Rasmusen



Draft of October 5, 2014

Playing Chicken with Obamacare’s State Exchanges:

The Political Economy of Halbig v. Burwell

[In preparation for a talk to undergraduates at Hillsdale College and for publication in some form. This draft is early and it should not be circulated.]

Abstract

In 2014, a 3-judge panel of the D.C. Circuit held in Halbig v. Burwell that the Affordable Care Act--- Obamacare--- specifies that if a state government decides not to establish an insurance exchange, the federal government may not establish an exchange in that state. If no federal exchange is established, the individual and employer mandates to purchase health insurance do not apply in that state. In this paper I show how the Democratic majority might have written the statute this way for mistaken strategic purposes, and how the court’s decision might nonetheless benefit the Democratic Party politically. I also use this statute to illustrate the difficulties of defining “legislative intent”.

Eric B. Rasmusen: Olin Faculty Fellow, Harvard Law School; Visiting Professor, Department of Economics, Harvard University; Dan R. & Catherine M. Dalton Professor, Department of Business Economics and Public Policy, Kelley School of Business, Indiana University; Erasmusen@law.harvard.edu; cell:812-345-8573.

I thank David Gamage for helpful comments, and participants in sdfsd for their comments. This paper’s origins lie in several of my posts at the Law and Economics Professors Blog.

Although our decision has major consequences, our role is quite limited: deciding whether the IRS Rule is a permissible reading of the ACA.

--- the majority in Halbig v. Burwell

This case is about Appellants’ not-so-veiled attempt to gut the Patient Protection and Affordable Care Act (“ACA”).

--- the dissent in Halbig v. Burwell

 1. Introduction

Halbig v. Burwell and King v. Burwell involve one of the many issues raised by Obamacare, the health insurance bill Congressional Democrats passed in March 2010 and tendentiously named, “The Patient Protection and Affordable Care Act (“the ACA”). The proponents of the bill wanted state governments to expand Medicaid eligibility and to set up state insurance exchanges to help implement a scheme in which large employers would be required to provide high-coverage, high-cost health insurance to their employees and anybody not covered by an employer plan would be required to buy their own high-coverage, high-cost insurance, but with a subsidy if their income was low enough. The bill also banned low-coverage insurance (controversially banning insurance policies that did not pay for birth-control pills) and required insurance companies to sell to people even if they had pre-existing medical conditions that would make the insurance unprofitable.

Congress could not constitutionally force a state to set up an insurance exchange, and the bill authorizes the federal government to set up a federal exchange if a state refuses. The issue in Halbig and King was whether the bill’s wording that low-income people were eligible for the insurance subsidy only using an exchange “established by the State”, the words should be interpreted (a) literally, or (b) as using either a federal or state exchange. If the words were taken literally, then not only would states that refused to establish exchanges lose insurance subsidies, but that would also prevent the individual and employer mandates to buy insurance from being triggered. Thus, under the literal interpretation not only the Medicaid expansion part of Obamacare but also the insurance-buying mandates would become optional for each state (other features such as the banning of low-cost low-coverage insurance policies and the requirement to cover people who were already sick would not be optional, though).

I’ll talk about a number of features of these cases. After explaining the legal issues, I will make two points:

1. Simple game theory analysis shows that making Obamacare optional for the states was a rational strategic decision, though perhaps mistaken give how things turned out.

2. Simple economics shows that the Democratic Party should be thankful for the delays in implementation of Obamacare, and making Obamacare optional for the states works to their political advantage.

3. This case offers a good setting to think about what “intent” means. In the context of this case, “legislative intent” is not a useful concept.

 2. The History and Legal Issues

Barack Obama was elected President in November 2008 and took office in January 2009. Both the House of Representatives and the Senate were also under Democratic Party control. By April 2009, after contested elections were decided and Republican Senator Spector switched to become a Democrat, Democrats held the Senate 60-40, permitting them to override filibusters. Health policy was one of President Obama’s priorities, and health care bills were passed both in the House and Senate. Everybody thought that the two bills would be reconciled and perhaps substantially changed in conference, but after Senator Kennedy died and was replaced by a Republican in January 2010, the Democrats only had 59 votes. They therefore decided to have the House vote for the Senate bill without modification, avoiding the need to override a Senate filibuster. The bill was made law in March 2010.

The bill’s various provisions were scheduled to go into effect at different dates, and some of these statutory dates were then postponed by Presidential action. The bill was carefully written, however, to avoid putting it into effect before the November 2012 presidential election. As it happened, the Democrats lost control of the House in the 2010 elections, but President Obama was re-elected to his second term in 2012, with no chance of a third term. In May 2012, the Administration promulgated regulations that permitted low-income people to receive subsidies for insurance bought from federal exchanges. 26 C.F.R. § 1.36B–1(k); Health Insurance Premium Tax 7 Credit, 77 Fed.Reg. 30,377, 30,378 (May 23, 2012). People challenged the regulations as violating the words of the statute, in cases which were named Halbig v. Burwell and King v. Burwell by the time they reached the appellate courts in 2014. In Halbig, the government lost 2-1 in the D.C. Circuit, and in King the government won 3-0 in the xxx Circuit. At the time Halbig was decided, only 14 states and the District of Columbia had set up state exchanges.[1]

The section of the Obamacare bill at issue is one that became 26 U.S.C. §36B in the U.S. Code, part of the Tax Code (Title 26) since the IRS administers much of the program.

§36B(b)(2) Premium assistance amount

The premium assistance amount determined under this subsection with respect to any coverage month is the amount equal to the lesser of—

(A) the monthly premiums for such month for 1 or more qualified health plans offered in the individual market within a State which cover the taxpayer, the taxpayer’s spouse, or any dependent (as defined in section 152) of the taxpayer and which were enrolled in through an Exchange established by the State under 1311[2] of the Patient Protection and Affordable Care Act, or

(B) the excess (if any) of—

(i) the adjusted monthly premium for such month for the applicable second lowest cost silver plan with respect to the taxpayer, over

(ii) an amount equal to 1/12 of the product of the applicable percentage and the taxpayer’s household income for the taxable year.

and

§36B(c)(2) Coverage month

For purposes of this subsection—

(A) In general

The term “coverage month” means, with respect to an applicable taxpayer, any month if—

(i) as of the first day of such month the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer is covered by a qualified health plan described in subsection (b)(2)(A) that was enrolled in through an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act, and

(ii) the premium for coverage under such plan for such month is paid by the taxpayer (or through advance payment of the credit under subsection (a) under section 1412 of the Patient Protection and Affordable Care Act).

It seems odd to put the important requirement that subsidies are only available to people who purchase insurance through state exchanges in the rules for premium assistance amounts and coverage months, and the government made that argument. The Halbig court noted, however, that is equally strange to put there the important requirement that subsidies are only available to people who purchase insurance through exchanges instead of private markets.[3] Oddity of drafting is a pervasive feature of the bill.

The IRS wrote the regulations to say that the premium assistance amount and whether the person was enrolled during a coverage month would not depend on whether the person enrolled in a state exchange or a federal exchange: either way, he would be eligible for the tax credit. The IRS did not give much explanation, but it did say (quoting from King):

The statutory language of section 36B and other provisions of the Affordable Care Act support the interpretation that credits are available to taxpayers who obtain coverage through a State Exchange, regional Exchange, subsidiary Exchange, and the Federally-facilitated Exchange. Moreover, the relevant legislative history does not demonstrate that Congress intended to limit the premium tax credit to State Exchanges. Accordingly, the final regulations maintain the rule in the proposed regulations because it is consistent with the language, purpose, and structure of section 36B and the Affordable Care Act as a whole.

The IRS interpretation had an important effect on the mandate. As Halbig puts it:

This broader interpretation has major ramifications. By making credits more widely available, the IRS Rule gives the individual and employer mandates—key provisions of the ACA—broader effect than they would have if credits were limited to state-established Exchanges. The individual mandate requires individuals to maintain “minimum essential coverage” and, in general, enforces that requirement with a penalty. See 26 U.S.C. § 5000A(a)-(b). The penalty does not apply, however, to individuals for whom the annual cost of the cheapest available coverage, less any tax credits, would exceed eight percent of their projected household income. See id. § 5000A(e)(1)(A)-(B). By some estimates, credits will determine on which side of the eight-percent threshold millions of individuals fall. See Br. of Economic Scholars in Support of Appellees 18. Thus, by making tax credits available in the 36 states with federal Exchanges, the IRS Rule significantly increases the number of people who must purchase health insurance or face a penalty.

The IRS Rule affects the employer mandate in a similar way. Like the individual mandate, the employer mandate uses the threat of penalties to induce large employers—defined as those with at least 50 employees, see 26 U.S.C. § 4980H(c)(2)(A)—to provide their full-time employees with health insurance. See generally id. § 4980H(a). Specifically, the ACA penalizes any large employer who fails to offer its full-time employees suitable coverage if one or more of those employees “enroll[s] . . . in a qualified health plan with respect to which an applicable tax credit . . . is allowed or paid with respect to the employee.” Id. § 4980H(a)(2); see also id. § 4980H(b) (linking another penalty on employers to employees’ receipt of tax credits). Thus, even more than with the individual mandate, the employer mandate’s penalties hinge on the availability of credits. If credits were unavailable in states with federal Exchanges, employers there would face no penalties for failing to offer coverage.

The Halbig Court decided that (a) the words “established by a State” were not ambiguous, whether in isolation or in context, and (b) using the literal meaning would not make the bill so absurd that no rational (or actual) Congress could possibly have wanted to pass a bill like that. The Court said:

Under section 36B, subsidies are available only for plans “enrolled in through an Exchange established by the State under section 1311 of the [ACA].” 26 U.S.C. § 36B(c)(2)(A)(i) (emphasis added); see also id. § 36B(b)(2)(A). Of the three elements of that provision— (1) an Exchange (2) established by the State (3) under section 1311—federal Exchanges satisfy only two: they are Exchanges established under section 1311. Nothing in section 1321 deems federally-established Exchanges to be “Exchange[s] established by the State.” This omission is particularly significant since Congress knew how to provide that a non-state entity should be treated as if it were a state when it sets up an Exchange. In a nearby section, the ACA provides that a U.S. territory that “elects . . . to establish an Exchange . . . shall be treated as a State.”2 42 U.S.C. § 18043(a)(1). The absence of similar language in section 1321 suggests that even though the federal government may establish an Exchange “within the State,” it does not in fact stand in the state’s shoes when doing so...

The government argues that we should not adopt the plain meaning of section 36B, however, because doing so would render several other provisions of the ACA absurd. Our obligation to avoid adopting statutory constructions with absurd results is well-established. See Pub. Citizen v. U.S. Dep’t of Justice, 491 U.S. 440, 454-55 (1989). Under this principle, we will not give effect to a statute’s literal meaning when doing so would “render[ the] statute nonsensical or superfluous or . . . create[] an outcome so contrary to perceived social values that Congress could not have intended it.” United States v. Cook, 594 F.3d 883, 891 (D.C. Cir. 2010)...

The government urges us, in effect, to strike from section 36B the phrase “established by the State,” on the ground that giving force to its plain meaning renders other provisions of the Act absurd. But we find that the government has failed to make the extraordinary showing required for such judicial rewriting of an act of Congress. Nothing about the imperative to read section 36B in harmony with the rest of the ACA requires interpreting “established by the State” to mean anything other than what it plainly says.

The Halbig Court also notes that the government maintained the opposite argument in another context, saying that Congress did intend to have some of Obamacare’s provisions but not the individual mandate in the Northern Marianas Territory:

Yet the supposedly unthinkable scenario the government and dissent describe—one in which insurers in states with federal Exchanges remain subject to the community rating and guaranteed issue requirements but lack a broad base of healthy customers to stabilize prices and avoid adverse selection—is exactly what the ACA enacts in such federal territories as the Northern Mariana Islands, where the Act imposes guaranteed issue and community rating requirements without an individual mandate. See 26 U.S.C. § 5000A(f)(4) (exempting residents of such federal territories as Puerto Rico and the Northern Mariana Islands from the individual mandate by providing that they are automatically treated as having “minimum essential coverage”); 42 U.S.C. § 201(f) (providing that the Public Health Service Act, where the guaranteed issue and community rating requirements appear, applies to residents of such territories). This combination, predictably, has thrown individual insurance markets in the territories into turmoil. See Sarah Kliff, Think Your State Has Obamacare Problems? They’re Nothing Compared to Guam, WASH. POST (Dec. 19, 2013), . But HHS has nevertheless refused to exempt the territories from the guaranteed issue and community rating requirements, recognizing that, “[h]owever meritorious” the reasons for doing so might be, “HHS is not authorized to choose which provisions of the [ACA] might apply to the territories.” Letter from Gary Cohen, Director, Center for Consumer Information and Insurance Oversight, HHS, to Sixto K. Igisomar, Secretary of Commerce, Commonwealth of the Northern Mariana Islands (July 12, 2013), available at HHS-CMS-CNMI-Letter-igisomar7-12-13.pdf.

In dissent, Judge Edwards says that the meaning of “established by the State” is not clear, and that to read it as meaning only an exchange that a state established would lead to absurd results. He said,

When HHS creates an exchange under § 18041(c), it does so on behalf of the State, essentially standing in its stead. Put differently, under the ACA, an Exchange within a State is a given. The only question is whether the State opts to create the Exchange on its own or have HHS do it on its behalf. On this view, “established by the State” is term of art that includes any Exchange within a State....

Because § 18041(c) authorizes the federal government to establish “Exchanges,” the phrase “established by the State” in § 18031 must be broad enough to accommodate Exchanges created by the HHS on a State’s behalf.

and

Fundamentally, the purported plain meaning of § 36B(b) would subvert the careful policy scheme crafted by Congress, which understood when it enacted the ACA that subsidies were critically necessary to ensure that the goals of the ACA could be achieved. Simply put, § 36B(b) interpreted as Appellants urge would function as a poison pill to the insurance markets in the States that did not elect to create their own Exchanges. This surely is not what Congress intended.

He dismissed the argument that Congress’s intentional omission of the individual mandate in the Northern Marianas Territory showed it did not think the mandate essential to make the scheme work by saying that it just showed Congress didn’t care much about what happens in places like the Northern Marianas:

To the contrary, Congress’ intentional omissions in these peripheral insurance markets of a tool it knew to be important to preventing adverse selection merely indicates that Congress had a substantially higher tolerance for the risk of adverse selection in such markets vis-à-vis the core markets where it did impose the individual mandate.

The King court was not as vehement as Judge Edwards (two of the three judges said they considered the case a close call), but it agreed that the meaning of “established by a State” was ambiguous, saying:

Because this case concerns a challenge to an agency's construction of a statute, we apply the familiar two-step analytic framework set forth in Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984). At Chevron's first step, a court looks to the “plain meaning” of the statute to determine if the regulation responds to it. Chevron, 467 U.S. at 842–43. If it does, that is the end of the inquiry and the regulation stands. Id. However, if the statute is susceptible to multiple interpretations, the court then moves to Chevron's second step and defers to the agency's interpretation so long as it is based on a permissible construction of the statute.

Thus, all the King Court had to find to uphold the IRS position was that the words “established by a State” were ambiguous and that the IRS interpretation of them had some legitimate basis. It found the words ambiguous:

The plaintiffs' primary rationale for their interpretation is that the language says what it says,... There can be no question that there is a certain sense to the plaintiffs' position.... However, when conducting statutory analysis, “a reviewing court should not confine itself to examining a particular statutory provision in isolation. Rather, [t]he meaning—or ambiguity—of certain words or phrases may only become evident when placed in context.” Nat'l Ass'n of Home Builders v. Defenders of Wildlife, 551 U.S. 644, 666 (2007) (internal citation and quotation marks omitted). With this in mind, the defendants' primary counterargument points to ACA §§ 1311 and 1321, which, when read in tandem with 26 U.S.C. § 36B, provide an equally plausible understanding of the statute, and one that comports with the IRS's interpretation that credits are available nationwide....

As noted, § 1311 provides that “[e]ach State shall, not later than January 1, 2014, establish an American Health Benefit Exchange (referred to in this title as an “Exchange”)[.]” It goes on to say that “[a]n Exchange shall be a governmental agency or nonprofit entity that is established by a State,” apparently narrowing the definition of “Exchange” to encompass only state-created Exchanges. ACA § 1311(d)(1). Similarly, the definitions section of the Act, § 1563(b), provides that “[t]he term ‘Exchange’ means an American Health Benefit Exchange established under [§ ] 1311,” further supporting the notion that all Exchanges should be considered as if they were established by a State....

Of course, § 1311's directive that each State establish an Exchange cannot be understood literally in light of § 1321, which provides that a state may “elect” to do so. Section 1321(c) provides that if a state fails to establish an Exchange by January 1, 2014, 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.” (emphasis added). The defendants' position is that the term “such Exchange” refers to a state Exchange that is set up and operated by HHS.

Judge Davis’s concurrence in King is stronger, and dismisses the challenge’s plain meaning argument thus:

I am not persuaded and for a simple reason: “[E]stablished by the State” indeed means established by the state--- except when it does not, i.e., except when a state has failed to establish an Exchange and when the Secretary, charged with acting pursuant to a contingency for which Congress planned, id. § 1321(c), establishes and operates the Exchange in place of the state. When a state elects not to establish an Exchange, the contingency provision authorizes federal officials to establish and operate “such Exchange” and to take any action adjunct to doing so.

That disposes of the Appellants' contention. This is not a case that calls up the decades-long clashes between textualists, purposivists, and other schools of statutory interpretation.

Judge Davis is referring to the following section of the Act:

§1321(c) FAILURE TO ESTABLISH EXCHANGE OR IMPLEMENT REQUIREMENTS.—

(1) IN GENERAL.—If—

(A) a State is not an electing State under subsection (b); or

(B) the Secretary determines, on or before January 1, 2013, that an electing State—

(i) will not have any required Exchange operational by January 1, 2014; or

(ii) has not taken the actions the Secretary determines necessary to implement—

(I) the other requirements set forth in the standards under subsection (a); or

(II) the requirements set forth in subtitles A and C and the amendments made by such subtitles; the Secretary shall (directly or through agreement with a notforprofit entity) establish and operate such Exchange within the State and the Secretary shall take such actions as are necessary to implement such other requirements. 2736(b) of the Public Health Services Act shall apply to the enforcement under paragraph (1) of requirements of subsection (a)(1) (without regard to any limitation on the application of those provisions to group health plans).

As for myself, I think that titling the section “Failure to Establish Exchange...” shows that it’s possible for a state to fail to establish an exchange. It doesn’t mean, “It’s impossible for a state to fail to establish an exchange because if it doesn’t, a state-established exchange will be established by the federal government. In some states, it seems that there has been a “failure to establish exchange”. When we talk about “Failure to Establish Exchange,” it must be some kind of exchange hasn’t been established. It isn’t talking about failure to establish a federal exchange. So it must be about states that haven’t established an exchange.

The worry was that in some places the state wouldn’t have established either (A) any exchange at all, or (B) a valid exchange--- because the state tried but messed up. In case (B), where the state exhange was set up but wasn’t valid because the state “ (ii) has not taken the actions the Secretary determines necessary to implement— I) the other requirements...”, the federal government has to establish “such exchange”. What kind of exchange is “such exchange”? Is it a state one? No--- obviously, it is one that does “implement the requirements”. That’s the whole point. The state’s exchange is no good, so so the Secretary has to set up one that implements the requirements. It woudl have been OK to leave out the word “such”, but is included to note that if the state didn’t set up one that’s valid, the one the Secretary set up had better be valid.

3. Applying Game Theory

One of the main legal arguments in favor of the IRS position is that Congress could not possibly have meant to incorporate provisions in a statute that would thwart the intent of those who voted for it. Of course, Congress does frequently enact laws that everybody later agrees were mistakes, and voters frequently regret their voting decisions. Indeed, given Obama’s current ratings in the polls, one might argue that the Courts should reverse the result of the 2012 election; voters couldn’t possibly have meant to re-elect Obama and a majority of them would probably now admit they were mistaken. But let’s move to where law-and-economics can be helpful: to showing why the Congressional Democrats might have written the statute as they did.

In his dissent, Judge Edwards says:

No legitimate method of statutory interpretation ascribes to Congress the aim of tearing down the very thing it attempted to construct…

Appellants in this litigation have invented a narrative to explain why Congress would want health insurance markets to fail in States that did not elect to create their own Exchanges. Congress, they assert, made the subsidies conditional in order to incentivize the States to create their own exchanges…

The simple truth is that Appellants’ incentive story is a fiction, a post hoc narrative concocted to provide a colorable explanation for the otherwise risible notion that Congress would have wanted insurance markets to collapse in States that elected not to create their own Exchanges….

The majority thinks it unremarkable that Congress would condemn insurance markets in States with federally-created Exchanges to an adverse-selection death spiral.

  Similarly, in his King concurrence explaining that “[E]stablished by the State” indeed means established by the state-except when it does not,” Judge Davis says

The majority correctly holds that Congress did not intend a reading that has no legislative history to support it and runs contrary to the Act's text, structure, and goals. Appellants' “literal reading” of the premium tax credits calculation subprovision renders the entire Congressional scheme nonsensical.

      A little bit of game theory goes a long way. Here’s why Congress would indeed condemn insurance markets in States with federally-created Exchanges to an adverse-selection death spiral. It has to do with payoffs on and off the equilibrium path of a game. Or, since I’m not trying to be pedantic, with why people make threats.

[pic]

 

     Let’s use a story. Suppose Harry Reid has a choice between passing a bill saying “No state exchange, no subsidy” or a bill saying “Fed exchange OK for subsidy.” He would prefer the states pay for the exchanges, since even a small saving like that will help reduce the cost to the federal government. He’s got a majority in the Senate, so he can pass whichever bill he wants. His payoff is 10, let us say, if the federal government has to raise taxes to pay for the exchanges, and 12 if the states pay. For the states, let’s call the player “Indiana”, since it’s one of the conservative states from which Reid expects trouble. Indiana will get a payoff of 0 if the federal government pays for the exchanges, and -1 if it has to pay for the exchanges itself, Reid thinks. Reid calculates, though, that under the “No state exchange, no subsidy” bill, Indiana’s payoff will be -3, because it will lose the subsidies and that’s more important than the expense of the exchanges. To be sure, Reid’s payoff would be -20 under that bill if Indiana didn’t establish an exchange, but that would be for Indiana to shoot itself in the foot, which politicians never do. Thus, Harry Reid passes the No State Exchange No Subsidy bill, Indiana establishes an exchange, and Harry gets his maximum possible payoff of 12. Harry has refuted Judge Edwards: he has purposely passed a bill that would cause chaos in Indiana and wreck Reid’s own policy--- but only if Indiana makes a mistake.

    Unfortunately, it was Harry who made the mistake. Indiana’s payoff from establishing the state exchange is -4, not -1. Harry has forgotten about the issue of principle: the Indiana conservative statehouse hates government health care even more than they love subsidies. And so Harry ends up with a payoff of -20.

     The game could be expanded realistically. At the cost of some complexity, we could formally model Harry’s uncertainty over whether Indiana’s payoff was -1 or -4, making this into “a game of incomplete information.” That would just be a technical cleanup, though--- the game would behave much the same. Or, we could also add another player: the Supreme Court. Suppose Harry thinks there is some chance Indiana’s payoff is actually -4, so his No Subsidy bill would backfire. He also knows, however, that some judges, like Judge Edwards, would like to come to his rescue. Thus, we might add a move by the Supreme Court at the end of Refuse to Establish State Exchange. The Supreme Court could keep the law as is, or change it to “Fed Exchange OK for Subsidy”--- in which case Reid is back to his +10 payoff. Or, even better, the Supreme Court might choose the move, “Force Indiana to set up an exchange no matter what the statute says,” and Harry could get his +12 payoff no matter how Indiana moved. I’ll leave that game as an exercise, or maybe for an amicus brief (anybody interested in writing one on this point?)

     This idea is familiar in law and economics in the form of the idea of “penalty defaults” in contract law. Professors Ayres and Gertner pointed out in 1989 that one way a judge could respond to sloppy contracts in which the parties made some clause ambiguous to try to get the courts to go to the trouble to sort it out would be for the court to pick a purposely harmful default clause to use if the parties tried that tactic. For example, if it was unclear which party would receive interest on an escrow account in a merger deal, the courts might want to say in advance that all the interest goes to the Taliban, so everybody loses. That would make them take more care with their drafting. A very recent example in another context is the case of the conservative professor who sued the U. of Iowa law school for political bias in hiring. The jury deadlocked and was dismissed, but somehow (I forget details) the judge called them back two minutes later and they were in agreement. The appellate court reluctantly said there’d have to be another trial, because though in this case it was satisfied that the jurors hadn’t had time to confer with outsiders and a new trial would be something of a waste, it was better to have a bright line rule.

4. Price Theory and Politics

Our governor in Indiana is Governor Pence, a conservative former U.S. Representative with a lot of talent and ambition (and a legislature controlled by his party). One of my law-and-econ colleagues said, “My guess is that Governor Pence’s refusal to set up an exchange will last only as long as his presidential ambitions.”

If Indiana residents can’t get Obamacare subsidies because there’s no state exchange, as Halbig says, then there are going to be some angry voters here. But some people will be happy too, because if people in Indiana don’t get the subsidies, Hoosiers don’t have to comply with the individual or employers mandates to buy health insurance. So how does the political calculus work out?

First, think about the individual mandate. The whole idea of a mandate is that people are being forced by the government to do something they don’t want to do. Here, the idea is that the law will force healthy people and people who prefer risk to the administrative costs to buy insurance so as to reduce adverse selection, reducing the price of health insurance for more risk-averse and less healthy people (in particular, for those with pre-existing conditions). This involves a large number of healthy people subsidizing a small number of unhealthy people; mandatory AIDS coverage, for example, requires large expenditure on a few people but zero expenditure on most. So the mandate per se is a political negative. Both Pence and Obama will be more popular if it isn’t imposed, ceteris paribus.

Of course, if you get enough subsidy that your insurance is free, you don’t mind the mandate. So the question is whether enough of the uninsured qualify for the subsidy. Poor people are out of the political calculus. They are eligible for Medicaid, so the mandate-and-subsidy part of Obamacare doesn’t matter for them. What we might call medium-poor people are the ones who must buy insurance but would also have gotten a subsidy. Remember, though, that the whole idea is to get the more-healthy people into the pool so they can subsidize the less-healthy. Otherwise, government subsidies for the medium-poor would just be an even bigger expansion of Medicaid. For the program to succeed, it needs the monetary contribution of most of the uninsured. So most of them are going to be unhappy, overall.

There is also the extra cost to taxpayers. That is borne nationally, so adding Indiana subsidy-receivers wouldn’t raise the taxes of Indiana voters by much. But note that it would raise them slightly, so taxpayers who aren’t otherwise affected by the subsidy or employer mandate (the vast majority) are going to be slight losers if Indiana participates in Obamacare.

How about the employer mandate? The mandate would force large employers to offer insurance if they didn’t earlier. The immediate effect is a huge benefit for their workers and a huge loss for the employers. Since many or most of the big employers are nationally owned, the net result is a big gain for Indiana (though another small loss for otherwise neutral voters if they own stocks directly or through their pension funds).

In the long run, though--- which means when the value of wages changes to its equilibrium level--- employers will lose less, and employees will be losers. Again: a mandate is a command to do something you didn’t want to do voluntarily. Employment is a contract between employer and employee. The employee gets a compensation package in exchange for working. He can ask for cash, or he can ask for less cash but insurance too. The effect of the mandate is to force workers who preferred all cash to take less cash plus insurance. Moreover, if the “less cash” has to be below the minimum wage to make the employer willing to hire the worker, the mandate will force the worker into unemployment. Part of the support for Obamacare was because people did not understand economics. Economists know this, but many of them supported Obamacare, because the employer mandate also has a benefit: employees can’t forego insurance and use Medicaid or charity medical care instead when they get sick. The employer mandate forces everyone to pay their share, and also puts insurance companies in place as monitors for unnecessary medical care. This benefit is real, but it is politically problematic, because the beneficiaries don’t realize they’re benefitting. The beneficiaries are taxpayers who pay for Medicaid and paying medical patients who pay higher prices so doctors and hospitals can cover charity patients. So here, too, once a year or so has passed, I foresee more political gain than benefit from Indiana non-participation for Pence and Obama.

You may think it odd that I say Obama would benefit politically from Indiana non-participation. That’s because quite aside from its overall merit, Obamacare is a political plus in the short run but a political minus in the long run. People did not understand it when it passed, and so most people thought they were direct winners. Implementation was purposely delayed till after the 2012 election because most people would think they were losers once the effects were felt. Even if the program had a wonderful effect in stopping wasteful health care spending and helping out unfortunate people who couldn’t get insurance, most people wouldn’t make the connection with lower spending and would notice that they had less cash in their pockets.

5. What Is “Intent”? Some Ideas from Economics

A lot of the discussion of Halbig is about the intent of Congress. The problem is that people are thinking of different things when they think “intent”. Many people think it’s ridiculous to say that Congress intended to use subsidies to induce states to establish insurance exchanges, because if you had asked a random member of the Democratic majority whether he’d thought of that, he’d say it never entered his mind. I agree he’d say that. But it’s not relevant, because it’s also true that if you asked him about virtually any detail of the bill, he’d say it never entered his mind.

We do know what he voted for, but even that we know better than he did. He didn’t read it, after all. As Tyler Cowen said,

Did Congress know what it was doing in a detailed sense, one way or another? Hard to say, personally I doubt it, and Alex says no. The basic starter hypothesis here is that many of them knew this was a health care bill, it would extend coverage, it had a mandate, it had some subsidies, it had a Medicaid expansion, it had some complicated cost control, it was approved by leading Democratic Party experts, it met some CBO standards, and beyond that — if you pull out those who were confused on the details of the exchanges and the subsidies do you still have majority support? I doubt it. Most absurd of all are the tweets asking the critics to show Congress intended no federal-level subsidies.



It’s worth noting that very often, even if there’s just one drafter, that drafter has no intent--- his brain is too confused for him to have one. Professors know this very well when he reads a student’s term paper. The student has a general aim of getting an A, or, perhaps, of avoiding a D. But to ask “what does the student intend this paragraph to mean?” is often a silly question. The student wrote it because he needed to pad the paper’s length, or he hasn’t yet learned that when you write a paragraph it’s supposed to mean something, or he had several contradictory meanings in mind and mashed them all together. If you took the paper to the student and asked, “What does this paragraph mean?”, he would be as helpless as if you’d asked that of a monkey at a typewriter. Indeed, professors do often ask questions like that (especially about exam answers) and get a “scared deer caught in the headlights” response from the student. Or, if the professor kindly says, “Did you mean to say X”, the student will gratefully reply, “Yes, that must be what I meant,” even though he’d have been equally grateful if the professor had said, “Did you mean to say Y?” or “Did you mean to say Z?” So, often it is silly to try to pin down student intent. He wrotes some words that have meaning, but he had no overall intention. Ex post, of course, if it was a test he will say his laserlike intention was to express the answer that the teacher has later announced was correct, but that intention only emerges ex post.

How, then, can we allow a court ever to void the plain words of a statute? The answer, which I think is actually standard rational basis jurisprudence, is that if there is no conceivable rational reason why a bill would be written to say X instead of Y, then the court should read it to say Y, or strike the bill down entirely on the grounds that its words have no rational and legitimate meaning. (Striking it down entirely is what the professor does with the student’s confused test answer!) That’s the principle in Halbig: a law denying subsidies to people in states that don’t have exchanges is not so crazy that a court should strike it down as having no rational basis.

This is related to one of the most interesting issues involving intent, and one we in law-and-economics might analyze more closely: whose intent counts? Congress is not an individual. We obviously don’t mean the intent of all Congressmen, since many voted against the bill. Even those that did vote for it, though, had different intentions. Here are several aspects of diversity of intent.

1. If we use the average of the legislators’ intents, we will probably end up with an intent that no real congressmen had. The average of 1, 2, and 6 is 3. If we use the median, that could be far from the average or the mode: the median of 1,2,3,20, 20 is 3. The mode is similarly problematic. Whose intent do we use?

2. Often, modifications are made to bills to satisfy not the bulk of the majority, but the marginal voter. It seems this happened with the state exchanges: they were stuck in to get the votes of some senator whose name I forget. In that case, since it was put in to please that one legislator, maybe his intent should be the only one that counts. The intent of the others was to let him have his way on state exchanges, whatever that was, so as to get the rest of the bill passed. Of course, this is further complicated if he outfoxed them, and they would never have agreed to his conditional subsidy idea if they’d realized its implications. Should the courts protect legislators against poor bargains?

3. Very often, a legislator will vote as his leader recommends, trusting that the leader will do what is best (or fearing punishment for nonconformity). In that case, should the relevant intent be that of the party leader--- Nancy Pelosi, say?

4. In the case of Obamacare, nobody was happy with the final bill. The Democrats who voted for it in the Senate were sure that the House would have a different version and the two would be reconciled in conference committee, at which time undesired parts of the bill would be taken out. The Democrats who voted for it in the House only voted for it because the Republicans had won the Massachusetts Senate election and they couldn’t send the bill back to the Senate for a new vote, so it was take-it-or-leave-it. Thus, it’s quite possible that *none* of the majority that voted for the bill actually wanted conditional subsidies to be in it, yet even if they’d realized the bill had that problem, they would have voted for it anyway.

These group intent problems make the use of intent in statutory interpretation a lot tougher than in contract interpretation. Contracts at least only have two people involved.

These problems don’t mean that resort to legislative history and intent is always a bad idea. If courts have to fill a gap in a statute, we’d want them to think about how the legislature would have filled it, I think, rather than just thinking about what fits in best with the philosophy of the rest of the plain words.

What does intent mean? One senator won’t vote for the bill unless clause X is added. It is added. Most of the majority senators don’t know that. They vote for the bill anyway, trusting their leader. Their leader just said, “Put in whatever he wants in section 234” so he doesn’t know either. And in fact that senator has drafted the draftsman. No one has read the final bill all through, not even the draftsman.

A big problem is that lots of experts confidently say they knew what was in the bill when they never read it. See the stinging article, "Halbig Shows How Leftist Wonks Just Aren’t Very Good At Their Jobs", with its quotes from journalists admitting that they didn't know and didn't care what the bill said about things like what happens if the states don't set up exchanges. What everyone thinks is written in the law isn't relevant if nobody's read what's in the law and are relying on what all their friends think. Staffers like David would have read many bits of the bill in writing regulations, but I wonder how many of them were reading with an eye to what would happen if a state decided not to establish an exchange--- remember, they all thought every state would do so, and they had a lot of regulations to write that they thought were far more relevant, right? There's also the problem of reading with preconceptions. I have a hard time finding mistakes in reading a paper just redrafted by a co-author because I know what a paragraph is "supposed" to say X, and it said X in the last draft, even if my co-author changed it to Y, particularly if I think it is an easy part of the paper.

In “The Problematic Halbig Decision: Why “Intent” is Too Narrow an Inquiry”, David Gamage tells us that he and others who were making regulations based on the new statute didn’t even hear mention of the possibility that non-participating states wouldn’t get subsidies for many months. That’s what the House oversight report says about Treasury at the time too. The Executive branch didn’t see any problem till it was pointed out to them from outsiders. This evidence cuts both ways, though. Notice that nobody says that Treasury officials read the subsidy clause and said, “Hey, there might be a problem because that language seems to exclude subsidies for federal exchanges.” My guess is that they were working frantically to implement the bill (remember the federal exchange rollout fiasco and all the deadline changes) and not looking for new problems.

Let’s go back to the intent problem, though. As a bill progresses, clauses are inserted to please this and that group, and often to get just one legislator’s vote. The people who draft the final bill may know very well what they’re doing, and hate the result compared to the draft-before-final, but insert the obnoxious clause knowingly because they need it to pass the bill. They may then employ a useful bureaucratic trick: put the clause in the document to get agreement, but ignore it in implementation and hope the people who pushed for it don’t notice. (I’ve had that used successfully against me myself more than once!)

More details are coming out about the legislative history. The Health Committee draft explicitly included a 6-year no-subsidy punishment period for states that didn’t establish exchanges (see § 3104 in ). The draft version of the Obamacare bill that introduced the idea of federal exchanges (the Health bill) explicitly said that people in states without state exchanges would not be eligible for subsidies for the first six years of the program. That’s not as drastic as the final bill, but it’s a pretty big stick against the states, so the Health Committee Democrats were definitely thinking about a punishment strategy. Also significant is that nobody in the press at the time seems to have discussed that aspect of the bill. It was in there, and on purpose, but nobody in the media took notice. See “The Senate HELP Bill Limited Exchange Subsidies to Compliant States (but No One Mentioned It)” (Breitbart)

The Health bill was redrafted to eliminate the six-year punishment and instead to explicitly provide for subsidies to people in states with federal exchanges. But then that bill was merged with the Finance bill. A staffer says, “We layered the HELP Committee language that established a federal fallback on top of the Finance Committee language that included ‘exchange established by the state.’” The explicit provision for subsidies was deleted, leaving, in the end, just the statement that subsidies would be provided for “an Exchange established by a state”.

Thus, some of the people working on the bill were thinking about punishment strategies, even though others weren’t. In the final stage of drafting, the people in control of the bill had a draft in front of their eyes that explicitly excluded the punishment strategy, and they used some provisions of the draft but not that provision. See “Liberal WaPo Blogger Inadvertently Strengthens Argument from Halbig Majority” (Patterico’s Pontifications) .

6. Concluding Remarks [Unfinished]

References [Unfinished]

Ian Ayres, Ya-Huh: There Are and Should Be Penalty Defaults, 33 FLA. ST. U. L. REV. 589, 597 (2006).

 

Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 YALE L.J. 87 (1989).

King v. Burwell, No. 14-1158, U.S. Court of Appeals for the Fourth Circuit (July 22, 2014).

Halbig v. Burwell, No. 14-5018, U.S. Court of Appeals for the District of Columbia Circuit (July 22, 2014).

The House oversight report

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[1] I almost wrote “At the time Halbig was decided, only 14 states and the District of Columbia had established state exchanges,” but that depends on how one would decide the cases. The government would presumably say that all 50 states and D.C. had exchanges “established by the state”.

[2] My source, , says, “So in original. Probably should be preceded by “section”.” This is one of many examples of poor drafting in the bill.

[3] From Halbig: “The government makes its own elephants-in-mouseholes argument, asserting that the formula for calculating tax credits (located in section 36B(b)) is an odd place to insert a condition that the states must establish their own Exchanges if they wish to secure tax credits for their citizens. The more natural location, the government suggests, would have been section 36B(a), which authorizes the credit in the first place. See 26 U.S.C. § 36B(a). But even under the government’s reading of section 36B(b), the statutory formula houses an elephant: namely, the rule that subsidies are only availabl[pic][4]

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@:?CJ$OJQJ\?^JaJ$&h«K»hå"{:?CJ$OJQJ\?^JaJ$&h«K»h )Â:?CJ$OJQJ\?^Je for plans purchased through Exchanges. Given that this other crucial limitation on the availability of subsidies is found only in section 36B’s formula, the government’s contention that the formula is a mere mousehole is unpersuasive.”

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