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Obamacare Update: DC Appeals Court: Only State Exchanges Can Grant Federal Obamacare Subsidies

From CNBC:

In a potentially crippling blow to Obamacare, a top federal appeals court Tuesday said that billions of dollars worth of government subsidies that helped nearly 5 million people buy insurance on HealthCare.gov are illegal.

A judicial panel in a 2-1 ruling said such subsidies can be granted only to those people who bought insurance in an Obamacare exchange run by an individual state or the District of Columbia — not on the federally run exchange HealthCare.gov.

The decision threatens to unleash a cascade of effects that could seriously compromise Obamacare’s goals of compelling people to get health insurance, and helping them afford it. …

If upheld, the ruling could lead many, if not most of those subsidized customers to abandon their health plans sold on HealthCare.gov because they no longer would find them affordable without the often-lucrative tax credits. And if that coverage then is not affordable for them as defined by the Obamacare law, those people will no longer be bound by the law’s mandate to have health insurance by this year or pay a fine next year.

If there were to be a large exodus of subsidized customers from the HealthCare.gov plans, it would in turn likely lead to much higher premium rates for non-subsidized people who would remain in those plans, who are apt as a group to be in worse health than all original enrollees.

The ruling also threatens, in the same 36 states, to gut the Obamacare rule starting next year that all employers with 50 or more full-time workers offer affordable insurance to them or face fines. That’s because the rule only kicks in if one of such an employers’ workers buy subsidized covered on HealthCare.gov.

LegalInsurrection.com posted technical details:

Section 36B of the Internal Revenue Code, enacted as part of the Patient Protection and Affordable Care Act (ACA or the Act), makes tax credits available as a form of subsidy to individuals who purchase health insurance through marketplaces—known as “American Health Benefit Exchanges,” or “Exchanges” for short—that are “established by the State under section 1311” of the Act. 26 U.S.C. § 36B(c)(2)(A)(i). On its face, this provision authorizes tax credits for insurance purchased on an Exchange established by one of the fifty states or the District of Columbia. See 42 U.S.C. § 18024(d). But the Internal Revenue Service has interpreted section 36B broadly to authorize the subsidy also for insurance purchased on an Exchange established by the federal government under section 1321 of the Act. See 26 C.F.R. § 1.36B-2(a)(1) (hereinafter “IRS Rule”).

Appellants are a group of individuals and employers residing in states that did not establish Exchanges. For reasons we explain more fully below, the IRS’s interpretation of section 36B makes them subject to certain penalties under the ACA that they would rather not face. Believing that the IRS’s interpretation is inconsistent with section 36B, appellants challenge the regulation under the Administrative Procedure Act (APA), alleging that it is not “in accordance with law.” 5 U.S.C. § 706(2)(A).

….Because we conclude that 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.

Court order (PDF).

Obama’s old Harvard Law professor, Laurence Tribe, said in response: “…I wouldn’t bet the family farm on this coming out in a way that preserves Obamacare.”

Further:

The law’s latest legal problem is that, as written, people who enroll in Obamacare through the federal exchange aren’t eligible for subsidies. The text of the law only provides subsidies for people enrolled through “an Exchange established by the State,” according to the text of the Affordable Care Act. Only 16 states decided to establish the exchanges.

The IRS issued a regulation expanding the pool of enrollees who qualify for the subsidies. Opponents of the law, such as the Cato Institute’s Michael Cannon and Jonathan Adler, argue that the IRS does not have the authority to make that change. (Halbig v. Burwell, one of the lawsuits making this argument, is currently pending before the D.C. Circuit Court; the loser will likely appeal the decision to the Supreme Court.) …

Finally, the IRS could fill in ambiguous gaps in a law. The problem for the IRS, though, is that the subsidies language is not ambiguous. Even Tribe acknowledged that the language is clear, according to the Fiscal Times.

“Yet in drafting the law, Tribe said the administration ‘assumed that state exchanges would be the norm and federal exchanges would be a marginal, fallback position’ — though it didn’t work out that way for a plethora of legal, administrative and political reasons,” the Fiscal Times writes.

Believe it or not, this may have all come down to a wording glitch:

As written, the law states that subsidies should be paid to those who purchase insurance through an “exchange established by the state.”

That would seem to leave out the 36 states in which the exchanges are operated by the federal government.

Lawyers and congressional staffers who worked on the 2010 law have described the problem as a classic wording glitch in a long and complicated piece of legislation.

One part of the law says that states, which normally regulate insurance, could create exchanges that would help consumers and small businesses shop for coverage. The law also said that if a state failed to establish an exchange, the federal government could step in and run one in its place.

A second part of the law described the subsidies that could be offered to low- and middle-income people to cover the cost of the insurance. This part of the law said these subsidies — or tax credits — would be offered for insurance bought on an exchange “established by the state.”

Apparently no one noticed the problem until the law was passed. Then, because of fierce political opposition and the 2010 Republican takeover of the House, supporters of the law could not fix the wording through an amendment. Moreover, the administration did not anticipate that most Republican-led states would refuse to create an insurance exchange for their residents.

At the end of the day, everything is not over:

The administration is expected to appeal the panel’s decision to the full 11-member appeals court. In the last year, Obama has added four judges to the D.C. Circuit court, giving Democratic appointees a majority for the first time since the mid-1980s.

If that effort should fail, the administration could appeal to the Supreme Court.

Also, at the present time, this decision does not have the full effect of law (according to more details from the above links), and will likely require escalation to the Supreme Court (if they were to grant Certiorari for the case) in order to be ultimately settled.

 

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