David R. Henderson  

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Cato Institute's health economist Michael Cannon is the lead economist in a legal case that takes on the IRS. The Affordable Care Act (ACA), aka Obamacare, grants tax credits to low-income people who buy health insurance in state-run exchanges. There is no provision in the the ACA for tax credits to people who buy insurance in federally-run exchanges. The IRS, though, ignored this aspect of the law and chose to grant tax credits even to people in the many states that do not have state-run exchanges.

I talked to Cannon about the case a year ago and he explained it to me. This isn't some high-level Constitutional debate about "action vs. inaction," as was the case of NFIB v. Sebelius two years ago. It's much simpler: can the IRS ignore the law?

Cannon has been having some fun lately criticizing those on the other side. In particular, he took on 48 economists who signed an amicus brief on the other side. In the brief they make the argument, which makes sense, that all three legs of the "stool" are needed for Obamacare to work. That is, Obamacare needs guaranteed issue and bans on pricing for pre-existing conditions, subsidies for low-income people to be able to afford health insurance, and a mandate that people buy health insurance. Take away that middle leg, subsidies to low-income people, they argue, and the stool collapses. The result will be a lot of low-income people, in states that don't have state exchanges, simply going without health insurance and paying the penalty, or, in Justice John Roberts's words, the "tax."

As I said, their economic argument is fine. But that's not what the suit is about. It's not about what works. It's about what the law says. The law contains no provision for subsidies for people who buy health insurance through federal exchanges.

But, argue the 48 economists, this can't make sense because Congress was aware of this and surely Congress wouldn't pass a law that doesn't make sense. In their words, "After all, a mandate to purchase insurance would be a cruel hoax if people were required to buy insurance that they cannot afford."

In short, their argument about Congressional intent seems to be that Congress would never pass a law that is a "cruel hoax." Really? Congress does that a lot. When Obama promised that if you like your health plan, you can keep your health plan, and when he promised that if you like your doctor, you can keep your doctor, that was a hoax, as is now widely admitted. I think it was cruel. Now that was admittedly Obama, not Congress, but surely it's not a stretch to reason from a former Congressman, Obama, committing a cruel hoax as President to a Congress committing a cruel hoax.

Also, as Cannon writes, "It's a pretty silly argument for anyone to make, but it's even sillier when made by economists. Well-intentioned but harmful policies are what economists study for a living."

Cannon adds:

By these economists' own definition of bad policy, however, Congress enacted even worse policy (community-rating price controls with zero protections against adverse selection) in both the CLASS Act and the markets for child-only health insurance, and enacted similarly bad policy (community rating with weak protections against adverse selection) in the non-Exchange individual market and in U.S. territories. Moreover, the potential adverse-selection effects amici describe are not out of character for a Congress that was trying to put "a gun to the head" of uncooperative states, which is what the Supreme Court found this Congress was trying to do. So their assertion that Congress would not, could not do such a thing does not fit with the available evidence.

Moreover, it turns out that you can actually check the votes on various provisions of the bill and see Congressmen and Congresswomen actually voting not to provide subsidies for those people who bought health insurance through the federal exchanges. Cannon writes:
Separate amicus briefs by the AARP and the seven congressional Democratic leaders most responsible for the PPACA, as well as a recent blog post by [Yale law professor Abbe] Gluck all acknowledge that allowing federal Exchanges to operate without subsidies was a live issue during the debate that produced the PPACA. (Fun facts: two of those seven congressional Democrats sponsored the idea. And all seven ultimately voted for it in the PPACA, though they now disavow all knowledge. They were for it, before they were against it. Another group of key congressional Democrats complained back in 2010 that the PPACA's Exchange subsidies, like the State Children's Health Insurance Program, were conditional and that states could block them. They then voted for the PPACA, yet now claim they never intended subsidies to be conditional. They were against it, before they were for it, before they were against it.)

Would the argument of these 48 economists be that they weren't conscious when they were voting? Shouldn't we assume that when people vote for something or against something, they meant to vote for something or against something?

The question does arise, though, as to why various people in Congress would vote not to give subsidies to people who buy through the federal exchanges. And there's an obvious answer: Congress wanted to give the state governments an incentive to set up state exchanges. Cannon writes:

Congress could have deemed federally established Exchanges to be "established by the State" in which they operate, if that had been Congress' intent. Indeed, that's what Congress did with respect to Exchanges established by U.S. territories. But Congress did not do so for federal Exchanges. Thus we are firm ground describing Friedman's ruling as absurd. Congress intentionally offered subsidies only in states that established Exchanges for the same reason it makes numerous categories of federal spending and tax benefits conditional on state action: to induce states to carry out federal priorities.

That incentive hasn't worked out as well as expected. But that hardly justifies the IRS acting as if it's Congress.

Note: I have provided fewer links than usual because many of the links would take you to "Darwin's Fool" rather than to the specific item cited.


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COMMENTS (9 to date)
John P. Cochran writes:

David's commentary illustrates how the ACC was crafted by Democrats (and their aids) in Congress not, not Obama, and given the 'cruel hoax', were nor really not concerned with how the negative impact, both intended and unintended, on much of the American public. They did not care. More proof that the legislation is not Obamacare, but Democare or better Demo(don't really)care.

Ted Levy writes:

Can so many professional economists be completely unaware of the teachings of Public Choice? They sound incredibly naive.

David R. Henderson writes:

@Ted Levy,
Can so many professional economists be completely unaware of the teachings of Public Choice? They sound incredibly naive.
Actually, yes. Recall the upset among many mainstream economists when Jim Buchanan won the Nobel Prize for his work in public choice. Although I guess that shows, not so much “unawareness” as disdain.

Floccina writes:
"After all, a mandate to purchase insurance would be a cruel hoax if people were required to buy insurance that they cannot afford."

Cannot afford needs to be defined.

Ben Bursae writes:
"After all, a mandate to purchase insurance would be a cruel hoax if people were required to buy insurance that they cannot afford."

Curious statement, since the SCOTUS declared that the mandate is not actually a mandate with an associated penalty but rather a tax credit for which not everyone will qualify. So, if permitted, the economists' rationale could allow the IRS to unilaterally extend all sorts of tax credits to people who otherwise (i.e., per whatever law created the tax credit) would not qualify for them.

Moebius Street writes:

The argument that "if we don't allow the IRS to do this, then ACA cannot survive" is an odd argument to make, because it cuts at least as well in the opposite direction.

If they are admitting that these measures are necessary to ACA, and we determine that these measures are in fact illegal, then mustn't we also determine that ACA is a failure, and that if we're acting in good faith we must repeal it before more damage is done?

ThomasH writes:

The "bad policy" argument IS relevant. For Congress to intentionally exclude subsidies to people who buy their insurance under exchanges established by the Federal government on behalf of citizens in "non-establishing" states (which no one expected to happen anyway) would have been such a transparently "bad policy" ("worse than a crime,it's a mistake") that the reasonable interpretation of Congress's intent is that everyone would be eligible for subsidies and that failing to include "or the Federal Government" language was a careless oversight. I can see a court refusing to force the Executive to enforce an intent of Congress with which the Executive is not in sympathy, but not the opposite.

Brandon Berg writes:

To link to a specific item on Darwin's Fool, you can go back to the front page, right-click on the link to the desired article, and select "copy link." This will copy it to your clipboard, allowing you to paste it wherever you like.

ZC writes:

"we have to pass the bill so that you can find out what is in it, away from the fog of the controversy" -- looks like Nancy wasn't kidding.

Hopefully Mr. Cannon's suit gets somewhere. Then Obamacare and Al Capone may have something in common...done in by the IRS.

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