New Article in Spectator: “Obamacare Was Designed to Punish Uncooperative States”

July 29th, 2014

One of the biggest criticisms of the D.C. Circuit’s opinion in Halbig, is that it would have been ridiculous for the Affordable Care Act, which aims to provide “near-universal” health insurance, to deny tax credits to residents of uncooperative states. Why, critics argue, would the drafters of the law allow recalcitrant Republican governors to sabotage its implementation and deny benefits to their poorest residents?

In a new article in the American Spectator, titled “Obamacare Was Designed to Punish Uncooperative States,” I show how another key portion of the Affordable Care Act was designed to operate in just this fashion–the Medicaid expansion. Recall that in NFIB v. Sebelius, one of the main issues was whether HHS would take away all of a state’s Medicaid budget if it did not expand under the ACA. The Justices pressed Solicitor General Verrilli on this point, based on a letter HHS sent to Arizona Governor Jan Bewer threatening to gut her entire Medicaid budget.

In 2010, Arizona inquired about what would happen if it declined to expand its Medicaid coverage under Obamacare. The federal government replied that it would eliminate its contribution to the state’s Medicaid budget entirely. The Department of Health and Human Services sent Arizona Governor Jan Brewer an ominous and pointed letter: “In order to retain the current level of existing funding, the state would need to comply with the new conditions under the ACA.” This observation was followed by a stark warning: “We want you to be aware that it appears that your request…would result in a loss of [all] Medicaid funding for Arizona.”

Arizona stood to lose almost $8 billion. That would have obliterated the Grand Canyon State’s budget, eliminated health insurance for the poorest of Arizonans, and potentially thrown the entire market into an adverse-selection death spiral. The feds could not force Arizona to expand Medicaid, but if Arizona declined to play ball, they would gut the state’s program entirely. It was Brewer’s choice.

Ultimately, the Supreme Court held that this was no meaningful choice at all—like putting a gun to someone’s head and saying “your money or your life.” Though conservatives were ultimately disappointed with Obamacare’s trip to the high court, this was their silver lining. During oral arguments, the justices pressed Solicitor General Donald Verrilli, the top government lawyer, about the letter to Arizona. They wanted to know whether the federal government would in fact take away all of Arizona’s funding if it declined to participate in the expansion. Verrilli refused to answer whether HHS Secretary Kathleen Sebelius had the power to revoke all funds, saying only that she would not exercise it.

The SG refused to answer the questions of the Justices, because he knew that Secretary Sebelius would not disclaim that power (I provide a lengthy background discussion in Part VI of Unprecedented).

Justice Scalia ribbed: “I wouldn’t think that is a surprise question.” The solicitor general was not unprepared. Verrilli told the justices, “I’m trying to be careful about the authority of the secretary of health and human services and how it will apply in the future.”

The Obama administration made a conscious choice, as I discuss in Unprecedented: The Constitutional Challenge of Obamacare. Sebelius was not willing to relinquish the power to deprive uncooperative states of all of their Medicaid funding. She wanted to preserve this ultimate authority to punish a state that disobeyed federal dictates. Verrilli’s evasion inflamed the concerns of Justices Roberts, Breyer, and Kagan, the very justices who would soon vote against him. The Obama administration would not disclaim that power, so the court took it from them.

Chief Justice Roberts wrote for the court, “What Congress is not free to do is to penalize states that choose not to participate in that new program by taking away their existing Medicaid funding.” It was coercive and unconstitutional. Yet this was the original design of the law, which no Democrats in Congress found objectionable.

Obamacare’s history, including the Solicitor General’s position in NFIB v. Sebelius, suggest that a core feature of the ACA would have punished noncompliant states, and their residents. While we may never know how those four words wound up in the statute,  as further evidence of legislators’ state of mind, we could take notice of the fact that the Affordable Care Act’s Medicaid expansion worked exactly on this theory of carrots and sticks. Uncooperative states, and their residents, would be punished.

Please note that my piece has nothing to do with Chevron. Rather, in light of the reasoning behind the Medicaid expansion, as both the D.C. and Fourth Circuit concluded, it is at least “plausible” that these four words were deliberately placed in the statute for this purpose.

Both courts acknowledged that legislative history does not say how these four words made their way into the statute. With this silence, the Fourth Circuit noted that “it is at least plausiblethat Congress would have wanted to ensure state involvement in the creation and operation of the Exchanges.” The D.C. Circuit likewise observed, “the most that can be said of [the challenger’s] theory is that it is plausible.” It’s telling that both courts independently came up with the exact same description: “plausible.”

That no one found this Medicaid regime objectionable in 2009 suggests that the tax credit scheme may not have been objectionable as it seems today.

Here is my conclusion:

Keeping the history of the law’s Medicaid provisions in mind, consider again whether it is indeed “plausible” that someone in the Senate—or maybe even an influential lobbyist or academic helping to draft the bill—intended with these four words to dangle similar carrots to induce unwilling states to establish health insurance exchanges. Perhaps some states would have initially declined to build exchanges, and in those cases HHS had the authority to operate a federal exchange as a backup. Could red-state governors have long handled the backlash from their citizens being punished with unaffordable insurance premiums? Maybe. Maybe not.

But such an incentive structure is at least consistent with the thinking behind other provisions of Obamacare: that states can be made to swallow bitter pills.

In considering this law, we should never lose sight of the fact that this was a rushed, draft piece of legislation that was never meant to be final. But this is the final law we have.

No one knows for sure how these four words made their way into the statute—which is to be expected. The 3,000-page bill was drafted quickly behind closed doors. Almost no one in the Senate bothered to read it. The version of the bill that passed the Senate on a straight party-line vote on Christmas Eve 2009 was only a draft that was never intended to become law. However, once Democrats lost their filibuster-proof majority after the election of Senator Scott Brown in Massachusetts, they decided to foist this incomplete, rushed, and unfinished draft on the American people.

And in January 2010, 51 health policy experts–including Tim Jost and Jon Gruber–urged the President to sign the incomplete Senate bill, warts and all.

These bills are imperfect. Yet they represent a huge step forward in creating a more humane, effective, and sustainable health care system for every American. We have come further than we have ever come before. Only two steps remain. The House must adopt the Senate bill, and the President must sign it.

So here we are, with the imperfect bill.

Update: Peter Suderman weighs in with similar thoughts:

Indeed, that explains Obamacare’s original Medicaid expansion mechanism, which, prior to Supreme Court intervention, threatened states that did not participate with the loss of all existing federal Medicaid funding. This would have been a huge price, and would have effectively gutted one of the nation’s two major health programs had a large number of states chosen not to comply.

If conditioning subsidies on the state establishment of exchanges was “legislative nihilism,” then so too was Obamacare’s original treatment of its Medicaid expansion.

The reason that Congress made its Medicaid threat so easily is that it was assumed that every state would eventually play ball and expand the program. Funding for the expansion was generous, and resistance would be catastrophically expensive.

The federal exchange system was such an afterthought that the law provided no funding whatsoever to create it. Federal health authorities had to scramble to rewire funding in order to get it built. In contrast, Obamacare provided nearly unlimited funds for states to set up their own exchanges. The thinking was that no state would turn the government down.

The total lack of funding for the federal exchange strongly suggests that Congress didn’t intend any subsidies to flow through the federal exchanges, because Congress didn’t really intend for them to exist.