New Analysis: “The Legality of Executive Action after King v. Burwell”

June 8th, 2015

I have published a piece in the Federalist Society’s Engage analyzing the lawfulness of certain executive actions the federal government may take if it loses in King v. Burwell. I do not address the merits of the case, or offer any predictions of how the case will turn out. Here is the introduction:

Section 36B of the Affordable Care Act (ACA) authorizes subsidies in the form of refundable tax credits for health insurance purchased through a state-established exchange. The “credit” “shall be allowed” based on the number of months “the taxpayer . . . is covered by a qualified health plan . . . enrolled in through an Exchange established by the State under § 1311.”1 After recognizing that this statute on its face limited subsidies to exchange established by states—meaning no subsidies would be paid in states relying on the federal exchanges—the Treasury Department issued a rule, providing that subsidies would be available in all states “regardless of whether the Exchange is established and operated by a State . . . or by HHS.”2 The Supreme Court is currently considering the legality of this rule in the case of King v. Burwell. A decision is expected by the end of June.

Only sixteen states, plus the District of Columbia, elected to establish a state-based exchange. (Three of these states operate what is known as a “federally-supported exchange,” which is treated as a state-based exchange). The other thirty-four states declined to establish an exchange. In response, the Department of Health & Human Services (HHS) established a “federally-facilitated exchange,” allowing consumers in each of the thirty-four states to purchase health insurance. At issue in King v. Burwell is whether the federal government can continue to pay subsidies to consumers on the federally-facilitated exchange.

This article will assess the legality of executive actions that the Administration may take after King v. Burwell to continue paying subsidies in these thirty-four states. I will not discuss the merits of the case, predict how the Court should construe the statute or IRS rule, or propose congressional modifications to the ACA.3 Rather, this analysis is premised on potential administrative fixes HHS could employ following an adverse ruling in King v. Burwell.

There are two possible approaches HHS could take that would continue the payment of subsidies in some or all of the thirty-four states using the federally-facilitated exchange. First, HHS could unilaterally deem several of these states as having tacitly established an exchange, without the state’s subsequent cooperation. Specifically, HHS could construe the fact that fourteen states perform certain functions that overlap with the ACA—what is known as “plan management”—as evidence that they in fact intended to establish an exchange. This post-hoc recognition of an establishment would drastically alter the terms on which states accepted certain responsibilities. Each of the fourteen states at issue notified HHS that it was only performing certain limited functions, and expressly declined to establish a state-based exchange. Retroactively and unilaterally declaring that these states in fact established a state exchange would distort political accountability, and disregard the considered judgments of the sovereign states, in violation of the principles of federalism. If HHS issued this interim rule without notice and comment, litigation would likely immediately follow by the King plaintiffs and the states. These suits, however, would face an uphill battle to stop the unlawful payment of subsidies. The administration could also attempt to limit the judgment inKing v. Burwell to the four named plaintiffs, but that effort to evade the Court’s judgment would be met with further litigation.

Second, HHS can streamline the process to fast-track the process for states seeking to establish an exchange. The threshold inquiry is whether a state has the appropriate authority to establish an exchange. The ACA requires that before a state can elect to establish an exchange, the state shall “adopt and have in effect . . . a state law or regulation that the Secretary determines implements the standards within the State.”4 Eighteen of the thirty-four states enacted the “Healthcare Freedom Act,” which would require an act of the legislature, or even a constitutional amendment, in order to allow the creation of an exchange. In the remaining exchanges, it is feasible that a governor’s executive order would satisfy the Secretary of HHS that the state has established an exchange. Even with this speculative authority, it is unlikely that the state would be able to complete all of the necessary steps to establish an exchange in 2015. However, a state could possibly deem the federally-facilitated exchange as state-established. This approach would be inconsistent with the text and history of the ACA, and would likely be challenged by further litigation.

A ruling against the federal government in King v. Burwell, even if stayed until the end of the tax year, would leave the Administration and the states with very limited options of how to respond quickly. Resorting to dubious administrative fixes to continue the payment of subsidies would invite an immediate court challenge. The path to amend the ACA must go through Congress.

I will have much more to say about this topic in the next three weeks.