Notice & Comment

How to Keep the Subsidies Flowing in a Handful of States

I’ve been toying with an idea that might allow the Obama administration, in the event that it loses in King v. Burwell, to keep subsidies flowing to residents in some of the 34 states that declined to create an exchange. What if HHS declared that any state that performs substantial, ongoing, and essential exchange functions has established an exchange, even if the state never formally elected to do so?

The idea is not as outlandish as it might at first sound, as David Jones and I explain in an essay at the Yale Law Journal Forum. The ACA doesn’t define what it means for a state to “establish” an exchange. And the word is at least somewhat ambiguous. As the ACA uses it, “establish” means “[t]o make or form; to bring about or into existence.”

Nothing in that definition demands a formal act of intentional establishment. In common usage, a consistent practice can be said to constitute the establishment of whatever that practice entails. You can establish a smoking habit without ever intending to do so—indeed, while insisting that you do not mean to establish such a habit. Why not an exchange?

In that vein, consider that fourteen states (including Michigan, Ohio, and Virginia) currently perform extensive plan management functions for These states are primarily responsible for deciding whether plans meet minimum exchange requirements, for overseeing their ongoing compliance, and for collecting data from them about rates and benefits. HHS superintends the exercise of these functions, but the states nonetheless have substantial operational responsibilities.

Might the performance of these essential exchange functions, over time, constitute the establishment of an exchange? The argument finds some support in the ERISA case law, of all places. The courts have consistently rejected the argument that an employee benefit plan is “established” within the meaning of ERISA only when an employer says that it has established a plan. Instead, “ it is the reality of a plan, fund, or program and not the decision to extend certain benefits that is determinative.”

By analogy, the administration could look to the “reality” of an exchange to decide whether a state has established it. Any state that HHS newly deems to have established an exchange would then face a choice. It could either surrender its plan management functions to the federal government (and lose the subsidies) or maintain those functions (and keep the subsidies). In other words, the state would have to decide not whether to establish an exchange, but whether to dismantle it.

Would this unintentional-establishment argument stand up in court? I frankly don’t know. My instinct is that it’s plausible but vulnerable. After all, the ACA doesn’t just speak of “establishing” an exchange; it also speaks of “electing” to do so. And it would be awkward to say that a state that deliberately refused to establish an exchange could be taken to have done just that.

I’d understand if the Obama administration eschewed a controversial, partial, and legally tenuous fix, preferring instead to keep the pressure on Congress and the states. Still, any legal challenge would take time to play out. In the meantime, an estimated three million people could hold onto their subsidies in 2016—which means the administration has three million good reasons to think hard about going it alone.

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