In King v. Sebelius, Obamacare's Viability Hangs In Balance

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Last Thursday Judge James R. Spencer of the U.S. District Court for the Eastern District of Virginia in Richmond said that he would rule on whether people who sign up for health insurance in the federal exchanges in 34 states can get subsidies. The judge ordered a speedy briefing of the case, King v. Sebelius, so he could issue a timely decision on the merits.

This follows a similar decision by Judge Paul L. Friedman of the U.S. District Court for the District of Columbia in Halbig v. Sebelius on October 21.

Under the letter of the Affordable Care Act, subsidies for health insurance premiums are only available for state exchanges. Sixteen states plus the District of Columbia have set up such exchanges. But in May 2012 the Internal Revenue Service issued regulations to extend subsidies to federal exchanges too.

Several groups are challenging the extension of subsidies to federal exchanges. Now, Judges Spencer and Friedman separately ruled that their case could go forward-disappointing the administration. The Justice Department had argued that the courts should not hear the cases because the plaintiffs supposedly have no standing.

If the judges rule that subsidies are not available for federal exchanges, few people will sign up because coverage will be unaffordable. Family plans will cost $20,000 a year in 2016, according to the IRS. The federal exchanges will not be viable without subsidies.

If Americans cannot receive subsidies for health care in the federal exchanges, then in those 34 states that declined to create exchanges there will be no individual mandate, and no employer mandate. People who do not want to be forced to buy health insurance, or health insurance that conforms to government standards, could move to states without exchanges. Firms that do not want to provide health insurance could set up operations in these states.

Alternatively, some of these 34 states might decide to create exchanges on their own, since it would be the only way they can get subsidies for their residents.

Two district court decisions will likely be issued in December or January. After that, the cases will go to two appellate courts. Either side will be able to appeal once the district courts enter their judgments, and, without a doubt, whoever loses will immediately appeal.

Judge Friedman's case will be appealed to the Court of Appeals for the D.C. Circuit. Judge Spencer's case will go to the Court of Appeals for the Fourth Circuit. The appellate cases will be decided by three-judge panels randomly selected from the judges of the appellate courts. Either side will be able to ask for expedited hearings and perhaps for interim relief pending a final decision.

The text of the Affordable Care Act states that people who buy health insurance from state exchanges 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.

A different section of the Act (Section 1321) allows the federal government to set up exchanges in states that have not done so. But nowhere does the law say that people on these federal exchanges can receive tax subsidies.

The IRS extended the subsidies to those getting health insurance on the federal exchanges by defining an exchange as a "State Exchange, regional Exchange, subsidiary Exchange, and Federally-facilitated Exchange."

In a Motion for a Preliminary Injunction in King v. Sebelius, attorneys Michael Carvin, Walter Kelley, Jacob Roth, and Jonathan Berry of the law firm Jones Day convincingly argue that the IRS ruling has serious consequences. "For the Government to pay out billions of dollars in subsidies before the facial validity of the IRS Rule is resolved by a federal court is a recipe for chaos," they write.

They continue, "Consider the consequences if the IRS Rule is invalidated only after millions of Americans receive subsidies. Those individuals might be forced to repay the funds after having purchased coverage only on the promise of receiving them... Or, if the funds cannot be recouped (whether practically or constitutionally), then the Government-and the taxpayers-will have irretrievably lost billions of dollars that were never congressionally authorized."

The Department of Justice stated 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 being hurt by being provided with subsidized insurance.

Judges Friedman and Spencer both denied the request for a preliminary injunction. But they made it clear that they understand the timing and intend to expedite the case to final judgment.

In his oral remarks on October 22, Judge Friedman said, "In this case we have a final regulation, it's purely legal. What does it mean? Is it consistent with the statute or isn't it?"

Some legal experts believe that the courts will rule that subsidies are allowed in the federal exchanges, just as in 2011 when the Supreme Court ruled that it was constitutional for the government to tax those who do not sign up for health insurance. With the ruling, the Supreme Court preserving the individual mandate. "The courts won't get us out of this," a former chief counsel for an executive branch agency told me on condition of anonymity.

But the issues are very different. The individual mandate was a constitutional question. The question of subsidies on federal exchanges is not a constitutional question, but rather one of statutory construction.

The consequences of the judges' decisions will go to the heart of entitlement spending. The question is this: Does the executive branch, via an IRS ruling, have the right to expand an entitlement to cover an additional two-thirds of American states?

If so, then the executive branch also has the right to expand or shrink other entitlements by definition, such as the Supplemental Nutrition Assistance Program (food stamps), Social Security, unemployment insurance, Medicaid, and Medicare.

The executive branch is grabbing power that up to now has been in the hands of Congress. If courts allow the federal exchange subsidies to stand, who knows where the power grab will end?

Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter: @FurchtgottRoth.   

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