Four separate pending lawsuits suits, filed in various federal district courts, challenge the legality of a crucial IRS rule authorizing tax credits for the purchase of health insurance on federally run health care exchanges. Each suit alleges that the IRS rule contravenes the plain text of the ACA (Obamacare) because the statute only authorizes tax credits (and subsidies) for the purchase of insurance in an exchange “established by a state” under Section 1311 of the law. Federal exchanges are neither “established by a state” nor authorized by Section 1311.
So far the government has attempted to have two of the four suits dismissed. Both times, the government has failed.
The most recent failure occurred today when Judge Paul Friedman of the U.S. District Court in Washington, D.C. denied the government’s request for summary judgment. He also denied the plaintiffs’ summary judgment motion.
The issues raised by the government’s motion are procedural in nature, relating to standing and ripeness. Thus, the denial of that motion provides no indication as to how Judge Friedman will rule on the merits.
The plaintiffs’ case on the merits is a strong one, though. This is clear from their summary judgment brief, submitted by Michael Carvin of Jones, Day. It contains a summary of the plaintiffs’ argument, which I reprint (in large part) below. Those who want a shorter version can refer to Jonathan Adler’s summary on the Volokh Conspiracy.
The Patient Protection and Affordable Care Act (“ACA” or “the Act”) provides federal subsidies for health insurance, if purchased through a marketplace established by a “State.” The federal government is not a “State.” The subsidies are therefore not available for coverage purchased through federally established marketplaces.
Yet the Internal Revenue Service (“IRS”) has, without any serious analysis, promulgated regulations that declare precisely the opposite. Those regulations, which purport to dispense billions of dollars in federal spending that Congress never authorized, are plainly contrary to law.
When Congress enacted the ACA, it deliberately chose to authorize states to execute one pillar of the Act—the establishment of health insurance “Exchanges,” or marketplaces, where individuals can purchase standardized insurance policies from regulated insurers. Since the Constitution does not permit the federal government to “commandeer” state authorities, however, Congress sought to provide inducements to the states to undertake this responsibility. [citation omitted]
Among the inducements offered by the Act is that individuals who buy insurance on a state-established Exchange are eligible for substantial subsidies from the federal treasury. If a state does not establish its own Exchange, however, its citizens will miss out on those federal funds.
As it turns out, that offer was not enough to persuade all of the states to accept this new responsibility. Indeed, thirty-four states have declined to establish Exchanges. As a result, the federal government itself is now responsible for establishing Exchanges in each of those states, as the Act requires as a fallback measure. Under the Act’s plain text, the consequence of these states’ decisions not to create their own Exchanges is that individuals who buy insurance through the fallback, federally established Exchanges in those states are not eligible for premium assistance subsidies.
The Act could not be clearer: It authorizes subsidies for policies “enrolled in through an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act.” ACA, § 1401(a); 26 U.S.C. § 36B(c)(2)(A)(i). Section 1311 is the section instructing the states to establish Exchanges. If an Exchange was not established by a state under that section—but by the federal government under a different section of the Act—no subsidies are available for policies purchased through such Exchange.
That is precisely the result compelled by the Act’s unequivocal language. But, with thirty-four states opting out, the IRS apparently determined that the Act’s limit on subsidies was bad policy.
Among other things, if individuals in those thirty-four states were ineligible for subsidies, many would be unable to afford the comprehensive coverage that the Act’s “individual mandate” requires them to purchase, and would therefore be entitled to an exemption from that mandate’s penalty. See ACA, § 1501(b); 26 U.S.C. § 5000A(e)(1). And if employees in those states were ineligible for subsidies, their employers would be effectively exempt from the Act’s “employer mandate” to sponsor certain health coverage for their employees, given the way that mandate is enforced. See ACA, § 1513(a); 26 U.S.C. § 4980H.
Refusing to accept those consequences, the IRS promulgated the regulations at issue here, which base eligibility for premium assistance subsidies not on enrollment in coverage “through an Exchange established by the State” (as the statute requires), but rather on enrollment in coverage through any Exchange, including a federally established one.
Of course, the federal government is not a “State,” as the ACA in fact expressly reiterates. Those regulations (together, “the IRS Rule” or “Subsidy Expansion Rule”) thus allow for the distribution of billions of dollars of federal funds that Congress never authorized.
The IRS Rule contradicts the plain text of the ACA, exceeds the agency’s authority, and is contrary to law.
Will the government be able to overcome this argument? Not unless courts are willing to ignore the plain meaning of the ACA in order to bail Congress out of a huge hole that it dug.
Given the distasteful way Congress went about enacting this law — rushing it through the “reconciliation” process because the Democrats had lost their “filibuster-proof” Senate, so that big chunks of the legislations, intended only as “placeholders,” ended up being enacted — it may be that only strongly leftist judges will be eager to bail Congress out.
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