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Obamacare Was Designed to Punish Uncooperative States

Carrots, sticks, and the Medicaid expansion.

By 7.29.14

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It all comes down to four crucial words. In 2009, as the Affordable Care Act was being rammed through the Senate, those words made their way into the statutory behemoth. The law says that the federal government has the power to dole out premium-lowering subsidies through those insurance exchanges “established by the State.” Now that thirty-six states have declined to set up exchanges, the implication is that those who purchase insurance from the federal HealthCare.gov website are, under the text of the law, ineligible for the tax credits. Their premiums would be much higher.

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.

All that said, these four words, if followed, trigger a devastating chain reaction in the Rube Goldberg-esque machinery of Obamacare. Without the tax credits, the unsubsidized premiums would be unaffordable to many. Further, because Obamacare’s mandates are tied to the subsidies, removing the latter eliminates the former. Meaning millions of Americans in thirty-six states would suddenly be exempt from the individual mandate, which narrowly avoided invalidation by the Supreme Court in 2012. In addition, many businesses would no longer face penalties for failing to provide their employees with health insurance. Without these two essential mandates, Obamacare would unravel.

The Obama administration declined to follow the plain text of the tax credit provision, and issued a regulation that read those four words out of the law. Opponents of Obamacare sued. Last week, the litigation came to a crescendo as two federal courts of appeals issued conflicting rulings within hours of each other. The Fourth Circuit Court of Appeals, finding that the government’s position was “stronger, although only slightly,” held that the government was permitted to dispense the tax credits even in states that relied on the federal exchange. The D.C. Circuit Court of Appeals, also acknowledging that the case was close, ruled against the government, finding that the plain text of the statute was controlling. Tax credits can only be paid in exchanges “established by the State.”

Those challenging the administration argue that Congress added these four words to create incentives for states. Because the federal government can’t force states to establish exchanges—this would violate the “commandeering” principle of the Tenth Amendment—it must encourage state participation indirectly, with carrots and sticks. The argument goes something like this: If a state did not establish an exchange, its citizens would be ineligible for federal subsidies. Citizens would complain about the higher costs, and at the next election would throw the governor who refused to create the exchange out of office.

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 plausible that 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.”

Advocates of Obamacare charge that it would be 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?

Much hay has been made of video showing MIT Professor Jonathan Gruber, an architect of the law, arguing in 2012 that this is exactly how the system would work: “If 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 get their act together and realize there are billions of dollars at stake here in setting up these exchanges.” After these remarks were unearthed by the Competitive Enterprise Institute last week, Gruber claimed it was a “speak-o”—like a typo, but from the mouth. But Gruber wasn't alone in thinking that the Affordable Care Act could expand health insurance by threatening to punish uncooperative states.

As further evidence of legislators’ state of mind, we could take 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.

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.

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.

In the end, Governor Brewer opted to join Obamacare’s Medicaid expansion anyway, unable to resist the siren song of free federal money. Several conservative governors, including Rick Scott of Florida and John Kasich of Ohio, have followed suit. The carrots and sticks in the law, intended to cajole even the most recalcitrant governor to expand Medicare, have to some extent worked.

Within the next few weeks, Obamacare's challengers will file a petition for certiorari with the Supreme Court, asking the justices to review the decision from the Fourth Circuit. At the same time, the administration will ask the complete D.C. Circuit—stacked with four new Obama appointees—to reconsider the court’s judgment invalidating the rule. In either event, the Supreme Court will have the final word.

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.

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About the Author

Josh Blackman is an assistant professor at the South Texas College of Law and the author of Unprecedented: The Constitutional Challenge to ObamacareHe blogs at www.joshblackman.com.