Fox News Promoting And Misrepresenting A Flawed New Obamacare Legal Challenge Targeting Tax Credits In Exchanges

Fox News is promoting another legal challenge to the Affordable Care Act that originated in a right-wing think-tank and was hyped by conservative blogs. The State of Oklahoma filed a lawsuit based on a problematic theory that alleges tax credits within federally-run health insurance marketplaces called “exchanges” are unauthorized, which was developed by Michael Cannon, Director of Health Policy Studies at the Cato Institute, and National Review Online contributing editor and Case Western Reserve University School of Law professor Jonathan H. Adler. But Fox News has not only failed to report the extensive debunking of this tax credit theory, it has also mischaracterized this challenge to tax credits offered in exchanges as a “serious” constitutional one, although the new constitutional arguments are even more far-fetched than the original statutory claims.

Tax Credits Within Exchanges Are The Essential Means For Providing Affordable Health Insurance to Working Americans.

Washington Post's Kliff: Without The Tax Credits, The Affordable Care Act Cannot “Do What It's Supposed To Do.” The Washington Post's health policy expert, Sarah Kliff, has noted how “important” these tax credits are because they subsidize the purchase of health insurance for “low- and middle-income Americans” in the new regulated marketplaces of exchanges:

Section 1401 of the Affordable Care Act is, on the surface, just as exciting as it sounds. It outlines in excruciating detail the eligibility requirements for an American to receive a tax subsidy to assist in purchasing health insurance.

That's at first glance, at least. Two experts who recently scoured Section 1401 think they found something huge: a missing word that could undercut the Affordable Care Act's promise of affordable health insurance.

Case Western Reserve University's Jonathan Adler and Cato Institute's Michael Cannon argue in a new paper that any federally-established health insurance exchange does not have the authority to dole out health insurance subsidies. Those subsidies are important: They are the $800 billion in tax credits meant to subsidize coverage for low- and middle-income Americans.

If that is true -- and it's worth noting that the Obama administration, along with a number of legal scholars, argue that it is not -- it would significantly curtail the Affordable Care Act's ability to do what it's supposed to do:  make health care affordable. And that puts Section 1401 at the center of a burgeoning debate over what Congress meant when it wrote the Affordable Care Act, and how that effects its ultimate implementation. [, 7/16/12]         

Adler and Cannon Have Been Pushing The Theory That Tax Credits Are Unauthorized In Federally-Run Exchanges...

Cato's Cannon: The “Clear Language” And “Congressional Intent” Of The Affordable Care Act Does Not Authorize Federally-Run Exchanges To Offer Tax Credits. The Affordable Care Act sets a deadline for states to set up their own health insurance exchanges, but also allows the federal government to create and run exchanges in states that refuse to do so. Cannon argues that the bill was drafted to purposefully deny federally-run health insurance exchanges the ability to offer tax credits in order to “encourage states to create them” on their own:

  1. The Patient Protection and Affordable Care Act explicitly restricts its “premium-assistance tax credits” (and thus the “cost-sharing subsidies” and employer- and individual-mandate penalties those tax credits trigger) to health insurance “exchanges” established by states;
  2. The IRS has no authority to offer those entitlements or impose those taxes in states that opt not to create Exchanges; and
  3. The IRS's ongoing attempt to impose those taxes and issue those entitlements through Exchanges established by the federal government is contrary to congressional intent and the clear language of the Act. [Cato@Liberty, 11/20/12]

...But This Tax Credit Theory Has Been Repeatedly Discredited.

CBPP's Solomon: States That Refuse To Set Up Exchanges Cannot Prevent Their Citizens From Receiving Tax Credits Through The Alternate Federally-Run Exchange Because The “Federal Exchange Is The State Exchange.” Judith Solomon, vice president for health policy at the Center on Budget and Policy Priorities, was among the first experts to debunk the interpretation of the Affordable Care Act put forth by Adler and Cannon:

Opponents of health reform apparently intend to file a legal challenge to the law on behalf of one or more employers who are penalized for not providing coverage in a state with a federal exchange, based on the claim that the federal exchange was not authorized to provide the subsidies.  A court considering such a claim would almost certainly defer to the Treasury Department interpretation that subsidies are fully available through federally operated exchanges.


In providing for a federal exchange, Congress clearly intended that it substitute for a state exchange.  One of the primary functions of an exchange is to determine eligibility for, and the amount of, advance premium tax credits so that people can afford to buy coverage.  The language of section 1321 of the ACA establishing the federal exchange is clear on that point, as is the reference in section 36B of the Internal Revenue Code to credits being provided through a federally operated exchange.  But even if the statute were ambiguous, a court examining whether the Treasury regulations are valid would certainly defer to the agency's interpretation of the statute because it is both permissible and reasonable. [Center on Budget and Policy Priorities, 7/16/12]

NPR's Rovner: Opponents Of Health Care Reform Likely To “Hammer At It Any Way They Can.” NPR health policy correspondent Julie Rovner further undermined Adler and Cannon's claim that the Affordable Care Act was intentionally drafted so federally-run health insurance exchanges would not be allowed to offer tax credits:

“That's, unfortunately for them, wrong,” says Timothy Jost, a professor at the Washington and a strong backer of the health law.

Jost admits the law isn't written as clearly as it could have been. But he says it is pretty clear that a federally run exchange will be able to do everything a state exchange can, including provide tax credits, despite Cannon's claim that federal exchanges can't.

“This is an interesting theory, but it's completely contrary to the structure of the legislation and even the language of the legislation,” he says.

And what about Cannon's assertion that Senate Democrats gave only the state exchanges the right to provide tax credits as a way to encourage the states to create them? A quick survey of Senate Democrats involved in writing the health law didn't uncover any who recall it that way.

“No, I think they're available in both,” says Tom Harkin, the Iowa Democrat who chairs the Senate Health, Education, Labor and Pensions Committee.

Sen. Ron Wyden, an Oregon Democrat and senior member of the Finance Committee, remembers it the same way.

“That's correct, and I make that judgment based on everything that came up in the Senate Finance Committee and the fact that the exchanges were something that were popular on both sides of the aisle,” Wyden says. [NPR, 7/18/12]

Oklahoma's Republican Attorney General Recently Amended His Lawsuit Against The Individual Mandate To Include Adler's And Cannon's Tax Credit Theory.

Tulsa World's Green: OK AG Scott Pruitt “Aims To Block” Tax Credits. As reported by Wayne Greene of the Tulsa World, Pruitt saw the tax credit theory -- which is based on statutory interpretation of the Affordable Care Act -- as an opportunity to revive his Oklahoma lawsuit that the Supreme Court's June 2012 decision in NFIB v. Sebelius rendered irrelevant:

The filing in federal court in the Eastern District of Oklahoma in Muskogee substantially revises Pruitt's 2011 lawsuit in the wake of a June U.S. Supreme Court ruling that found the law to be substantially constitutional.

Although the new filing continues to argue that the Oklahoma Constitution legally prohibits an individual mandate to buy health insurance, it also brings forward a new argument - that IRS rules to implement the law can't be applied in the state because of the law's own language.

“Oklahoma is in a unique position with the only active lawsuit against the Affordable Care Act to hold the federal government accountable in how it implements the law,” Pruitt said. “Now that the Supreme Court has deemed the ACA a tax, and therefore constitutional, the federal government must follow the law and proper procedures, and that is not being done.” [Tulsa World, 9/20/12]

NRO's Adler: Oklahoma Is Challenging “The Legality Of An IRS Rule That Would Authorize Tax Credits” In The Exchanges. Adler confirmed that the tax credit theory adopted by Oklahoma correctly framed the central challenge as a question of administrative law, not constitutional law:

Oklahoma Attorney General E. Scott Pruitt today filed an amended complaint in the state's lawsuit against the Patient Protection and Affordable Care Act that, among other things, challenges the legality of an IRS rule that would authorize tax credits for the purchase of health insurance in federally run exchanges, and thereby expose Oklahoma employers to penalties should they fail to comply with the law's employer mandate. Here's AG Pruitt's press release and an early news report. For background on the issues in this suit, see here. [The Volokh Conspiracy, 9/19/12]

Fox News Initially Reported That Oklahoma Is Suing Over The “Implementation” Of Tax Credits in Exchanges, Not Over Their Constitutionality...

Fox's Cavuto: The Legal Challenge To Exchange Tax Credits Is A New “Wrinkle” In Attacks On The Affordable Care Act. On the September 20 edition of Cavuto, Fox Business host Neil Cavuto noted the “separate” non-constitutional tax credit challenge to the Affordable Care Act in the Oklahoma lawsuit that alleges health insurance tax credits cannot be provided in state exchanges run by the federal government:

CAVUTO: Well, a big deal and now, a big federal case again. Again, the Supreme Court ruled that the individual mandate was indeed constitutional. Now, Oklahoma is saying that the government really doesn't have the authority to penalize employers that don't provide that coverage.


PRUITT: Well, speaking of regulatory action, Neil, the IRS on May 18 of this year, adopted rules saying that the employer mandate penalty would issue in states, whether they had a state health care exchange or a federal health care exchange. The problem with that rule, Neil, is that it's in clear violation of the Affordable Care Act.

The state of Oklahoma has not taken action to adopt the health care exchange. And so we are being deprived of the benefit in our state of employers not having to pay the employer mandate tax or a penalty as a result of this rule with the IRS on May 18. So the lawsuit is about that.

This is about implementation. The original lawsuit, as you know, is about constitutionality of the law under the commerce clause and their spending power. This is addressing implementation of the law.

And the agencies of the federal government, be it HHS or IRS or other agencies involved in implementation, must do so consistent with the ACA. And we believe that the IRS has exceeded their authority. And we're seeking a challenge that -- our challenge in the action in Oklahoma.

CAVUTO: What's interesting about this is you've moved beyond, you know, the legality that supposedly the Supreme Court tried to settle on whether you can mandate someone to buy health care coverage. And now, we learn that six million Americans will have to pay the penalty rather than four million we thought as recently as last week. But this is separate because it cuts to the core of how far the government can go. [Fox Business Network, Cavuto, 9/20/12, via Nexis]

...But Fox News Is Now Trying to Repackage The Same “Implementation” Argument As A Constitutional Challenge...

Fox's Hemmer: The Tax Credit Lawsuit Is Actually “Drawing A Longer Line” On The Supreme Court Ruling On The Medicaid Expansion. On the November 19 edition of America's Newsroom, Fox News host Bill Hemmer added his legal analysis to American Spectator senior editor John Fund's explanation of why NFIB v. Sebelius will lead to exchanges being declared “unconstitutional”:

HEMMER: OK, now let's get to your big point. You say we are in a stalemate phase, explain that.


FUND: [A] bunch of state attorneys general led by attorney general Pruitt of Oklahoma are challenging the constitutionality of the exchanges. Saying, look, the Supreme Court says you can't force them to do this on Medicaid, why can you force them to do this on the insurance exchanges. I think we may be seeing a very significant Supreme Court case land up before the high court next year and a big chunk of Obamacare could actually be declared unconstitutional. 

HEMMER: [W]hat would the case challenge, John?

FUND: It challenges the right of the federal government to order the states around, to force them to either set up the exchanges or if they don't set up the exchanges they give up a lot of the privileges and benefits of having Obamacare, including the fact that employers won't have to pay a fine if they don't offer health coverage, because then everybody is going to get it from the exchange. This is a big deal, because the states say, look, we have the right to run our own healthcare facilities the way we wish, and just like the federal government couldn't do it with Medicaid you can't do it with healthcare exchanges.

HEMMER: I see, you're drawing a longer line on that because what the court said, the Supreme Court said, is if you disagree with this Medicaid deal you don't have to go through with it. [Fox News, America's Newsroom, 11/19/12]

Fox's Varney: “The Fight Over Obamacare is Not Done Yet.” On the November 19 edition of Your World With Neil Cavuto, Fox News Host Stuart Varney interviewed regular Fox guest Betsy McCaughey to explain why “the Constitution says” exchanges are not permissible, which will lead to the “unraveling” of the Affordable Care Act:

VARNEY: Hold on a second, the fight over Obamacare is not done yet. Today, Oklahoma governor Mary Fallon announced it will be up to the federal government to create her state's health care exchanges becoming the 14th republican governor so to do. But can the law sustain itself without state participation? Our guest says these governors may have just found a way out of this new and she says awful law.


VARNEY: And these exchanges, within each and every state, have to be set up and running by October of next year...

MCCAUGHEY: That's right, and...

VARNEY: Right, hold on a second- and some of these republican governors are saying no we're not going to do it, we're not going to set up the exchange, we don't have the money, and we're not going to send state money to do it....

MCCAUGHEY: And they're not required to, because the Constitution says the federal government cannot require or force states to do things.

VARNEY: Ok, so here's what our viewers want to know. A lot of them do not like Obamacare, would this - don't set up an exchange in your state - would that scuttle Obamacare?

MCCAUGHEY: Well certainly it's going to delay it, and perhaps scuttle it...This law not only calls for the state insurance exchanges it calls for insurance exchanges to hand out subsidies to people to buy the mandated, mandatory health plan. So, people who are uninsured and have to buy their health plan, people who were previously covered by an employer and were dumped out of their health plan because they cost too much, this mandated plan costs so much, they will have to buy health insurance on the exchange, but where is the subsidy? This law empowers subsidies for state health insurance exchanges but in a careless error did not provide for subsidies in the exchanges set up by the federal government.

VARNEY: Ok fast forward, let's go to, say, September of the next year, or October of next year, and some of these states they don't have an exchange...

MCCAUGHEY: And there will be litigation because the Obama administration says we can hand out the subsidies regardless of what the law says and the lawyers say no.

VARNEY: But maybe other states will say, wait a minute, we don't want to spend our money either, hey you feds, you can do it. Now that would be the unraveling of the whole thing. [Fox News, Your World, 11/19/12]

Fox's Kelly: The Tax Credit Lawsuit Brought By Oklahoma Is “A Serious New Challenge.” On the November 26 edition of America Live, Fox News host Megyn Kelly discussed the “new Constitutional question” in her interview with Fox News contributor Phil Kerpen about the the claim that tax credits were not intended to be provided in federally-run exchanges:

KELLY: Well, a serious new challenge facing president Obama's health care law, and that portion of it that requires states to set up their own health insurance exchanges.


KERPEN: Well at least in these states [that refuse to set up Exchanges] it remains to be seen if they're going to be able to get these things up and running and if they're going to be effective in any way. And then Megyn the other aspect of this is there is a legal challenge that Oklahoma has brought, and they argue that the IRS rule that provides subsidies in federally run exchanges is unlawful. I think they have a very strong argument on that. If they prevail, there might not be new Obamacare subsidies in the states that don't set up exchanges.

KELLY: Alright, and just to translate that into real person English, that means that to the extent the Obama administration is subsidizing these health care plans, there is question about whether that's legal if these health care exchanges are run by the feds as opposed to the states. Now you've got 16 to 25 states that are going to have the feds involved in some part. So it raises a new constitutional question behind this law. [Fox News, America Live, 11/26/12]

...And Is Conflating Different Constitutional Doctrines With The Original Tax Credit Argument.

CRS: The Tax Credit Challenge Is Questioning The “Administrative Authority” Of Implementing Agencies To Provide Tax Credits In “Federally Created Exchanges.” The Congressional Research Service drafted a legal memorandum that concluded the IRS rules recognizing the provision of tax credits in all exchanges “appears to be an exercise of the authority delegated to the agency,” pursuant to standard statutory interpretation under the Administrative Procedure Act:

[T]he Treasury Department, through the IRS, has issued final regulations that define an exchange, for purposes of §36B, to include both state and federally created exchanges. If these regulations were to be challenged as being outside the scope of the IRS's authority under the Administrative Procedure Act, a determination of whether the Service exceeded its delegated authority in issuing the regulations under §36B may hinge on the degree of deference that a reviewing court accords the IRS's understanding of the scope of its authority under ACA. Courts have traditionally “recognized that considerable weight should be accorded to an executive department's construction of a statutory scheme it is entrusted to administer.” [CRS, “Legal Analysis of Availability of Premium Tax Credits in State and Federally Created Exchanges Pursuant to the Affordable Care Act,” 7/23/12]

CRS: Last Summer's Affordable Care Act Decision Does Not Support The Constitutional Claim That The “Limited Remedy Fashioned By The Court” Is Relevant To The Tax Credit Challenge. Contrary to the claims presented in the Fox News segments on the tax credit lawsuit, the Congressional Research Service explained that the Supreme Court holding that found a provision of the Affordable Care Act unconstitutionally coercive was limited to the Medicaid expansion's enforcement mechanism, and is not applicable to tax credits within the exchanges:

The Supreme Court fashioned a very limited remedy for the unconstitutional threat of the loss of all federal Medicaid funds as a condition of implementing the 2014 Medicaid expansion requirements: only federal funds offered to finance medical assistance for the new adult coverage group may be withheld if the states choose not to expand their Medicaid programs to include this new population. As a corollary, if a state accepts the new ACA federal funds to expand its coverage to this new group, and the state becomes non-compliant with any conditions applicable to the ACA expansion group, again, only ACA Medicaid federal funds may be withheld because they are the only funds tied to this “new grant program.” The Court's decision only limited this new grant program's enforcement mechanism; it did not specifically affect, change or limit any other Medicaid or ACA provisions. This distinction will be important going forward.[CRS, “Selected Issues Related to the Effect of NFIB v. Sebelius on the Medicaid Expansion Requirements in Section 2001 of the Affordable Care Act,” 7/16/12]

Bagenstos: The “Deeply Legally Flawed” Tax Credit Theory Has Nothing To Do With Unconstitutionally “Commandeering” The States To Set Up Exchanges. Rejecting the new claims that the Oklahoma argument is built upon the idea that offering tax credits in a federally-run exchange is a violation of state sovereignty, University of Michigan Law School professor and former Department of Justice official, Samuel Bagenstos, pointed out that the choice of a default exchange was included in the Affordable Care Act to precisely avoid this “commandeering” problem:

[A]nyone who understands the Supreme Court's commandeering doctrine knows that the premium subsidies were not at all necessary to overcome any commandeering problem. The anticommandeering principle forbids Congress from compelling the states to regulate private parties, but it permits Congress to give the states the choice between regulating private parties according to federal standards and standing aside to allow the federal government to regulate those parties directly. That's the Court's square holding in New York v. United States. And that, of course, is the precise choice that the ACA gave states even without the subsidies -- regulate individuals and insurance companies through state-operated exchanges, or stand aside and let the federal government set up and operate exchanges of its own. So there is no reason to attribute to Congress a decision to limit subsidies to participants in state-operated exchanges in order to overcome any commandeering problem. Once the federal government could set up its own exchanges, there was no commandeering problem. [Balkinization, 11/27/12]   



The Right Reveals Its Latest Dubious Attack On Health Care Reform

The Wall Street Journal Misrepresents Exchange Progress and Conservative Obstruction