One of the issues underlying Halbig v. Sebelius and three similar lawsuits making their way through federal courts is whether Congress intentionally restricted the Patient Protection and Affordable Care Act’s (PPACA) private health‐​insurance subsidies to individuals who buy coverage through state‐​established Exchanges. If so, that would mean the Internal Revenue Service’s decision to issue subsidies in the 34 states that did not establish Exchanges (i.e., that have federally established Exchanges) is illegal. For more on the IRS’s attempt to rewrite the PPACA in this fashion, click here.


On Twitter, a skeptic challenges my coauthor Jonathan Adler’s claim that Congress intended to withhold subsidies in states that did not establish Exchanges, arguing, “The exchanges serve no purpose at all absent subsidies.” (Read the entire exchange here.)


In legal jargon, the skeptic argues that a literal interpretation of the statutory language restricting subsidies to those enrolled “through an Exchange established by the State” would produce absurd results, and the courts should defer to the agency’s reasonable interpretation.


Exchanges, however, are regulatory bureaucracies that perform other functions and serve other purposes besides dispensing subsidies. The PPACA’s authors, the Obama administration, and the president himself have all acknowledged this.

• In 2008, Senate Finance Committee chairman Max Baucus wrote, “The Exchange would be an independent entity, the primary purpose of which would be to organize affordable health insurance options, create understandable, comparable information about those options, and develop a standard application for enrollment in a chosen plan.” 
• In 2009, President Obama said that health insurance Exchanges “would allow families and some small businesses the benefit of one‐​stop‐​shopping for their health care coverage and enable them to compare price and quality and pick the plan that best suits their needs.”
• Senate Majority Leader Harry Reid (D-NV) has said the PPACA “guarantees real choice and competition to keep insurers in check… By creating strong competition, we’ll reduce skyrocketing health care costs.” 
• The PPACA’s Senate drafters wrote, “Insurers that jack up their premiums before the Exchanges begin will be excluded–a powerful incentive to keep premiums affordable.”
• The Internal Revenue Service’s proposed tax‐​credit rule issued August 17, 2011 explains, “Exchanges will offer Americans competition and choice. Insurance companies will compete for business on a level playing field, driving down costs. Consumers will have a choice of health plans to fit their needs and Exchanges will give individuals and small businesses the same purchasing power as big businesses.”

In fact, the Exchanges are supposed to perform more than a dozen functions besides issuing subsidies. Here are some of the ways the PPACA’s health insurance Exchanges attempt to serve the goals of “one‐​stop shopping,” price and quality comparisons, expanding choice and competition, and reducing health insurance premiums, even in the absence of subsidies:

1. Facilitate the creation of SHOP Exchanges, where premium‐​assistance tax credits are not available. §1311(b).
2. Certify, recertify, and decertify qualified health plans. §1311(d)(4)(A).
3. Maintain a toll‐​free telephone hotline. §1311(d)(4)(B).
4. Monitor premiums and require issuers of QHPs to justify premium increases. §1311(e)(2). 
5. Monitor QHPs’ compliance with hospital quality measures. §1311(h).
6. Monitor QHPs’ compliance with mental health parity regulations. §1311(j).
7. Require transparency from issuers of QHPs, including periodic financial disclosures; and oversee compilation of information on enrollment, disenrollment, the number of claims that are denied, rating practices, cost‐​sharing and payments with respect to any out‐​of‐​network coverage, enrollee and participant rights, and “other information as determined appropriate by the Secretary.” §1311(e)(3)(A).
8. Collect data from QHPs on the quality of care, including “case management, care coordination, chronic disease management, medication and care compliance initiatives…, prevent[ing] hospital readmissions through a comprehensive program for hospital discharge that includes patient‐​centered education and counseling, comprehensive discharge planning, and post‐​discharge reinforcement by an appropriate health care professional…, reduc[ing] medical errors through the appropriate use of best clinical practices, evidence based medicine, and health information technology…, [and] the implementation of wellness and health promotion activities [and] activities to reduce health and health care disparities.” §1311(g).
9. Rate QHPs based on quality, price, and patient satisfaction. §1311(d)(4)(D).
10. Maintain a website with standardized comparative information on qualified health plans. §1311(d)(4)(C), (E).
11. Make eligibility determinations and enrolling applicants for Medicaid and SCHIP. §1311(d)(4)(F).
12. Issue exemptions from the individual mandate, and certify such exemptions to the IRS. §1311(d)(4)(H).
13. Facilitate the purchase of health insurance across state lines. §1311(f).
14. Establish a Navigator program and awarding grants to Navigators. §1311(i).
15. Facilitate the merger of the individual and small‐​group markets (at each state’s discretion). §1312(c)(3).
16. Provide an employee benefit (health insurance coverage) for members of Congress. §1312(d)(3)(D).

Nor is the PPACA the only piece of legislation Congress debated that would allow for Exchanges without premium subsidies. As I have explained elsewhere, the Democrats who controlled the Senate’s Health, Education, Labor, and Pensions (HELP) Committee in 2009 approved a bill that would have withheld similar Exchange subsidies in states that failed to implement that bill’s employer mandate. This is true whether the state established its own Exchange, or the federal government established one for the state. Since the HELP Committee allowed for the creation of both state‐​run and federal Exchanges without subsidies, its drafters presumably saw the Exchange as serving more than just that one purpose. 


Twelve Senate Democrats voted for the HELP Committee bill. Why should we be surprised that they–and the remaining Senate Democrats, and the vast majority of House Democrats, and President Obama–would approve the PPACA’s similar provisions?


Update: This post has been updated to include the 2008 Baucus quote.



Update #2: This post has been updated to include the quote from the IRS’s proposed tax‐​credit rule.