The Mandate’s Final Hours

Michael Cannon and Jonathan Adler on a key aspect of the law the IRS is pursuing without the legal authority to do so.

Under the guise of implementing the law, the Internal Revenue Service has announced it will impose a tax of up to $3,000 per worker on employers whom Congress has not authorized a tax. To make things more interesting: If the IRS doesn’t impose that unauthorized tax, the whole law could collapse.

The Act’s “employer mandate” taxes employers up to $3,000 per employee if they fail to offer required health benefits. But that tax kicks in only if their employees receive tax credits or subsidies to purchase a health plan through a state-run insurance “exchange.”

This 2,000-page law is complex. But in one respect the statute is clear: Credits are available only in states that create an exchange themselves. The federal government might create exchanges in states that decline, but it cannot offer credits through its own exchanges. And where there can be no credits, there is nothing to trigger that $3,000 tax.

States are so reluctant to create exchanges that Secretary of Health and Human Services Kathleen Sebelius estimates she might have to operate them for 15 to 30 states. Even if she manages that feat, the law will still collapse without the employer mandate and tax credits.

To prevent that from happening, on May 18 the IRS finalized a rule making credits available through federal exchanges, contrary to the express language of the statute.

Because those credits trigger penalties against employers, the IRS is literally taxing employers and spending billions without congressional authorization. Estimates by the Urban Institute indicate that had this rule been in effect in 2011, it would have cost at least $14.3 billion for HHS to run exchanges for 30 states. About 75% of that is new federal spending; the remainder is forgone tax revenue.

The IRS doesn’t have a leg to stand on here. It has not cited any express statutory authority for its decision, because there is none. The language limiting tax credits to state-established exchanges is clear and consistent with the rest of the statute. The law’s chief sponsor, Senate Finance Committee chairman Max Baucus (D-Mont.), is on record explaining creation of an exchange is among the conditions states must satisfy before credits become available. Indeed, all previous drafts of the law also withheld credits from states to push them to cooperate.

Avik Roy notes the Democratic sniping:

Peter Baker of the New York Times notes that the majority of Democrats were dismissive of the mandate’s constitutional challenges in 2010. “Are you serious?” said Nancy Pelosi, scornfully, at the time. The few who did worry publicly, like NYU Law prof Michael Waldman, were quickly shot down by their peers.

President Obama, the former con law lecturer, wasn’t so naïve. As Ron Suskind details in his book Confidence Men, Obama “was concerned about legal challenges” to the mandate, but was also told of Jonathan Gruber’s work – work that heavily influenced the estimates of the Congressional Budget Office – that estimated that Obamacare would cover half as many people without a mandate.

Indeed, Democrats in Congress were also aware of the mandate’s weakness. The House version of the bill did contain a severability clause with regard to the individual mandate, because they appreciated this risk. The Senate version of the bill, however, did not.

As John McDonough writes in his book Inside National Health Reform, “By the late fall [of 2009], Senate Republicans had begun to argue against the constitutionality of the individual mandate as a talking point against reform, and Democratic staffers decided to leave out severability to deprive Republican senators of a talking point against the law – Republicans would claim that the inclusion of the severability showed the Democrats’ lack of confidence.”

Because of Scott Brown’s election in Massachusetts, Democrats were not able to merge the Senate and House versions in the traditional way, and had to pass the Senate version mostly intact – without the severability clause.

The point being: Many Democrats, including the President, were well aware of the mandate’s constitutional risks. They went forward with it anyway, because getting the right “number” in terms of the law’s coverage expansion was, in their view, more important than doing right by the Constitution. We’ll soon find out if they will pay a price for that decision.

What happens to the money states already have in their coffers?

If the U.S. Supreme Court declares all or parts of the national health law unconstitutional this week, legal experts say it is unclear what will happen to billions in federal money provided by the law that has already been sent to state and local governments, and private organizations.

To date, Washington has written checks for $13.7 billion, according to a federal funds tracker created by the Kaiser Family Foundation. Of that, 31 percent, or about $4.2 billion, has gone directly to state and local governments.

Even if the Affordable Care Act survives the high court review, Congress could attempt to repeal all or parts of the law, putting the billions already spent and billions more to come in question. “It’s definitely a concern,” says Matt Salo, director of the National Association of Medicaid Directors. “What the Congress giveth, the Congress can taketh away.”

Salo says it would be surprising if the federal government wanted a refund of money states have already spent, but Washington could take back funds that have been obligated but not spent.

The biggest chunk of state grants – $1.2 billion – went to insurance industry reforms and to create online shopping sites known as health insurance exchanges. Part of that money also went to pay claims for people with pre-existing conditions who became newly insured through the federal-state high-risk insurance pools that became available under the health law.

The second largest portion went for special projects primarily aimed at cost containment in Medicaid. These include grants for programs such as aging and disability resource centers designed to help people find community-based long-term care services. States also received grants to develop innovative approaches to caring for so-called dual-eligibles who qualify for both Medicaid and Medicare.

After the oral arguments before the Court, a responsible administration would’ve waited to dole out more cash toward a law that could soon be changed dramatically.

But the administration has forged ahead, spending at least $2.7 billion since oral arguments in the case ended on March 28. That’s more than double the amount that was handed out in the three-month period leading up to the arguments, according to a POLITICO review of funding announcements from the Department of Health and Human Services.

While much – if not all – of this funding was in the pipeline well before March, the timeline for handing out specific funds is not set in stone, which gives the agency leeway over the kinds of dollars it has been handing out.

And the stakes have increased as the date of a Supreme Court ruling approaches, because money that is spent most likely won’t have to be repaid. But remaining funds will dry up if the court strikes down the law.

The court is expected to announce its decision this week.

The $2.7 billion includes grants and awards that have been handed out since the Supreme Court arguments – including more than $90 million in funds for health insurance cooperatives that HHS announced Friday. By contrast, the administration gave out about $1 billion in grants, loans and other awards during the three months before the Supreme Court arguments.

Hopes dashed.

With that lottery, Oregon became a laboratory for studying the effects of extending health insurance to people who previously did not have it. Health economists say the state has become the single best place to study a question at the center of debate in Washington as the Supreme Court prepares to rule, likely next week, on the constitutionality of President Obama’s health care law: What are the costs and benefits of coverage?

In a continuing study, an all-star group of researchers following Ms. Parris and tens of thousands of other Oregonians has found that gaining insurance makes people feel healthier, happier and more financially stable.

The insured also spend more on health care, dashing some hopes of preventive-medicine advocates who have argued that coverage can save money – by keeping people out of emergency rooms, for instance. In Oregon, the newly insured spent an average of $778 a year, or 25 percent, more on health care than those who did not win insurance.

For the nation, the lesson appears to be mixed. Expanded coverage brings large benefits to many people, but it is also more likely to increase a stretched federal government’s long-term budget responsibilities.

This includes populations already covered by state programs:

Oregon’s legislature, for example, gave final approval this year to broad changes in the state’s health care delivery system that will channel $1.9 billion in federal dollars to the state over the next five years.

Oregon aims to fully integrate comprehensive medical and dental care with behavioral health and substance abuse services. It plans to do that by setting up so-called “coordinated care organizations,” licensed and monitored by the state, which will help patients navigate the system and ensure patients have access to local support services – all for one fixed fee per customer.

Governor John Kitzhaber, a physician and the author of the overhaul, secured tacit approval from Washington in May – just in time to add $620 million in federal funds to the state’s biennial Medicaid budget.

New Jersey and Nevada are seeking federal approval for similar changes in the way health care is delivered under the Medicaid program. Both states plan to target patients with certain chronic illnesses and those who suffer from both medical and behavioral health problems.

California, Delaware, New York and Texas have secured federal approval to include elderly and disabled patients in managed care programs, and Florida, Kansas, New Jersey and New Mexico have similar requests pending, according to a new report from the Kaiser Family Foundation.

And despite the shaky status of the Affordable Care Act, a handful of states have received federal approval to get a head start on the Medicaid enrollment expansion that the Act will require in 2014.

California, Colorado, Minnesota, Missouri, New Jersey, Washington State and the District of Columbia have received federal money to expand Medicaid coverage for low-income, non-disabled adults immediately. Arizona, Ohio and Illinois have applications pending. In most cases, these moves mean more federal money for adults who already are covered by state-funded health programs.