Tag Archives: 26 USC 36B

Yes, you can pick your health plan or your doctor for now, but prepare to start paying a lot more for the privilege

Much has been written about the general issues associated with higher premiums for plans purchased on the various Exchanges under the Affordable Care Act. The fear is that higher premiums will price individuals out of the market — at least lower risk individuals — and result in a spiral of premium increases. Supporters of the ACA counter, however, that increases in gross premiums — the amount insurers say they charge — does not matter much because the amount most individuals pay under the Affordable Care Act does not depend on gross premiums so much as it depends on one’s income. Recent studies, after all, suggest that about 87% of purchasers receive tax credits to purchase plans that depend solely on their income.

The truth, however, about the effect of premium increases under Obamacare is more complex. Basically, increases in gross premiums for basic silver plans can have a non-linear and frightening effect on increases in the net premiums Americans pay to persist in plans that are more generous either because they afford greater choice in selecting one’s doctors or because they require less cost sharing by insureds. The remainder of this blog post explains why.

Let’s start with a simple example drawn from real life to illustrate the general idea. Data taken directly from healthcare.gov shows that in my home city of Houston (Harris County, Texas), the gross premium for the second lowest silver plan (an HMO plan) is about $250 per month for a 40 year old individual. If that person’s net income is $25,000, under 26 U.S.C. § 36B their net premium can be computed as  $143 per month for that second lowest silver plan; the remainder is supposed to be paid via a $107 tax credit from the federal government. (Mathematica notebook containing the analysis available on request)  Suppose, however, the individual does not want an HMO plan but wants a PPO plan so they can have greater choice of doctors. The cheapest one in Harris County has a gross premium of $338 per month or about 35% more. But, because the tax credit stays constant at $107, the net premium is $231. This means that the right to select one’s own doctor costs our hypothetical individual 57% more in the amount they actually pay.

The situation is similar if one is willing to accept an HMO plan but one wants the plan to pay a higher percentage of expected medical expenses. The second least expensive gold plan in Harris County is $297 per month or 18% more than the second lowest silver plan. Again, however, because the tax credit remains the same, there’s a problem: the actuarial value of the gold plan is actually just 14% higher than its silver counterpart, but because of the way subsidies are calculated, the cost is 33% higher. Only two types of people would likely be willing to incur this “double payment” to get a better plan: people who are unhealthy for whom a small improvement in a plan might mean a great deal or people who are just extremely risk averse.

The situation persists for the few platinum purchasers. If one goes from the second lowest silver plan all the way to the second least expensive platinum plan, it turns out that the net premium increases a whopping 138%. And this is true even though the while the gross premium goes up by 79% to $448 per month and the actuarial value of the policy goes up only about 29% and the gross premium goes up “only” by 79%. One can imagine that the only people of this income level willing to incur this high a premium increase in exchange for only somewhat better coverage would be those who expected to use the coverage extensively — exactly the people that force insurers to increase future prices.

Some of the same mathematical logic that drives the disproportionate increases in net premiums in a single year applies in a similar way to premium changes over time. Let us consider our same individual and project forward to 2016. Imagine that they purchased that PPO silver plan in 2015 and wish to continue in it. To do the computations, we’ll have to make a few assumptions: (1) that the federal government’s expected contribution from income increases for 2016 at the same rate it increased for 2015 and that the federal poverty levels for 2016 likewise increase at the same rate that they did in 2015. Suppose further that the gross premium for the second lowest silver plan and the gross premium for the increases by 4% but the gross premium for the gold HMO plan or the silver PPO plan increase by 8%. If our individual’s income again increases by 10%, the net price of the more generous policy jumps by 13.5%. The effect is non-linear.

And what if we start talking not about individuals, but about families?  Consider, now, the family of four with two adults each age 40. We’ll give the family an income of $50,000 per year. Again, for concreteness, I’ll place them in Harris County, Texas. The gross premium for the second lowest silver plan (an HMO) is $748 per month. But with a tax credit of $456, the net premium for that policy is $292 per month. If the family wants to purchase a silver PPO, the cheapest one will feature a gross premium of $1013. Since the tax credit stays the same at $456 per month, this means the net premium is $557 per month, an increase of 91% just to get more choice in picking doctors. Or, if the family wants to purchase the second cheapest Gold HMO, that will cost $890 gross and $434 net. This is an increase of 49% just to get a plan with 14% richer expected benefits. Now, whom do you suppose might pay such a disproportionately higher amount?

The diversity of metal levels and of plan types has always been touted as a benefit of Obamacare. It is supposed to distinguish the ACA from  administratively simpler (“one size fits all”) regimes such as single payor plans. But the existence of premium subsidies pegged to the price of the second lowest silver plan means that the present diversity of plans may be a short run phenomenon or that the diversity may exist only on paper. There may technically still be gold plans or PPOs, but very few may be purchasing them. Assuming Obamacare lasts a few more years, we may effectively see the demise in the marketplace of Gold and Platinum plans and, even more likely, the demise of Gold and Platinum PPO plans. Choosing one’s doctor may, as a practical matter, become a sensible option only for the few wealthy purchasers that do not depend on subsidies.

Might this all be just sort of bug that would be easy to fix if only Congress were more cooperative? Actually, not. The high marginal costs of more generous policies is a fundamental feature of Obamacare’s architecture. It is one  that is simply becoming more apparent as the program matures. Once you tell people that government will essentially buy you an HMO silver plan if you contribute some amount based on your income – but will pay no more – the net costs of buying anything more generous than that inevitably look very high.

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Is there an answer to the House lawsuit on the ACA other than standing?

Many have been concerned that the architecture of health insurance without medical underwriting created by the Affordable Care Act was inherently unstable and that, sooner or later, the markets it created would contract due to serious adverse selection problems. Although various creative bolsters from the Obama administration have delayed that forecast from yet materializing, except perhaps for the most generous of ACA exchange plans, as it turns out, the more immediate threat to Obamacare may come not from its inherent architectural deficiencies but from technical flaws now being unearthed by program detractors.

One of these flaws has been much in the news: the failure of the premium tax credits section of the ACA (section 36B of the Internal Revenue Code) to extend to policies sold in states that did not establish an exchange pursuant to section 1311 of the Act.  There are approximately 34 such states. In 2014, they covered about two-thirds of those enrolled in individual health plans through the Exchanges.  The Supreme Court is likely to decide this term in King v. Burwell whether the Obama administration’s determination to extend tax credits to persons in those 34 states is lawful.  A decision against the Obama administration, which appears to be the prevailing prognostication,  will throw major parts of the ACA  into turmoil because only the sicker insureds with incomes that now qualify them for policies are likely to purchase those policies at full freight.  Insurers, knowing of that proclivity, are going to be very leery of selling such policies; adverse selection would seem inevitable.  It remains to be seen whether legislative action at the federal level — revision of section 1311 of the ACA — or at the state level — grudging creation of exchanges — would return those markets to equilibrium following a decision expected by many in King v. Burwell.

Another flaw, however, has not received much attention — until late. It is the apparent failure of Congress directly to appropriate money for another critical part of Obamacare that keeps premiums low: the cost sharing subsidies created by section 1412 of the law and now codified at 42 U.S.C.  § 18071.  The idea of this provision is that poorer purchasers can purchase a policy for “Silver” prices that ordinarily would have 30% cost sharing, but receive a policy that provides anywhere from “Silver plus” (27%) to “Platinum-plus” (6%) levels of cost sharing.  This way, lower-middle-class people can get a policy that they might be able to afford without much of its purpose being undone by hefty deductibles and copays.

Cost Sharing Reductions
Cost Sharing Reductions


For the reasons I outline below, it appears clear that Congress at least strongly contemplated that provision of these extra benefits to the poor would come not from higher prices for policies paid by wealthier purchasers on the individual exchange.  Instead, the federal treasury would pay the insurers for the extra costs they incurred in offering these more generous variants of the policy.  It appears that the Obama administration has been making such payments to insurers, even if the amount of the payments — potentially in the billions —  has not been made clear. (see 3:29:36 of this CSPAN video and the comments of CMS administrator Marilyn Tavenner).

In the lawsuit captioned United States House of Representatives v. Burwell, however, filed November 21, 2014, the plaintiff demonstrates with some care how Congress never actually appropriated any money for the cost sharing subsidies that sweeten Obamacare coverage. Presumably, insurers should thus have to cover themselves the resulting extra expenses created by higher utilization and lower deductibles and copay. Presumably insurers should do so out of revenues they receive from customers paying the full price. Gross premiums for everyone would thus need to be higher: probably 10-15% higher to cover the shortfall.  And if insurers neglected to take those extra expenses into account, well, tough on the insurers one supposes.  Such a lack of empathy would not be without recent precedent.  Congress just hurt the insurers badly in section 227 of the Consolidated and Further Continuing Appropriations Act, 2015 (“Cromnibus”) by apparently cutting off a creative funding arrangement the Obama administration had undertaken to make payments to/bailout the insurance industry through the Risk Corridors subsidy program.

The complaint
The complaint

Incomplete funding of Risk Corridors is middling potatos, however, compared to non-funding of cost sharing. I would not be surprised to see an increase of 10-15% in gross premiums result if such cost sharing payments were found unlawful.  An increase of (1) 10-15% resulting from the absence of appropriations for cost sharing subsidies, (2) perhaps 3% from whatever premium increases  are likely to result from  the “Cromnibus” decision not to permit circuitous funding of Risk Corridors deficits and (3)  perhaps another  7% from  increases in premiums that will result from the ACA-required phaseout of the Transitional Reinsurance provision under which the federal treasury covers insurers for insureds with large losses all adds up to a gloomy future for the Affordable Care Act. And that’s true even if, as its proponents claim, the cost curve is being bent. One reason insurance premiums are as low as they in the Exchanges is that, behind the scenes, the government is heavily subsidizing them in a variety of ways.

This cumulative projected increase can not be dismissed by asserting that the increase in premiums resulting from court-barred federal subsidies would affect only those earning more than 400% of the Federal Poverty Level and thus ineligible for Obamacare subsidies. Yes, it might appear that the net premium for others under section 36B really relates only to their incomes and not to the gross premium for insurance.

But the appearance of a limited effect is misleading in at least two respects.  Increases in premiums resulting from court decisions and statutory reductions will matter more broadly.  First, the subsidy only covers the cost of the second lowest silver plan in the rating area.  The many people wanting a plan more expensive than that — a Silver PPO in many parts of the country or even a Gold or Platinum HMO — will be affected.  Indeed, their net premiums will go up by a higher percentage than the increase in the gross premiums because the denominator of the increase calculation will not be the old gross premium but the (smaller) old net premium.  Second , to the extent that insurers attempt to compensate for the premium revenue shortfall by raising premiums on employer-sponsored insurance, under Revenue Procedure  2014–37 (page 363), which purports to implement section 36B, such a move would trigger increases in percentages of income that individuals have to pay as the net premium for even the second lowest cost Silver Plan.

So, what’s the answer?  We haven’t seen the literal answer in court to the complaint by the House of Representatives and, of course, there’s a very serious issue as to whether this is the kind of dispute that belongs in a court anyway.  Bet the house that the Obama administration will raise issues called “standing” and “political question doctrine” in an effort to get the case dismissed.  But, if those objections fail, is there an answer to the core of the House of Representative’s complaint on this point?

Congress intended that the federal treasury fund cost sharing

One answer might be that Congress at the time of the ACA’s passage clearly intended that payments for cost sharing reduction come out of the federal treasury and not through insurers charging higher prices.  The evidence on this point seems rather compelling.  Here is at least some of it.

  1. In discussing premium tax credits and cost sharing reductions, Section 1412(a)(3) of the ACA says that the “The Secretary [of HHS], in consultation with the Secretary of the Treasury, shall establish a program under which— the Secretary of the Treasury makes advance payments of such credit or reductions to the issuers of the qualified health plans in order to reduce the premiums payable by individuals eligible for such credit. “
  2. Section 1412(c), captioned “(c) PAYMENT OF PREMIUM TAX CREDITS AND COST-SHARING REDUCTIONS” states in subparagraph (3) “COST-SHARING REDUCTIONS.—The Secretary shall also notify the Secretary of the Treasury and the Exchange under paragraph (1) if an advance payment of the cost-sharing reductions under section 1402 is to be made to the issuer of any qualified health plan with respect to any individual enrolled
    in the plan. The Secretary of the Treasury shall make such advance payment at such time and in such amount as the Secretary specifies in the notice. “
  3. Section 1313(a)(6)  of the ACA , captioned  “APPLICATION OF THE FALSE CLAIMS ACT” states:  “Payments made by, through, or in connection with an Exchange are subject to the False Claims Act (31 U.S.C. 3729 et seq.) if those payments include any Federal Funds. Compliance with the requirements of this Act concerning eligibility for a health insurance issuer to participate in the Exchange shall be a material condition of an issuer’s entitlement to receive payments, including payments of premium tax credits and
    cost-sharing reductions, through the Exchange. ”  This provision makes little sense if cost sharing reductions were not paid for by the federal government.
  4. Section 1332 of the ACA addresses the possibility of states getting a waiver from many of the provisions of Title I of the ACA and says that in such event “the Secretary shall provide for an alternative means by which the aggregate amount of such credits or reductions that would have been paid on behalf of participants in the Exchanges established under this title had the State not received such waiver, shall be paid to the State for purposes of implementing the State plan under the waiver. ” Why would the State receive such funds for cost sharing reduction if the ACA did not contemplate that the federal government would already be paying for them?
  5. Section 6055 of the ACA requires issuers of “minimum essential coverage” to provide information on the amount of any cost sharing reductions received.  This provision makes no sense if insurers were just supposed to absorb the reductions and pass them on to other customers.
  6. Section 10104(c) of the ACA addresses limits on use of federal funds to pay for abortions.  It says no qualified health plan may pay for abortion services with  “[a]ny cost-sharing reduction under section 1402 of the Patient Protection and Affordable Care Act (and the amount (if any) of the advance payment of the reduction under section 1412 of the Patient Protection and Affordable Care Act).”  This prohibition would hardly seem necessary if cost sharing reductions were supposed to be absorbed internally by the insurer.

But perhaps it takes more than intent in a bill

My assumption, however, is that plaintiff House of Representatives will concede that the ACA certainly authorizes payments for cost sharing reductions and may indeed have contemplated that they would be made, but that it takes more than authorization for the executive branch. The House will argue, however, that to actually to make the payments: the Executive branch needs money. And it needs the money to be  in the right account via a formal appropriation by Congress.  The House will likely cite “The Purpose Statute,” 31. U.S.C. §1301 in support of this assertion.  This statute reads: “Appropriations shall be applied only to the objects for which the appropriations were made except as otherwise provided by law. ” It will likely also cite 31 U.S.C. §1341(a)(1), the Antideficiency Act in support. It says “An officer or employee of the United States Government or of the District of Columbia government may not make or authorize an obligation exceeding an amount available in an appropriation or fund for the expenditure of obligation.”

These statutory citations are indeed foreshadowed by several paragraphs on the House complaint during which it recites the requests of HHS for appropriations to pay for Cost Sharing Reductions ($4 billion) and asserts that no such appropriation was ever made.  The plaintiff notes that, by contrast, Congress did appropriate funds for the first cousin of Cost Sharing Reductions, advance premium tax credits through a standing appropriation under 31 U.S.C. § 1324 for tax refunds due individuals.

Or maybe not

I would expect two rejoinders to this argument.  The first is a technical and statutory one: apparently the Secretary has at one time asserted that appropriations for premium tax credits also covers cost sharing reductions.   The second is that any law restricting the executive’s power to spend money in this fashion is itself unconstitutional.

A statutory rejoinder?

Although acceptance of this first statutory argument would avoid the turmoil sure to erupt if cost sharing subsidies are judicially prohibited and the difficulties of constitutional adjudication, it strikes me, at least initially, as a loser. Although premium tax credits have a similar objective to cost sharing reductions, the two programs are not identical.  They could operate independently. There are many who are entitled to premium tax credits who are not entitled to cost sharing reductions.  If similarity of objective means that funds between programs are transferrable, an awful lot of Congress’ “Power of the Purse” has been evaded.

It’s also possible, however, since we haven’t seen the defendant’s response to the complaint that there’s some more authorization somewhere for the spending. If so, the House of Representatives is going to have egg on its face.  I assume, however, that  the House wouldn’t have been so foolish to file this lawsuit if it had not its homework carefully and failed to find even a needle-in-a-haystack explicit authorization for the spending.

A constitutional rejoinder

The harder question — and the one that would make House of Representatives v. Burwell a case about far more than the ACA — is the constitutional one.  Under what circumstances does the President have authority to spend unappropriated funds? Much ink has been spilled by scholars on this issue over the decades . Tahere are some older Supreme Court cases (Hooe and Sutton and Bradley) that indirectly suggest that the limits created by the predecessors to these statutes are real and permissible.  There’s also a thorough review of the then-existing literature by the Clinton-era Department of Justice in a memo of its Office of Legal Counsel from 2001 (2001 WL 36175929). Perhaps more relevant will be two cases which, though not binding on the Supreme Court, will likely have some precedential force.

West Point: Excellent views, historic buildings
West Point: Excellent views, historic buildings

Consider first Highland Falls-Fort Montgomery Central School District v. United States, 48 F.3d 1166 (Fed. Cir. 1995), a case decided by the Federal Circuit in 1995.  It involved a statute, the “Impact Aid Act” designed to help certain categories of schools: (1) “section 237” school districts whose property tax base was reduced by the presence of a lot of non-taxable federal property in the area, (2) school districts that had to educate children of workers on federal property, and (3) school districts that had incurred a substantial increase in the number of attending children.  Highland Falls, which sits near the West Point Military Academy, was an example of the first kind of district.  It should have received money pursuant to the Impact Aid Act since West Point apparently ate up apparently 50%  — and a beautiful 50% at that — of the property in the district .  But Congress, instead of allocating a lump sum for all payments to be made under the Impact Aid Act, split up the money with specific appropriation for each of the three categories of hardship it identified. And, apparently, the amount of money allocated to the category against which Highland Falls was claiming was short whereas the amount of money Congress had allocated to two other categories was more complete.  So, Highland Falls wanted the Department of Education (DOE) to transfer money from the more fully funded accounts to the one that would benefit it.

The court in Highland Falls refused to direct such a reallocation of appropriated funds.  Here’s what it said when DOE declined to do so:

Section 1341(a)(1)(A) makes it clear that an agency may not spend more money for a program than has been appropriated for that program, while § 1532 provides that an agency may use money appropriated for one program to fund another program only when authorized to do so by law. It is undisputed that, in each of the relevant fiscal years, Congress appropriated specific amounts to pay for § 237 entitlements. It also is undisputed that, in each of the relevant fiscal years, in order to fund § 237 entitlements at 100% levels, it would have been necessary for DOE to use money appropriated by Congress for entitlements under other sections of the Act—squarely in contravention of § 1532. The approach DOE followed was consistent with this statutory landscape.

As noted above, in order for DOE to fund § 237 entitlements at 100% in accordance with § 240(c), the agency would have had to transfer money from other sections’ appropriations to fund § 237. If DOE had followed such an approach, it would have been spending more money than Congress had appropriated for § 237 entitlements, in violation of § 1341(a)(1)(A). In addition, it would have been depriving at least one other section’s program of funds expressly appropriated for it by Congress. Put another way, it would have been “raiding” one appropriation account, for example § 238 or § 239, to credit another, § 237, in violation of § 1532.

Now, this is not a square holding on precisely the issue in the House of Representatives current lawsuit. It’s not a case where — as here — the Executive branch undertook a reallocation and someone wanted to challenge it.  Nonetheless, the language of Highland Falls is supportive of the House’s point.  Having decided, apparently, not to allocate funds for Cost Sharing, the executive branch can’t raid a related fund to help pay for it.

Also relevant will be Eastern Band of Cherokee Indians v. United States, 16 Cl. Ct. 75 (1988). There an Indian tribe sought money to equalize funding of its schools relative to local schools.  There was a federal statute that was supposed to provide such money.  But Congress had declined to appropriate funds for this special “set aside.”  The tribe asked that money be used from other accounts controlled by the Secretary of the Interior to make the statutory payments.  The court upheld the government’s decision not to do so.

The Set–Aside Fund was not funded in fiscal year 1986, the year of plaintiffs’ request. Plaintiffs argue that the Department of Interior could have applied funds from other accounts. However, the Anti–Deficiency Act, 31 U.S.C. § 1341(a) states that a United States officer may not authorize expenditures “exceeding the amount available in an appropriation or fund for expenditure or obligation.” Thus, the officers of the Department of the Interior could not grant the plaintiffs’ request for funding. Penalties for violating the Anti–Deficiency Act are codified at 31 U.S.C. §§ 1349 and 1350. The court thus finds that the plaintiffs have failed to state a claim upon which relief may be granted as funds are not available to satisfy plaintiffs’ claim.

Again, not a case 100% on point, but still one that, at least in dicta, reinforced the House’s claim here that the executive can not dip into one pot of money, even if related and even if efficient, to pay bills for another program. And that is true even if Congress has earlier expressed its intent that such a program be funded.

MRE Beef Stew
MRE Beef Stew

And there is, on the other hand a case involving a disappointed bidder and military purchases of diced turkey (with gravy) and beef stew: Southern Packaging and Storage Company, Inc. v. United States (D.S.C. 1984). There, a district court found that, although the  purchase from a Canadian company violated the “Buy-American” provision of the Department of Defense Appropriations Act there was no violation of the anti-deficiency statute because the amount spent on combat rations — even Canadian-sourced ones — did not exceed the overall Congressional appropriation.

There is, in addition, lots of non-judicial authority on the subject, ranging from death-match law review articles by Professors Sidak (1989 Duke L.J. 1162 (1989)) and Stith, (97 Yale L.J. (1988)),  to summaries of the law from the United States General Accountability Office to a memorandum from the Clinton-era Justice Department.


So, there is a lot more to be said on this subject and we have not yet had the benefit of Secretary Burwell’s research and argument.  But, at least for now, provided the House can overcome the substantial justiciability questions, it looks like it may have a strong case on the merits. Of course, the House ought, like all of us, to be careful what it wishes for.  One wonders what reaction many Americans will have to a House legal victory when they find that they can no longer afford the health insurance they purchased due to what they may well regard as a “technicality.”


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Why Gruber matters, at least a little bit

Let’s start with some facts we can all presumably agree on.  MIT Professor Jonathan Gruber was involved in the development of the Affordable Care Act. He attended numerous meetings with the executive branch officials while the ACA was being formulated, met with President Obama once, and stayed as a member of a Congressional Budget Office Advisory Council on Long Term Modeling for a decade, including the years when the ACA was designed. Although perhaps he exaggerated in an effort to draw attention to himself, he referred to himself, as others did, as the architect of Obamacare.  Although he is hardly President Obama himself or Senators Harry Reid, Max Baucus or then Speaker of the House of Representatives Nancy Pelosi, Professor Gruber was not a mere technocrat crunching numbers.  He is more intimately connected with the bill, more of an insider, than many other academic proponents of the legislation. And so he has described himself.

The back cover of Gruber's graphic book, which, by the way, even if you don't like the ACA, is a fun read.
The back cover of Gruber’s graphic book, which, by the way, even if you don’t like the ACA, is a fun read.


So, when we are looking to understand a challenging provision of the ACA, and if we accept that the provision is sufficiently ambiguous (in context) to be subject to broader interpretive methods, and if there isn’t much other contemporaneous evidence on the subject, it does not become crazy to look at Professor Gruber’s statements about the provision.

The provision of which I speak is, of course, is section 36B of the Internal Revenue Code (section 1421 of the ACA) in which, to the untrained eye, Congress appeared to limit advance premium tax credits (subsidies) to those “enrolled in through an Exchange established by the State under section 1311.” Only 16 or so states established such an Exchange. The remaining 34 in one form or another have let the work be done by the Federally Facilitated Marketplace established in section 1321 of the ACA as a fallback precisely when the States did not, as anticipated, establish an exchange.  But the IRS has interpreted “established by the State under section 1311” to include exchanges “established” by State non-establishment, i.e. their not establishing an Exchange knowing that the federal government would do so for them.  This latter interpretation means that, just because people live in states with entrenched opposition to the ACA, like Texas, or states which have recognized their apparent incompetence in running an Exchange, like Oregon, or other states, which perhaps didn’t want the trouble, they will not be denied thousands of dollars of subsidies in a program which, at least according to the rhetoric of its proponents, was intended to reduce the rank of uninsured nationwide.

This provision, section 36B, is one that  presumably the Supreme Court will interpret this term  in King v. Burwell — unless of course it “DIGs” the case and  decides to withdraw review for now.  Although Burwell is not a constitutional case, and although it may have few jurisprudential ramifications, from a practical perspective, it is an extremely important decision. Because of the way section 36B reads, it is likely to determine whether many millions of Americans who have purchased health insurance on the “Federally Facilitated Marketplace” (FFM) pursuant to Obamacare in reliance on an advance of federal tax credits are in fact entitled to those advances or tax credits at all.  It is about whether insurers will continue to sell health insurance policies in states now served by the FFM or seek to withdraw for fear of unsubsidized policies being bought predominantly by those with high projected medical expenses. And it is about whether some states will be induced by a decision in King v. Burwell to mitigate the damage to many of its citizens that would otherwise occur, by now establishing Exchanges whose creation they previously opposed. Oh, and if subsidies end up being unavailable, the employer mandate (26 USC 4980H) could be diluted because few employees will actually purchase policies on an Exchange.

It’s also about politics.  The Democrats may look bad for having misused executive power to stretch the interpretation of an arguably clear law beyond recognition.  And, of course the collateral political consequences of a “win” by mostly Republican opponents of Obamacare at the Supreme Court may provide that party with the credibility that comes from having a litigation position vindicated by the nation’s highest court. But all will not end there.  At least some of this perceived political advantage to the GOP may be offset by the political harm likely to occur if the “victory” rips health insurance from their constituents. And it augurs a delightful spectacle: Republicans joining Democrats in the aftermath of the former’s victory in King v. Burwell to amend the ACA to actually say what the Obama administration now says it means. One can hear now Republicans claiming that it was all a matter of principles, of defending separation of powers and the Rule of Law. One could also perhaps see some Republicans wanting to take such a victory as  a hostage and seeking concession from Democrats on a variety of matters, including a renegotiation of many provisions of Obamacare,  as a condition of restoring coverage to millions of Americans.

Did Gruber lie?

But back to Gruber.  The problem for those who support the IRS’ interpretation of section 36B is that it takes a heroic stretch of statutory language to get there. And Gruber — on videotape — twice — offered what purported to be a knowledgeable account of at least a plausible reason why the drafters of the ACA might have indeed threatened to punish the uninsured in states unwilling to “get with the program” and establish Exchanges.  You can watch him below starting at about 31:25. Here’s a transcript.

Question: You mentioned the health information exchanges through the states and it’s my understanding that if states don’t provide them the federal government will provide them.

Gruber : Yes so these health insurance exchanges  … will be these new shopping places and they’ll be the place that people go to get their subsidies for health insurance. In the law it says that if the states don’t provide them the federal backstop will. The federal government has been kind of slow in putting in the backstop I think partly because they want to sort of squeeze the states to do it.  I think what’s important to remember politically about this is that if you’re a state and you don’t set up an exchange that means your citizens don’t get their tax credits. But your citizens still pay the taxes for this bill. So you’re essentially saying to your citizens, you’re going to pay all this taxes to help all the other states in the country.  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 and that they’ll do it.  But, you know, once again the politics can get ugly around this.

Or here. It’s an audio from January 10, 2012 at the Jewish Community Center of San Francisco. Again, here’s a transcript

I guess I’m enough of a believer in democracy to think that when the voters in states see that by not setting up an exchange the politicians of the state are costing state residents hundreds of millions and billions of dollars, that they’ll eventually throw the guys out. But I don’t know that for sure. And that is really the ultimate threat and that is will people understand that, gee, if your government doesn’t set up an exchange you’re losing hundreds of millions of dollars in tax credits to be delivered to your citizens. So that’s the other threat: will states do what they need to do to set it up.


Per Gruber, it was all a bluff.  It was a stick to get the states to establish their own Exchanges.  It’s not all that much different from lots of conditional spending decisions, such as tying federal highway funds to state raising of the drinking age, except this was a conditional taxing decision.  It’s a not-so-unusual way of nicely inducing the states to do something they might otherwise be reluctant to do because, now, not doing so, hurts their citizens.  As careful health law scholar and Obamacare advocate Tim Jost pointed out in a 2009 article (see figure below), conditioning subsidies on the state’s creation of an exchange is a way around a potential constitutional impediment to simply directing that the states do so. And if the states call the bluff, well, so be it, that’s a matter for internal state politics and does not undercut the federal desire that the states behave in conformity with the incentives.  The limitation on subsidies set forth by the text of section 36B was a stick so big and so bad that resistance was thought to have been futile.  Indeed, that may well have been why Professor Gruber, as he stated under oath in his testimony this week before the House Oversight Committee, always assumed in his modeling that subsidies would be available in all states.

An excerpt from Health Insurance Exchanges: Legal Issues by Timothy  Stolzfus Jost
An excerpt from Health Insurance Exchanges: Legal Issues by Timothy Stolzfus Jost

There was only one problem. Many of the states called the statute’s bluff. They refused to establish their own Exchanges, either seeking to avoid the financial obligation or, at least in the Red Zone,  complicity with the evils of the Affordable Care Act.  And so, having seen the bluff called, the IRS, under this theory, pretended that the statute had never conditioned subsidies on state creation of an Exchange.  In order that the benefits of Obamacare extend from sea to shining sea, the IRS interpreted “established by a state under section 1311” to include inaction by a state under section 1311 that led, under section 1321, for the federal government to come to the rescue.

Now, in ordinary circumstances, the musings, even recorded musings, of a lone professor at an academic conference or a community group on why Congress might have written a statute which, if one believes in many of the ideas of the ACA, is rather cruel, would not be particularly relevant to a Supreme Court case on its interpretation. After all, even careful law review articles by scholars are frequently ignored in statutory debate.  And there is even a respectable argument that Gruber’s remarks are not relevant now to King v Burwell.

But interpretation disdains a vacuum. And the problem is that none of the legislators apparently explicitly focused on the purported cruelty of a literal interpretation of section 36B at the time the ACA was pushed through. And their silence could be interpreted several ways: that most people who cared understood it was a bluff that likely would not be called, that most people who cared understood that “established by a state under section 1311” should be read broadly, or, perhaps most realistically, that most had no idea about the details of a 2,700 page bill, even one that had indeed been widely debated.

And so, if the executive branch is to prevail in its reading of section 36B, it would sure help if it could tamp down contemporaneous evidence some proponents, even non-legislative ones, thought that use of a bluff made any sense.  Professor Gruber’s comments, as an important proponent of the ACA, thus acquire  additional saliency.

To be sure, Professor Gruber at the same hearing before the House Oversight Committee had an explanation for his assertions on this point. It was one, I assume he and others hoped, that would further diminish  the force of what he had to say earlier on.   Its an argument based on allegedly omitted context. Here is what he had to say (go to about minute 34 of the CSPAN video):

About my January 2012 remarks concerning the availability of tax credits in states that did not set up their own health insurance exchanges: the portion of these remarks that has received so much attention lately omits a critical component of the context in which I was speaking. The point I believe I was making was about the possibility that the federal government for whatever reason might not create a federal exchange. If that were to occur and only in that context then the only way that states could guarantee that their citizens would receive tax credits would be to set up their own exchange.

In other words, Gruber now claims that the only circumstance under which citizens of states not setting up their own exchanges would be deprived of tax credits would be if the federal government did not set up an exchange either.  In that event, even under the broad definition of “established by a state under section 1311” that he embraces, there would be no exchange and the citizens would lose out.

The main problem with Gruber’s remarks is that the purportedly clarifying context is invisible except retrospectively and in Gruber’s own mind.  Nowhere in his answers — nowhere in the full recordings — does he indicate a belief that Washington would not set up an exchange at all – a reasonable omission given that Washington was very much in the throes of establishing a federal exchange at the time. Washington spent hundreds of millions on healthcare.gov but was never going to get it up and running?

Want more evidence of the absurdity of the hypothetical scenario created by Gruber to reconcile his earlier comments with the desires of the Obama administration in King v. Burwell? You could read this May, 2012 report from CMS in which it discusses over 19 pages how the federally facilitated marketplace will work. You could read these July 2011 regulations and find the eight places in which the Department of Health and Human Services set forth how it is going to set up a federally facilitated marketplace, including the passage in the figure. Find me the warnings from CMS, from HHS, from the President from anyone that, in fact, the federal government was not going to establish a federally facilitated marketplace.

Not good enough?  How about contemporaneous words very close to Gruber himself. Take a look at the work in December 2011 of the Study Panel on Health Insurance Exchanges. It’s important not only because it was work mandated by Congress but because a member of that study panel was … Jonathan Gruber. (Look at the list of panel members on page ii.)  It writes a 34-page report on precisely how the federally facilitated exchange — the thing Gruber now says he doubted might exist — would come into being and the steps already being taken. The figure below is an excerpt from page 12 of that report.

Page 12 of the Study Panel on Health Insurance Exchanges; Professor Gruber was a member
Page 12 of the Study Panel on Health Insurance Exchanges; Professor Gruber was a member

It is thus no surprise that the report ends with the following statement: “Over the next 12 months, the federal government will continue to invest in and build a Federally-facilitated Exchange to operate in states that elect not to operate a State Exchange, or are unable to meet the certification and implementation schedule to stand up their Exchanges in 2014. ” In short the hypothetical scenario set forth by Professor Gruber in which the federal exchange does not exist looks like a fantastic reconstruction of events that simply did not occur.

And what are we to make of Gruber’s “squeezing the states” language?  Are we to believe that the federal government thought tax credits were so important for a nationwide program that they would squeeze the states by going slowly on establishing an exchange only then to not set up an exchange at all if some states failed to capitulate to the pressure?  How would that be consistent with a belief that the ACA was supposed to establish a nationwide program? And what are we to make of his language about state democracy: “I’m enough of a believer in democracy to think that when voters in states see that by not setting up an exchange the politicians of the state are costing state residents hundreds of millions and billions of dollars, that they’ll eventually throw the guys out.”  It wasn’t the federal officials, his Obama administration friends, that Gruber hoped the state voters would throw out for failure to establish a backstop exchange; it was the officials in the state that he hoped would be thrown out for failing to establish an exchange. The simplest explanation for this hope is that Gruber believed that  under the statute, even if the federal government established an exchange that let people buy policies without subsidies, states not establishing their own exchanges would thereby cause their citizens to lose hundreds of millions of dollars in tax credits.

I’m afraid he did

In short, and I say this with some sorrow as a fellow professor who has testified before the same committee, there is proof beyond most doubt that Professor Gruber deliberately lied under oath on at least this point.  He did so not in an off the cuff remark but with advice of counsel and after having apparently rehearsed and written out his testimony beforehand.

Now, to be complete, I suppose we order to consider one other make-weight explanation offered by Professor Gruber to diminish the import of his earlier recorded comments: it’s about his models.

Indeed, my microsimulation models for the ACA expressly modeled that the citizens of all states would be eligible for tax credits whether served directly by a state exchange or by federal exchange.

But this explanation about his behavior presumably prior to the enactment of the ACA is not inconsistent with a view that 36B conditions subsidies on a state creating an exchange. It’s consistent with a (mistaken, as it turned out) view that the carrot and stick contained in section 36B was too large for states to ignore.  It is also potentially inconsistent with his belief, expressed two sentences earlier, that he, unlike anyone else in the debate, harbored this suspicion that Washington would not set up an exchange for the states that failed to set up their own.  In that event, according to Gruber’s own reasoning, he should not have assumed in his model that all states would receive subsidies.

Why does it matter?

Ok, so some MIT professor interpreted section 36B of the ACA the way the plaintiffs in King v. Burwell do. OK, so he took liberties with the truth in his testimony before Congress. Is this an irrelevant tempest in a teapot brewed up by implacable Republican adversaries of Obamacare? I don’t want to speculate on motivation, but I actually think it is neither the most important event in the history of Obamacare — far from it — nor entirely irrelevant.  It may well be that the statute is so clear, though, that Professor Gruber (or anyone else’s thoughts) on its meaning are entirely beside the point.

Nonetheless, if for no other reason than to satisfy curiosity, I would like to see Professor Gruber, when he is hauled back before Congress pursuant to an additional subpoena, asked a more open ended question about how he, a mere (MIT) economics professor without legal training acquired his beliefs about the meaning of section 36B.  Did he really read the statute with care and come to that conclusion using the same somewhat — let us be fair — circuitous statutory reasoning now advanced by the defendants in King v. Burwell? Or might it have actually been based on comments he heard from the true legislative architects of the ACA during some of the many meetings he held on the subject?  If so, even such hearsay might be more relevant than Gruber’s own beliefs as to interpretation of a critical statute.

I am also old fashioned enough to be somewhat concerned about what sure looks to me like at least one calculated lie.  If, for example, Professor Gruber believes so strongly in the ACA — and one need only read his graphic book to realize the passion of his commitment — that he is willing to re-invent events in order to play a tiny role in its salvation, how non-instrumental was he in the modeling that led up to passage of the ACA and that,  I believe, may have some residual role in contemporary forecasts of its success?  I can understand that lies in order to provide, in his opinion, millions of people access to life-saving healthcare  may in his mind be a necessary evil. After all, although transparency may be important, it is crystal clear that Gruber would, as he said, rather have this law than not.

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Small business, the ACA and a second potential debacle

Small_Businesses_and_Obamacare___National_Review_OnlineThe following are excerpts of an article written by me and published in the National Review Online.  It’s available here. I recommend starting here, seeing if you are interested, and then clicking over to the National Review to read the entire article.

We could be about to see the same clumsy reconciliations of egalitarianism and freedom [that we see in the individual market provisions of the Affordable Care Act] ensnare the nation’s 6 million or so small businesses, the 40 million–plus people they employ, and the millions more spouses and children who depend on those employees. If only because the number of people involved is so much larger, the consequences and the stresses created could be even more serious than those we have seen playing out over the past few months in the individual market. The major points of tension here are (1) the prohibitions in section 1201 of the ACA on experience rating and medical underwriting in policies sold to small employers; (2) the requirement, also in section 1201, that, if a small business purchases group health insurance from a state-regulated insurer, it must provide the same sort of generous protections (including “essential health benefits”) as do individual policies; and (3) the effective tax that section 1421 of the ACA (section 45R of the Internal Revenue Code) places on wage increases and hiring by some small businesses that choose to offer health insurance.

What [various provisions of the ACA mean] is that there are an awful lot of employers who, if they want to provide health insurance to their employees and dependents, will now be able to purchase those policies at prices that do not take into account their abnormally high projected medical expenses.

A large number of these employers are likely to do so; even now 35 percent of employers with 50 or fewer employees provide some form of health insurance. Many small employers with lower-than-average projected health costs will strive to avoid being lumped in with their colleagues or competitors with higher costs. Instead, they will, if financially possible, “self-insure”: The section 1201 requirement of uniform premiums does not apply to arrangements whereby the employer (or union) itself nominally provides the medical benefits but throws off much of the financial risk onto reinsurers and many of the headaches of running a health plan onto “third-party administrators.” This option becomes even more attractive if employers can get away with the now-bandied-about “dumping strategy” of offering to pay their sickest employees enough so that they can purchase platinum health insurance in the individual exchanges and have money left over. Still other small employers may simply decide not to insure at all — reserving perhaps the delicious option of entering the exchange if some crucial employee or his dependents develop expensive medical conditions.

This self-segregation of small employers based on the projected health-care expenses of their employees will pressure small-group health insurers to raise prices. …

Of course, the curious thing about the looming debacle in the small-group market is that its possible contraction might be the one thing that could rescue the individual market from the probable death spiral. Right now, the individual markets are in danger as a result of lower-than-predicted enrollment and disproportionate enrollment of those over age 50. If small employers actually stop offering coverage — either because the costs of ACA-compliant policies prove too high or because of a death spiral in the SHOP exchanges (or both), they may end up just sending people to the individual exchanges. That won’t do much for President Obama’s promise that people could keep their health plans, and it won’t constitute a “silver lining” for people who want to reduce government’s role in health insurance, but it will do what many conservatives have wanted to do for years: undo the ideology that has previously tied the labor and health-insurance markets together.

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