CONFIDENTIAL

December 15, 2010 MEMORANDUM For: House Republicans From: Dick Armey, , and Dean Clancy Subject: Repeal Is Achievable

Congratulations on a great year. Big-government supporters may still have formal control of Congress for another few weeks, but they are clearly on the retreat. Routed at the polls last month, forced to accept the Bush tax cuts this month, rebuffed in court on Obamacare this week -- it all confirms that big- government ideas are in retreat while limited-government reform ideas are making a long-overdue comeback.

Washington has clearly turned a corner, moving away from a conversation centered around bailouts, “stimulus,” and ever-bigger government toward a conversation focused on job creation, tax relief, and spending restraint.

Even the Obama Debt Commission report, released a couple weeks ago, confirms this. The commissioners were absolutely right in their analysis of the fiscal problems facing our nation. But their prescription -- raise taxes by $1 trillion, but don’t touch $1 trillion in Obamacare spending -- was itself bizarrely out of touch.

On the other hand, last month’s bipartisan Ryan-Rivlin proposal to voucherize Medicare and block-grant Medicaid -- though unfortunately rejected by the other debt commissioners -- may prove to be an important turning-point in the fight to save the country.

There is hope. Good policy is good politics. Conservatives are winning, we believe, because they’re sticking to their principles and staying on offense.

We think this is also true of health care, and that’s the reason for this memo.

Contrary to the conventional wisdom, we believe repeal is achievable. Indeed, our growing sense is that reversing the government takeover of health care is not just possible but probable. Our reasons for this:

1. Support for repeal has gone up since the election. 2. The law’s structure makes it immune to repair but highly vulnerable to repeal. 3. Fiscal realities make the law an irresistible source of offsets for deficit reduction. 4. Three-fifths of the states are challenging it, and the Supreme Court could find it unconstitutional.

Replacing the law will take years, but its repeal could come sooner than expected, if health care reformers stay on offense and foment divisions among the fragile coalition that squeaked the bill through last March.

In this memo, we’d like to flesh out our reasons for our optimism, and offer a little tactical advice to help you win this fight.

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1) Support for Repeal Still Going Up

Support for repeal has gone up since the election. Last month’s Kaiser health tracking poll found that 49 percent of voters want the government takeover of health care fully or partially repealed, compared with only 40 percent who want to see it preserved or expanded -- a margin of 9 points.

A month later, the latest Rasmussen poll of likely voters found that Americans support repeal by a margin of 21 points (58 to 37 percent). Independents support repeal even more strongly, by 24 points (59 to 35 percent). And Rasmussen adds: “Belief in the likelihood of repeal has now edged to its highest level to date”: 47 percent, up 1 point from the election.

An ABC News Washington Post poll released December 13th confirms these findings: 59 percent of Americans support full or partial repeal, compared with only 38 percent who say, “Leave the law as is.”

Voters want, and expect, repeal.

Before the election, Democrats tried desperately to pivot from a failing effort to sell an unpopular bill to promising to “fix” it. Recent numbers suggest they may try to hew to that same line. The aforementioned Kaiser poll found 25 percent of voters support repeal of “parts” of the law, while 21 percent would actually expand it, and another 19 percent support “leaving the law as is.” Adding those numbers together, Democrats could argue the public is saying, “Mend it, don’t end it.” But there’s a problem: The law’s supporters can’t persuasively explain how they’d mend it.

2) The Law Is Vulnerable to Repeal

The most important policy fact to remember about the is that it can’t work. It will eventually collapse into single-payer, or be repealed. The second most important fact is that it can’t be repaired. It can only be repealed, or acquiesced in, because its core elements are all interconnected, as its defenders keep reminding us. Those elements -- the mandates, the exchanges, and the subsidies -- rise or fall together. (By “subsidies,” we mean the exchange premium subsidies and the massive Medicaid eligibility expansion.) These elements all start on the same day, January 1, 2014, for a good reason. Delay one core element, and you realistically need to delay the others as well. Repeal one, and you are eventually forced to repeal all. This interconnectedness makes the law highly vulnerable to “effective repeal” through surgical amendment.

Target the individual mandate. Like the Death Star, the health care “reform” law has one especially critical weakness: the individual mandate. Section 1501 of the Affordable Care Act requires all individuals to purchase government-approved health insurance. Take away this mandate, and the core of the bill comes apart. Without the mandate, the system can’t work. That’s why, pending full repeal, it should be our number one target.

In the absence of a mandate to purchase health insurance, people who lack job-based coverage will wait till they’re sick to seek coverage through their local government exchange. When that happens, the premiums in the exchange will soar, driving people away. The system will become unsustainable. The balloon will go pfffffft. Insurers call this a “death spiral.” We’ve seen it happen in every state that has imposed guaranteed issue and community rating on their own insurance markets without also imposing an individual mandate. A good example of this is New Jersey, where, according to the Council for Affordable Health Insurance, a family health insurance policy with a $500 deductible costs twice as much as in neighboring Pennsylvania. New Jersey today is what all of America will look like tomorrow, absent the individual mandate.

Massachusetts is currently the only state to impose an individual mandate, but doesn’t enforce it

2 effectively. Reports suggest the state is now having trouble with people waiting until they’re sick to sign up for coverage, then dropping that coverage following treatment. This gaming is driving up costs. So the state is attempting to stamp out the gaming by enforcing the mandate more rigorously. We suspect vigorous enforcement is not sustainable, even in Massachusetts.

Question: Who supports the mandate (besides the obviously self-interested health insurance industry)? Answer: Only 27 percent of the American public, according to the November 2010 Kaiser Health Tracking Poll. A remarkable 68 percent of Americans oppose it.

3) The Trillion-Dollar Pay-For

But the news only gets better. According to the Congressional Budget Office, repealing the individual mandate saves taxpayers $252 billion over the first six years (2014-20), because without a requirement to purchase coverage, fewer people will enter the exchanges or enroll in Medicaid.

Fully 70 percent of the subsidy spending in the bill ($900 billion, out of $1.3 trillion, 2010-19) doesn’t begin for another three years. This means no group of voters yet thinks of that spending as their “property.” If during the next three years you repeal the parts of the Act that spend money, all you’ll be doing is saving taxpayers money. You won’t be taking anything away from anybody, because nobody will have received anything yet.

Here are some illustrative Affordable Care Act savings ideas for your consideration (all are CBO figures for the six-year period, 2014-19):

● Eliminate the individual mandate, save $202 billion. ○ Delay it by one year, save $12 billion. ○ Delay it by two years, save $36 billion. ○ Delay it by three years, save $71 billion. ● Eliminate the Medicaid expansion, save $434 billion. ○ Delay it by one year, save $29 billion. ○ Delay it by two years, save $85 billion. ○ Delay it by three years, save $166 billion. ● Eliminate the health insurance exchange subsidies, save $464 billion. ○ Delay them by one year, save $15 billion. ○ Delay them by two years, save $49 billion. ○ Delay them by three years, save $106 billion. ● Eliminate the law’s discretionary authorizations for new programs, save $19 billion. ● Eliminate the law’s discretionary authorizations for existing programs, save $86 billion. ● Eliminate the subsidy to fill the Medicare prescription drug "donut hole," save $75 billion. ● Eliminate the poorly designed small employer tax credits, save $40 billion.

In short, not counting the individual mandate (which overlaps with the other items), there’s more than $1 trillion dollars in not-yet-spent funds just sitting there in the World’s Biggest Deficit Reduction Piggy Bank.

Therefore, in addition to repealing the individual mandate, Congress should tap unspent Obamacare funds to pay for higher priorities, for example, Alternative Minimum Tax relief or raising the Debt Ceiling without increasing overall spending.

Another good use of this money would be the Medicare “doc fix.” As you know, there’s a recurrent problem of large automatic cuts in Medicare physician payments, stemming from a goofy formula in current law. Every year since 2002, Congress has to scramble to avert these automatic cuts with an infusion of additional cash. The current fix runs out on January 1st. Assuming the outgoing Congress enacts a 12-month fix before adjourning this month, which seems likely, the next fix, for 2012, will cost

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$30 billion or so -- more, if you attempt a longer one. Depending on how it’s structured, a permanent fix would cost somewhere between $250 billion and $300 billion (2012-19). Where will you find that kind of money? The answer is easy: Obamacare.

By the way, the Democrats can’t complain if you tap this keg. They themselves have already used a minor tweak to the premium exchange subsidies, to pay for the $19 billion, one-year doc fix you’ll be voting on this week. The precedent is established.

4) The States Are Resisting, and Their Lawsuits Could Succeed

Even as we mull legislative strategy, we should keep an eye on the states, who have mounted a monumental effort to stop the Affordable Care Act in court. Why do most states oppose the new law? Because it could bankrupt them. It puts them on the hook, after 2017, for a not-insignificant chunk of the costs of the massive Medicaid eligibility expansion, which is projected to add some 16 million people to the rolls of this already overburdened program.

Another reason is federalism. Prior to the new law, the states were the main regulators of health insurance. Many states today have their own reform approaches they’ve been working on, and they strongly oppose the new law’s top-down approach, which will force them to set up and operate federally controlled exchanges while having to serve as local enforcers of federal price controls (in the form of limits on “reasonable” premium increases, as defined by Washington).

Lawsuits. As of this writing, there are more than 20 active lawsuits that challenge the Affordable Care Act on numerous grounds, with most suits contesting the constitutionality of the individual mandate. Twenty states have joined Florida’s lawsuit, Virginia has filed its own separate suit, and another 9 have filed friendly briefs, bringing the total number of states involved in fighting the government takeover to 30 -- fully three-fifths of the Union. These states are: 1) Alabama, 2) Alaska, 3) Arizona, 4) California, 5) Colorado, 6) Florida, 7) Georgia, 8) Idaho, 9) Indiana, 10) Iowa, 11) , 12) Michigan, 13) Mississippi, 14) Missouri, 15) Nebraska, 16) Nevada, 17) New Hampshire, 18) New Jersey, 19) , 20) North Carolina, 21) , 22) , 23) , 24) Pennsylvania, 25) South Carolina, 26) South Dakota, 27) Tennessee, 28) , 29) Utah, and 30) Virginia.

This week’s ruling by federal district judge Henry E. Hudson in the Virginia case (Virginia v. Sebelius) dramatically brought to national attention the possibility that, despite what the establishment had been saying for more than a year, the Supreme Court could rule the individual mandate unconstitutional.

As we’ve explained, if that mandate were to go away, the whole bill would unravel. But would the Supreme Court strike it down? What does the Constitution say?

The law’s defenders cite two main provisions in support of a congressional power to pass the Affordable Care Act:

● Commerce Clause. “Findings” in the bill purport to show the legislation to be a legitimate exercise of Congress’s power to regulate interstate commerce under Article I, Section 8, Clause 3, of the Constitution. The inclusion of these “findings” in the bill is a sign its authors were worried about the constitutionality of their actions.

● Tax Power. Following enactment, the Obama Administration chose to defend the law in court, not just on commerce clause grounds, but also as a permissible tax under Article I, Section 8, Clause 1 (based on the fact that the penalties for not buying insurance are collected by the IRS). This suggests the President’s lawyers were nervous they might lose the Commerce Clause argument.

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Do either of these arguments hold water?

Commerce Clause argument: Since the late 1930s the Court has given Congress pretty free rein to regulate the economy, but it has also said that the Commerce Clause does have limits -- yet without specifying too clearly where those limits are. The present lawsuits challenge the Court to define the limits, or else give up the pretense that there are any.

Tax Power argument: The Supreme Court has indicated that in order for a federal tax to be constitutional, its purpose must be to raise revenue, rather than to advance some other policy goal, no matter how worthy. A tax may advance some non-revenue goal (e.g., serve as a penalty or deterrent) as a secondary effect, so long as its primary effect is to raise revenue. One of the Court’s tests for “whether a tax is really a tax” (as opposed to merely being a penalty) is: How much revenue does it raise? On that test, the Affordable Care Act fares poorly, since anticipated individual mandate penalty collections are a mere $4 billion a year.

Judge Hudson in Virginia ruled that Congress had no authority under either clause to enact the individual mandate. Judge Roger Vinson in Florida may well do the same, early next year.

It’s hard to predict what the Supreme Court will do, because no matter what happens, these cases promise to be historically consequential:

● If the Court upholds the mandate under the Commerce Clause, constitutional limits on the federal government will effectively be at an end, because there will now be in principle nothing Congress cannot require of citizens in the name of “regulating interstate commerce.”

● If the Court upholds the mandate under the Tax Power, Congress will have a new and powerful tool for regulating our lives -- the penalty, masquerading as a tax.

● If the Court strikes down the mandate under the Commerce Clause, it will help define the limits of Congress’s powers -- and reveal just how wrong it was for Congress to ram the bill through in the first place.

Expedited Review. That’s why FreedomWorks has launched a grassroots effort in favor of expedited Supreme Court review of these cases. The constitutional question here is so important, these cases should be expedited, bypassing the appeals courts and going directly to the U.S. Supreme Court for prompt judicial resolution. Fast-track consideration could save a year or more from the traditional two- or three-year process. While the Supreme traditionally grants expedited review only in special cases of "imperative public importance," we would argue that these cases clearly fit that description, asking the important questions: Is our government truly one of limited -- or unlimited -- powers? Are we truly Washington's masters, or its servants? In our view, these questions need to be answered now, before any more time passes.

Severability. If the mandate is struck down, does that mean the whole, 2,801-page bill is also struck down? The lawyers don’t seem to know. The bill (perhaps intentionally) lacks a so-called “severability clause,” which would help the Court surgically nullify specific provisions while leaving the rest of the bill standing. That would suggest that if the mandate goes down, so does the rest of the bill. But in practice, such clauses are not decisive -- the Court has sometimes read a severability clause into a bill, even though it was missing. Indeed, Judge Hudson in Virginia chose to leave all of the bill standing, except the individual mandate (section 1501) and those provisions directly connected to it. He didn’t, however, specify which provisions exactly are nullified. Logically, they should include the guaranteed issue, community rating, and preexisting conditions exclusions, at a minimum. They probably would not include the exchanges, the premium subsidies, and the Medicaid expansion. But that’s only our best guess.

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At all events, it’s imperative that we keep fighting on the legislative front, since we can’t know in advance what the Court will do, or even when a decision will come down. (The lawsuits probably won’t be resolved until 2012 at the earliest.)

Exchanges. On a related note, we think it’s a mistake for states to collaborate with HHS on the setting up of exchanges. All states -- but especially the 30 who are fighting the law in court -- should refuse to set up an Affordable Care Act exchange.

HHS is currently offering each state some “planning and evaluation” money to nudge it into setting up an exchange by 2013. If a state has no exchange by then, the federal government will impose one. Some states may think they can outsmart the feds by setting up a Utah-style “lite” exchange (which tries to serve as a convenient internet portal, open to all insurers, with lots of offerings) and “daring” the feds not to approve it -- but that’s naive. The HHS Secretary has vast powers to shape and control an exchange, both at the time of certification and afterward. By the time HHS is done “improving” your state’s exchange, you can be sure it will be a central planner’s dream: uniform, rigid -- and costly to your state’s taxpayers.

While some states might simply want set up a market-oriented approach like Utah’s, regardless of what the feds are doing, most states will likely come up with something much more bureaucratic and cumbersome, like the Massachusetts “Connector” or California’s Soviet-style exchange. These governmentalist models try to use the monopolistic power of the exchange to limit and control consumers’ choices. In theory, California’s exchange could be used to impose single-payer in that state.

6) Some Advice on Next Steps

Nothing we’ve said here should be construed as suggesting that reversing the government takeover will be easy. It will be hard. But the coalition that supported the bill is clearly on the defensive, and we have at least four helpful factors on our side:

1. Public opinion: More than half of the public opposes the government takeover of health care. A shrinking minority supports it. Only 25% of Americans think the law will benefit them personally.

2. Time: Since the core elements of the new law don’t come on line until January 2014 -- and 70 percent of the spending under the bill (and all of the politically salient spending) begins after that date -- we have three full years to repeal the law effectively, if not formally.

3. Congressional majorities: One out of every eight members of the incoming Congress ran on the “,” which includes a commitment to “defund, repeal, and replace government-run health care.” Counting non-signers, a solid majority in the House and a narrow majority in the Senate ran on either full repeal or major changes.

4. Finally, your four-prong strategy (as we understand it) is a good one:

○ Repeal: Put members on record on full repeal early, then go after the law’s specific flaws, especially its core elements (the mandates, the exchanges, and the subsidies) and above all the individual mandate. ○ Reveal: Conduct thorough oversight of the law and implementing regulations to show how it will kill jobs and harm patients, doctors, workers, employers, and taxpayers. ○ Defund: Refuse to fund those parts that are unconstitutional, unjustifiable, or unaffordable. ○ Replace: Build the case for -- and vote on -- a series of bills that, together, effectively replace the government takeover of health care with a patient-centered approach.

Full repeal vote. We urge you to hold the full repeal vote in January, and to make it a “clean” bill, with no extraneous matter that could confuse the issue or give the law’s supporters cover to vote no. 6

Everyone knows of your commitment to a “replace” agenda, but we realize some members will find it easier to for vote “repeal” if they can also cast a simultaneous vote for something specific to “replace” it with. Since the “replace” bills need to be vetted through regular order, you might want to finesse this issue by drafting the special rule governing floor debate so as to include language directing the committees of jurisdiction to report legislation next year that will increase competition and lower costs. This would signal your seriousness about the “replace” part of the campaign; and a vote on the “rule” would be your “replace” vote, leaving your “repeal” vote clean and distinct.

Incidentally, you shouldn’t need to “pay for” the repeal bill, because the small amount of deficit reduction the Act allegedly produced at the time of enactment ($143 billion, 2010-19) will almost certainly vanish in the next CBO re-estimate. Even if there is some residual “cost” to full repeal under existing budget rules, you can (and we would argue, you should) waive the relevant points of order in the special rule governing debate, on the ground that no one should have to pay to repeal an unconstitutional bill, especially one whose tax hikes and spending streams haven’t begun yet. At all events, we would urge you to keep any pay-for vote separate from the “full repeal” vote, adopting House rules on day one that ensure this is possible.

Don’t be hog-tied by the Democrats’ rules, which are simply designed to make growing government easy and shrinking government hard.

Effective repeal votes. Following your full repeal vote, we’d encourage consideration of a series of “effective repeal” bills that put Members on record, so the public can see exactly who’s on their side. And -- with an eye on getting at least some of these bills through to the President’s desk -- we’d recommend favoring issues that have a chance to attract all 47 Senate Republicans and at least 13 Senate Democrats, in order to overcome a filibuster.

We think at least four bills potentially fall into this “bipartisanly popular” category.

1. Repeal the individual mandate. 2. Repeal the IRS Form 1099 paperwork nightmare. (This one is admittedly peripheral to the Affordable Care Act, but its high popularity level makes it an ideal vehicle for carrying other bills.) 3. A “Keep What You Have” bill: Let the 170 million Americans who have private health insurance actually “keep what they have,” as President Obama famously promised, by permanently “grandfathering” existing health plans from the law’s costly and unnecessary insurance mandates. 4. A “State Sovereignty” bill: Let individual states opt out of the Medicaid eligibility expansion, and exclude federally controlled exchanges from operating within their borders, if they certify they have a credible plan to reduce premiums and increase coverage within their state by other means.

With respect to “state sovereignty,” it’s important to give the states maximum flexibility. Don’t force them to meet the health care law’s coverage levels by other means or to jump through a lot of federal hoops -- doing so would merely force them to replicate the core elements of the law at the state level. Also, it’s very important that a state be able to opt out immediately, rather than having to wait until 2017 as under current law or 2014 under the Wyden-Brown bill (S.3958, 111th Congress).

Replace. As for the “replace” part of the strategy, we’ll have more to say in coming months, but for now, we would reiterate the importance of addressing the tax code’s inherent unfairness among types of insurance, and the need to address the issue of preexisting medical conditions in a reformed and expanded individual insurance market. We also think you should think big and keep the other three major health-care entitlements -- Medicare, Medicaid, and the tax exclusion -- on the table as you contemplate genuine health care reform.

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Conclusion

Repeal is achievable, possibly sooner than many expect, because the American people clearly want and expect repeal, and because the law is vulnerable to effective repeal.

We support your four-prong strategy and urge you to hold a clean “full repeal” vote in January, followed by a series of “effective repeal” votes (we’d start with the individual mandate) as well as a set of patient- centered “replace” bills.

As we’ve said, there is hope. Good policy really is good politics. Stick to your principles and stay on offense -- and you can be sure that the tea party grassroots will be there with you, helping you promote the cause of freedom.

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