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Taxation without representation: the illegal IRS rule to expand tax credits under the PPACA.

ABSTRACT

The Patient Protection and Affordable Care Act (PPACA) provides tax credits and subsidies for the purchase of qualifying health insurance plans on state-run insurance exchanges. Contrary to expectations, many states are refusing or otherwise failing to create such exchanges. An Internal Revenue Service (IRS) rule purports to extend these tax credits and subsidies to the purchase of health insurance in federal exchanges created in states without exchanges of their own. This rule lacks statutory authority. The text, structure, and history of the Act show that tax credits and subsidies are not available in federally run exchanges. The IRS rule is contrary to congressional intent and cannot be justified on other legal grounds. Because tax credit eligibility can trigger penalties on employers and individuals, affected parties are likely to have standing to challenge the IRS rule in court.
CONTENTS

INTRODUCTION
  I. THE PPACA
 II. THE PPACA's REGULATORY STRUCTURE
     A. A Three-Legged Stool
     B. Exchanges, Tax Credits & the Employer Mandate
     C. Tax Credits & the Individual Mandate
     D. Tax Credits & State-Run Exchanges
III. THE IRS RULE
 IV. TEXT, LEGISLATIVE HISTORY, AND CONGRESSIONAL INTENT
     A. Plain Text
     B. Preference for State-Run Exchanges
     C. Financial Incentives
     D. Antecedent Bills
     E. Authorial Intent
     F. Non-Equivalence
     G. Revealed Intent
     H. An Error of Miscalculation
  V. ASSESSING OTHER POTENTIAL LEGAL RATIONALES FOR
     THE IRS RULE
     A. Scrivener's Error
     B. Absurd Results
     C. Chevron Deference
     D. "Such Exchange"
     E. The "CBO Canon"
 VI. STANDING TO CHALLENGE THE IRS RULE
CONCLUSION


INTRODUCTION

On March 23, 2010, President Barack Obama signed the Patient Protection and Affordable Care Act (PPACA or "the Act") into law. (1) The PPACA creates a complex scheme of new government regulations, mandates, subsidies, and agencies in an effort to achieve near-universal health insurance coverage. Immediately after passage, a majority of state attorneys general and numerous business and public interest groups filed suit challenging various portions of the new law--most notably the so-called "individual mandate" and Medicaid expansion. This litigation wound its way to the US Supreme Court, which produced a divided ruling upholding the constitutionality of the mandate but limiting the Medicaid expansion. (2) Yet this decision did not end the controversy surrounding the PPACA. (3) Additional litigation has already ensued and is likely to continue in the years to come. (4)

The PPACA's congressional sponsors created incentives for states to implement much of the law and reasonably expected that states would do so. (5) States help implement many complex federal programs like Medicaid and the Clean Air Act. Among other things, the PPACA encourages states to create new agencies called health insurance "Exchanges" to execute many of the law's key features. If a state fails to create an Exchange that meets federal standards, the Act authorizes the federal government to create a "fallback" Exchange for that state. As an inducement to state officials, the Act authorizes tax credits and subsidies for certain households that purchase health insurance through an Exchange, but restricts those entitlements to Exchanges created by states. Apparently this was not inducement enough.

Contrary to initial expectations, a large number of states will not create Exchanges before the PPACA's key provisions take effect in 2014. As Health and Human Services (HHS) Secretary Kathleen Sebelius commented in February 2012, the federal government could be responsible for running Exchanges in fifteen to thirty states. (6) Yet dozens of states are either dragging their heels or flatly refusing to cooperate with implementation. (7) As of February 15, 2013, only seventeen states and the District of Columbia have signaled intent to create a PPACA-compliant Exchange, leaving the federal government responsible for creating them in thirty-four states. (8)

This apparent miscalculation creates a number of problems for implementation of the PPACA. The tax credits and subsidies for the purchase of qualifying health insurance plans in state-run Exchanges serve as more than just an inducement to states. These entitlements also operate as the trigger for enforcement of the Act's "employer mandate." As a consequence, that mandate is effectively unenforceable in states that decline to create an Exchange. The tax credits further play a role in the enforcement of the Act's "individual mandate," such that a state's decision not to create an Exchange would exempt a substantial portion of its residents from that mandate. (9) Because such a large number of states have declined to create Exchanges of their own, it may be difficult to implement the law as supporters had hoped.

A final Internal Revenue Service (IRS) rule issued on May 18, 2012, attempts to fix this problem by extending eligibility for tax credits and cost-sharing subsidies to those who purchase qualifying insurance plans in federally run Exchanges. (10) The PPACA, however, precludes the IRS from issuing tax credits in federal Exchanges. The plain text of the Act only authorizes premium-assistance tax credits and cost-sharing subsidies for those who purchase plans on state-run Exchanges, and the IRS rule's attempt to offer them to other individuals cannot be legally justified on other grounds. In other words, the IRS is attempting to create two entitlements not authorized by Congress and, in the process, to tax employers and individuals whom Congress did not authorize the agency to tax.

It may be somewhat surprising that the PPACA contains such a gaping hole in its regulatory scheme. We were both surprised to discover this feature of the law and initially characterized it as a "glitch." (11) Yet our further research demonstrates that this feature was intentional and purposeful and that the IRS's rule has no basis in law. This supposed fix is actually an effort to rewrite the law and to provide for something Congress never enacted--indeed, something that the PPACA's authors chose not to include in the law.

This Article explains the importance of the law's limitation on the availability of tax credits for health insurance for implementation of the PPACA and details the case for and against the IRS rule. Part II provides a brief overview of the PPACA's legislative history and explains the regulatory structure that the Act creates to govern private health insurance markets--paying particular attention to the instability the law introduces into those markets, the role of tax credits and subsidies in mitigating that instability, and the central role of health insurance "Exchanges." Part III describes the IRS rule and the agency's justification for it. Part IV shows how the IRS rule is contrary to the text, structure, purpose, and history of the PPACA. Part V identifies and evaluates other potential legal rationales for the IRS rule and finds them wanting. Part VI explains that while an IRS rulemaking expanding the eligibility of tax credits or subsidies beyond that authorized by Congress would normally escape judicial review, the interactions of the tax credit provisions with the law's employer and individual mandates provides a basis for Article III standing to challenge the IRS rule. States may have standing to sue as well. (12) In other words, this question is likely to be resolved in federal court.

I. THE PPACA

What we now call the PPACA is the product of three different bills, two of which originated in the Senate and a third that made limited amendments to the final Senate bill at the behest of the House of Representatives. In 2009, two Senate committees reported major health care legislation. On September 17, the Health, Education, Labor, and Pensions (HELP) Committee approved the "Affordable Health Choices Act" (S. 1679). (13) On October 19, the Senate Committee on Finance approved the "America's Healthy Future Act of 2009" (S. 1796). (14) The two Senate bills shared many features. Before either bill reached the Senate floor, Senate Majority Leader Harry Reid (D-NV) assembled the chairmen of those committees and congressional and White House staff in his office in the US Capitol, where they merged the two committee-reported bills into the Patient Protection and Affordable Care Act. (15)

Although Senate Democrats held a sixty-seat majority--the minimum necessary to break a Republican filibuster--Senator Reid had difficulty collecting yea votes from every member of his caucus. (16) Once he had corralled all sixty votes, Senate Democrats broke the Republican filibuster. The new Patient Protection and Affordable Care Act cleared the US Senate before sunrise on December 24, 2009, without a vote to spare. (17)

Congressional Democrats had intended to have a conference committee merge the PPACA with the "Affordable Health Care for America Act" (H.R. 3962) that had passed the House of Representatives in November. (18) Had this occurred, the PPACA might look quite different than it does today. But in January 2010, Republican Scott Brown won a special election to fill the seat vacated by the death of Sen. Edward Kennedy (D-MA). Brown's victory shifted the political terrain. It gave Senate Republicans the forty-first vote necessary to filibuster a conference report on the House and Senate bills.

As a result, House and Senate Democrats abandoned a conference committee in favor of a novel strategy. House Democrats agreed to pass the PPACA exactly as it had passed in the Senate, but only upon receiving assurances that after the House amended the PPACA through the "budget reconciliation" process, the Senate would immediately approve those amendments. Because Senate rules protect reconciliation bills from a filibuster, the PPACA's supporters needed only fifty-one votes to pass the House's "reconciliation" amendments. The downside of this strategy was that the rules governing budget reconciliation limited the amendments House Democrats could make. (19) Supporters opted for an imperfect bill--that is, a bill that did not accomplish all they may have set out to do, but for which they had the votes---over no bill at all.

The Act signed into law by President Obama and the law that the IRS rule purports to implement---the PPACA--is thus a hybrid of the two Senate-committee-reported bills, as amended by the Health Care and Education Reconciliation Act of 2010 (HCERA). (20) This history, and the need to resort to the reconciliation process to pass the final law, helps explain why the final legislation looks as it does and why the Act does not conform with the hopes or expectations of some of its supporters. (21)

II. THE PPACA's REGULATORY STRUCTURE

The PPACA attempts to achieve near-universal health insurance coverage through an interdependent system of government price controls, mandates, and subsidies. To understand the significance of the IRS rule, it is important to understand the role of health insurance Exchanges and how they were intended to complement the other controls enacted by the PPACA.

A. A Three-Legged Stool

Among the central features of the PPACA are new regulatory controls limiting medical underwriting by health insurance companies. (22) Specifically, the Act requires carriers to charge individuals of a given age the same premium, regardless of their health status. (23) This type of government price control, known as "community rating," reduces premiums for those with pre-existing conditions but increases premiums for low-risk consumers and thereby encourages healthy people to wait until they fall ill to purchase health insurance. (24) Such price controls can produce a vicious cycle of adverse selection: the influx of high-risk consumers and exodus of low-risk consumers cause premiums to rise, which leads additional low-risk customers to drop coverage, leading to further price increases, and so on. (25) In other contexts, community-rating price controls have caused comprehensive health insurance plans and even entire carriers to exit certain health insurance markets, (26) often to the point of market collapse. (27)

To combat the instability introduced by its community-rating price controls, the Act imposes an "individual mandate" that requires nearly all Americans to purchase a health insurance policy offering a minimum package of "essential" coverage. (28) Failure to comply may result in a penalty payable to the IRS. (29) In addition, the Act imposes an "employer mandate" that requires employers to offer "affordable" health benefits of "minimum value" to all full-time employees and their dependents. (30) Failure may result in penalties against the employer. (31) The combined effect of the PPACA's price controls and individual mandate is that health-insurance premiums could increase by as much as 100 percent or more for some young and healthy households. (32)

Given the burden those higher premiums will impose on low-income households, the Act offers refundable "premium assistance" tax credits to households with incomes between 100 and 400 percent of the federal poverty level (FPL). (33) The Act further offers "cost-sharing subsidies" that enable households between 100 and 250 percent of FPL to obtain, at no additional cost to them, more than the mandatory minimum level of coverage. (34) This premium assistance, however, is only available for the purchase of insurance through Exchanges. (35)

These features of the PPACA's regulatory scheme are interdependent. An apt metaphor is that of a three-legged stool: removing any of the three above-mentioned "legs"--the price controls, the individual mandate, or the tax credits and subsidies--could cause the structure to collapse. Remove the price controls, and premiums for high-risk households would increase dramatically; those households would have a more difficult time complying with the individual mandate. Remove either the individual mandate or the tax credits and the Act's price controls would further threaten the viability of health insurance markets by pushing low-income/low-risk households to exit the market.

B. Exchanges, Tax Credits & the Employer Mandate

Health insurance Exchanges play an essential role in the PPACA's regulatory scheme. As the Department of Health and Human Services (HHS) explains, "Exchanges are integral to the Affordable Care Act's goals of prohibiting discrimination against people with pre-existing conditions and insuring all Americans." (36) Specifically, Exchanges are government agencies that oversee the buying and selling of health insurance within a state; monitor carriers' compliance with the Act's health-insurance price cantrols; implement measures to mitigate the perverse incentives created by the Act's price controls; (37) report to the IRS on whether individuals and employers are complying with the individual and employer mandates; (38) and distribute hundreds of billions of dollars in government subsidies to private health insurance companies. (39)

Like the individual and employer mandates, Exchanges help to limit how much of the cost of the Act's insurance expansion appears in the federal budget. By requiring households to give money directly to insurance companies, the individual mandate keeps those transactions off of the government's books. (40) Likewise, the employer mandate requires employers to purchase coverage for their workers, thereby removing those transactions from the federal budget and even household budgets. (41) In this way, the PPACA achieves its redistributionist goals off-budget. Similarly, Exchanges reduce the Act's impact on the federal budget by limiting eligibility for tax credits and subsidies. Allowing all households within the relevant income ranges to claim these entitlements would dramatically increase the federal deficit and significantly disrupt existing employer-sponsored insurance arrangements. The PPACA's authors therefore offered these entitlements only to certain households that purchase a qualified health plan through an Exchange. In addition to household-income criteria, individuals are eligible for tax credits only if they are not Medicaid-eligible and do not receive an offer of "minimum value" and "affordable" self-only health coverage from an employer. (42)

Offering tax credits and subsidies within Exchanges, however, creates an incentive for employers to drop their health benefits so that their workers can gain access to those entitlements. If employers did so in large numbers, the PPACA's budgetary footprint would grow. (43) The employer mandate attempts to prevent such employer "dumping." It penalizes employers with more than fifty workers if they fail to offer "minimum value" and "affordable" health benefits to all employees. By compelling employers to offer health benefits and thereby restricting access to the Exchanges, the employer mandate reduces the federal budgetary impact of the Act's insurance expansion and reduces disruption to existing insurance arrangements. (44)

Exchanges, in turn, play an essential role in enforcing the employer mandate. Before the IRS may levy a penalty against an employer, (1) the employer must fail to offer "minimum value" or "affordable" coverage to all full-time employees and their dependents, and (2) one of the employer's full-time employees must enroll in a qualified health plan through an Exchange "to which an applicable premium tax credit or cost-sharing reduction is allowed or paid with respect to the employee." (45) If an employer fails to offer "minimum value" coverage, the Act fines the employer $2,000 for every full-time employee (after exempting the first thirty employees). If an employer offers coverage that is "minimum value" but not "affordable," the Act fines the employer either $3,000 for each employee who receives or is eligible for a tax credit through an Exchange or the penalty for not offering "minimum value" coverage, whichever is less. (46) Employer groups have expressed concern about both the size and the unpredictability of these penalties. (47)

C. Tax Credits & the Individual Mandate

Exchanges also play a key role in the enforcement of the individual mandate. Subject to certain exemptions, the PPACA requires all US residents to obtain a minimum level of health insurance coverage or pay a tax penalty. (48) When fully phased-in by 2016, penalties will be the greater of a flat fee of $695 (for single individuals) to $2,085 (families of four or more) or 2.5 percent of income in excess of the income-tax filing threshold, up to a limit of the nationwide average premium of all "bronze" level health plans available to the taxpayer's age and household size. (49) One estimate posits that by 2016, the maximum penalty will reach $7,779 for a single fifty-five year old and $18,085 for a family of four with a fifty-five year-old head of household. (50)

The Act exempts taxpayers from that penalty if coverage is deemed not "affordable," defined as when the "required contribution" to the cost of health insurance exceeds roughly 8 percent of household income. (51) In the case of a household that does not have an offer of "minimum value" and "affordable" coverage from an employer, the "required contribution" is the difference between the premium for the lowest-cost plan available to the household through an Exchange, and any premium-assistance tax credit for which the household is eligible. (52)

Importantly, the mere fact that a taxpayer is eligible for premium-assistance tax credits will deprive many taxpayers of this "affordability" exemption. Mere eligibility for a tax credit will bring the individual's "required contribution" below 8 percent of household income, thereby subjecting him to penalties.

D. Tax Credits & State-Run Exchanges

The PPACA's authors envisioned that each state would have its own Exchange, operated by state officials. As President Obama explained shortly after signing the PPACA, "by 2014, each state will set up what we're calling a health insurance exchange." (53) The PPACA does not force states to create Exchanges, however. Although the Act declares that each state "shall" create an Exchange and lays out rules for state-run Exchanges, (54) it does not and could not mandate that states establish one. (55) A direct command that state governments assist in the implementation of a federal regulatory scheme would be unconstitutional commandeering. (56) If Congress believes state cooperation is necessary to facilitate the implementation of a federal program, it must create incentives for state action. The Supreme Court has explained there are "a variety of methods, short of outright coercion, by which Congress may urge a State to adopt a legislative program consistent with federal interests." (57) Among other things, the federal government may offer states financial assistance or threaten to implement the program directly if the state refuses to participate. (58) The use of such incentives to induce state cooperation is often referred to as "cooperative federalism" (59) and is quite common. In the PPACA, Congress used such "cooperative" measures to encourage state creation of Exchanges.

Though the Act provides that states "shall" create their own exchanges, it actually gives states a choice. Section 1311 declares, "Each State shall, not later than January 1, 2014, establish an American Health Benefit Exchange (referred to in this title as an 'Exchange')" and lays out rules for state-run Exchanges. (60) If a state fails to create an Exchange under Section 1311, the Act directs the federal Department of Health and Human Services to create an Exchange for that state. (61) Specifically, Section 1321 requires the HHS Secretary to "establish and operate" an Exchange within any state that either fails to create an Exchange or fails to implement the PPACA's health insurance regulations to the Secretary's satisfaction. Section 1321 thus requires a federal "fallback" for states that do not create Exchanges of their own.

As noted above, the PPACA provides tax credits for the purchase of qualifying health insurance plans on such Exchanges. Specifically, Section 1401 adds a new Section 36B to the Internal Revenue Code that authorizes refundable "premium assistance tax credits" for the purchase of qualifying health insurance plans in Exchanges established by states under Section 1311. (62) These are "refundable" tax credits, meaning that in many cases the credit does not just reduce tax liability but also results in government outlays to private insurance companies. (63) Section 1402 also authorizes "cost sharing", subsidies for the purchase of health insurance plans on Exchanges. Congress designed these subsidies to help lower-income households obtain more comprehensive coverage. (64) Section 1402 makes these direct outlays available only where tax credits are available--i.e., through state-run Exchanges. (65)

III. THE IRS RULE

On August 17, 2011, the IRS proposed a regulation to implement Section 36B that would offer premium assistance tax credits through federal Exchanges. As proposed by the IRS, the rule provided that
   a taxpayer is eligible for the credit for a taxable year if ... the
   taxpayer or a member of the taxpayer's family (1) is enrolled in
   one or more qualified health plans through an Exchange established
   under section 1311 or 1321 of the Affordable Care Act.... (66)


If the tax credits authorized by Section 1401 are to be available without regard to whether an insurance plan is purchased through a state-run (Section 1311) or federal Exchange (Section 1321), the same will be true for cost-sharing subsidies, which Section 1402 makes available wherever tax credits are available. Because the receipt of tax credits or cost-sharing subsidies by workers triggers tax penalties against employers, another result of the rule is that it taxes employers who otherwise would be exempt from PPACA's employer mandate--i.e., employers in states that decline to create an Exchange. Because the availability of tax credits will reduce the "required contributions" of many taxpayers from above 8 percent of household income to below that threshold, the rule also taxes many individuals who would otherwise be exempt from the individual mandate and denies even more individuals access to low-cost "catastrophic plans"--individuals in states that decline to create an Exchange.

The proposed rule did not identify any specific statutory authority for the extension of tax credits and cost-sharing subsidies, or the imposition of the individual and employer mandates on exempt persons, through federal Exchanges. And indeed, the plain text of the PPACA does not authorize these actions in federal Exchanges. The rule thus amends the tax code by offering tax credits and subsidies not authorized by the statute and by taxing individuals and employers whom the statute does not authorize the IRS to tax. The IRS's decision to offer tax credits in federal Exchanges, and its rationale for that decision, are departures from the agency's strict adherence to the plain meaning of the statute concerning far less consequential matters. (67)

Ironically, tax reduction is only a minor part of the tax-credit rule's impact. By far, the rule's largest effect is to increase federal spending. Because the tax credits are "refundable" (i.e., individuals with no tax liability receive the benefit of a cash payout from the IRS) and the cost- sharing subsidies are federal payments that also flow directly to private health insurance companies, the rule also appropriates federal dollars without statutory authority. Those expenditures completely swamp any tax reduction. Official projections show 78 percent of the budgetary impact of the tax credits and cost-sharing subsidies is new spending, with tax reduction accounting for just 22 percent. (68) Net of revenue from the employer-mandate penalties that those tax credits will trigger, new spending accounts for roughly 90 percent of the rule's budgetary impact, and tax reduction just 10 percent. (69) Roughly speaking, for every two dollars of tax reduction, the rule triggers one dollar in immediate tax increases and eight dollars of deficit spending. Since every dollar of deficit spending must eventually be financed through taxes, taxpayers will bear the burden of those eight dollars of deficit spending as well.

The actual cost of the rule cannot be known with certainty, as it depends on how many and which states ultimately decline to create an Exchange or to implement the law's Medicaid expansion. But its cost is certainly larger than a routine IRS rule. (70) Given that the thirty-four states that have opted not to establish an Exchange account for two-thirds of the US population, (71) CBO projections through 2023 suggest the IRS rule is thus likely to result in more than $600 billion of unauthorized spending, $178 billion of unauthorized tax reduction, more than $100 billion in unauthorized taxes, and to increase federal deficits by some $700 billion. (72)

After the rule was proposed, commentators and several members of Congress raised concerns about the IRS' apparent lack of statutory authority. (73) In response, IRS officials and representatives of both the Treasury and HHS Departments insisted such authority was in the Act yet cited no specific provisions in support. (74) A Treasury Department spokeswoman said the Department is "confident that providing tax credits to all eligible Americans, no matter where they live and whether their state runs the exchange, is consistent with the intent of the law and our ability to interpret and implement it." (75)

On November 3, 2011, two dozen members of the House of Representatives wrote IRS Commissioner Douglas H. Shulman a letter arguing that the proposed rule "contradicts the explicit statutory language describing individuals' eligibility for receipt of these tax credits." (76) On November 29, Shulman responded:
   The statute includes language that indicates that individuals are
   eligible for tax credits whether they are enrolled through a
   State-based Exchange or a Federally-facilitated Exchange.
   Additionally, neither the Congressional Budget Office score nor the
   Joint Committee on Taxation technical explanation of the Affordable
   Care Act discusses excluding those enrolled through a
   Federally-facilitated exchange. (77)


On November 29, the Department of Health and Human Services offered a similar defense:
   The proposed regulations ... are clear on this point and supported
   by the statute. Individuals enrolled in coverage through either a
   State-based Exchange or a Federally-facilitated Exchange may be
   eligible for tax credits ... Additionally, neither the
   Congressional
   Budget Office score nor the Joint Committee on Taxation technical
   explanation discussed limiting the credit to those enrolled through
   a State-based exchange. (78)


Despite the public concerns about the proposed regulations, the IRS stayed the course. Late in the afternoon on Friday, May 18, 2012, (79) the IRS issued a final rule adopting its proposal without significant change. (80) The agency claimed its decision was supported by legislative intent, if not the actual language of the Act:
   The statutory language of section 36B and other provisions of the
   Affordable Care Act support the interpretation that credits are
   available to taxpayers who obtain coverage through a State
   Exchange, regional Exchange, subsidiary Exchange, and the
   Federally-facilitated Exchange. Moreover, the relevant legislative
   history does not demonstrate that Congress intended to limit the
   premium tax credit to State Exchanges. Accordingly, the final
   regulations maintain the rule in the proposed regulations because
   it is consistent with the language, purpose, and structure of
   section 36B and the Affordable Care Act as a whole. (81)


On October 12, 2012, the Treasury Department offered this explanation of the rule in response to a request from the chairman of the House Committee on Oversight and Government Reform:
   We interpreted the statutory language in context and consistent
   with the purpose and structure of the statute as a whole, pursuant
   to longstanding and well-established principles of statutory
   construction. For example, ACA section 1311 refers to an exchange
   being "established by a State." Congress provided in section 1321,
   however that where a state was not proceeding with an exchange, HHS
   would establish and operate "such Exchange within the State,"
   making a federally-facilitated exchange the
   equivalent of a state exchange in all functional respects.
   Moreover, throughout the ACA, Congress refers to the exchanges as
   "exchanges," "exchanges established by a state," and "exchanges
   established under the ACA." There is no discernible pattern that
   suggests Congress intended the particular language in section
   36B(b)(2)(A) to limit the availability of the tax credit.

   In addition, the information reporting requirements of section
   36B(f)(3) apply to exchanges under both ACA sections 1311 and 1321.
   This requirement relates to the administration of the premium tax
   credit. The placement of this provision in section 36B and the
   information required to be reported--including information related
   to eligibility for the credit and receipt of advance
   payments---strongly suggests [sic] that all taxpayers who enroll in
   qualified health plans, either through the federally-facilitated
   exchange or a state exchange, should qualify for the premium tax
   credit. Our interpretation is consistent with the explanation of
   the ACA released by the non-partisan Congressional Joint Committee
   on Taxation and with the assumptions made by the Congressional
   Budget Office in estimating the effects of the ACA. (82)


An October 25, 2012, letter from the Treasury Department to the chairman reiterated these points and added:
   On September 19, 2012, the Oklahoma Attorney General amended an
   existing civil lawsuit in the Eastern District of Oklahoma to
   include claims challenging Treasury regulations promulgated under
   section 36B. We disagree strongly with these claims, and we intend
   to defend the lawsuit vigorously. Ultimately, however, it will be
   up to the courts to determine the proper interpretation of section
   36B.... (83)


These statements are notable for what they do not include. Neither agency has identified any statutory language expressly authorizing the IRS to issue tax credits through federal Exchanges or authorizing the IRS to do so via regulation. For more than a year since the IRS's interpretation was first questioned, these agencies failed to cite any statutory language in support of the rule. Instead, the IRS claimed various unidentified provisions of the law "support" its interpretation, that its rule is "consistent with" the Act, and that the "relevant" legislative history does not contradict its interpretation. In October 2012, Treasury officials ultimately cited a provision of the statute that they claim supports that interpretation, yet did not claim that interpretation is compelled by the text of the PPACA.

IV. TEXT, LEGISLATIVE HISTORY, AND CONGRESSIONAL INTENT

Notwithstanding the Treasury Department's recently articulated legal theory, the IRS rule lacks statutory authority. The text of the PPACA does not authorize the IRS to offer tax credits through federal Exchanges. The plain text of the Act precludes it. Section 1401's language restricting tax credits to states that establish an Exchange under Section 1311 is clear and unambiguous. Nor can the rule be justified on other grounds. The IRS's position is not supported by the structure of the statute, its legislative history, or other indicia of congressional intent. (84) The remainder of the statute, along with the Act's legislative history, shows that this restriction was intentional and purposeful and that the plain meaning of Section 1401 reflects Congress' intent. The PPACA's authors strongly preferred state-run Exchanges over federal Exchanges, the statute repeatedly uses financial incentives to encourage states and others to comply with the Act's regulatory scheme, and the idea of conditioning tax credits on states creating Exchanges was part of this debate from the beginning. Both of the PPACA's antecedent bills thus contained the feature of withholding subsidies from residents of uncooperative states. The PPACA's authors knew how to provide for Exchanges established by different levels of government to operate similarly and did so when that was their intent. Similarly, they knew how to authorize tax credits in Exchanges established by levels of government other than the states, which they also did when that was their intent. During congressional consideration, the PPACA's lead author affirmed that the law conditions tax credits on states establishing Exchanges. In addition, the legislative history strongly suggests that House Democrats were aware of this feature before they approved the PPACA. While PPACA supporters in the House and Senate closely scrutinized and repeatedly amended Section 1401 through the HCERA, they left intact the relevant provisions. Finally, even if the foregoing evidence demonstrating that Section 1401 accurately reflects congressional intent did not exist, PPACA supporters' approval of this text reveals that their intent was indeed to enact a bill that restricts tax credits to state-run Exchanges. At no point have defenders of the rule identified anything in the legislative history that contradicts the plain meaning of Section 1401.

Professor Timothy Jost has argued the provisions restricting tax credits to state-run Exchanges "clearly say what Congress clearly did not mean." (85) On the contrary, the PPACA's authors clearly meant what the statute clearly says.

A. Plain Text

The starting point for statutory interpretation is the statute's text. (86) As noted above, the PPACA authorizes two methods for establishing an Exchange within a state. Section 1311 provides that "Each State shall, not later than January 1, 2014, establish an American Health Benefit Exchange (referred to in this title as an 'Exchange')" and provides rules for state-run Exchanges. (87) For purposes of Section 1311, the Act specifically requires that an Exchange must be "a governmental agency or nonprofit entity that is established by a State." (88) Section 1304(d) clarifies, "In this title, the term 'State' means each of the 50 States and the District of Columbia." (89)

Section 1321 requires the federal government to create an Exchange in states that elect not to create their own. Specifically, if a state either fails to create an Exchange or fails to implement the PPACA's health insurance regulations to the Secretary's satisfaction, Section 1321 requires the HHS Secretary to "establish and operate such Exchange." Section 1321 thus requires a federal "fallback" for states that do not create Exchanges of their own. State-run Exchanges created under Section 1311 and federal fallback exchanges created under Section 1321 are distinct.

Section 1401 authorizes premium-assistance tax credits and makes them available only through state-run Exchanges. This section specifies that taxpayers may receive a tax credit only during a qualifying "coverage month," which occurs only when "the taxpayer is covered by a qualified health plan ... that was enrolled in through an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act." (90) By its express terms, this provision only applies to Exchanges "established by a state" and "established ... under Section 1311." Section 1401 further emphasizes that tax credits are available only through Section 1311 Exchanges when it details the two methods for calculating the amount of the credit. The first method bases the amount on the premiums of a qualified health plan that the taxpayer "enrolled in through an Exchange established by the State under [Section] 1311 of the Patient Protection and Affordable Care Act." (91) The second method bases the amount on the premium of the "second lowest cost silver plan ... which is offered through the same Exchange through which the qualified health plans taken into account under [the first method] were offered." (92) Both methods therefore require that taxpayers obtain coverage through a state-run Exchange. The second method also relies on the concept of an "adjusted monthly premium," which only applies to "individual[s] covered under a qualified health plan taken into account under paragraph (2)(A)" (93)--i.e., "through an Exchange established by the State under [Section] 1311." (94)

These clauses carefully restrict tax credits to state-created Exchanges. They either employ or refer to not one but two limiting phrases: "by the State" and "under Section 1311." Either phrase by itself would have been sufficient to limit availability of tax credits to state-run Exchanges as (1) states can only establish Exchanges under Section 1311 and (2) that section provides no authority for any other entity to establish Exchanges. (95) The repeated use of both phrases makes the meaning and effect of the language abundantly clear. (96)

Indeed, Section 1401 either employs or refers to this restrictive language a total of seven times. (97) Even though the appearance of those phrases in the definition of "coverage month" is sufficient to restrict tax credits to state-run Exchanges, every reference to Exchanges in Section 1401's tax-credit eligibility rules is to an Exchange "established by the State under section 1311." The Act contains no parallel language authorizing tax credits in Exchanges established by the federal government under Section 1321. Nor does it contain language authorizing the IRS to issue tax credits through the "functional equivalent" of a Section 1311 Exchange.

Courts are to "give effect, if possible, to every clause and word of a statute, avoiding, if it may be, any construction which implies that the legislature was ignorant of the meaning of the language it employed." (98) To treat federal fallback Exchanges as equivalent to state Exchanges established under Section 1311 is to ignore the PPACA's repeated reference to Exchanges "established by the State" and render this latter language into mere surplusage. (99) Further, as Professor James Blumstein notes, under the familiar canon of expressio unius est exclusio alterius, "the ACA's granting of subsidies for income-qualified enrollees under state exchanges established under Section 1311 is to be construed not to grant comparable subsidies for income-qualified enrollees under federal exchanges established under Section 1321." (100)

The painstaking repetition of the phrase "established by the State" makes the plain meaning of the statute abundantly clear. As the Congressional Research Service has written,
   a strictly textual analysis of the plain meaning of the provision
   would likely lead to the conclusion that the IRS's authority to
   issue the premium tax credits is limited only to situations in
   which the taxpayer is enrolled in a state-established exchange.
   Therefore, an IRS interpretation that extended tax credits to those
   enrolled in federally facilitated exchanges would be contrary to
   clear congressional intent, receive no Chevron deference, and
   likely be deemed invalid. (101)


Section 1402 authorizes cost-sharing subsidies for "an individual who enrolls in a qualified health plan ... offered through an Exchange." (102) This language would appear more inclusive. But Section 1402 also stipulates that "[n]o cost-sharing reduction shall be allowed under this section with respect to coverage for any month unless the month is a coverage month with respect to which a [premium assistance tax] credit is allowed to the insured...." (103) In other words, Section 1402 explicitly and exclusively ties cost-sharing subsidies to premium-assistance tax credits, which Section 1401 explicitly and exclusively ties to state-run Exchanges created under Section 1311.

There is a discernible pattern here. Congress tightly crafted the eligibility rules for premium-assistance tax credits and cost-sharing subsidies so that they would be conditioned on each state's implementation of an Exchange. The statute provides no authority for the IRS to offer either entitlement through federal Exchanges created under Section 1321. Because cost-sharing subsidies are available only where premium-assistance tax credits are available, the discussion below will focus primarily on tax credits.

The remainder of the statute shows this choice was intentional. Section 1421 authorizes tax credits for certain small businesses that offer to make "a nonelective contribution on behalf of each employee who enrolls in a qualified health plan offered to employees by the employer through an exchange." (104) Just as the eligibility rules for premium-assistance tax credits consistently refer to Exchanges "established by a State under section 1311," Section 1421 also uses consistent language when referring to Exchanges in the rules governing small-business tax credits. The word "exchange" appears four times in Section 1421. Each reference is to "an exchange," a phrase that encompasses both state-created Exchanges (Section 1311) and federal Exchanges (Section 1321). The contrast between Sections 1401 and 1421 reinforces the plain meaning of the language limiting premium-assistance tax credits to Exchanges "established by the State under section 1311." As surely as the PPACA makes small-business tax credits available through both state-established and federal Exchanges, it offers premium-assistance tax credits solely through the former.

B. Preference for State-Run Exchanges

The language, structure, legislative history, and congressional debate over the PPACA demonstrate that its authors preferred state-run Exchanges to federal Exchanges. From the outset, the Act directs states to establish Exchanges, and many of the PPACA's supporters presumed that all states would create Exchanges of their own.

The text of the PPACA suggests that Congress sought universal state cooperation. Section 1311(b) provides that "each state shall ... establish an American Health Benefit Exchange" by 2014. (105) The Act further details various requirements state-run Exchanges must meet. This was not accidental. The Senate Finance Committee, where the relevant PPACA language originated, wrestled with the question of whether states or the federal government should take the lead in creating Exchanges. A November 2008 "white paper" issued by Chairman Max Baucus (D-MT) endorsed a single, federal Exchange: "The Baucus plan would ensure that every individual can access affordable coverage by creating a nationwide insurance pool called the Health-Insurance Exchange." (106) The committee subsequently heard testimony from a broad coalition endorsing state-run rather than federal Exchanges. (107) When Sen. Baucus introduced his "Chairman's Mark" in September 2009, it directed states to establish Exchanges and provided for a federal fallback Exchange. (108) Advocates of state-established Exchanges prevailed in the Finance Committee and later in both chambers of Congress. It is unlikely that the PPACA would have passed the Senate without this provision. (109)

The congressional debate over the PPACA and its antecedents correspondingly emphasized state-run Exchanges over federal Exchanges. We surveyed eight Senate committee hearings and markups, (110) the Finance Committee Chairman's Mark of the America's Healthy Future Act of 2009, (111) and the House and Senate floor debates over the PPACA. (112) In those venues, Democratic members of Congress and their staffs made 117 references to "state Exchanges" or state-established Exchanges, three references to federal Exchanges, and 359 non-specific references to Exchanges. Republican members of Congress, all of whom opposed the PPACA, mentioned state or state-established Exchanges forty-one times and federal Exchanges seven times in these venues. The emphasis on state-run Exchanges reflects the PPACA's emphasis. When Republicans spoke of federal Exchanges, it was typically to raise the specter of a federal takeover of health care--a specter that PPACA supporters downplayed by emphasizing that Exchanges would be created and run by the states, (113) Further reflecting the Act's preference for state-run Exchanges, the Joint Committee on Taxation's technical explanation of the revenue provisions in the PPACA and HCERA made fifteen references to state Exchanges, zero references to federal Exchanges, and fifty-one non-specific Exchange references. (114)

C. Financial Incentives

Further evidence of this preference is that the PPACA's authors created large financial incentives to encourage states to establish Exchanges. The Act authorizes the Secretary of Health and Human Services to provide unlimited funding for states to cover the start-up costs of establishing Exchanges. (115) As of January 2013, the Secretary had issued a total of $3.526 billion in Exchange grants to states. (116) The Secretary has announced these "start-up" grants will be available through 2019. (117) In contrast, the PPACA's authors failed to authorize any funding for HHS to create federal Exchanges. (118) Unlimited start-up grants and a lack of funding for federal Exchanges appear not only in the PPACA but also in both antecedent bills reported by the Finance and HELP committees. (119)

Making credits and subsidies available solely through state-run Exchanges is consistent with the PPACA's modus operandi of using financial incentives to elicit a desired behavior. Under the Act, individuals who fail to obtain health insurance must pay a penalty. Large employers that fail to offer required health benefits likewise must pay a penalty.

Many statutes seek to encourage state cooperation by threatening to cut off funding to recalcitrant states. (120) The PPACA contains this feature in other provisions such as the Medicaid expansion. (121) Under the Act as passed, states that failed to expand their Medicaid programs to those below 138 percent of the federal poverty level would have lost all federal Medicaid grants, which account for 12 percent of state revenues. (122) The Act imposes a "maintenance of effort" requirement on states' Medicaid programs that only lifts upon certification of an Exchange "established by the State under section 1311."

States that opt to establish an Exchange may receive unlimited start-up funds from HHS if, "as determined by the Secretary," the state makes adequate progress toward establishing an Exchange, implements other parts of the Act, and "meet[s] such other benchmarks as the Secretary may establish." (123) This feature-conditioning the continued availability of start-up funds on state cooperation--appears in the HELP committee bill as well. (124) It is hardly a departure for the Act to condition the availability of tax credits and cost-sharing subsidies on state cooperation.

The language in Sections 1401 and 1402 restricting credits and subsidies to state-created Exchanges is more than just consistent with the rest of the Act. It is integral to Section 1311's directive that states "shall" create an Exchange. Because it likely creates a larger financial incentive than the Medicaid "maintenance of effort" requirement, it is the primary sanction imposed on states that do not establish Exchanges. (125) It thus animates Section 1311's "shall." To ignore it as the IRS has would sap that directive of most of its force.

As noted above, the federal government cannot actually force states to create Exchanges, as this would constitute unconstitutional commandeering. (126) The federal government can, however, utilize a combination of positive and negative incentives to induce state cooperation--in this case, subsidies for creating Exchanges and the threat of a federally run Exchange if a state does not create its own.

Such incentives are common. Various federal programs, including Medicaid, condition the receipt of federal funding on state acceptance of the federal government's conditions. (127) In this context, limiting the availability of tax credits to insurance purchased in state-run Exchanges can be seen as just one more inducement for state cooperation: the PPACA threatens states with the loss of tax credits for state residents if they do not create an Exchange. (128)

This idea of using conditional tax credits to avoid the commandeering problem was also part of the health care reform debate well before PPACA supporters first introduced any legislation. In early 2009, Professor Jost wrote:
   Congress cannot require the states to participate in a federal
   insurance exchange program by simple fiat. This limitation,
   however, would not necessarily block Congress from establishing
   insurance exchanges. Congress could invite state participation in a
   federal program, and provide a federal fallback program to
   administer exchanges in states that refused to establish complying
   exchanges. Alternatively it could exercise its Constitutional
   authority to spend money for the public welfare (the "spending
   power"), either by offering tax subsidies for insurance only in
   states that complied with federal requirements (as it has done with
   respect to tax subsidies for health savings accounts) or by
   offering explicit payments to states that establish exchanges
   conforming to federal requirements. (129)


D. Antecedent Bills

Both the Finance bill and the HELP bill withheld subsidies from taxpayers whose state governments failed to establish an Exchange or otherwise failed to implement the bills' requirements.

The PPACA's closest antecedent was the Finance Committee-reported "America's Healthy Future Act of 2009" (S. 1796). (130) The relevant language in the PPACA is nearly identical to that of the Finance bill. Indeed, the four ways Section 1401 confines tax credits to state-run Exchanges appear almost verbatim in the Finance bill. (131)

The HELP bill even more explicitly withheld credits in states that failed to implement its requirements, and it employed that strategy to encourage state cooperation even if the federal government created the Exchange. If a state sought to establish its own "Gateway" (i.e., Exchange) then the HELP bill provided that "any resident of that State who is an eligible individual shall be eligible for credits"--but only after the Secretary determined that the state had (1) created a qualified Gateway, (2) enacted legislation imposing various health insurance regulations on the state's individual and small-group markets, and (3) enacted legislation subjecting its state and local governments to the bill's employer mandate. If a state failed to meet these criteria, its residents would be ineligible for credits. (132) When an "establishing state" fell out of compliance, the HELP bill went so far as to revoke credits that state residents had already been receiving. (133)

If a state formally requested that HHS establish a Gateway for the state (such states were called "participating states"), the HELP bill authorized the federal government to do so and authorized credits within the federal Gateway. But the bill again withheld those credits if the state failed to satisfy (2) or (a).

If state officials opted neither to be an "establishing state" nor a "participating state," then the HELP bill again authorized the federal government to create a Gateway for the state, authorized credits within that federal Gateway, imposed the bill's health insurance regulations on the state, and deemed the state to be a "participating state." However, the bill still withheld credits unless state officials complied with (3) as well. (134)

This history demonstrates that restricting tax credits to state-run Exchanges was a deliberate policy choice. The authors of these provisions sought to limit the availability of credits to state-run Exchanges. The PPACA, the Finance bill, and the HELP bill all explicitly withheld credits from individuals as a means of encouraging state officials to implement the law. None of the three bills allowed residents of a state to receive credits absent cooperation by state officials. Some PPACA supporters may have preferred to provide tax credits for the purchase of health insurance in federally run Exchanges, but other proponents felt otherwise. It is the latter group that prevailed.

E. Authorial Intent

Statements by one of the PPACA's primary authors, Senate Finance Committee Chairman Max Baucus, provide additional evidence that the language of Section 1401 conditioning tax credits on a state establishing an Exchange was no accident.

During Finance Committee deliberations over the Baucus bill, which became the PPACA without pertinent alteration, Sen. John Ensign (RNV) asked Baucus, "How do we [in this committee] have jurisdiction over changing state laws on coverage," such as through the bill's requirements that states establish Exchanges and adopt the bill's insurance regulations, when such matters are "only in the jurisdiction of the HELP Committee and not in the jurisdiction of this committee?" Baucus responded that the bill conditions the availability of tax credits on states complying with those directives. (135) Specifically, Senator Baucus explained that the requirements Ensign mentioned are among the "conditions to participate in the Exchange," and that "an Exchange ... essentially is tax credits," which "are in the jurisdiction of this committee." (136) In other words, the reason the Finance Committee could impose requirements on state-run Exchanges was because tax credits were conditional on state compliance.

Conditioning the tax credits on state compliance provided the jurisdictional hook the Committee needed to direct states to create Exchanges and otherwise alter their health insurance laws. If the Finance Committee bill had authorized tax credits in both state-run and federal Exchanges, then the Committee would not have had jurisdiction to impose regulatory requirements on state-run Exchanges. The operation of state Exchanges would have been outside the Committee's bailiwick and arguably immune from federal oversight altogether. (137) The fact that Section 1401 provided the Finance Committee this jurisdictional hook further demonstrates that the PPACA's authors intentionally restricted tax credits to state-run Exchanges.

It is irrelevant that the need for that jurisdictional hook evaporated when the Finance bill cleared committee or that other members of Congress may have preferred a different outcome. The text that the Finance Committee approved is the text that the House and Senate passed and that the president signed. Nor is it plausible to argue the IRS rule is justified because congressional intent subsequently changed; the language did not. (138)

In our extensive search of the PPACA's legislative history, this comment by Sen. Baucus is the only instance we found of a member of Congress discussing whether tax credits would be available in federal Exchanges. Like all other relevant aspects of the legislative history, it flatly contradicts the IRS's position. In contrast, the IRS and its defenders have identified nothing from the legislative history that supports the IRS rule. Senator Baucus's own words show both that the plain meaning of Section 1401 accurately reflects congressional intent and that the IRS rule undermines congressional intent by discouraging states from creating Exchanges.

F. Non-Equivalence

Further evidence that the plain meaning of Section 1401 reflects congressional intent is that PPACA supporters knew how to craft language ensuring that Exchanges created by different levels of government would operate identically, yet opted not to create such equivalence with respect to the availability of tax credits in state-run versus federal Exchanges.

Contrary to the Treasury Department's claim that the Act makes "a federally-facilitated exchange the equivalent of a state exchange in all functional respects," the Act does not provide that an Exchange established by the federal government under Section 1321 is a Section 1311 Exchange, shall be considered a Section 1311 Exchange, or is functionally equivalent to a Section 1311 Exchange. Instead, Title I of the Act imposes various requirements on state-created Exchanges which Section 1321 incorporates and imposes on federal Exchanges by reference. First, Section 1321(a) mentions "the requirements under tiffs title ... with respect to the establishment and operation of Exchanges ... and such other requirements as the Secretary determines appropriate." (139) Section 1321(e) then provides that if a state either fails to create an Exchange or to implement the Act's health insurance regulations to the Secretary's satisfaction, "the Secretary shall ... establish and operate such Exchange within the State and ... take such actions as are necessary to implement such other requirements." Section 1321 does not deem Exchanges established by the federal government to have been established under Section 1311. It takes the requirements imposed on state-created Exchanges and incorporates them into Section 1321. Section 1311 and Section 1321 remain distinct.

Nor does Section 1321 create full equivalence between Exchanges established by the federal government and those established by states. Section 1321 instead imposes on federal Exchanges the same requirements that Title I imposes on state-created Exchanges. Those requirements include the eligibility restrictions (contained in Section 1401) that Title I imposes on premium-assistance tax credits. In no way does Section 1321 alter or conflict with those restrictions.

Moreover, the language of Section 1321 is a far cry from the explicit Exchange-equivalence language found in the health care bills Congress rejected and elsewhere in the PPACA. The House-passed "Affordable Health Care for America Act" (H.R. 3962), for example, created a single federal Exchange for all states and allowed states to opt out by creating their own Exchanges. To ensure that certain aspects of state-run and federal Exchanges would operate in an identical manner, H.R. 3962 contained the following language: "any references in this subtitle to the Health Insurance Exchange or to the Commissioner in the area in which the State-based Health Insurance Exchange operates shall be deemed a reference to the State-based Health Insurance Exchange and the head of such Exchange, respectively." (140)

The HELP bill likewise contained explicit equivalence language: "A Gateway shall be a governmental agency or nonprofit entity that is established by a State, in the case of an establishing State ...; or the Secretary, in the case of a participating State[.]" (141) Even with this language, as discussed above, the HELP bill allowed for state and federal Gateways to function differently based on a state's level of cooperation, as it explicitly withheld subsidies in non-compliant states.

The PPACA contains full-equivalence language, but not with regard to federal Exchanges. The Act provides that Exchanges established by US territories shall be fully equivalent to state-run Exchanges. Section 1323, as added by HCERA, provides that "[a] territory that elects ... to establish an Exchange in accordance with part II of this subtitle"--Part II includes Section 1311, but not Section 1321--"and establishes such an Exchange in accordance with such part shall be treated as a State for purposes of such part[.]" (142) Section 1323 also explicitly authorizes and appropriates funds for "premium and cost-sharing assistance to residents of the territory obtaining health insurance coverage through the Exchange[.]" (143) This language shows PPACA supporters knew how to create full equivalence between Section 1311 Exchanges and other Exchanges, particularly with regard to tax credits and cost-sharing subsidies, when that was their intent. Congress created full functional equivalence for Exchanges established by federal territories but not for exchanges established by the federal government. (144)

The HCERA also added information-reporting requirements to the Act. (145) These provisions explicitly require both Section 1311 Exchanges and Section 1321 Exchanges to report an array of information pertaining to the purchase of health insurance plans, including the level of coverage purchased, identifying information about the purchaser, the premium paid, and the amount of any advance payments of tax credits and cost-sharing subsidies.

Supporters of the IRS rule maintain these reporting requirements show that Congress sought to make federal and state-run Exchanges equivalent with respect to tax credits. (146) The Treasury Department writes, "The placement of this provision in section 36B and the information required to be reported ... strongly suggests [sic] that all taxpayers who enroll in qualified health plans, either through the federally-facilitated exchange or a state exchange, should qualify for the premium tax credit." (147) Professor Jost writes, "In this later-adopted legislation amending the earlier-adopted ACA, Congress demonstrated its understanding that federal exchanges would administer premium tax credits." (148) Alternatively, supporters of the IRS' position maintain this reporting requirement introduces sufficient ambiguity to permit the IRS to resolve the claimed ambiguity by offering tax credits in federal Exchanges. (149)

To the contrary, these reporting requirements do not suggest, let alone require, that state-created and federal Exchanges are functionally equivalent with respect to tax credits. These requirements support, rather than undermine, the plain meaning of Section 1401. They likewise advance the Act's goal of encouraging states to create Exchanges. Nothing about these requirements suggests that Congress erred in limiting tax credits and subsidies to the purchase of health insurance in state-run exchanges.

This reporting requirement expressly refers to both state-run Exchanges (Section 1311) and federal Exchanges (Section 1321). This shows that Congress knew to mention both Sections where that was their intent--something Congress did not do when authorizing tax credits. (150) To the extent this paragraph creates equivalence between state-run and federal Exchanges, that equivalence extends only so far as the paragraph's information-reporting requirement. (151)

The reporting requirement is clear and straightforward. The paragraph refers to "the credit under this section" a total of four times. Since this paragraph resides in Section 36B, which authorizes tax credits solely in Exchanges "established by the state under section 1311," it plainly requires federal Exchanges to report zero advance payments.

There are valid reasons why Congress would require federal Exchanges to report that and other information about their enrollees. First, imposing these reporting requirements on both types of Exchanges serves to ensure a degree of uniformity in the information provided to the federal government. That not every requirement would seem equally applicable to both state and federal Exchanges is not anomalous. It is easier for Congress to draft and enact a single set of reporting requirements than to enact two separate provisions. Second, applying these reporting requirements to federal Exchanges enables those Exchanges and the Treasury Secretary to notify individual taxpayers of the tax credits for which they would become eligible and to publicize to state officials the number of taxpayers who would benefit if the state were to establish its own Exchange. The reporting requirement thus advances the PPACA's goal of encouraging states to establish Exchanges. Finally, it was necessary for Congress to state explicitly that these requirements would apply to both state-created and federal Exchanges. Since Section 1401 precludes tax credits in federal Exchanges, administrators of federal Exchanges might otherwise think that Congress did not want them to compile and report that information.

The text of the reporting requirements even allows that tax credits would not be available through federal Exchanges. The paragraph provides that state and federal Exchanges must provide information about "any" tax credits an individual receives. "Any," as used here, is conditional. That an Exchange is obligated to report "any" advance payments made means that if such payments are made they must be reported. It does not suggest, let alone require, that such payments will be made in all entities covered by the provision any more than this language suggests that all individuals who purchase insurance within Exchanges must be eligible for premium assistance.

The fact that the HCERA's authors made no changes to Section 1401's language restricting tax credits to state-run Exchanges corroborates that the plain meaning of Section 1401 accurately reflects congressional intent that state-created and federal Exchanges would not be equivalent in this respect and demonstrates that the reporting requirements are not evidence of any contrary intent. The HCERA's authors scoured Section 1401, amending it seven times (and Section 1402 five times) but left the language restricting tax credits to state-run Exchanges undisturbed. (152) It would be difficult to argue that the HCERA's authors noticed that state and territorial Exchanges were not equivalent in this respect, but somehow failed to notice the same asymmetry between state and federal Exchanges.

The plain meaning of these reporting requirements is thus consistent with the rest of Section 1401 and the overarching goals of the law, as is the directive that the Secretary "shall prescribe such regulations as may be necessary to carry out the provisions of this section." The PPACA draws absolutely no equivalence between state-run and federal Exchanges when it comes to offering tax credits. Indeed, the only time it mentions state and federal Exchanges together is when it enables the Secretary to inform people of that fact.

Another chapter of the PPACA's legislative history provides further evidence that members of Congress did not consider state and federal Exchanges under that law to be equivalent. As congressional leaders and Obama administration officials attempted to merge the House- and Senate-passed bills in late 2009 and early 2010, eleven US representatives--all Texas Democrats--authored a letter to President Obama, House Speaker Nancy Pelosi (D-CA), and House Majority Leader Steny Hoyer (D-MD) expressing their strong opposition to the Senate bill's approach to Exchanges. (153)

The letter did not explicitly address whether the bill restricted tax credits to states that established Exchanges. Yet the authors clearly saw a difference between state-created and federal Exchanges under the Senate bill. If states failed to create Exchanges, they warned, residents of those states would not "receive[] any benefit" and "millions of people will be left no better off than before Congress acted." (154)

The authors of that letter believed that under the PPACA, recalcitrant states could block the law's benefits. (155) It seems implausible that these members would say taxpayers in states with federal Exchanges would see zero benefit if they believed that state and federal Exchanges were equivalent and billions of dollars of tax credits and subsidies would flow into those states whether or not states cooperated. Nonetheless, all eleven cosigners subsequently voted for the PPACA without any modifications to the language restricting tax credits to state-created Exchanges. (156)

G. Revealed Intent

Even if--contrary to the clear language of the statute and its legislative history--supporters of the PPACA somehow shared a tacit understanding that tax credits would be available in federal Exchanges, their actions reveal that their intent was to enact a law without tax credits in federal Exchanges. Following Scott Brown's election, congressional Democrats faced two options. The first was to merge the House- and Senate-passed bills in a manner that made enough changes to secure the support of one Senate Republican, thus enabling proponents to invoke cloture on a conference report. This option was problematic. Not only was there no guarantee that Democrats could peel away one senator from the GOP bloc, but doing so could have moved the conference report far enough to the center that House Democrats likely would have rejected it. The second option was to have the House pass the PPACA, thus sending the bill directly to the president's desk, and have the House and Senate make limited amendments to the PPACA through the reconciliation process. Congressional Democrats chose the latter strategy. This was in no small part because while a "regular order" strategy would have moved the PPACA to the center to appease one or another GOP senator, the "reconciliation" strategy would move it to the left to appease House Democrats.

The PPACA's supporters thus made a quite deliberate choice to pass a bill with which none of them were completely satisfied and to use the reconciliation process to make only limited amendments because a more satisfactory conference report would have failed. They made a decision that, whatever the PPACA's remaining shortcomings, passing it with limited amendments was the best they could do under the circumstances. (157) An "imperfect" bill was better than no bill. It may well be the case that, as Professor Jost writes, "the Senate Bill was not supposed to be the final law." (158) Yet it became their only option. If what they passed was a bill without tax credits in federal Exchanges, then that is exactly what they intended. If they had sought to pass a bill authorizing tax credits in federal Exchanges, there would have been no law. If tax credits in federal Exchanges could not have passed Congress, it cannot be the law.

H. An Error of Miscalculation

The statute and the lack of any support for the IRS rule in the legislative record put defenders of the IRS rule in the awkward position of arguing that it was so obviously Congress' intent to offer tax credits in federal Exchanges that despite a year of debate over the PPACA, it never occurred to anyone to express that intent out loud. A better explanation is that the PPACA's authors miscalculated when they assumed states would establish Exchanges. As The New York Times reported, "When Congress passed legislation to expand coverage two years ago, Mr. Obama and lawmakers assumed that every state would set up its own exchange," and that "running them [would] be a herculean task that federal officials never expected to perform." (159) Prior to enactment, HHS Secretary Kathleen Sebelius proclaimed states were "very eager" to create Exchanges and predicted most would quickly do so. (160) The end result would "very much be a State-based program." (161) Shortly after signing the law, President Obama predicted, "by 2014, each state will set up what we're calling a health insurance exchange." (162) If the PPACA's failure to authorize tax credits in federal Exchanges represents an error at all, it is that miscalculation.

Such a miscalculation would be consistent with the widespread view among supporters that the public would grow to support the law over time (163) or the view that the challenge brought against the law by state attorneys general was so meritless that federal courts should sanction the challengers. (164) Having created an enormous incentive for states to establish Exchanges, it likely never occurred to some of the Act's authors that states would refuse. (165) This interpretation also explains why the PPACA authorizes no funding for HHS to create federal Exchanges. (166) Its authors did not anticipate that such funds would be necessary. (167)
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Title Annotation:Patient Protection and Affordable Care Act; Introduction through IV. Text, Legislative History, and Congressional Intent, p. 119-166
Author:Adler, Jonathan H.; Cannon, Michael F.
Publication:Health Matrix
Date:Mar 22, 2013
Words:11258
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