Friday, December 6, 2013

The Case With The Best Shot at Defeating Obamacare - IRS's Illegal Subsidies

On Tuesday, December 3rd the federal District Court in Washington D.C. heard oral arguments on Halbig v. Sebelius.  Halbig v. Sebelius is one of four lawsuits challenging the Internal Revenue Service’s attempt to expand Obamacare’s subsidies and penalties beyond what Congress authorized. I refer to this as Oklahoma vs Obamacare on this site because Oklahoma was the first state to issue this challenge.  Judge Paul Friedman who heard the case has promised a prompt decision but offered no timeline on Tuesday.  

PPACA provides premium assistance in the form of government subsidies for the purchase of health insurance plans in the Exchanges established by states under PPACA Section 1311, 42 U.S.C. § 18031. The IRS rule purporting to implement those credits violates the plain language of PPACA by exceeding the agency’s authority and subverting congressional intent. 

PPACA mandates the creation of health insurance “exchanges” and declares that “Each State shall . . . establish” an Exchange. It then directs the federal government to establish one in states that elect not to.  Finally, it offers health insurance subsidies to certain individuals who enroll in a health plan “through an Exchange established by the State under Section 1311.” This language originated in the Senate Finance Committee, was clarified and strengthened thereafter in the Senate, and was signed into law by the President.  

The authors of Obamacare conditioned premium-assistance tax credits on states establishing Exchanges to induce cooperation. This is analogous to what the federal government does with federal highway dollars and speed limits.  The federal government can't force states to set speed limits at 65 miles per hour, but it can dangle federal dollars over them like a carrot until states acquiesce to national preferences.  This "doggie treat" approach to state discipline avoids the legal challenge that the federal government illegally “commandeered” the states.  Yes, many courts still hold to the quaint notion of constitutional restraint. 

On September 23, 2009 during Senate Finance Committee deliberations over the Baucus Bill (which ultimately became ObamaCare) Senator John Ensign (R-NV) asked Baucus how the Senate Committee had jurisdiction over state coverage levels and state coverage mandates.  Baucus responded that the bill conditions the availaiblity of tax credits on states complying with those directives.  Here is a video clip from C-SPAN on that exchange (found at beginning at 2:54:10): 

Hence, it is obvious that PPACA’s authors offered premium-assistance tax credits only in state Exchanges to financially induce them to open their own Exchanges.  They surmised that no state would pass up the opportunity to gorge on massive federal handouts.  But the problem is that 34 states did!  Uh oh, panic time. 

So, contrary to the clear language and purpose of the statute, and without any legal basis, the IRS rule attempts to dispense premium-assistance in the 34 states that have opted not to establish an Exchange. How could Obamacare work if two-thirds of Americans got no subsidies? The IRS was forced to bail out the Senate's drafting gamble because everyone knew that there could be no more legislative changes to PPACA after the 2010 midterm election and division of congress.   

The subsidies, however, are only the tip of the iceberg.  Under the Law, those tax credits directly trigger the most significant penalties against employers. ($3,000 per employee for unaffordable or inadequate coverage.) The IRS rule, therefore, has the effect of triggering spending and imposing financial penalties that Congress never authorized. If the courts ultimately do what I think they will and strike this IRS rule down there will be no subsidies in two-thirds of the states and therefore, vastly reduced employer penalties (and in many cases no employer penalties) as well.  It would totally collapse the law.  You would see businesses who can, flood from the 16 "penalty" states to the 34 "no penalty" states. 

The legal argument made on behalf of the Administration is a beyond strained piece of linguistic gymnastics.  They are forced to argue that "State" means "State or federal government standing in the place of the state."  Even though throughout the statute congress clearly refered to the federal government and federally facilitated exchanges distinctly and separately from states and state exchanges.  Congress could have clearly made the same distinction in this context had that been its intent. 

Jonathan Adler, the Case Western Reserve University law professor who originally proffered this legal rationale was in Washington and watched part of the oral arguments Tuesday, says 

his legal rationale is strong, but he has studied courts long enough to know not to assume victory.
"As far as what's going to happen next, it's hard to predict," he said.
"As I teach my students in administrative law, courts are always reluctant to strike down decisions made by administrative agencies."

For More on This Case

A legal brief submitted on the plaintiff's behalf contains new material from federal law and the legislative history of PPACA. Read the whole thing here (pdf). 

Other Media

The Washington Post:  Opponents of the health-care law took their latest legal challenge to a federal courtroom in the District on Tuesday in a case that many critics of the law view as their last and best chance to gut it before key provisions kick in Jan. 1. Though some legal scholars view the case as a long shot, it could have significant consequences if it is successful. Millions of people in 34 states could be denied the government subsidies established by the law to help low- and middle-income people pay their health-insurance premiums starting next year. 
The Wall Street Journal:  A federal judge in Washington offered few hints Tuesday of how he plans to rule during arguments in a case challenging the legality of federal subsidies available to most consumers who purchase health insurance through federally run online exchanges. At issue is the implementation of a key part of the 2010 Affordable Care Act, which requires most Americans to carry health insurance or pay a tax penalty. To make coverage more affordable, the law calls for the government to subsidize coverage for qualifying low- and middle-income individuals. 
Fox News: The Affordable Care Act faced another legal challenge Tuesday in federal court, as a group of business owners and individuals pushed back against an IRS regulation they say is both unlawful and potentially crippling. The regulation, which stems from the ACA, defines which applicants are eligible for subsidies in connection with obtaining health care coverage. It's a significant distinction, because those subsidies trigger massive employer and individual obligations in the states where they are awarded. 
The Cleveland Plain Dealer: "But the ACA made clear, Adler says, that the subsidies were to be used in these new state marketplaces, or "exchanges." There is no record, he says, that shows Congress directed the subsidies to what has since evolved: a large, federally run, health-policy shopping exchange. When the subsidies are mentioned in the law, Adler says, it is always and only in the context of state exchanges."