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Beyond the Courthouse Countdown for Federal Health Exchanges

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Beyond the Courthouse Countdown for Federal Health Exchanges

July 14, 2014

The last round of oral argument in the most serious legal challenge to Obamacare’s insurance coverage subsidies ended over three months ago.  Now the courthouse watch for a final ruling in the U.S. Circuit Court of Appeals for the D.C. Circuit has neared a fever pitch.

Diehard defenders of the Affordable Care Act (ACA) are worried that a three-judge panel is about to overturn an Internal Revenue Service rule issued in May 2012 that authorized distribution of insurance premium assistance tax credits in health exchanges administered by the federal government. By the end of a March 25 hearing on motions for summary judgment in Halbig v. Burwell, it appeared that two of the judges (a majority) were leaning toward agreeing with a group of private individuals and employers (who were appealing a federal district court ruling against them) that only an exchange “established by a state” is eligible for federal tax credits under the ACA.

Court watchers started anticipating release of the D.C. Circuit Court’s ruling earlier this month (opinions usually are issued on Tuesday and Friday mornings each week). Shortly before then, the Supreme Court overturned in part another provision within the ACA relating to mandated coverage of certain contraceptive products. Hence, a sudden wave of manic/depressive op eds, short news articles, and blog posts started popping up, almost uniformly “discovering” a new hidden mortal threat to Obamacare on one hand, but then usually reassuring readers on the other hand that any unfavorable ruling had no real basis in law and would soon be overturned. Although experienced federal judges are rarely influenced by the editorial etchings of the chattering class, some of the latest articles almost look like desperate pre-emptive shots across the judicial bow. 

The Halbig v. Burwell action actually is one of four lawsuits against the IRS rule and federal exchange tax credits. They all have been working their way through the federal court system (in Virginia and Indiana since 2013, and in Oklahoma since 2012). However, the D.C. Circuit’s opinion will carry more weight in matters involving an administrative law challenge to a federal agency’s rulemaking authority.  

I’ve written earlier about the legal merits of the claims that the Obama administration is again failing to enforce the clear text of a particular provision of federal law, in this case sections 1401 and 1311 of the ACA. At a minimum, they raise serious, credible issues of statutory construction and the rule of law. Of course, different judges holding different legal perspectives may disagree. However, it is unfortunate when more zealous policy advocates attempt to repackage their unwavering political preferences as indisputable law -- particularly in the case of the ACA, one of the most contentious, contradictory, and contorted statutes ever squeezed through Congress by any means necessary.    

Michael Cannon of the Cato Institute recently recapped the dismal track record of the legal seers who have been most consistently disdainful of court challenges to the ACA. But for today’s discussion, let us focus on three future issues that might arise in the wake of a ruling in federal appellate court against the IRS rule and the federal exchange tax credits:

(1) Would the D.C. Circuit Court of Appeals quickly overturn any such ruling through en banc review (by its entire roster of active judges)? 

(2) When and how would any ruling against the federal exchanges be enforced? 

(3) More broadly, what might happen next in the political arena?

Don’t Go to the Bank on “En Banc”

Some critics of the Halbig appellants’ case seem to be self-assured that any “erroneous” ruling by the D.C. Circuit Court’s three-judge panel would be quickly overturned by the entire court, after a petition for en banc review—where the case is reheard by all the Court’s judges—is accepted. The reality is that successfully pursuing this procedural path is possible, but far from likely. Deciding to grant a rehearing en banc involves a very limited degree of judicial discretion, because Rule 35 of the Federal Rules of Appellate Procedure requires conflicting circuit  precedent or “a question of exceptional importance” to justify rehearing en banc. Like most other federal circuit courts, the D.C. circuit only rarely grants such review. For example, from 2000-2010, it granted en banc review in only 0.2 percent (two in a thousand) of its cases. Additional factors contributing to this trend were the relatively small number of judges on the D.C. Circuit and efforts to improve the Court’s collegiality. 

Colter Paulson of Squire Sanders points out that an en banc case draws on intra-circuit political capital, consumes scarce judicial resources, and diverts the attention of the entire court for just one case.  A petition must show that the result will be worth the price. Sixth Circuit Court of Appeals Judge Jeffrey Sutton recently outlined broader institutional reasons for such limited use of en banc review, pointing out that a vote against en banc is not an endorsement of a panel decision and that such review should require far more than mere disagreement on the merits. In Mitts v. Bagley, Judge Sutton noted, “We are not the only Article III judges concerned with deciding cases correctly. Sometimes there is nothing wrong with letting the United States Supreme Court decide whether a decision is correct and, if not, whether it is worthy of correction.”

Based on a crude, and far from fool-proof, assessment of the current roster of active judges on the D.C. Circuit bench, the recent addition of four Obama-appointed appellate judges might produce a nominal 7-4 majority of Democratic-appointed judges supposedly automatically opposed to any anti-ACA ruling in Halbig -- regardless of the actual reasoning in the original opinion – and therefore also ready to grant an en banc review.  (If the two senior judges sitting on the original appeal also choose to vote on the en banc rehearing decision itself, Judges Randolph and Edwards are likely to split their votes anyway, making for a “predicted” total 8-5 to overturn any Halbig ruling on the merits). 

However, federal judges are not so pre-programmed that they simply serve as surrogate politicians in judicial robes. Bottom line – if any en banc review is granted after a ruling against the IRS rule, it would be highly unusual and a sign of greater than usual politicization of the D.C. Circuit Court of Appeals.  

Would Federal Exchanges and Most of the ACA Collapse Quickly if the Appellants Win?

Even if the appellants in Halbig convince a two-judge majority (Judges Griffith and Randolph) that the IRS rule is illegal and federal exchanges cannot dispense premium assistance tax credits under the ACA, it remains unclear when and how any such judicial order would become enforceable. The federal government appellees would immediately seek a stay, pending further appeals to the full D.C. Circuit Court and/or the Supreme Court. In the meantime, it might be seen as impractical for a federal court simply to order repayment of insurance tax credits previously disbursed earlier this year to income-qualified enrollees in federal exchanges that operate in up to 36 different states (and probably even more next year). Given the reliance of private individuals on such payments up to now (including making past changes in their insurance coverage), at what point would a judicial order cut off access to future monthly payments? 

As a practical matter, a court might be tempted to wink at some continuing reliance on the “illegal” payments for at least the remainder of the first full plan season under the ACA (e.g., through December 31, 2014), or perhaps even into the next open season, pending a final review and decision at the Supreme Court level. Moreover, one might expect an attempt by the Obama administration’s Centers for Medicare and Medical Services to cobble together some form of transitional relief for enrollees, such as a mechanism for retroactive (subsidized) enrollment in federal exchanges after (assumed) future success in overturning an unfavorable D.C. Circuit decision or even a new form of hybrid exchange that remains largely federal administered but can be officially “endorsed” by a state government. 

Obamacare opponents should not underestimate the likelihood that a number of Republican-controlled state governments might decide later to temper their rhetorical opposition to Obamacare exchanges, if it means that a sizable number of their own lower-income constituents might otherwise lose access to premium assistance tax credit subsidies in the absence of a state-administered exchange. 

What Might Happen Next?

No one really knows – and perhaps not even after the D.C. Circuit Court panel finally issues its ruling. But a reasonable guess is that a 2-1 majority opinion, written by Judge Griffith, will decide that the text of the ACA is sufficiently clear on its face that only state-administered exchanges can provide the law’s premium assistance tax credits to subsidize qualified insurance coverage. Even then, the federal dollars are likely to keep flowing at least for the rest of 2014, and perhaps even for part of 2015 while the Supreme Court grants review of this case (and a likely ruling to the opposite effect later this year in another case before the 4th Circuit Court of Appeals in Virginia). We might eventually find out if Chief Justice Roberts has more judicial tricks up the sleeves of his robe. 

In the meantime, any imminent breakdown of the delivery system of taxpayer dollars to millions of ACA-exchange-covered enrollees might worry officeholders enough to finally push Congress to start working at its regular day job and hammer out a difficult compromise that actually replaces the worst excesses of Obamacare with less-over-regulated, but still taxpayer-subsidized, access to insurance products that less-fortunate Americans really need and want, and will purchase. Courts alone cannot, and should not, dare to fix such broader problems and structural complexities.

Congress should replace a law that is unpopular, does not work, and has been distorted to pretend to authorize practices and payments that Congress never approved. It should then pass a new law that leaves more personal health care decisions to patients and their chosen agents, while targeting public assistance more carefully to the most vulnerable Americans who need special help. Stripping away the legal façade propping up Obamacare might open up a far more productive debate over sustainable health policy reform than the one that launched, and later sank, the ACA.


Tom Miller is a resident fellow at the American Enterprise Institute.

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