision goes against the White House, it's widely expected that will be a result of the Court's conservative wing finding the Obamacare subsidies to be illegal.

The government does have one legal doctrine, however, that might be especially persuasive to right-leaning judges. It's called the Pennhurst doctrine, and its all about ensuring that the federal government doesn't violate state rights.

Legal scholars defending Obamacare think this argument may resonate with the court's conservative wing, but some worry that a ruling on Pennhurst grounds could have implications that stretch far beyond health reform.

What is the Pennhurst doctrine and why is it important for this case?

The Pennhurst doctrine holds that Congress cannot surprise states by imposing new or unexpected obligations on federal money.  If the government wants to attach conditions to such funding, states must receive clear and explicit notice about what, precisely, those conditions are. The name comes from 1981 Supreme Court decision in Pennhurst State School & Hospital v. Halderman. (Pennhurst was a mental institution serving several hundred residents in Southeastern Pennsylvania.)

Then-Justice William Rehnquist wrote the following in his on the "clear-statement rule" in his opinion:

The legitimacy of Congress' power to legislate under the spending power thus rests on whether the State voluntarily and knowingly accepts the terms of the "contract." There can, of course, be no knowing acceptance if a State is unaware of the conditions or is unable to ascertain what is expected of it ... if Congress intends to impose a condition on the grant of federal moneys, it must do so unambiguously.

Chief Justice John Roberts — who many see as the likely swing vote in this case—was a clerk for Rehnquist during the 1981 term when Rehnquist authored the key opinion in Pennhurst. Justice Samuel Alito cited the doctrine in a 2006 opinion, where he wrote that the Court must consider interpretation from "the perspective of a state official who is engaged in the process of deciding whether the State should accept [federal] funds and the obligations that go with those funds." Most recently, several conservative justices expressed commitment to state sovereignty and the clear-statement rule in NFIB vs. Sebelius, the health law's 2012 Supreme Court challenge.

Even one of the key architects of the King lawsuit is somewhat sympathetic to the Pennhurst defense.

"I've said if the plaintiffs have to lose, I hope they lose along those lines," said Jonathan Adler, a law professor at Case Western Reserve University, in a podcast on the case last week. Adler is widely-credited for shaping this lawsuit. "Arguments about ensuring that states have notice of what's expected of them and arguments about the need to preserve a traditional federal-state balance are serious arguments, and are the sorts of arguments that I would like to think courts take seriously."

What's the rebuttal to invoking Pennhurst?

The most straightforward rebuttal,  one that the King plaintiffs use in their final brief to the Court,  is that the "notice" to states was sufficiently clear on the face of the statute; clearer notice was not needed. This invites the same technical debate — how should the context matter, is language around the Medicaid expansion an appropriate parallel, why would Congress bury an important threat in a tax calculation provision — that we see throughout the case's central arguments.

There's also a more academic argument: that this isn't a straightforward application of the Pennhurst doctrine. Typically, the principle comes into play when a state believes that Congress did not clearly spell out that state's obligations in accepting federal funding. You'd think of a situation where Congress, for example, didn't let states know when that money to build roads came with a requirement to maintain those streets, too.

Here, the complaint isn't about obligations — what is required of states who want to set up exchanges. It's about consequences — that subsidies will not flow to these states, resulting in spiraling unaffordability of premiums and massive disruption of the individual insurance markets.

Superficially, that distinction between obligations and consequences might seem minor, but it could actually have spillover effects for other areas of the law. Invoking the doctrine in this case would represent a different and more expansive application than the Court has used in the past — but some might view that as a feature, not a bug.

"This could be an attractive expansion of the Pennhurst principle for the more conservative justices, which is one of the reasons why I think it is potentially a powerful argument for the government," said Samuel Bagenstos, a professor of administrative law at the University of Michigan. "It’s hard to know how far it would extend, but certainly it would breach a major barrier that has contained the principle so far."

Devil in the details: Are there implications beyond Obamacare?

Obligations that bind states in cooperative agreements with the federal government can — and should and legally must — be clearly articulated in the laws that Congress passes.  But "consequences" are different; those aren't always spelled out in statutes. Depending on your understanding of policy "consequences," many may not be foreseeable at all, because they depend on how a policy plays out in the real world.

If justices apply the legal principle in this case, to consequences of failure to establish an exchange, where would they draw the line for other laws? A "narrowly-tailored" ruling on Pennhurst grounds would likely try to contain the doctrine's new scope — say, to consequences legally mandated by statute — but lower courts could try to stretch its reach in future litigation.

"The idea that Pennhurst would apply not just to obligations that the state assumes, but to consequences for the people living in those states is consequential," Bagenstos said. "The breadth of that principle is potentially quite large and uncertain. It would give folks an opportunity to challenge federal statutes that they can’t challenge right now."

A government win on Pennhurst grounds would have parallels to the health law's original Supreme Court ruling. NFIB was widely hailed as a victory for the administration because the health law emerged largely intact. However, some argued that the bigger  "win" belonged to conservatives, because NFIB marked the first time the Court limited Congress's power under the Spending Clause. In deeming the original Medicaid expansion unconstitutionally coercive, the justices circumscribed the powers of the federal government. Obamacare survived, but so did a more conservative philosophy of the law.

A new application of Pennhurst would only become binding legal precedent if five or more justices cited it in their ruling.

Bottom line: Pennhurst could be key to upholding the subsidies, but consequences are uncertain

The administration has not relied on Pennhurst in their defense. Their argument comes in two parts: first, that the text of the law plainly authorizes subsidies; and second, if the text of the law isn't plainly obvious, it is at least ambiguous on the point. Under a principle called Chevron deference, agencies have latitude to interpret laws written ambiguously. When the Fourth Circuit Court of Appeals ruled for the government in July, it did so on Chevron grounds.

But briefs filed with the Court — like an amicus submitted by 23 attorneys general and this brief from prominent legal scholars — have carefully keyed arguments to the doctrine. Legal argumentation often happens on different levels because different arguments are more likely to persuade different justices.

Pennhurst, like Chevron, turns on textual ambiguity — but conservative justices might favor it because of the doctrinal implications. If only three or four justices support upholding the subsidies on plain text or under Chevron, the Pennhurst argument might just help the government reach a critical mass of support.