Courts Hold the Key to Obamacare's Future

Congress and President Obama are engaged in a great battle to determine whether Obamacare and its individual mandate will be implemented in 2014. But the answer to that question may rest with neither Congress nor the president, but with courts in Washington D.C. and Virginia. Later this month two judges are poised to deliver rulings on whether Americans who buy insurance on federal health exchanges qualify for subsidized premiums.

The essence of these cases is whether the Americans who purchase health insurance on federally-run exchanges are eligible to receive premium subsidies. The IRS says yes. Some others say no.

The implications are immense. Family plans will cost $20,000 a year in 2016, according to the IRS. If Americans on the 34 federally-run exchanges do not qualify for health insurance subsidies, few will sign up. Plans will simply be unaffordable. Obamacare will collapse not because of Congress, but due to flaws in the structure of the law.

The text of the Affordable Care Act clearly states that people who buy health insurance from state exchanges (my emphasis) get subsidies if they earn under 400 percent of the poverty line, currently $94,000 for a family of four. Most applicants will qualify for some subsidy.

According to the law, subsidies are available to those who get their health insurance "through an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act." Or, in another section, those "enrolled in through an Exchange established by the State under section 1311."

The subsidies were put in place to encourage states to set up exchanges. Only sixteen states and the District of Columbia have set them up, fewer than forecast by the Congressional Budget Office.

A different section of Act (Section 1321) allows the federal government to set up exchanges in states that have not set up their own web-based portals. Uncle Sam has set up exchanges for an additional 34 states. But nowhere does the law state that people on federal exchanges can receive tax subsidies.

No problem, said the IRS in a May 2012 ruling. The IRS extended the subsidies to those getting health insurance on any exchange by defining an exchange as a "State Exchange, regional Exchange, subsidiary Exchange, and Federally-facilitated Exchange."

Two groups of Virginia and District of Columbia residents are suing the government, arguing that extending the subsidies to federal exchanges puts them at a disadvantage.  West Virginia resident David Klemencic would suffer "irreparable injury if preliminary relief were not granted; and the balance of equities and public interest strongly favor granting an injunction," according to the motion for preliminary injunction and expedited hearing.

Without the subsidy, their attorneys argue, the cost of health insurance would be greater than eight percent of their income, meeting the definition of unaffordable coverage. This would enable them to receive a certificate of exemption from the requirement to purchase health insurance. It would also enable them to buy catastrophic health insurance, low-cost insurance against major illness.

Otherwise, lower-cost catastrophic health insurance is only available to those under 30 years of age.

In response, the Department of Justice states that the law is ambiguous, so the IRS had the right to extend subsidies to the federal exchanges. Plus, the government attorneys say, the plaintiffs are not hurt by being provided with subsidized insurance. With the subsidies in the federal exchanges, the plaintiffs would pay $20 monthly for insurance, rather than hundreds of dollars monthly for catastrophic health insurance.

The Competitive Enterprise Institute, a free-market Washington D.C.-based research organization, is assisting in the funding and coordination of the lawsuit. Sam Kazman, CEI's general counsel, told me, "The Obamacare statute demonstrates that Congress made some very deliberate distinctions between participating states, which choose to set up their own exchanges, and ‘refusenik' states which see things differently."

He continued, "The IRS is now attempting to cover up those distinctions through an unauthorized rule that treats all states identically, thus engaging in an end-run around this program's massive unpopularity. This maneuver has no basis whatsoever in the law, and should be overturned as soon as possible."

The major question, to my mind, is spending authority. If Congress did not authorize subsidies for federal exchanges, does the IRS have the right to spend the money?

In the motion for preliminary injunction in the U.S. Court for the District of Columbia, Jones Day attorneys Michael Carvin, Jacob Roth (no relation), and Jonathan Berry argue persuasively that "executive agencies are not empowered to disburse federal funds absent ...statutory authority; indeed, to do otherwise is a crime. Yet the IRS Rule effectively appropriates billions of dollars without authorization."

In August, U.S. District Court Judge Ronald White allowed Oklahoma to proceed with a similar case against the tax credits.

Judge Paul L. Friedman of the U.S. District Court for the District of Columbia will rule on the preliminary injunction motion on October 21, and Judge Robert Spencer of the U.S. District Court for the Eastern Division of Virginia (Richmond) will rule on October 31.

Some people view the Affordable Care Act as the crowning achievement of President Obama's administration. Yet in order to make it workable, the administration has to twist the law in numerous ways. Some provisions, such as employer penalties get delayed. Others, such as individual penalties, do not. It remains to be seen how the courts will judge the IRS's novel interpretation.