On Lapses in the Law: The Affordable Care Act's Lemon Doughnut

Max Raskin*

Often the real world is stranger than the hypotheticals we mere law students can conjure up. My friend Jack Millman recently published a paper in the Ohio State Online Law Journal detailing one of these real world lapses in the law that currently exists as a result of the Affordable Care Act and the Supreme Court’s decision upholding its key provisions.

Having some fun with the doughnut hole, Millman offers a unique tax-planning stratagem that would benefit those in the doughnut’s hole – hit the slots.

Individuals are eligible for health insurance subsidies under the Affordable Care Act if their incomes are between 100 and 400 percent of the federal poverty level. Because some states have chosen not to expand Medicaid, there is a group that falls below this range, but also outside of Medicaid coverage. It is estimated that about five million Americans are too poor for Obamacare, but too rich for Medicaid. As Millman contends, this was almost certainly not the intent of the Act, but it is the situation that currently exists.

Having some fun with the doughnut hole, Millman offers a unique tax-planning stratagem that would benefit those in the doughnut's hole – hit the slots. By going to a casino and gambling, an individual can inflate their estimated income and become eligible for subsidies – benefits that could be worth thousands of dollars.  Because the subsidies are based on estimated income, the actual result of the gambling should not matter as long as the transaction is properly structured.  And even if the taxpayer ends up with an actual income under 100 percent of the federal poverty level, the amount of subsidies they have to repay are capped at $300 or $600 for a family.

For Whiggish optimists on all sides of the political spectrum, this situation will be rectified sooner, rather than later. An example from the Establishment Clause might be instructive to show how real-life absurdities lead to a refiguring of doctrine.

The doughnut in the ACA is bad for your health. 

The doughnut in the ACA is bad for your health. 

In the 1980s, there were two competing strains of doctrine dealing with government aid to religious schools. The first was the separationist view, codified in the Court’s Lemon Test, which held that the government would be impermissibly entangled with religion if it tried to ensure the aid it gave would be purely secular. The second was a strain that, among other things, stressed the neutral manner in which the aid was distributed, the secular motivations of the legislators, and the benefits to the children. These two strains led to a series of cases where the comedy of line drawing reached noticeable proportions to members of the Court as well as legislators. In a school prayer case called Wallace v. Jaffree, then-Justice Rehnquist derided the Lemon Test for the odd conclusions it was generating, “For example, a State may lend to parochial school children geography textbooks that contain maps of the United States, but the State may not lend maps of the United States for use in geography class. A State may lend textbooks on American colonial history, but it may not lend a film on George Washington, or a film projector to show it in history class.” Posed differently by Senator Daniel Patrick Moynihan, acting as a Socratic law professor: “What about atlases?”

These fractured opinions led to a rethinking about the government aid jurisprudence and eventually the Court reversed some of its earlier thinking, establishing a more permissive approach to government aid. For the less cynical optimists, this doctrinal shift was not merely a response to personnel changes in the Court, but rather a reasoned reaction to the playing-out of unreasonable theoretical doctrine.  

Today, we have an untenable situation with five million Americans falling into the gap caused by a combination of judicial doctrine and legislation. It is analogous to allowing students of religious schools to have geography textbooks filled with maps, but denying the maps themselves.

The reason I am writing is to say that if the Whig theory of the law is correct, which is to say that the arc of jurisprudence tends towards justice and coherence, then something’s gotta give.

*Max Raskin is a J.D. Candidate in the Class of 2016 at New York University and a Staff Editor for the Journal of Law & Liberty.