A new hazard has appeared on the radar screens of Team ObamaCare. The first, and most profoundly dangerous, hazard was overcome in Florida v United States when SCOTUS ruled that the individual mandate was constitutional. None of the ancillary cases floating around posed a serious threat.
This new one, however, could be very dangerous.
In 2011, Jon Adler, a law professor, sent an eMail to his friend Michael Cannon, saying that he [Adler] thought he had spotted an error in ObamaCare that could unravel a significant portion of the law. It seems an important aspect of the implementation of the Affordable Care Act is being executed in defiance of the law’s instructions. The law says one thing and the government is doing another.
The exchanges are defined in §1311 and §1321 of the law, and their rights and duties delineated. In short, Affordable Care Act-compliant insurance policies would be offered through software “exchanges” that would act as a router between consumer and insurer, filtered for qualifications and assistance. One would go online and submit their data, and the exchange would produce a range of policies for which they qualify. The consumer would click on the policy desired, and the exchange would reveal how to directly contact the insurer offering that plan. These exchanges were to be operated in each State by that State (§1311). If a State declined to set up and operate an exchange, the federal government would establish and operate an exchange in that State (§1321). At issue are the federal subsidies for individuals buying insurance in their state’s healthcare exchanges. The plain-text language of the law stipulates that those subsidies should be allotted for plans purchased “through an Exchange established by the State under Section 1311.”
The law is being implemented such that all fifty states are offering subsidies, not just the 14 states that chose to set up a 1311-exchange. Adler contends that this is illegal behavior, and that 1311-subsidies to 1321-exchanges should be struck down. This is problematic because it would take a significant number of consumers out of the game (those who could no longer afford any policy), costing the insurer a significant revenue stream, causing post-March premium adjustments. Premiums of those carrying ObamaCare policies would spike. This would be just the latest in a seemingly unending string of unpleasant surprises – increasing public displeasure with the Affordable Care Act (and thus the Democrats who voted for it or currently support it).
It would take players out of the game because a, say, $300-a-month policy, costs the insurer ~$240-a-month, actuarially, to operate, eighty percent of revenues being conscripted to payouts on policies. Profits and overhead – to include salaries and wages – to be gleaned from the remaining twenty percent of revenues. This means that insurers are operating on a razor-thin margin, particularly at the outset. ObamaCare insurers will be cash-flow businesses for a decade or so from program enactment (March 31 2014). A significant reduction in consumers (and therefore revenues) will necessitate a re-calculation of fiscally responsible premium levels to adjust to this new reality. This could cause a further winnowing of financially-stretched consumers from ObamaCare (opting for the fines, or finding some other method of managing their healthcare), sparking another round of re-calculation and premium adjustments. Rinse and repeat. This feedback loop – what the industry calls a Death Spiral – leads inexorably to zero consumers for infinitely high-priced insurance.
Adler and Cannon wrote an op-ed to this affect in 2011. Now there are four cases challenging the subsidies in federally-run exchanges. One of them, Halbig v Sebelius, was argued in DC District Court in November of 2011 by premier litigator Michael Carvin. The government issued a barrage of motions to dismiss, ranging from standing to fuzziness of complaint. Judge Paul L Friedman brushed the motions aside, each with cause, and noted that the trial should proceed to the merits phase. He noted that the issue is of “some urgency to both sides,” and said that “I want to do it quickly.” All briefs and motions were to be filed by November and oral arguments were heard on December 3. Judge Friedman said he would enter final judgment by February 15, ideally before IRS began handing out subsidies on January 1.
The crux of plaintiffs’ argument is that Congress unambiguously defined State and Federal exchanges and then unambiguously designated State exchanges as being eligible for federal subsidies. This is important because a principle of judicial interpretation of legislation is to look at the language used in the plain-text version of the legislation written and passed by Congress, and signed into law. And there it is: “subsidies should be allotted for plans purchased through an Exchange established by the State under Section 1311.”  It is considered a priori that Congress means what it says. Here the search is for legislative intent.
The crux of government’s argument is that the federal government is acting “in the shoes” of State exchanges, and thus should be treated as such. This is important because another principle of judicial interpretation holds that an insular ruling should resonate with the law as a whole. The purpose of the Affordable Care Act is to bring full-service healthcare coverage to the uninsured, so it would be logical to subsidize the resource-challenged consumer, wherever they are found. Here the search is for internal consistency.
A side issue involves why IRS is poised to emit subsidies on January 1. It seems that President Obama issued a request to IRS that it interpret the disparate clauses as unintentionally specifying that only State exchanges are eligible, and to issue subsidies to all who financially qualify. Plaintiffs argue that this effectively changes the language of the law, and that no one but Congress is constitutionally allowed to do that.
Whoever loses in the DC District Court will undoubtedly appeal to the US DC District Court of Appeals, and that loser to the US Supreme Court. A narrow ruling on Halbig v Sebelius (that only States exchanges are eligible to authorize subsidies) will all but unravel the Patient Protection and Affordable Care Act, and a broad ruling (that subsidies be considered only on financial criteria) will further buttress its legal pedigree.
 Professor, law; director, Center for Business Law and Regulation, Case Western Reserve University.
 Director, health policy studies, Cato Institute.
 Pema Levy, The Case That Could Topple ObamaCare, in Newsweek, December 17 2013, 1505EST.
 Insurers will generate “off-book” revenues by short-term investing operating surpluses in low-risk, dependable return instruments. This will increase absolute profits without polluting ObamaCare accounting of the 80-20 rule, making it possible for insurers to participate in the first place.
 There are those who say that this was the Democrats’ idea – allow ObamaCare to collapse so as to necessitate the “Single-Payer” option – nationalized healthcare.
 Jonathan H Adler and Michael F Cannon, Another ObamaCare Glitch, in Wall Street Journal, November 16 2011.
 See, for example, Michael F Cannon, An Update on Halbig, and Other Lawsuits That Could Make the Decrepit HealthCare.gov Look Like a Hiccup, in Forbes, November 2013.