Are Federal Exchanges Going To Bring Down ObamaCare?

Provisions in the Affordable Care Act may cause the entire statutory scheme to collapse.

The Washington Post’s Sarah Kliff makes note of a new paper by Law Professor Jonathan Adler and Cato’s Michael Cannon that argues that there is a statutory flaw in theAffordable Care Act that could bring the entire law crashing down on itself. Here’s how Kliff explains it:

Let’s back up and look at Adler and Cannon’s argument. It starts with the the Affordable Care Act’s defining a health insurance exchange, in scintillating Section 1311, as a “governmental agency or nonprofit entity that is established by a state.”

The last three words are the crucial ones, because they indicate that only states can establish exchanges under that Section 1311. There’s a whole other part of the law, Section 1321, that allows the federal government to set up federal exchanges in states that do not take on the task themselves.

This all matters in the all-important Section 1401, where it lays out who can get a federal insurance subsidy. There, the law says that only those who are “enrolled … through an Exchange established by the State under 1311.”

If there’s a smoking gun in this case, it’s that sentence right there. It says that the only people who can qualify for subsidies are those who get coverage through a state-based exchange.

“The statute was very poorly drafted if the intent was to cover federal exchanges,” says Kevin Outterson, a Boston University professor who focuses on health policy and who previously worked as a tax attorney. “If I had a client who had recently lost some money on a provision like this, I’d say you have a pretty good chance to win that case.”

The debate now centers on whether Section 1401 has a drafting error. Did the federal government mean to count federally-established marketplaces there and miss a word? Or did they actually mean to send insurance subsidies only to states that did the heavy lifting?

Cannon and Adler argue its the latter: The tax subsidies were meant encourage states to build exchanges and not leave the task to the federal government. They point to an exchange in the Senate Finance Committee, where Sen. Max Baucus (D-Mont.) told Sen. John Ensign (R-Nev.) that using the tax credits were a “condition to participate in the Exchange.”

Administration officials and several law professors argue that the argument that Adler and Cannon are making is flawed and that there’s no fatal contradiction in the law. However, statutory construction is an area where courts have proven themselves reluctant to read something into the law that isn’t there, regardless of what they evidence of Congressional intent might be. If their argument is accepted it would mean that only people participating in exchanges set up by the states would be eligible for tax subsidies to purchase insurance, thus locking out anyone in a state where the Governor and/or Legislature has refused to set up an exchange likely unable to afford insurance. In the end, and depending on how many states stay out of the exchanges, that would mean that the entire logic for the PPACA would melt away and health care costs would increase exponentially.

The bigger problem, though, is that the Federal Government may find itself unable to set up workable exchanges if a large number of states refuse to create state-run exchanges. In a piece at Cato’s blog, Cannon links to a PoliticoPro article (paywalled unfortunately) that makes the point clear:

More than $860 million of President Barack Obama’s proposed $1 billion increase in the CMS budget will go to building the federal exchange, acting [Centers for Medicare and Medicaid Services] Administrator Marilyn Tavenner said during a budget briefing at HHS on Monday.

This funding is necessary in part because the amount originally appropriated for the federal costs of implementing the Affordable Care Act — $1 billion — is expected to be gone by the end of this year, HHS officials said.

Assistant Secretary for Financial Resources Ellen Murray said at the briefing that half of these funds have already been obligated, and the remaining amount will be used by the end of the year.

She also said states will still be able to get help building exchanges, because other ACA funds are still available for exchange work.

“Funding for [state grants] was provided in the Affordable Care Act, so the money we’re asking for in this budget is just for the federal exchange,” Murray said.

There’s no chance that the Administration would be able to get that money out of a Republican Congress or a Senate either under Republican control or with a sizable Republican majority. What that means is that, if enough states resist the call to set up exchanges and the Federal Government becomes responsible for doing it, then the ACA would end up collapsing out of sheer inability to pay for it.  And anyone who doesn’t think that the GOP is just going to roll over and cooperate with implementing the PPACA if Obama is re-elected is fooling themselves. If they can’t repeal it, they can essentially destroy it.

Between this and the legal arguments noted above, there very well may be a self-destruct mode right inside the Affordable Care Act, and there’s little that the Administration can do about it.

FILED UNDER: Congress, Healthcare Policy, Law and the Courts, US Politics, , , , , , ,
Doug Mataconis
About Doug Mataconis
Doug Mataconis held a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May 2010 and contributed a staggering 16,483 posts before his retirement in January 2020. He passed far too young in July 2021.


  1. al-Ameda says:

    What a recipe for a colossal stalemate.

    America – The can’t do country.

  2. Dave Schuler says:

    Nah. If this were Britain, maybe. Details of wording tend to be more important under British law. American judges are more pragmatic than that.

    Although I must say that this does prove Nancy Pelosi wrong. They passed the law and we still don’t know what’s in it.

  3. rudderpedals says:

    It only breaks it in a world that continues to elevate form over substance.

  4. Gromitt Gunn says:

    I find it really interesting that Cato is deliberately making an argument that has the effect of reducing economic freedom and mobility for individuals. Frankly, I’m embarassed for them. I guess they’re just a bunch of Koch-heads after all. Disappointing.

  5. Let me get this straight … section 1311 talks about state exchanges, and the very next one, section 1312 talks about the federal government setting them up where states fail?

    And some idiot sees the two adjacent sections as contradictory? Come on, it is conditional logic.

  6. Oh … dyslexia is a terrible disease.

  7. John,

    The argument is that the statutory language that authorizes subsidies for purchasing insurance provide via exchanges only mentions state exchanges, not exchanges set up by the Feds. The argument, then, would be that the Feds cannot, by law, provide subsidies to people who are part of Federal exchanges.

  8. Tsar Nicholas says:

    Well, this is just one quarter of the problem. It won’t take a collapse of the exchange scheme to result in skyrocketing healthcare premium costs. Healthcare premium costs already are skyrocketing, and have been since 2009-2010, before this train wreck of a legislative farce even kicked into gear.

    There are three other fundamental flaws with the Act: (1) for people with dependents the penalties for not complying with the individual mandate are less than the costs of individual health coverage; large numbers of people therefore will continue to be uninsured by choice; (2) the Act only requires employers to pay for 60% of employees’ premium costs (much less than what most employers historically have paid) and vast numbers of small and mid-sized businesses will take the Feds up on that offer, meaning that many people will have worse coverage packages post-Obamacare than they did pre-Obamacare; (3) large numbers of states for obvious reasons will refuse to expand their Medicaid rolls and there’s nothing the Feds can do about it, meaning a signature portion of the Act is nothing but an unfunded mandate of nothingness.

    What the Democrats have done here is akin to a trauma surgeon deciding to treat a gunshot victim with a chest wound by amputating the man’s arms and legs. Unless this turkey of a law is repealed in toto it won’t end well for the country.

  9. Fog says:

    If RombamaCare is so bad, then why isn’t Massachusetts a train wreck already?

  10. @Doug Mataconis:

    I actually love that IANAL is one of the oldest Internet abbreviations. And I am not.

    I am a programmer though, and as such totally comfortable with conditional logic. If not A, then B.

    It seems totally reasonable to me that these sections (even if separated by a little distance) present the first (and preferred) case of state exchanges, and then describe what happens if they are not created. If not A, then B.

    But in the ancient letters of the Internet, IANAL.

  11. Heh, since I got the last one right, that the mandate is a tax, even as lawyers got it wrong, I might have too much confidence about this one being conditional. We can wait and see …

  12. sam says:

    @Tsar Nicholas:

    large numbers of states for obvious reasons will refuse to expand their Medicaid rolls and there’s nothing the Feds can do about it

    Really? The Feds have already done something about it. See, The super wonky reason states may join the Medicaid expansion:

    [The reason depends] on something called DSH payments (pronounced “dish” payments, in health-wonk parlance). That stands for Disproportionate Share Payments, extra money that Medicaid sends to hospitals that provide a higher level of uncompensated care. Those payments, which totaled $11.3 billion in 2011, are meant to offset the bills of the uninsured.

    The Affordable Care Act phases out these payments. If most Americans are covered under the Affordable Care Act, after all, hospitals would presumably see a reduction in unpaid bills. They wouldn’t need the supplemental payments anymore.

    Can you hear the howls from the hospitals and hospital associations now? Note, too, that this doesn’t run afoul of the Court’s ruling that you cannot penalize a state for not accepting the expansion. This is a straight phaseout of the DSH payments that affects all states equally, those that accept and those that do not.

    Moreover, see, Arkansas says Medicaid expansion saves $372 million. How do think this will play in Mississippi?

    You’re shoveling shit against the tide, Nick.

  13. Herb says:

    “If they can’t repeal it, they can essentially destroy it.”

    Back to the “if this happens, we can kill healthcare reform.”

    Sooner or later, we’ll get to “If we try to make this work, we can build a better healthcare system in this country.”

  14. Barry says:

    @Tsar Nicholas: “Healthcare premium costs already are skyrocketing, and have been since 2009-2010for decades.”

  15. sam says:

    BTW, on why Rick Perry needs to have his meds recalibrated, see Who’s Afraid of the Medicaid Expansion (and Why)? A taste (to read against the background of the DSH payments phaseout):

    1. As a matter of simple arithmetic, Texas will receive at least $9 of federal money for every $1 it puts into this program, on an ongoing basis in the “out years.” In the first few years the ratio is even more lopsided, with Texas getting something like $20 for every $1 it puts in. [This will amount to $52.5 billion in the period from 2014-2019.]
    2. This money will create a tremendous number of jobs—many of them quite good jobs, at hospitals and clinics throughout Texas. This spending also has a multiplier effect. It will grow the Texas economy.
    3. Even if we refuse to take the federal money, Texans will still be paying, through our federal taxes, for the Medicaid expansion in other states. Our taxes will go out; the only question is whether we’ll get our share back.
    4. The Medicaid expansion will significantly cut the number of uninsured in the state. This means that some substantial number of Texans who otherwise would die, will live.
    5. Even if you don’t care about that, consider who is paying today for the care the uninsured receive and cannot pay for (uncompensated care). There are two main sources. The first is local and state government. This money comes from our taxes—often property taxes. The rest comes from cost-shifting: making those with insurance pay more than what their medical care actually costs.
    6. Notice a pattern? Both of these sources of funding are from you, ordinary Texan. You are paying for the uninsured. You will save money as a result of the Medicaid expansion.

    Mr. Perry seems more interested in refighting the Civil War than addressing the problems of folks in his state. Pity, really.

  16. @Herb:

    It’s all rather desperate. It presumes that you can ignore intent and say “we caught you on a word”

    BTW, I look forward to my state’s insurance exchange. Were I to move, I’d want my destination to have one for easy selection of new policies. Why wouldn’t I?

    I have applied for individual insurance under the current system, and basically had to fight my way to acceptance with each provider. It is currently an adversarial system. They want you to prove perfect health (which I had, but it was still a cycle of letters and counter-letters), and then they let you into a plan. If you are applying to more than one you’ve got to juggle all these applications and plan types.

  17. Console says:

    States refusing these things are little more than temper tantrums. The one free market, individual choice part of the plan is the exchanges… and that’s what states are going to try to avoid setting up? The fact that this exists as a possibility is the reason there is no point to take conservatives seriously on healthcare.

  18. PD Shaw says:

    Illinois can’t afford to create a state exchange given its current budget problems, so its entering into a partnership with the feds who will be running Illinois’ exhcange out of D.C. with the Illinois state seal affixed to it.

  19. stonetools says:

    Didn’t we just see this movie? According to Roberts, the courts should ( and IMO, will ) read the statute in such a way as to achieve the intent of the legislators. Sure, if the courts were straining to find a way to make the statute unworkable, they would interpret it that way. But if they did so, and it went to the SCOTUS, I expect they would be reversed.

  20. Jeremy R says:

    This is kind of a predictable side effect of congress being so broken lately. Every bill of this size and complexity in the past needed tons of legislative tweaks, over time, to fix unexpected issues that crop up. Since instead of wanting to fix things the vandals in the GOP would only use each of these inflection points to break & blackmail, HHS will just have to muddle through (at least until enough of these nullification types who refuse to govern are swept out of power).

  21. al-Ameda says:

    @Tsar Nicholas:

    Healthcare premium costs already are skyrocketing, and have been since 2009-2010, before this train wreck of a legislative farce even kicked into gear.

    Did you forget about the period from around 1997 to 2009?

    Health insurance premiums were increasing at an annual rate in excess of 3 times the rate of inflation. I had to change my health insurance plan 4 times during the period 1997 to 2009.

    Health insurance premium rates have been rocketing well-ahead of inflation rates for over 15 years. And that had nothing to do with ACA.

  22. KariQ says:


    Health insurance premium rates have been rocketing well-ahead of inflation rates for over 15 years. And that had nothing to do with ACA.

    I believe you have forgotten the time machine by which everything bad that has happened in the entire history of the world is Barack Obama’s fault. I’m pretty sure he’s responsible for the fall of Rome and the sack of Constantinople.

    No doubt any weakness or perceived weakness will be exploited by those who oppose the law and want to prevent it from being enacted. Weaknesses will continue to be invented if the previous one fails to deliver the hoped for result of causing everything to crash and burn.

    It would be nice if more experts, instead of trying to find every imaginable roadblock to implementation, would look for ways to help more people get insurance.

  23. David M says:


    It would be nice if more experts, instead of trying to find every imaginable roadblock to implementation, would look for ways to help more people get insurance.

    I’m really starting to dislike Adler, Barnett, Cato, etc as they literally are trying to take health insurance away from millions of people.

  24. Rob in CT says:

    Tiring, isn’t it?

  25. John D'Geek says:


    Sooner or later, we’ll get to “If we try to make this work, we can build a better healthcare system in this country.”

    I’d prefer “One of these days, someone will do a ‘root cause analysis’ and figure out why the healthcare system in this country is broken. Then …”. But, this is politics as usual, so I’m not holding my breath …

    If you thought that was too geeky, you might want to skip this next part. 😀

    @john personna:

    I am a programmer though, and as such totally comfortable with conditional logic. If not A, then B.

    Ah, well then this might help:

    Lawyers are like compilers — they do exactly what you tell them to do, no matter how stupid that might be.

    To translate the current predicament into code:

    bool isStateParticipating = getDecisionFromState();
    bool isFederal = true;
    // Dang thing removes my indentation!!!
    if(isStateParticipating ) { payUp(); }

    Notice that if isState is false, no one will pay up? Programmer error, file a bug.

    Just remember that there are a lot of programmers that think the entire code base is flawed and they’d like to start over from scratch. So they will simply refuse to maintain it and require a full rewrite.

    Is it cheating? Absolutely. But, then, if there were honest politicians on capitol hill we wouldn’t be in this predicament in the first place. (Insert Mark Twain quote here).

  26. @John D’Geek:

    Heh, well. As I say, I got the last one right. We’ll see who guesses right this round.

  27. Rob in CT says:

    Damn, man. I’d like to start from scratch too. It’s a whole lot easier, for one thing! But it doesn’t happen that way, unfortunately.

    Think of some city planner, looking at Boston. Could you design it better? Hell yeah! But it’s already there. So when you decide to do something like the Big Dig, it’s way harder than it would’ve been had the original highway system been built better. You’ve got to keep traffic moving while at the same time replacing the existing infrastructure.

    New England saying: You can’t get there from here.

    I’d like to reform the tax code by tearing the whole thing up and starting fresh. Not gonna happen. Tax reform, if/when it does happen, will be a bunch of tweaks to the existing structure and none of us will be fully satisfied with the outcome.

    Tearing it all down and starting anew is a nice fantasy.

  28. Trumwill says:

    Aren’t some liberals consistently complaining about red states living on the federal government’s dole? Shouldn’t they be applauding the turning down of federal funds? A lot of them certainly give them grief for the money they do take, after all.