David R. Henderson  

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We reach this conclusion, frankly, with reluctance. At least until states that wish to can set up Exchanges, our ruling will likely have significant consequences both for the millions of individuals receiving tax credits through federal Exchanges and for health insurance markets more broadly. But, high as those stakes are, the principle of legislative supremacy that guides us is higher still. Within constitutional limits, Congress is supreme in matters of policy, and the consequence of that supremacy is that our duty when interpreting a statute is to ascertain the meaning of the words of the statute duly enacted through the formal legislative process. This limited role serves democratic interests by ensuring that policy is made by elected, politically accountable representatives, not by appointed, life-tenured judges.

Thus, although our decision has major consequences, our role is quite limited: deciding whether the IRS Rule is a permissible reading of the ACA. Having concluded it is not, we reverse the district court and remand with instructions to grant summary judgment to appellants and vacate the IRS Rule.


This is from Jacqueline Halbig, et al vs. Appellants, decided today by the United States Court of Appeals by a 2-1 vote.

More on it here.

Whatever you think of ObamaCare, it's a huge triumph when a Court tells the IRS that, no, you can't just ignore the legislation when you develop your regulations.

Congratulations to Jonathan Adler and Michael Cannon.


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COMMENTS (33 to date)
Martin writes:
"This limited role serves democratic interests by ensuring that policy is made by elected, politically accountable representatives, not by appointed, life-tenured judges."

I am not sure I agree, and correct me if I am wrong, but can Congress not issue instructions to the IRS on what regulations to make or not to make? And if not Congress, what about the executive?

It seems to me that the IRS should already be under democratic control, and rulings such as these might even frustrate the purpose of Congress if they have the power to issue instructions to what the IRS can or cannot put into its regulations.

Policy, in that case, would be made by life-appointed judges instead of by politically accountable representatives who choose to act by delegating the power to make these regulations or allowing the IRS to make these regulations.

Jon Murphy writes:

While I agree this is a good ruling, I think we still have a while to go before we can celebrate a victory. I am sure the Administration will appeal this, to the Supreme Court if necessary.

Chris Wegener writes:

What is freedom enhancing about preventing people from buying health insurance?

Jon Murphy writes:

I'm a bit of a law nerd (despite having no formal training in the law) and the Court's opinion is interesting. Everything comes down to a few words in a section. It's fascinating how one phrase can dismantle an entire regulation.

Charley Hooper writes:

@Chris Wegener,

Who is preventing anyone from buying health insurance?

Jeremey Arnold writes:

@ Charley

I think what Mr. Wegener might be getting at is that it is net freedom loss for millions of people who now can afford insurance to now be UNable to do so because without subsidies their private coverage they are currently enrolled in is instantly unaffordable.

Of course I personally disagree with this as I disagree with any form of forced charity including my subsidization of someone else's health coverage / purchasing decisions but I think there is a case to be made that says initially measuring the hypothetical harms to the freedoms of tax payers versus the very tangible gains to others who are recipients is a quantitatively tricky matter.

If I am wrong of course about your point Mr. Wegener please feel free to correct me and I'll be more than happy to return to my corner of the internet and keep quiet :)

David R. Henderson writes:

@Chris Wegener,
What is freedom enhancing about preventing people from buying health insurance?
Nothing. The enhancement to freedom, if the decision stands, comes from two aspects of the decision: (1) the one that is most publicized, namely, that taxpayers in a majority of states will no longer be forced to pay for other people’s health insurance, and (2) the one that has received little publicity, namely that employers in those states with no state exchanges will no longer be subject to penalties.
The only entity that I know of, by the way, that prevents people from buying insurance, is government. So, for example, in my native Canada, there are many, many procedures for which it is illegal to buy health insurance. The only other two countries in the world where government prevents people from buying health insurance are Cuba and North Korea. In those two countries, the prohibition is total.

David R. Henderson writes:

@Martin,
correct me if I am wrong, but can Congress not issue instructions to the IRS on what regulations to make or not to make?
You are right. And that is precisely the power that the judges were upholding. The legislation had said one thing clearly, and the IRS ignored it and did what Obama wanted.

Daniel Kuehn writes:

David -
re: "correct me if I am wrong, but can Congress not issue instructions to the IRS on what regulations to make or not to make?
You are right. And that is precisely the power that the judges were upholding. The legislation had said one thing clearly, and the IRS ignored it and did what Obama wanted.
"

Well hold on a minute. Nobody was challenging the idea that Congress can issue instructions to the IRS and that those should be obeyed. There were two competing interpretations of the legislation and the court sided with one of them. Another Court of Appeals today sided with the other interpretation. But I think everyone is on the same page about whether laws ought to be enforced!

charley Hooper writes:

@Jeremey Arnold,

Only if you include as a "freedom" the freedom to spend other people's money.

To continue the logic to an extreme degree, laws against murder infringe upon our "freedom" to kill others.

David R. Henderson writes:

@Daniel Kuehn,
There were two competing interpretations of the legislation and the court sided with one of them.
There were two interpretations only in the sense that one interpretation was that the IRS had to follow what the legislation said, and the other “interpretation” was that the IRS didn’t have to follow it because common sense dictated that no Congress could be so nutty as to leave this huge loophole.

Don Boudreaux writes:

David:

Right you are (in your response just above to Daniel Kuehn).

And the fact that legislators in the U.S. have for nearly 80 years now relied upon courts to re-write their legislation if and when the actual wording of that legislation proves to be a barrier to the growth of government power should call into question the very capacity of legislators to legislate sensibly to begin with. Yet there persists among many uncritical people (including many judges and justices) the belief that legislators are so thoughtful and careful when legislating that they can be trusted with power over others and simultaneously so prone to thoughtlessness and carelessness when legislating that the very words that legislators enact into "law" must frequently be creatively interpreted and re-written by courts - always to ensure that the extension of the state's reach and the enhancement of the state's power not be halted.

Daniel Kuehn writes:

David -
re: "There were two interpretations only in the sense that one interpretation was that the IRS had to follow what the legislation said, and the other “interpretation” was that the IRS didn’t have to follow it because common sense dictated that no Congress could be so nutty as to leave this huge loophole."

That is not my understanding of the government's argument at all. There is language in the legislation that says that if states don't set up state exchanges that the federal government "shall establish and operate such exchanges" and apparently that language legally implies that the federally managed exchange operates as if it were set up by the state. (I leave that to the lawyers and judges to sort out but apparently currently they disagree).

The government further argues that at the very least there are firm grounds for considering it ambiguous legally and that is sufficient to not have the courts enter and make policy.

I don't know why you think it's because they argue that Congress is not nutty. I haven't heard that anywhere - where are you getting that?

Daniel Kuehn writes:

Don - if you think he's right could you clarify where you guys are getting this?

Why have reports from the Richmond ruling and descriptions in new sources been saying something completely different from what you and David are claiming?

mike shupp writes:

Ah! So a hundred million people who had foolishly imagined their healthcare was being subsidized by the federal government will soon learn, instead, that their freedom has been "enhanced" by Republican governors and state legislators who refused to construct state healthcare insurance exchanges.

Good show! By the way, three are three hundred million rifles and guns in the hands of freedom loving Americans. Truly, we have such an amazing future to look forward to. No doubt we can all anticipate more of the blessings of liberty.

txslr writes:

I wouldn’t want to speak for anyone else, but it strikes me that the argument made by the administration is disingenuous. The language in the law is quite clear and it is equally clear why it was written the way it was – to provide incentives to states to build exchanges because the courts had limited the federal government’s ability to coerce state cooperation. When the incentives failed the administration cooked up an argument (that the plain language didn’t mean what it said) to provide the courts with thin cover to rewrite the law and correct the mistake. Then Congress nuked the veto in order to rush three new judges to the DC circuit to ensure the right outcome once the case goes en banc.

So this is not a case of differing interpretations of a confusing bit of legislation. It is a series of machinations designed to involve the courts in the process of (re)writing legislation that would never pass congress.

Dave Everson writes:

Mike Shupp: the issue was whether the IRS could make its own law. Is that what you favor? That's even worse than Congress making laws.

BTW, those policies were being subsidized by TAX PAYERS -- actual people. The federal government is merely the redistributor of other people's money.

Daublin writes:

Daniel, if you allow such wide leeway in "interpretation", then it amounts to the same thing as just deferring to the executive says.

From reading the article, the state exchanges have largely failed, and so Obama has just declared that the federal government will take over running of the exchanges. There's no provision in the law for doing that, though. It's just something that the president made up.

It's much like his previous decision to close a lot of parks that aren't even federally. It's plainly out of his jurisdiction. If it happened in any other country, we'd be horrified of national police being coopted for the executive's personal agendas.


http://washingtonexaminer.com/obama-white-house-closing-private-businesses-to-add-pain-to-government-shutdown/article/2536820


Daniel Kuehn writes:

Daublin -
Please stop overdramatizing this. I'm no more saying that we should just defer to the executive than you or David are saying that the courts should get to rewrite legislation at will.

I am agnostic on this case because I don't know how strong the contending legal arguments are. The courts seem to disagree too (I don't know why everyone was sharing the DC decision but few were sharing the Richmond decision). As a policy matter I'd love for the government to be right in this case. There was a lot wrong with Obamacare but the low income subsidies were not one of the things wrong with it. Good legal arguments, though, are different from good policy arguments.

LD Bottorff writes:

I don't know how one can expect a democratic government to work when the legislature can't write clear, understandable laws. It was refreshingly honest of (then) Speaker Pelosi to tell us that the law had to be passed before we would know what was in it, but I really think we should hold our legislators to a higher standard. If the law, as written, does not authorize subsidies to states that did not set up exchanges, then that is the law. Voters who are unhappy with this legislative failure should throw out the legislators who botched the writing of the law.

Phil writes:

David - It may not be so huge after all. Halbig was handed down in the DC Circuit. Meanwhile, the Fourth Circuit Court of Appeals came to a different conclusion saying the law is ambiguous enough that the court should defer to the IRS' interpretation. See opinion here. This question appears to be headed to the Supreme Court.

Chris Wegener writes:

@David


(1) the one that is most publicized, namely, that taxpayers in a majority of states will no longer be forced to pay for other people’s health insurance

So we go back to the old system where taxpayers are forced to pay for 100% of those people's health care at exorbitant prices, when they become sick and go to the emergency room?

That doesn't seem like a good deal for anyone.

David R. Henderson writes:

@Chris Wegener,
So we go back to the old system where taxpayers are forced to pay for 100% of those people's health care at exorbitant prices, when they become sick and go to the emergency room?
Chris, if I could convince you that that WAS a better deal for taxpayers than what they are getting under ObamaCare, would that change your mind about ObamaCare?

Chris Wegener writes:

@David
I have no doubt that you could make an argument that it would be better for taxpayers.

But that isn't the point because the government's responsibility is to promote the "general welfare" as explicitly set out in the Constitution.

We currently pay for everyone's healthcare whether they can afford insurance or not. Those without insurance receive substantially worse health care than the majority who do have insurance. Allowing that group to purchase subsidized insurance greatly improves the likelihood that their health and circumstances will improve.

The subsidy provided by taxpayers will be less than the cost to the economy of their healthcare and inability to work as well as they should.

This will improve the "general welfare" and is thus a specific goal of the founding fathers.

Shayne Cook writes:

To Chris Wegener:

"... promote the general welfare ..." is NOT synonymous with "provide the general welfare, nor with define and compel the general welfare.

The Federal (and State) governments' modification of tax law to allow a 100% individual tax deduction for all actual health care expenditures - as an adjustment to gross income, not an itemized deduction - would fit the definition of promoting general welfare to a far greater extent than the current ACA does.

Instead, the ACA - and to be fair, it's predecessor system of health care finance (via business tax deduction only) - institutionalizes and compels support of insurance company "administrative" costs, layered on top of hospital/health service provider "administrative" costs, which are then topped off with a layer of governmental "administrative" costs.

All tolled, "administrative" costs of the U.S. health care financing and control system divert between a third and a half of the $3T-plus U.S. annual costs of "health care" away from actual health care delivery. And the ACA institutionalizes and compels that diversion!

I am all for the provision of actual health care for all U.S. citizens and residents. And I argue that if anyone else is actually interesting in providing health care, they/you would similarly be interesting in supporting a system that reduces "administrative" costs, rather than elevating them, institutionalizing them, and compelling the general population to fund them.

Folks may also want to consider the fact that those ACA-defined 20% private insurance company "administrative" costs directly serve to finance the limits and restrictions on your/their choices of health care providers, delivery, and receipt of health care.

In that, the ACA has institutionalized the limiting and restricting of the general welfare, not promoting the general welfare.

Chris Wegener writes:

To Shayne Cook

The ACA is in no way "providing" the general welfare but clearly promoting it.

I absolutely agree with you. I would whole support a single payer system with the administrative overhead of Medicare. In fact simply eliminating the age limit on Medicare would solve the problem immediately.

Back in the real world, that is not going to happen, to say nothing of the disruption of eliminating $3T of economic activity. We need to address what is currently going on.

Shayne Cook writes:

To Chris Wegener:

I've been asserting since 2009, when ACA was first being outlined/released/discussed, that it was intentionally designed to be so cumbersome, problematic, onerous, inefficient, and costly that it would make the "single payer" system seem a preferable alternative to the American people. I still assert that ACA was designed explicitly to do that and only that. The seemingly endless legal challenges - such as the one that is the subject of this post by Dr. Henderson - and the Presidential "delays" in implementation of various aspects of ACA, and the lack of (voluntary) participation as well as the "need" to compel participation via tax fines, are all symptoms of what a mess the ACA is - and was designed to be. Frankly, I, would prefer a "single payer" model over ACA for financing health care in the U.S., both as an economist and as an economic actor.

BUT, a "single payer" model is still decidedly sub-optimal - it still contains an unnecessary and expensive transaction cost layer (governmental "administration costs") that diverts funding away from actual health care expenditure - at best. Worse, that governmental "administration cost" finances nothing more than governmental mis-management and rationing. Given the governments' fiscal outlook for Medicare/Medicaid, as well as its gross mis-management of it's own health care systems such as VA and IHS, it is abundantly clear that the "Government" is the absolute least desirable "third party" to be involved in either health care decisions or health care financing.

Chris Wegener writes:

To Shayne Cook

There will always be an administrative cost to any system. private of public.

The cost of administering Medicare is 3% with the caveat that there is a level of fraud which is involved. (The saying is if you know how to bill for Medicare you can bill for non existent services.) The fraud could be reduced but at a higher administrative cost. Also Medicaid would cease to exist in Medicare for Everyone.

You are mistaken by calling the VA mismanaged, recent news reports to the contrary. Outcomes for VA patients is far better than for private patients. The VA is chronically underfunded particularly with the recent influx of veterans injured in the two Iraq wars and the Afghanistan conflict.

The knee jerk belief that "Government" is always bad at what it does is in general not true. There are as many problems in private companies they just don't receive the publicity that "Government" failures do nor do private companies labor under the constant barrage of criticisms and negative propaganda that the "Government" does.

ThomasH writes:

It would certainly be a triumph for the court to tell IRS that it cannot ignore the intent of Congress in developing its regulation. My disagreement is in discerning the intent of Congress.

Did Congress intend to withhold subsidies for those who purchased insurance on Federally established exchanges. Several people have argued that the could have had such intent as way to coerce states into establishing exchanges. But did it? I think the IRS acted reasonably in assuming that even if getting states to establish exchanges was an an intent, it was trivially important compared to the intent of making insurance purchased by those who do not receive subsidies through employers-transacted insurance affordable. And even if we were really doubtful about Congress's relative priorities between establishing exchanges and making insurance affordable, do we think IRS's reasoning so outlandish as to be worthy of judicial overrule?

ThomasH writes:

Interesting, Henderson’s comment:

taxpayers in a majority of states will no longer be forced to pay for other people’s health insurance

It brings to light the root of all the anguish some people (maybe not Henderson) feel over ACA: taxes, taxes to pay for benefits for "other" people.

There was no Tea Party organized to complain about taxpayer subsidies to people like us whose insurance was transacted by employers (“transacted” because it was, pace the Hobby Lobby decision, the employees’ money that bought it). No, opposition arose because somebody was going to have to pay so that coverage could be expanded to people who could not afford it before.

Shayne Cook writes:

To Chris Wegener:

I'd be interested in knowing the source of your "3% cost of administering Medicare" assertion. That sounds quite low to me. (Actually, it seems extraordinary that the Federal Government could readily achieve a 3% administrative costs rate for itself, then specify a 20% "administration costs" rate for private insurance companies, as it does within the ACA.)

But no matter - I'm willing to use your 3% assertion to illustrate my point.

Assuming your preferred "single payer" system is implemented, and private insurance - with all of its "administrative costs" (estimated at about $300 Billion per year) - is eliminated, the resulting U.S. health care expenditure is reduced to some $2,700 Billion (currently).

The result of a mere 3% Federal administrative costs burden on $2,700 Billion health care is about $81 Billion per year - and growing.

That's $81 BILLION (and growing) per year that is DIVERTED from actual health care. $81 Billion per year would buy quite a few medical procedures, cancer treatments, contraceptives, etc. See Opportunity Cost.

And by the way, that $80 Billion plus, each and every year, are in addition to (and multiplicative of) pre-existing administrative costs of the health care providers themselves. You are correct that "administrative costs" can never be completely eliminated. But they need not be both added to and multiplied. And any "third party" payer system adds and multiplies transaction costs ("administrative costs").

Chris Wegener writes:

To Shayne Cook


Medicare Administrative cost per CBO:

Indeed your 80 Billion number is correct. However it is out of a total spending of 585 billion appropriation. (7.3%) It is higher than the total administrative because there is a subside to insurance companies that provide Medicare Advantage plans.

Total Healthcare spending in US:

So at the 20% rate specified by the ACA we have a private administrative cost of 760 Billion though that is definitely understated because most commercial plans charge 30% for overhead, administration and salaries.

Medicare for all is clearly a better plan.

What do you propose that would have no administrative costs?

Shayne Cook writes:

To Chris Wegener:

Glad you asked ...

1.) Change tax law to allow 100% of actual incurred health care expenses to be tax deduction, as an adjustment to gross income (bottom of Form 1040) - for individuals.
A couple of explanatory notes ...
Health insurance premiums are currently 100% tax deductible expense for businesses/employers and actual health care payments are 100% tax deductible expense for insurance companies - as are the "administrative costs" 100% tax deductible for both entities. Even 100% of the "employer half" of Medicare payments for workers are a tax deductible expense for employers, but not for employees.
Shift the tax deductibility for actual incurred health care expense to individuals who are the actual recipients/payers of health care, instead of to business (third party payers).

2.) Make the 100% tax deductibility for actual incurred health care expense - for individuals - a transferable adjustment to gross income/tax deduction. The health care expense tax deduction I describe in 1.) above will not be of great value to low-income folks, or people who are unfortunate enough to incur catastrophic health care costs or both. The transferability of the individual tax deduction incentivises me, family, neighbors, charity organizations or even businesses to "donate" to the costs of health care for the less fortunate, in exchange for their tax deduction.

Eliminating the "third party payer" artifact of U.S. health care financing will eliminate all "third party payer administrative costs". Also eliminated are the "third party" rules/regulations/restrictions, etc. If I choose to pay the actual health care costs of my son or daughter or parents, I don't have to be concerned about whether they are over/under 26 years (or any other arbitrarily set age set by the "third parties"). I also don't have to concern myself about getting reimbursed/approved for health care treatment on a visit to California, when my place of residence - and my "insurance coverage network" - is in North Dakota.

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