Chief Justice Roberts and Justice Kennedy (Pool Image/Getty)

The battle over insurance subsidies.

With the Supreme Court on the brink of invalidating an IRS rule that provides billions of dollars of subsidies in states that did not establish Obamacare exchanges, defenders of the law have suddenly become fair-weather federalists. They argue that the Obamacare regulation must be upheld, because invalidating it would intrude on state sovereignty. Yes, you read that right: Allowing the federal government to expand the reach of Obamacare and its mandates into states that refused to create Obamacare exchanges would promote states’ rights. While this argument may seem crazy on its face, it has emerged as a Hail Mary effort to obtain the blessing of the Court’s perennial swing vote, Justice Anthony M. Kennedy. This plan, however, may seriously backfire and unravel all of Obamacare, not just this provision. If the subsidy scheme is in fact unconstitutionally coercive to states, the correct remedy is to strike the law in its entirety, not salvage its legitimate parts.


In order to make insurance more affordable, Obamacare pays subsidies to people who buy policies on an “exchange established by the state.” The administration expected that all 50 states would establish exchanges, but in fact more than three dozen states declined. To ensure a pain-free implementation of the law despite this fact, the Obama administration’s Internal Revenue commissioner issued a rule saying that subsidies would be paid in all states, regardless of whether they established an exchange. This rule was challenged as inconsistent with the ACA, and now the Supreme Court is poised to invalidate it in the case of King v. Burwell.


Supporters of the law, recognizing that they have a weak argument based on the text of the ACA — after all, the law says subsidies are limited to an “exchange established by the state” — have turned to federalism to save Obamacare. (Curiously, they were silent on the coercive nature of Obamacare’s Medicaid expansion when it was challenged in 2012.)

The argument goes something like this: Congress could not have intended to deny subsidies in states without exchanges, because that would render insurance policies unaffordable in those states, and trigger the dreaded “adverse-selection death spiral.” The Democratic Congress in 2010, they argue, would never have forced this Hobson’s choice on recalcitrant red states. Therefore, in order to promote the interests of federalism and states’ rights, the Supreme Court should interpret the statute so that subsidies are available in all states. In other words, the potential intrusion onto federalism is so severe that the justices should place a thumb on the scale in order to uphold the government’s reading of the statute, even if that is not how Congress actually designed it.


If this is how the ACA operates, fair-weather federalists should be very careful what they wish for. Justice Kennedy — the target of this federalism pitch — wrote in the joint dissent in NFIB v. Sebelius that the proper remedy for such a coercive law is not to discard its unconstitutional provisions, but to invalidate it in its entirety. With respect to the “question of remedy” in the face of Obamacare’s coercive Medicaid expansion, Justice Kennedy — joined by Justices Scalia, Thomas, and Alito — wrote that the “most natural remedy would be to invalidate the Medicaid expansion.” All of it, whether a state wanted the additional Medicaid funding or not.


Some may argue that invalidating the subsidies for all states goes too far. Not so, said the joint opinion in NFIB: A judicial remedy that “imposes on the Nation” a law that “Congress did not enact . . . can be a more extreme exercise of the judicial power than striking the whole statute and allowing Congress to address the conditions that pertained when the statute was considered at the outset.” Applying this principle to King v. Burwell would mean that no state, even those that had established exchanges, could receive subsidies. Allowing the Court to split the difference with a Solomonic remedy that Congress did not design would amount to a “judicial usurpation.” Rather, if the Court invalidates the provision in its entirety, Congress would get to start with a blank slate, instead of salvaging a judicially created chimera.


The trouble for ACA supporters doesn’t end with this case. Even if the Court jettisons the subsidies only in states that did not establish an exchange, you can be certain that some enterprising state attorneys general will file suit immediately. The inevitable multi-state challenge will argue that the ACA as designed cannot exist without the subsidies, one-third of the law’s three-legged stool. As a result, the core provisions of the ACA — the individual mandate and the guaranteed-issue and community-rating provisions — would need to be scuttled as well. If successful, those 37 states would become exempt from all the most burdensome aspects of Obamacare.

Under the best-case scenario for Obamacare supporters, the Court may decide to read the law in such a way as to save the challenged IRS rule. Indeed, such a “saving construction” was effectively how Chief Justice Roberts resuscitated Obamacare’s Medicaid expansion for states that wanted it. But even there, Roberts justified his life preserver to Obamacare on the basis of the fact that the law threatened to withdraw pre-existing funding that states had already agreed to. However, this distinction does not exist for the year-old Obamacare subsidies, which many states have expressly refused. If the severability analysis of the joint opinion in NFIB controls, then supporters of Obamacare have much, much more to fear than the invalidation of the IRS rule. Federalism will sink, rather than save, Obamacare.