D.C. Circuit Panel Skeptical of IRS in Obamacare Subsidy Lawsuit

By William Peacock, Esq. on April 04, 2014 | Last updated on March 21, 2019

We teased the premise of the Obamacare subsides lawsuits back in October on our U.S. Supreme Court blog, but since then, one of the cases has proceeded all the way through oral arguments at the D.C. Circuit.

Last week, while the Supreme Court was hearing oral arguments in the contraception mandate lawsuit, the D.C. Circuit was hearing its own oral arguments in Halbig v. Sebelius (the subsidy dispute), with two of the three judges appearing to be inclined to side against the IRS and Obamacare.

Should the subsidies collapse, not only would that kill demand for insurance on the exchanges, but it would also wipe out the employer mandate, which is triggered by at least one employee receiving a subsidy on the marketplace.

Drafting Error or Intentional Incentive?

This case comes down to the meaning of "through an Exchange established by the State under 1311."

Obamacare provides subsidies to qualifying individuals, making insurance through the exchanges more affordable. The exact language of the statue states that subsides are available to those who purchase insurance "through an Exchange established by the State under 1311." And "State" is defined as the 50 states plus Washington, D.C.

Jonathan Adler, writing for The Volokh Conspiracy, and whose work with Michael Cannon has been credited with inspiring the litigation, argues that the subsidy was an intentional incentive for states to set up their own healthcare exchanges. If states set up an exchange, they get cheaper insurance for constituents. If they don't, angry citizens have to pay more through the federal system.

With more than 30 states declining to set up exchanges, that would pretty much collapse the system, as without subsidies, it makes lower-income individuals' enrollment far less likely. The IRS then "interpreted" the statute to apply subsidies to all, regardless of whether the exchange was through the "State" or through the federal government.

Or, the other take is, that the statute was sloppily drafted and ambiguous, and the IRS was correct to interpret the vague statute as it did under Chevron.

What About Plain Text?

Was it a drafting error or an incentive?

Better question: Does it even matter? Two out of three D.C. Circuit judges on the panel, one a George H. W. Bush appointee, the other a George W. Bush appointee, appeared to be leaning towards a textual interpretation, according to a recap of the arguments by MSNBC.

Mistake or intentional, if the statute's language is clear, the text controls, so the argument goes.

"If the legislation is just stupid, I don't think it's up to the court to save it," Judge A. Raymond Randolph stated. He was joined by Judge Thomas B. Griffith who noted, "The key language is 'established by the state.'"

Judge Harry Edwards, a Jimmy Carter appointee, disagreed, stating, "I've thought about this a lot, your argument makes no sense. What you're asking for is to destroy the individual mandate and gut the statute ... That's what this is about."

While Edwards may be in the minority for now, should the case proceed to an en banc rehearing, the IRS's odds will certainly improve, as a majority of the D.C. Circuit overall are Democratic appointees, thanks to four recent post-filibuster Obama appointments.

And then, of course, there would be a Supreme Court cert. petition.

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