Yes, the Federal Exchange Can Offer Premium Tax Credits

By Timothy Stoltzfus Jost
In Health Law
September 11, 2011
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jostWhatever else the Affordable Care Act may accomplish, it has provided endless entertainment for law professors. The latest ACA kerfuffle involves the discovery by critics of the ACA of an ACA drafting error that would seem to deprive millions of uninsured Americans of tax credits to purchase health insurance and invalidate regulations recently proposed by HHS and the Treasury Department. The mistake is found in section 1401 of the ACA, which creates a new section 36B of the IRC. Two subsections of 36B ((b)(2)(A) and (c)(2)(A)(i)) suggest that premium tax credit eligibility under the ACA depends on the applicant being enrolled in a qualified health plan “through an Exchange established by the State under section 1311.” This would in turn suggest that individuals enrolled in a qualified health plan through a federal exchange established under section 1321(c) would not be eligible for premium tax credits, contrary to the recent proposed regulations.

That this is a drafting error is obvious to anyone who understands the ACA. Section 1311 of the ACA requests the states to establish American Health Benefit Exchanges and sets out the duties of the exchanges. Section 1321 of the ACA, however, provides that if a state elects not to establish and exchange or fails to do so, HHS must “establish and operate” an exchange in such a state and “take such actions as are necessary to implement” the other requirements of title I of the ACA, which includes section 1401. There is no coherent policy reason why Congress would have refused premium tax credits to the citizens of states that ended up with a federal exchange. None of the CBO reports scoring the ACA suggest that premium tax credits would only be available though 1311 state exchanges and not through 1321 federal exchanges. It is, finally, highly unlikely that the House, whose bill included only a federal exchange, would have approved a bill that only provided tax credits through state exchanges but not through the federal exchange.

No one pretends that the ACA is a model of statutory drafting. The bill, for example, contains three section 1563’s. No one intended the current ACA to become the final law. It was the Senate bill, enacted after the House bill, which was to go through conference before the final ACA was enacted. The election of Scott Brown in Massachusetts, and the adamant refusal of the Republicans to allow the legislation to become law without a supermajority in the Senate, doomed efforts to craft a final bill. Of course, major pieces of legislation are often replete with drafting errors. They are commonly followed by technical correction bills, which are often adopted by unanimous consent. If Congress were functioning as a normal deliberative governing body rather than as the legislative equivalent of trench warfare, errors in the ACA would long ago have been fixed.

But now we seem to be stuck with the textualists delight: a statute whose words clearly say what Congress clearly did not mean.

Is there a way out of this quandary? One possibility is to simply recognize that this is a drafting error. The Supreme Court has occasionally recognized that it is appropriate to exercise common sense in recognizing that “a busy Congress is fully capable of enacting a scrivener’s error into law.” Koons Buick, Pontiac, GMC, Inc. v. Nigh, 543 U.S. 50, 65 (2004) (Stevens concurring). But we do not need to rely on the courts to correct this error. Congress corrected it itself.

Four days after Congress passed the Patient Protection and Affordable Care Act, it enacted the Health Care and Education Reconciliation Act of 2010. Section 1004 of HCERA amended section 36B(f) of the IRC to impose on exchanges established under section 1311(f)(3)—that is, state exchanges—and under section 1321(c)—that is federal exchanges, the obligation to report to the IRS and to the taxpayer information regarding tax credits provided to individuals through the exchange. In this later-adopted legislation amending the earlier-adopted ACA, Congress demonstrated its understanding that federal exchanges would administer premium tax credits.

Section 36B(g) gives the Secretary of the Treasury the responsibility of issuing regulations to implement section 36B. This includes the authority to reconcile ambiguities in the statute, such as the inconsistency between subsections (b), (c), and (f) of 36B. In proposed regulations published on August 17, Treasury has proposed to recognize as eligible for premium tax credits any individual who is enrolled in a qualified health plan through an exchange and who meets other eligibility requirements, and adopts the HHS proposed definition of an exchange, which includes a federally-assisted exchange.

Under the Chevron rule, this official construction of an ambiguous statute should be accorded deference by any reviewing court. In fact, however, there will be no judicial review of this determination. It is not possible to conceive of a person who would be injured in fact by this interpretation of the rule such that they could present a case or controversy under Article III. The possibility, expressed by some, that a state official might be able to challenge the IRS rule should be put to rest by Thursday’s Fourth Circuit ruling, reaffirming long established Supreme Court precedent holding that state officials do not have the authority to serve as “roving constitutional watchdog[s].”

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25 Responses to “Yes, the Federal Exchange Can Offer Premium Tax Credits”

  1. […] regs that tracked the statutory language. Even some folks on Krugman’s side have conceded that the statute’s words “clearly say” credits are only authorized in state-established exchanges, even if they believe this is “what […]

  2. […] Timothy Jost, a prominent critic of these cases, acknowledges the tax-credit eligibility rules “clearly say” exchange subsidies are available only through state-established exchanges. Nor do any other […]

  3. […] his oped, Jost elides the fact that he has written that the PPACA ‘s subsidy eligibility rules “clearly say” subsidies are available only in states that establish […]

  4. Halbig And King: A Simple Case Of IRS Overreach

    On March 25, a three-judge panel of the D.C. Circuit heard oral arguments in Halbig v. Sebelius , one

  5. […] Jost has written, and we agree, that the statutory eligibility rules for the ACA’s premium-assistance tax credits […]

  6. […] plaintiffs to neutral observers like a Congressional Research Service to defenders of a IRS like law highbrow Timothy Jost have famous that a difference “established by a State underneath territory 1311” meant that […]

  7. […]  I’m not sure if the plaintiffs have standing – taxpayer standing is very limited. See Tim Jost’s post for a roadmap to the […]

  8. […] the statute is sloppy.  It has three section 1563s, for example, as Tim Jost has pointed out.  The section at issue in this case, the one introducing the tax subsidies, is another example of […]

  9. […] Yes, the Federal Exchange Can Offer Premium Tax Credits : Health Reform Watch […]

  10. […] Jost, a law professor at Washington and Lee University, has said that Congress essentially fixed the drafting error in another piece of legislation requiring the federal exchange to report information to the IRS and […]

  11. […] Obamacare supporters dismiss the fact that Congress originally intended for the limitation of premium assistance […]

  12. […] and Lee has been perhaps the most vocal defender of the IRS’ interpretation. And he’s consistently dismissed the challenges, suggesting that the language around subsidies represents one of the […]

  13. […] of the IRS rule, of course. Timothy Jost, a law professor at Washington & Lee University, writes that PPACA does indeed permit federally-created exchanges to issue subsidies. He claims that […]

  14. […] we first began drawing attention to the rule last year, Jost admitted the relevant provisions of the statute “clearly say” that “tax credit eligibility…depends […]

  15. […] Others, including Timothy S. Jost, a law professor from Washington and Lee University School of Law, assert that this is merely a drafting error, and one of many in the bill. To read his argument, click here. […]

  16. Erik Kengaard says:

    The words Robert Trivers used in criticizing attacks on sociobiology by Marshall Sahlins and others apply here. For more intellectually robust and rigorous logic, see Adler and Cannon, Case Western Reserve School of Law research paper.

  17. […] ACA is not a model of clear drafting, as I have noted earlier.  In addition to obvious drafting errors conceded by Cannon and Adler, the ACA contains three […]

  18. Erik Kengaard says:

    Drafting error? The plain language of 1401 reads “and which were enrolled in through an
    Exchange established by the State under 1311 of the Patient Protection and Affordable Care Act.” “by the State” is pretty plain.

  19. […] involving just poor drafting that a court can ignore or correct because it is obvious that Congress never intended to limit health care tax credits only to states where the state itself created the […]

  20. jjray says:

    “In fact, however, there will be no judicial review of this determination. It is not possible to conceive of a person who would be injured … .”

    But we all know there will be litigation. And I’ve long since stopped being amazed at what the legal community is capable of conceiving. Their collective imagination is boundless when a well-funded client walks through the door.

  21. […] ACA lawsuit waiting in the wings is a challenge to whether premium tax credits can be offered through the federal exchanges, an […]

  22. […] law.  He is also too honest for government service, for he has acknowledged that ObamaCare “clearly” does not authorize premium assistance in federal Exchanges, and that it is only […]

  23. […] tax credits will only be available through the state exchanges.  This “glitch” was arguably fixed through the later Budget Reconciliation Act, however, and the Joint Committee on Taxation and Congressional Budget Office assumed that the tax […]

  24. Jon Shields says:

    Yes, the CBO scored the premium tax credits assuming they would occur in all 50 states.

    And no, there is no conceivable reason for a federal exchange to report

    “Any information provided to the Exchange, including any change of circumstances, necessary to determine eligibility for, and the amount of, such credit”

    ““The aggregate amount of any advance payment of such credit or reductions under section 1412 of such Act”

    “Information necessary to determine whether a taxpayer has received excess advance payments”

    if no one on the federal exchange is eligible for credits or advance payments in the first place.

  25. mls says:

    I am not sure who is included in the category of “anyone who understands the ACA.” I am guessing that very few members of Congress are included. But I think what you are saying is that there is no coherent reason why someone who shares your policy perspective on the ACA would have desired the result that the statute apparently requires. But surely there were members of Congress who did not share your policy perspective and who may have favored this result for a variety of reasons (eg, to favor state exchanges, to keep costs down).

    I take it that you are not claiming that the ACA is ambiguous with regard to authorizing tax credits for policies obtained on federal exchanges (it does not), but contending that a later-enacted reporting provision creates an ambiguity where none existed before. Do you have any support for that line of analysis? Needless to say, if this is a plausible line of argument (which I tend to doubt), it could only succeed if there is no conceivable reason for the reporting provision other than the interpretation of ACA that you favor.

    Finally, with regard to the CBO scoring, CBO must have made an assumption as to whether the tax credits applied to federal exchanges. You say that there is no indication that CBO excluded the federal exchanges from the tax credits, but are you saying that CBO definitely scored these tax credits? Is there a way to determine the answer for sure?

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