Obamacare Subsidies and Justice Anthony Kennedy

It’s not too much to say that President Obama’s domestic legislative legacy could turn on the outcome of King v. Burwell, the landmark case argued in March before the U.S. Supreme Court, which a decision forthcoming soon. If the administration loses, Obamacare will become like Humpty Dumpty, and it is not certain that "the king’s men"—Congress—could put it back together again. A review is in order to understand why the decision could go one of two ways.

Earlier, Vision & Values explained how the Affordable Care Act (ACA) calls for states to set up insurance marketplaces—i.e., "exchanges"—where health plans that comply with the ACA can be purchased by individuals. However, due to a line of past constitutional decisions, Congress could not compel sovereign states to create the exchanges. That would create unconstitutional "coercion." All Congress could do was to provide incentives that would induce the states to set up the exchanges.

A key incentive was awarding federal subsidies (tax credits) to individuals who purchased insurance on state exchanges. It was highly unlikely, the drafters reasoned, that a state would refuse to set up an exchange and thereby risk the loss of the federal subsidies for its citizens. As stated by one of the chief architects of the ACA, Jonathan Gruber, "[I]f you’re a state and you don’t set up an exchange, that means your citizens don’t get their tax credits. … I hope that that’s a blatant enough political reality that states will … realize there are billions of dollars at stake here in setting up these exchanges, and that they’ll do it." However, Gruber and the drafters miscalculated. An incredible 34 states failed to establish exchanges. In such cases, the ACA permits the federal government to create exchanges within those states. However, the language of the ACA does not offer subsidies to citizen purchasers on federal exchanges, only exchanges "established by the state."

The implementing agency of the ACA, the Internal Revenue Service, tried to remedy the problem by simply issuing a regulatory edict saying that subsidies would be available to purchasers on federal exchanges. That determination sparked a legal challenge which ended up in the Supreme Court as the aforementioned case.

What will the court decide?

Michael Carvin, attorney for the petitioners challenging the IRS action, called the language of the ACA "unambiguous." The law clearly states that only state exchanges receive federal subsidies. The three conservatives Justices—Clarence Thomas, Samuel Alito, and Antonin Scalia—seem to agree with that line of reasoning, and Chief Justice John Roberts may likewise. If Justice Anthony Kennedy joins the four, the IRS regulations would be struck down and states with "federal exchanges" would be without subsidies.

Justices Alito and Scalia anticipated that result. Alito asked whether a stay (postponement) of the decision could give states time to comply. Scalia asked Solicitor General Donald Verrilli, Jr., "You really think Congress is just going to sit there while … all of these disastrous consequences ensue?" A denial of subsidies to federally created exchanges is the outcome most consistent with the wording of the ACA. It recognizes that when Congress legislates and the wording is unambiguous, the court must adhere to the "plain meaning" of those words.

However, Justice Kennedy, the likely swing vote in this case, raised an objection during the oral argument that makes the direction of the eventual decision unclear. Kennedy knows that Congress cannot compel the states to establish exchanges. That would nullify their sovereign status. However, during arguments he came very close to saying that striking down the IRS regulation would put the states that don’t have their own exchanges under such intense pressure from their constituents that those circumstances would amount to unconstitutional "coercion." Kennedy, speaking to Verrilli, said, "It does seem to me that if petitioners’ argument is correct, this is just not a rational choice for the states to make and that they’re being coerced." Suppose that enough justices accepted the view floated by Kennedy, that the states would be "coerced" by a decision that denied them subsidies. Kennedy hinted that in such an event the court could invoke a little-used doctrine of "constitutional avoidance." A version of this doctrine says that the Supreme Court could substitute its own interpretation of the statute, effectively allowing the non-participating states to receive subsidies.

There are two things wrong with Kennedy’s speculations. First, as long as a state remains free to accept or reject a federal program—in this case the subsidies—there is no "coercion" even if the state’s choice not to participate places its officials under political pressure. For example, in South Dakota v. Dole, the secretary of transportation, Elizabeth Dole, carried out a Congressional Act that withheld a portion of federal highway funds from states that did not adopt a minimum drinking age of 21 years. South Dakota challenged the law. The Supreme Court held that the threatened loss of highway funds did not amount to unconstitutional coercion. States still had the power to refuse to comply if they chose to do so even though there might be political fallout from the loss of the funds.

Secondly, the avoidance doctrine is a last resort, according to professor Mark Tushnet: "The canon of constitutional avoidance comes into play only when the statute, given its most natural reading, would in fact be unconstitutional." Though the plain meaning of the ACA creates a political "hot potato" for state officials, it does not make it unconstitutional.
If words mean what they ordinarily mean, then the ACA grants subsidies to state-created exchanges and to them alone.

— Dr. John A. Sparks is the retired dean of the Calderwood School of Arts & Letters at Grove City College. He is a member of the State Bars of Michigan and Pennsylvania and is a fellow for educational policy for The Center for Vision & Values at Grove City College.