Wednesday, October 1, 2014

Oklahoma Federal District Court Also Rules Obamacare Subsidies Illegal in Federal Exchanges (Pruitt v. Burwell)

Yesterday, Oklahoma became the first state to defeat the federal government on the issue of the Patient Protection and Affordable Care Act ("Obamacare") subsidies in the 34 states where Exchanges were established by the federal government.  This decision only impacts Oklahoma and has been stayed pending the Obama Administration's appeal.  However, it does bolster the argument that the U.S. Supreme Court should step in and decide this issue.

This is from Michael Cannon, writing at Forbes:
The U.S. District Court for the Eastern District of Oklahoma handed the Obama administration another – and a much harsher — defeat in one of four lawsuits challenging the IRS’s attempt to implement ObamaCare’s major taxing and spending provisions where the law does not authorize them. The Patient Protection and Affordable Care Act provides that its subsidies for private health insurance, its employer mandate, and to a large extent its individual mandate only take effect within a state if the state establishes a health insurance “Exchange.” Two-thirds (36) of the states declined to establish Exchanges, which should have freed more than 50 million Americans from those taxes. Instead, the Obama administration decided to implement those taxes and expenditures in those 36 states anyway. Today’s ruling was in Pruitt v. Burwell, a case brought by Oklahoma attorney general Scott Pruitt. 
These cases saw two appellate-court rulings on the same day, July 22. In Halbig v. Burwell, a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit ordered the administration to stop. (The full D.C. Circuit has agreed to review the case en bancon December 17, a move that automatically vacates the panel ruling. In King v. Burwell, the Fourth Circuit implausibly gave the IRS the thumbs-up. (The plaintiffs have appealed that ruling to the Supreme Court.) A fourth case, Indiana v. IRS, brought by Indiana attorney general Greg Zoeller, goes to oral arguments in federal district court on October 9. 
[On September 30, 2014], federal judge Ronald A. White issued a ruling in Pruitt that sided with Halbig against King, and eviscerated the arguments made by the (more senior) judges who sided with the government in those cases. ...
Set forth below is an excerpted version of yesterday's 20-page ruling.  For readability most internal citation and issues of lesser interest (such as standing) have been removed.  The full opinion can be read here.


Section 1311 (b)(1) of the ACA requires that “[e]ach State shall, not later than January 1, 2014, establish an American Health Benefit Exchange. . . for the State.”

This directive, however, runs afoul of the principle that Congress cannot compel sovereign states to implement federal regulatory programs.  The Act also provides, therefore, that states may choose not to establish such Exchanges.  Oklahoma has so chosen.  Under section 1321 of the Act, each state may “elect[] . . . to apply the requirements” for the state exchanges, or if “a State is not an electing State . . . or the [Health and Human Services] Secretary determines” that the State will fail to set up an Exchange before the statutory deadline, “the Secretary shall (directly or through agreement with a not-for-profit entity) establish and operate such Exchange within the State.”

Additionally, Congress authorized federal subsidies (in the form of tax credits) paid directly by the Federal Treasury to the taxpayer’s insurer as an offset against his or her premiums. The Act provides that a tax credit “shall be allowed” in a particular “amount,” 26 U.S.C. §36B(a), based on the number of “coverage months of the taxpayer occurring during the taxable year.”  A “coverage month” is a month during which “the taxpayer . . . is covered by a qualified heath plan . . . enrolled in through an Exchange established by the State under section 1311 of the [ACA].”  The subsidy for any particular “coverage month” is based on premiums for coverage that was “enrolled in through an Exchange established by the State under [section] 1311 of the ACA.” 

Further, the Act contains an “employer mandate.”  This provision may require an “assessable payment” by an “applicable large employer” if that employer fails to provide affordable health care coverage to its full-time employees and their dependents.  The availability of the subsidy also effectively triggers the assessable payments under the employer mandate, inasmuch as the payment is only triggered if at least one employee enrolls in a plan, offered through an Exchange, for which “an applicable premium tax credit . . . is allowed or paid.”  Oklahoma contends it has standing in this case (among other reasons) because it constitutes an “applicable large employer” and the receipt of tax credits by any of its employees would trigger its liability for a penalty under that provision for failure to provide adequate coverage to those employees.

This contention arises because the Internal Revenue Service (“IRS”) has promulgated a regulation (the “IRS Rule”) that extends premium assistance tax credits to anyone “enrolled in one or more qualified health plans through an Exchange.”  It then adopts by cross-reference an HHS definition of “Exchange” to include any Exchange, “regardless of whether the exchange is established or operated by a State . . . or by HHS.”  In other words, the IRS Rule requires the Treasury to grant subsidies for coverage purchases through all Exchanges – not only those established by states under §1311 of the Act, but also those established by HHS under §1321 of the Act.  The IRS Rule is under challenge in this case, with plaintiff arguing that the regulation is contrary to the statutory language.

The Merits of the Case

Finding this claim to be justiciable, the court turns to the merits.  As just noted, the court has the benefit of two recent opinions by courts of appeals, which reach opposite
conclusions. In Halbig v. Burwell, 758 F.3d 390 (D.C.Cir.2014), the majority struck down the IRS Rule.  In King v. Burwell, 759 F.3d 358 (4th Cir.2014), the IRS Rule was upheld.  For the reasons described below, this court finds the Halbig decision more persuasive.  This court also independently relies on Tenth Circuit and Supreme Court authority.

[T]he majority in Halbig resolved the issue at the first stage of Chevron, finding that inasmuch as “the ACA unambiguously restricts the section 36B subsidy to insurance purchased on Exchanges ‘established by the State,’ we reverse the district court and vacate the IRS’s regulation.”

The majority in Halbig acknowledged that sections 1311 and 1321 do establish “some degree of equivalence between state and federal exchanges[.]”  This equivalence is such, the court went on, that “if section 36B had authorized credits for insurance purchased on an ‘Exchange established under 1311,’ the IRS Rule would stand.”  That is not, however, the language chosen by Congress.  Instead, credits are authorized only for coverage purchased on an “Exchange established by the State under section 1311.”  Faced with that statutory language, “the government offers no textual basis – in sections 1311 and 1321 or elsewhere – for concluding that a federally-established Exchange is, in fact or legal fiction, established by a state.”

In contrast, the court in King adopted the “legal fiction” interpretation.  It resolved the case at step two of Chevron, finding the statutory language ambiguous, giving deference to the IRS’s determination, and upholding the IRS Rule as a permissible exercise of the agency’s discretion. King, 759 F.3d at 363.

In other words, the “legal fiction” reading does not appear to comport with normal English usage, as Professor Richard Epstein describes:
These long and learned opinions should not obscure the fact that at the root of the case is a simple question: Do the words an “exchange established by a State” cover an exchange that is established by the federal government “on behalf of a state”?  To the unpracticed eye, the two propositions are not synonyms, but opposites. When I do something on behalf of myself, it is quite a different thing from someone else doing it on my behalf.  The first case involves self-control. The second involves a change of actors. It is not, moreover, that the federal government establishes the exchange on behalf of a state that has authorized the action, under which case normal principles of agency law would apply. Quite the opposite: the federal government decides to act because the state has refused to put the program into place. It is hard to see, as a textual matter, why the two situations should be regarded as identical when the political forces at work in them are so different. 
This is a case of statutory interpretation.  “The text is what it is, no matter which side benefits.” Bormes v. United States, 759 F.3d 793, 798 (7 Cir.2014).  Such th a case (even if affirmed on the inevitable appeal) does not “gut” or “destroy” anything.  On the contrary, the court is upholding the Act as written.  Congress is free to amend the ACA to provide for tax credits in both state and federal exchanges, if that is the legislative will.

It is a “core administrative-law principle that an agency may not rewrite clear statutory terms to suit its own sense of how the statute should operate.”  Util. Air Regulatory Group v. EPA, 134 S.Ct. 2427, 2446 (2014). 

  Footnote 24 on Page 19
The court permitted plaintiff to supplement the record with statements made by Professor Jonathan Gruber, who was involved in the ACA’s drafting. (#115).  It is evidently undisputed that in January, 2012, Prof. Gruber made the statement “if you’re a state and you don’t set up an Exchange, that means your citizens don’t get their tax credits.”  What is disputed is whether Prof. Gruber’s statement was “off the cuff.”  The statement evidently has now been disavowed on his part. In any event, the court does not consider this statement as reflecting “legislative intent” (a concept in which the court has little faith anyway) because Prof.  Gruber is not a member of Congress and his statement was made after the Act had passed.  The court takes the statement for the limited relevance of words of interpretation, not intent.  That is to say, the statement cuts against any argument that the plaintiff’s interpretation is absurd on its face, or that plaintiff’s argument that the statutory language might support a reading of “incentivizing” states to set up exchanges is “nonsense, made up out of whole cloth.”  Halbig, 758 F.3d at 414 (Edwards, J., dissenting).
Conclusion and Holding

The court holds that the IRS Rule is arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law, pursuant to 5 U.S.C. §706(2)(A), in excess of statutory jurisdiction, authority, or limitations, or short of statutory right, pursuant to 5 U.S.C. §706(2)(C), or otherwise is an invalid implementation of the ACA, and is hereby vacated.

The court’s order of vacatur is stayed, however, pending resolution of any appeal from this order.