The Wayback Machine: From Ten Years Ago: July 20-July 26, 2006
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(Late) Monday Smackdown/Tuesday Hoisted Idiocy: Embarrassingly Poor Legal Reasoning from Michael Cannon and Jonathan Adler

Hoisted from Four Years Ago: What passes for Republican think-tannery these days. Judge Paul Friedman's smackdown should have ended this then--rather than later, at the Supreme Court, 6-3, with John Roberts writing:

Congress passed the Affordable Care Act to improve health insurance markets, not to destroy them. If at all possible we must interpret the Act in a way that is consistent with the former, and avoids the latter...

The idiocy, from Michael Cannon and Jonathan Adler:

Michael Cannon and Jonathan Adler: The Illegal IRS Rule To Expand Tax Credits Under The PPACA: A Response To Timothy Jost:

The Act provides that taxpayers are eligible for tax credits if they purchase a health plan through “an Exchange established by the State under section 1311.”... There is nothing in the statute that conflicts with the plain meaning of that language. Indeed, the rest of the statute supports that plain meaning.... Even though some members of Congress and the President might have preferred a law that authorized tax credits in federal Exchanges, they nevertheless enacted a law that did not...

Judge Paul Friedman:

Plaintiffs and defendants agree that 42 U.S.C. § 18031 does not mean what it literally says; states are not actually required to “establish” their own Exchanges. Pls.’ SJ Opp. 14 (“All agree that states are free not to establish Exchanges.”). This is because Section 1321 of the ACA provides that a state may “elect” to establish an Exchange and implement federal requirements for that Exchange. ACA § 1321, codified at 42 U.S.C. § 18041. If a state (i) is not an “electing State,” (ii) fails to have “a required Exchange operational by January 1, 2014,” or (iii) has not taken the actions necessary to establish an operational Exchange consistent with federal requirements, “the Secretary shall... establish and operate such Exchange within the State and the Secretary shall take such actions as are necessary to implement such other requirements.” 42 U.S.C. § 18041(c) (emphasis added). In other words, if a state will not or cannot establish its own Exchange, the ACA directs the Secretary of HHS to step in and create “such Exchange”--that is, by definition under the statute, “an American Health Benefit Exchange established under [Section 18031].” 42 U.S.C. § 18041(c); 42 U.S.C. § 300gg-91(d)(21).

Looking only at the language of 26 U.S.C. § 36B(b)-(c), isolated from the cross-referenced text of 42 U.S.C. § 18031, 42 U.S.C. § 18041, and 42 U.S.C. § 300gg-91(d)(21), the plaintiffs’ argument may seem the more intuitive one. Why would Congress have inserted the phrase “established by the State under [42 U.S.C. § 18031]” if it intended to refer to Exchanges created by a state or by HHS? But defendants provide a plausible and persuasive answer: Because the ACA takes a state-established Exchange as a given and directs the Secretary of HHS to establish such Exchange and bring it into operation if the state does not do so. See 42 U.S.C. §§ 18031(b)-(d), 18041(c). In other words, even where a state does not actually establish an Exchange, the federal government can create “an Exchange established by the State under [42 U.S.C. § 18031]” on behalf of that state....

Plaintiffs’ construction would render superfluous other portions of the ACA, such as the advance payment reporting requirements under Section 36B(f). See infra at 30-31. Thus the canon against surplusage is of no use here. The canon “is not an absolute rule,” and “assists only where a competing interpretation gives effect to every clause and word of a statute.” Marx v. Gen. Revenue Corp., 133 S. Ct. 1166, 1177 (2013).

The defendants point to various provisions of the ACA that appear to reflect an intent by Congress to make tax credits available to taxpayers purchasing insurance from the federally-facilitated Exchanges; they also cite provisions that, if construed consistently with plaintiffs’ proposed definition, would create numerous anomalies within the statute that Congress could not have intended. See 26 U.S.C. § 36B(f)(3) (requiring reporting by federally-run Exchanges of advance payments of tax credits); 42 U.S.C. § 18032(f)(1)(A)(ii) (restricting any Exchange-based purchase of health insurance to residents of “the State that established the Exchange”); 42 U.S.C. § 1396a(gg) (providing that a state must maintain certain standards in its Medicaid program until “an Exchange established by the State under [42 U.S.C. § 18031] is fully operational”); 42 U.S.C. § 1397ee(d)(3)(B) (requiring HHS to determine, for each state, whether health plans offered through “an Exchange established by the State under [42 U.S.C. § 18031]” provide benefits for children comparable to those offered in the state’s CHIP plan).

The Court finds the defendants’ arguments compelling and the plaintiffs’ counter-arguments unpersuasive. The Court need not discuss each of the many such provisions highlighted by defendants. It is sufficient to illustrate the persuasiveness of their arguments to focus on two provisions in the ACA: the reporting requirements for state and federal Exchanges, and the eligibility requirements for individuals purchasing insurance through the Exchanges.

a) The Advance Payment Reporting Requirements Under 26 U.S.C. § 36B(f)(3) Subsection (f) of Section 36B – titled “Reconciliation of credit and advance credit” and located in the same section as the disputed statutory phrase – provides that the premium tax credit that a taxpayer receives at the end of the year must be reduced by the amount of any advance payment of such credit. 26 U.S.C. § 36B(f)(1). In order for the IRS to track these advance payments, the statute mandates that “[e]ach Exchange (or any person carrying out 1 or more responsibilities of an Exchange under [42 U.S.C. § 18031] or [42 U.S.C. § 18041])” provide certain information to the Secretary of the Treasury and to the taxpayer “with respect to any health plan provided through the Exchange.” 26 U.S.C. § 36B(f)(3) (emphasis added). The provision requires the reporting of information on the level of coverage provided to each taxpayer, the price of the insurance premium, and the amount of the advance payment.

By invoking both Section 18031 and Section 18041, this advance payment provision is expressly directed at every Exchange, regardless of whether the Exchange is state- or federally-run. Section 36B(f) would serve no purpose with respect to the federally-facilitated Exchanges, and the language referencing 42 U.S.C. § 18041 would be superfluous, if federal Exchanges were not authorized to deliver tax credits. Section 36B(f) thus indicates that Congress assumed that premium tax credits would be available on any Exchange, regardless of whether it is operated by a state under 42 U.S.C. § 18031 or by HHS under 42 U.S.C. § 18041.

b) Qualified Individuals Under 42 U.S.C. § 18032 Section 1312 of the ACA, codified at 42 U.S.C. § 18032, sets forth provisions regarding which individuals may purchase insurance from the Exchanges. This section provides that only “qualified individuals” may purchase health plans in the individual markets offered through the Exchanges, and requires that a “qualified individual” be a person who “resides in the State that established the Exchange.” 42 U.S.C. § 18032(f)(1)(A)(ii). There is no separate provision defining “qualified individual” for purposes of the federally-facilitated Exchanges.

If this provision were read literally, no “qualified individuals” would exist in the thirty-four states with federally-facilitated Exchanges, as none of these states is a “State that established [an] Exchange.” The federal Exchanges would have no customers, and no purpose. Such a construction must be avoided, if at all possible. See Fund for Animals, Inc. v. Kempthorne, 472 F.3d 872, 877 (D.C. Cir. 2006) (“[C]ourts presume that Congress has used its scarce legislative time to enact statutes that have some legal consequence.”). And this absurd construction can be avoided, say defendants, by viewing 42 U.S.C. § 18041 – the provision which grants states flexibility in the operation of Exchanges and permits the Secretary to establish and operate an Exchange when a state declines to do so – as authorizing the federal government to “stand[] in the shoes of the state” for purposes of Section 18032’s residency requirement. See Defs.’ Reply 13.

Plaintiffs concede that the federally-run Exchanges must be able to offer insurance, and suggest that the Court should not interpret the residency requirement literally. According to plaintiffs, the residency provision “assumes that a state created the Exchange; so it can quite readily be construed as not prohibiting eligibility [to apply for insurance] where that assumption proves false.” Pls.’ SJ Opp. 15; see also Dec. 3, 2013 Tr. 24-25. But plaintiffs’ concession only proves the defendants’ point. Various provisions of the ACA besides the residency provision reflect an assumption that a state-established Exchange exists in each state. See, e.g., 42 U.S.C. § 18032(f)(1)(A)(ii); 42 U.S.C. § 1396a(gg) (requiring state compliance with certain Medicaid standards until “an Exchange established by the State under [42 U.S.C. § 18031] is fully operational”); 42 U.S.C. § 1397ee(d)(3)(B) (directing HHS to assess compliance of certain benefits of health plans offered through “an Exchange established by the State under [42 U.S.C. § 18031]”); see also 42 U.S.C. § 18031(d)(1) (“An Exchange shall be a governmental agency or nonprofit entity that is established by a State.”) (emphasis added). If construed literally, these provisions would be nullified when applied to states without state-run Exchanges, leading to strange or absurd results. These provisions make far more sense when construed consistently with defendants’ interpretation of the Act – i.e., viewing 42 U.S.C. § 18041 as authorizing the federal government to create “an Exchange established by the State under [42 U.S.C. § 18031]” on behalf of a state that declines to establish its own Exchange.