Why Obamacare Will Lose

A lower court's ruling could help the Supreme Court weaken Obamacare's subsidies.

The exterior of the U.S. Supreme Court on March 26, 2012. (National Journal)

National Journal looks at the upcoming Supreme Court case on Obamacare and explains why each side will win. Click here for our story on how the Obama administration will win.

The Supreme Court will hear oral arguments next month in King v. Burwell, the conservative-led lawsuit that will determine the future of the Affordable Care Act

Here's why the Obama administration will lose.

The central issue in King is the formula for calculating Obamacare's premium subsidies. The law says the payments are tied to coverage through an Exchange "established by the State." The challengers say that line means that subsidies are only available in states that set up their own marketplaces—not in the 34 states that punted the task to the federal government.

"The fear is going to be that the Court is going to read these four words in isolation," said Abbe Gluck, a law professor at Yale University who sides with the Obama administration in the case.

The question that keeps nagging at the Justice Department is this: If Congress didn't intend to limit subsidies to state-based exchanges, what are the words "established by the State" doing there? It's one the government will have to answer during oral arguments, given the strong textualist leanings of the Court's conservative majority.

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The most honest answer is probably some version of, who knows? It's a messy statute; this part was written in a hurry—maybe it's just a mistake.

But the Justice Department can't really make that argument before the Court, legal experts said, because courts try to avoid reading parts of any legislation as extraneous. If Congress said something, the courts tend to assume that it did so for a reason.

"It's a simple argument for the petitioners," said Chris Walker, a law professor at Ohio State University and a former clerk to Justice Anthony Kennedy.

So, the government's best bet is to argue that "established by the State" belongs there, but doesn't mean what it sounds like. The Justice Department says "established by the State" refers to any exchange, no matter who established it.

The statute treats state- and federally run exchanges as equivalent in other ways and, the government argues, the statute as a whole indicates that Congress intended for the federally run exchanges to "stand in the shoes" of the states.

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"That phrase is a term of art that includes both an Exchange a State establishes for itself and an Exchange HHS establishes for the State," the Justice Department said in a brief to the high court.

Still, everyone who supports Obamacare and wants to see this case fail would be happier if the words "established by the State" weren't there. And that makes them a problem. The question is, how big a problem?

Under the Justice Department's interpretation, critics argue, "established by the State" is a "term of art" that doesn't mean anything—the sentence would mean the same thing with those words as it would without them. So, again, why are they there?

"Why would Congress add unnecessary words that, on any reading, say precisely the opposite of what it supposedly meant?" the challengers' brief asks.

Legal experts said David Rivkin, who is arguing the case for the challengers, will likely do his best to bring the justices—particularly Kennedy and Chief Justice John Roberts—back to that question.

(RELATED: Will John Roberts or Anthony Kennedy Save Obamacare?)

The Justice Department has a thorough argument about the most natural way to read other parts of the statute, but when the questioning is confined to "established by the State," it will likely stay pretty circular. The further the justices are willing to branch out, the greater chance the government has of winning.

Realistically, the Justice Department has more ways to win than the challengers. But the silver lining for the law's critics is that their strongest argument is the starting point for the court's analysis.

"The four words are definitely on their side, and then they just have to be able to really hammer home that you can read the rest of the statute consistently with that," Walker said.

That's not easy, but it can be done.

The challengers have worked hard to build a case that Congress fully and explicitly intended to limit Obamacare's subsidies to state-run exchanges. It's not an especially strong argument; no lower-court judges have bought it. It's more of a permission structure—a loose collection of facts and theories that might help a conservative justice cast doubt on the government's view of congressional intent, even without a fully formed alternative.

That was enough for a three-judge panel from the D.C. Circuit Court of Appeals, which ruled 2-1 last year that subsidies should only be available in state-based exchanges. Although the majority in that decision didn't buy the challengers' argument that Congress clearly intended to limit the scope of subsidies, as an incentive for states to set up their own exchanges, it said the government's theory of intent wasn't a sure thing, either—and that the text should be the tie-breaker.

(RELATED: 5 Things to Watch in SCOTUS' Obamacare Arguments)

"The fact is that the legislative record provides little indication one way or the other of congressional intent, but the statutory text does. Section 36B plainly makes subsidies available only on Exchanges established by states. And in the absence of any contrary indications, that text is conclusive evidence of Congress's intent," that court wrote.

The D.C. Circuit's majority could provide a sort of road map if the Supreme Court's conservative bloc wants to invalidate the subsidies. It largely accepted the government's argument that federally run exchanges were meant to stand in for state-based marketplaces—but, again, said that doesn't change the meaning of "established by the State."

"The problem confronting the [government] is that subsidies also turn on a third attribute of Exchanges: who established them," the D.C. Circuit wrote.

Such a ruling might appeal to Roberts's inner textualist, offering him a way to rule against a law he presumably doesn't care for, while framing that ruling as the only way to resolve an unclear statute.

The Justice Department needs to emphasize the subsidies' connections to other parts of the statute to steer the Supreme Court away from a similar decision, Gluck said.

"This is a very complicated statute, and the fear is that the Court won't understand it enough to be able to see through the challenger's arguments. That's what I'm most worried about. That's what happened in the D.C. Circuit."

Now read why the Obama administration will win.

— This story has been updated.