Smoking Gun: Obamacare Subsidies For States Without Exchanges Invented 2 Years After Law Passed

by Michael Patrick Leahy

Nov 20, 2014 3:09 PM PT

A new paper by businessman and finance expert Scot Vorse throws an evidentiary grenade into the pending Supreme Court Case on Obamacare, King v. Burwell. The new information, published in a white paper from the Competitive Enterprise Institute, "highlight[s] a growing body of evidence indicating government officials originally planned to offer Obamacare tax credits only on state-established insurance exchanges," according to the accompanying CEI press release.

At issue in King v. Burwell is whether the 2012 IRS rule that provided federal tax subsidies to Obamacare enrollees in the 34 states that have chosen not to open their own exchanges is authorized under the 2010 Patient Protection and Affordable Care Act (Obamacare). The plain language of the law contains no such provision. 

The Competitive Enterprise Institute disclosed when it released Vorse's white paper on Thursday that it has helped fund the plaintiff's legal expenses in King v. Burwell. 

Subsidized premium payments made by the IRS to insurance companies for individual policies have been the key factor driving enrollment in all 50 states. Should the Supreme Court decision go against the federal government, it could send Obamacare into a death spiral as the number of enrollees, already well below the 19 million anticipated by the administration when the law passed in 2010, could plummet in the 34 states without their own exchanges.

Compare, for instance, how the ruling would effect the out-of pocket expenses of two individuals with the same income and health characteristics. One resides California, which has its own exchange. Another resides in Texas, which does not have its own exchange.

A Supreme Court decision against the federal government would have no impact on the out-of-pocket expenses of the California resident. If he's currently paying a monthly health insurance premium of $500 and receiving a $400 monthly premium subsidy (calculated based on income and health characteristics specified in the 2010 Obamacare law) that subsidy would continue to be paid directly to his insurance company by the IRS. The California resident's monthly out-of-pocket expense would remain at $100.

In contrast, such a decision would dramatically increase the out-of-pocket expenses of a Texas resident with the same income and health characteristics and the same $500 per month health insurance premium. Unlike the California resident, the Texas resident's insurance company would no longer receive a federal subsidy. The Texas resident's out-of-pocket monthly premium expense would increase from $100 to $500, a $400 increase.

In his white paper, Vorse presents compelling evidence that from March 23, 2010, when President Obama signed Obamacare into law, until early 2012 no one in Congress or the Obama administration interpreted the law as offering federal insurance premium subsidies to residents of states that did not set up their own health exchanges.

Vorse points out that as late as January 2012, MIT professor Jonathan Gruber, the "architect" of Obamacare whose recent admissions about the law caught on video have backfired on its supporters, vigorously asserted that subsidies were only available in states that had established their own exchanges.

Speaking at the Noblis Innovation and Collaboration Center on January 18, 2012, Gruber told the audience: "if you're a state and you don't set up an exchange that means your citizens don't get their tax credits." New information contained in Vorse's white paper shows that public documents from the Obama administration's first two years implementing the law corroborate Gruber's 2012 assertion.

"Based on the paper trail of several government contracts and other documents, it is clear Jonathan Gruber was not the only person working on Obamacare who believed subsidies would only be provided to individuals purchasing insurance on state-based exchanges," Vorse writes.

According to the federal government's brieffiled with the Supreme Court on October 3, "The IRS [on May 23, 2012], through notice-and-comment rulemaking, interpreted Section 36B [of Obamacare] to make credits available to all eligible individuals who purchase insurance on an Exchange—both in States that establish the Exchanges for themselves and in States that are unable to do so or that opt to allow HHS to establish the Exchanges in their stead."

But Case Western Reserve University's Jonathan Adler, a professor of law involved in the plaintiff's case, told the New York Timeson November 8 that "[g]ranting tax credits to those who need help purchasing health insurance may be a good idea, and may have bipartisan support, but the I.R.S. lacks the authority to authorize such tax credits where Congress failed to do so."

Vorse's new white paper adds compelling evidence that backs up Adler's argument.

"What the administration is saying today," Vorse wrote on Thursday, "directly contradicts what HHS, Treasury, and the IRS did for the first two years of Obamacare’s implementation. It was not until many states opted out that the administration’s story began to change."

As the CEI pointed out in its news release: "Vorse's findings demonstrate that although HHS helped states develop a tax-credit calculator, the department initially set out to establish its federal exchange without a calculator and would not provide users any information about tax credits."

In his white paper, Vorse writes: "[T]he Obama administration and the Department of Health and Human Services required states establishing their own exchange to build a tax credit calculator. However," he continued, "for two years after passage of the law, they did not require the same for the federal exchange. These actions provide additional support that the Obama administration and HHS understood that only states that established their own exchanges were entitled to tax credits—the exact opposite of what they have been arguing in federal court."

Vorse presents a compelling case that after the President signed the Patient Protection and Affordable Care Act (Obamacare) on March 23, 2010 "the IRS initially began developing a rule to make tax credits available only on exchanges established by a state. As the findings outlined below show, HHS had a similar understanding of the law."

Significantly "in order for an exchange website to offer tax credits, it must have a tax credit calculator that allows individuals to view the actual cost of their coverage after tax credits have been applied to their premiums." Vorse notes that "[o]fficial documents show that while HHS moved quickly after [Obamacare's] enactment to help state governments make tax credits available through state-based exchanges, for nearly two years, it developed its HealthCare.gov website without any effort to offer tax credits on the federal exchange."

The timeline of events highlighted in Vorse's report begins in March 2010 and ends in May 2012:

March 23, 2010 – President Obama signs the Patient Protection and Affordable Care Act (Obamacare) into law.

January 20, 2011 –  "Nearly three months after issuing its first guidance document, HHS releases the Cooperative Agreement to Support Establishment of State-Operated Health Insurance Exchanges, the governing agreement for establishing “state-operated” health insurance exchanges. That document provides significant insight into HHS’ views at the time. This agreement specifies 'state-based' or 'state-operated' exchanges 17 times. The terms 'federally facilitated exchange' and 'federal exchange' are never used."

February 16, 2011  – "HHS awards millions to states to develop key technology and collaborate with other states but keeps HealthCare.gov out of the picture."

Prior to Early March 2011 – "Early drafts of tax credit regulations specify tax credits are only for state established exchanges. After a months-long investigation into the development of the IRS’s tax credit rule, a Joint Staff Report to the U.S. House of Representatives published on February 5, 2014, concludes: 'Early drafts of the proposed premium subsidy regulation contained the statutory language restricting tax credits to Exchanges established by the State.' This language was removed from those drafts in early March 2011."

March 16, 2011 – "HHS creates an online system for states to share technology with other states but not with HealthCare.gov."

March 23, 2011 – "Louisiana announces that it will not set up a health insurance exchange."

July 15, 2011 – HHS issues a request for comments that suggests it has not started developing a tax credit calculator. HHS releases draft rules for health insurance exchanges and qualified health plans, and requests comments on whether a model tax credit calculator would be helpful for the states. This request suggests HHS has not yet started developing a tax credit calculator.

September 30, 2011 – "HHS signs a contract with CGI Federal to develop HealthCare.gov with a revised Statement of Work. The contract does not mention a tax credit calculator and includes only five references to tax credits. All of these references are unrelated to HealthCare.gov providing tax credits."

January 11, 2012 – "Seven states [Kentucky, Maine, New Mexico, North Dakota, Tennessee, Utah, and Virginia] request written opinion from Attorney General on federal exchange tax credits so they can make a decision" about whether or not to establish their own health care exchanges.

January 18, 2012 – Obamacare architect Jonathan Gruber says "if you're a state and you don't set up an exchange that means your citizens don't get their tax credits."

March 27, 2012 – "The IRS distributes Final rules/Interim final rules. One noteworthy comment in the filing is that the IRS took 'recommendations into account' for HealthCare.gov as a model tax calculator. By this time, HHS has been granting money and requiring states to develop tax credit calculators for 18 months, yet still the federal government is only considering building a model tax calculator."

May 3, 2012 - "HHS revises the CGI contract Statement of Work. The revised statement of work has three significant modifications:

   1) A tax credit calculator is now required on HealthCare.gov (there are seven references to a tax credit calculator in the modified statement of work compared to none in the original);
   2) HHS will from this point forward collaborate with states; and
   3) CGI is now required to go on 10 to 12 state visits to share technology.

In short, more than two years after the law passed, HHS has finally decided it must start developing a tax credit calculator for HealthCare.gov."

May 16, 2012 – "HHS finally distributes HealthCare.gov guidance. The guidance says that states operated as part of HealthCare.gov are entitled to premium tax credits."

May 23, 2012 - The IRS issues a rule that interprets Section 36B of Obamacare as meaning subsidies should be made available to residents of states that do not have their own healthcare exchanges. 

When the Supreme Court rules on King v. Burwell in June of 2015 it will add what may be the most important entry to  this timeline, one that could well mark the death knell for Obamacare.

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