King v. Burwell Pre-Mortem: The Spending Clause Question

by Michael Dorf

So much has been said already about the statutory interpretation issue in King v. Burwell (which will be argued on Wednesday), that I thought it might be worth jumping ahead a bit to consider an issue that might arise in the event that the Court finds that ACA subsidies are not available on federal exchanges. I think that this would be the wrong outcome of the case, but it is a live possibility, and thus worth some thought.

What would happen after a ruling for the petitioners? With political pressure already building on mostly Republican governors and state legislators, some would probably establish state exchanges. But probably not all. The ideological opposition to the ACA in some states--and perhaps more importantly, in the Republican primary electorate--is so strong that even though it would make no economic sense, there would be states that do not run state exchanges, perhaps leading to the dreaded "death spiral" of the federal exchanges for those states.

However, even before it came to that, might the objecting states be able to argue that, in light of King (as imagined here), the ACA is impermissibly coercive? Here's how the argument would go:

Money for federal subsidies comes from taxes collected nationwide, but is only distributed to people in states that have established their own exchanges. That arrangement puts states to a terrible choice: Either cross-subsidize health exchanges in other states or establish their own exchanges, which they have a constitutional right not to do, because--under New York v. United States--Congress may not force the states to enact legislation.

Under the current case law, that argument is a loser. NY v. US expressly acknowledges that while Congress may not directly "commandeer" state legislatures, it can offer them financial inducements, via conditional exercises of the Spending power. Moreover, in 1937, in Steward Machine Co. v. Davis, the SCOTUS upheld, as a valid exercise of the Spending power, a regime of unemployment insurance that worked more or less the same way: If states put into place unemployment insurance meeting federal requirements, then employers collecting unemployment premiums got 90% of that rebated as a federal tax credit. There, as in the hypothesized post-King world, the regime created a large benefit for private actors in states that did the federal bidding. But this financial inducement was not found to be unconstitutionally coercive.

Accordingly, if the argument I'm imagining here had been made prior to the 2012 ruling in NFIB v. Sebelius, I would have said it's a clear loser. I think it still loses, but not quite as decisively now, in light of the Court's ruling--inexplicably 7-2 on this point--that conditions on the expansion of Medicaid in the ACA were so hard to resist as to constitute impermissible coercion under the Spending Clause. That aspect of the case arguably marked a shift in the Court's jurisprudence towards greater skepticism of conditional spending.

I nonetheless think that even the Roberts Court would reject the hypothesized Spending Clause challenge as different from the successful challenge to the Medicaid expansion in NFIB on three grounds. First, there's less money at stake here, and the dollar figures--both in absolute terms and as a percentage of state budgets--seem to matter. Second, here, as in Steward Machine but unlike in NFIB, the federal subsidies go to in-state private actors rather than to the state itself, and are thus less of a temptation to the state. And third, the Court in NFIB thought it significant that Congress attached new conditions to receipt of new money as well as money under the prior program. Although Justice Ginsburg's dissent explained persuasively why this was a nonsensical classification, the majority thought it significant, and nothing like it would be true of the state exchange subsidy that would come into play after a ruling for the petitioners in King.

So, as we head into the oral argument on Wednesday, I still expect the government to win; and if the government loses, a state that tried the Spending Clause argument I've previewed here would likely lose. However, I have less confidence in those expectations than my doctrinal analysis should predict, simply because, over the last decade and a half I and other liberals have repeatedly been surprised by the Rehnquist and then the Roberts Court taking seriously or accepting arguments that we thought were off the wall.