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Obamacare's Next Bout: More Legal Challenges

Monday, October 21, 2013

Obamacare is off to a bad start — and potentially greater threats to its health care exchanges are looming.

The first three weeks after the initial launch of Obamacare’s health exchanges — relabeled “marketplaces” (apparently without market prices!) by the White House earlier this year — have been plagued by multiple snafus. They include dysfunctional software design, information disconnections, data mismatches, and heightened risks to consumer privacy — particularly for states with exchanges administered by the federal government. Soon we may see reports of carpal tunnel syndrome from would-be customers trying again and again to enter data into the frozen enrollment pages of states’ insurance coverage websites.

Earlier this month, Tea Party conservatives failed dismally in their efforts to defund and stop further implementation of the Affordable Care Act (ACA) by shutting down the federal government. Now, the poorly designed scheme of the Department of Health and Human Services (HHS) for an exchange-based coverage expansion in 2014 may be pitching in to handle part of that mission.

Obamacare’s plan to transform more and more private health insurance coverage into a federally approved public utility model — full of complex layers of rate regulation, income redistribution, and benefits mandates — isn’t exactly off to a great start. And perhaps the gravest mortal threat to these exchanges is about to arrive onstage, in the form of several federal district court cases.

Four Legal Challenges to Health Care Exchanges

First up is today’s hearing in the federal district court for the District of Columbia on a motion for a preliminary injunction that would halt any disbursement of federal premium assistance tax credits for new coverage in the 34 exchanges established by the federal government. A group of individuals and small business owners from six different states in Halbig, et al. v. Sebelius, et al. seek to overturn an Internal Revenue Service (IRS) rule that illegally authorizes such tax subsidies for federal health exchanges. (As many as 16 states and the District of Columbia arguably have established their own ACA-compliant health exchanges).

The cases are another reminder that much of Obamacare was constructed haphazardly out of political fables, budgetary gimmicks, legal contortions, and procedural shortcuts. Its troubled past keeps catching up with its unworkable future.

On October 31, another federal district court in Richmond, Virginia, is scheduled to consider a similar motion in a case brought by four individual plaintiffs residing in that state. They claim that the IRS rule reduces their out-of-pocket cost of health coverage and effectively subjects them to the ACA’s individual mandate either to purchase more costly and comprehensive insurance than they would otherwise want, or to pay a penalty. The tax subsidies authorized by the IRS rule make such coverage through federal exchanges “affordable” and thereby subject to the individual mandate.

A related case in federal district court in Oklahoma first raised the IRS rule and federal exchange tax credits issue back in September 2012. On August 12, 2013, Judge Ronald White ruled that the state of Oklahoma’s legal challenge could move forward (after dismissing two of the five counts in the state’s amended complaint). Upcoming motions for summary judgment by either the state plaintiff or the federal government defendants have not yet been scheduled for a hearing, but most likely it will be before the end of this year.

On October 8, 15 Indiana public school corporations and the state of Indiana filed a related lawsuit in federal district court in Indianapolis against the IRS, the U.S. Department of the Treasury, and HHS. The initial complaint is particularly well-crafted (learning from the earlier lawsuits). It emphasizes how the potential penalties under the ACA’s employer mandate — which would be triggered if employees of the state government or the schools received tax credits for coverage in the state’s federally administered exchange — would result in harmful consequences such as reduced working hours and other economic hardships for workers, plus a detrimental impact on the quality of education for students. However, it’s not yet clear how soon the plaintiffs will be able to able to obtain an initial hearing and ruling in the case.

How a Bill Becomes a Law

The basic legal problem for the Obama administration goes back to the final Senate-passed version of the ACA that had been rewritten behind the closed doors of Majority Leader Harry Reid’s office in the fall of 2009. Unlike the version of the legislation passed in the House, the Senate bill favored state-based administration of new health exchanges. However, it lacked the constitutional authority to simply command state governments to establish them, so that bill added a provision for federally established exchanges as a backup option for states that refused to do so.

It turns out that even a heavily Democratic Congress ended up writing a different law than the one the Obama administration wants to enforce today. Many moving parts of the final bill never fit together as the ACA was desperately pushed through Capitol Hill by any means necessary. Much of the legislative history remains a muddle because Democratic leaders in Congress had to abandon regular procedures and swallow the incomplete version of the Senate-approved bill. After Senate Democrats lost their 60-vote majority in a special election in January 2010, the best remaining option for passage of the ACA required the House to pass the Senate bill unchanged, which they did in March 2010. President Obama pushed Congress to pass the only law he could get through both houses without facing another filibuster by Senate Republicans. The final law was only patched up to a small degree in an accompanying budget reconciliation law, without any definitive committee reports or any House-Senate conference reports.

How a Law Becomes a Suit

By the late fall of 2010, several legal challenges to the constitutionality of the ACA’s individual mandate to purchase insurance coverage (set to begin in January 2014) already were underway. I organized a forum at the American Enterprise Institute on December 6, 2010, to examine other types of potential legal challenges to the new law, particularly those involving its Medicaid expansion and other federal efforts to commandeer state governments. Two astute legal scholars, former Deputy Assistant Attorney General Tom Christina and Vanderbilt law professor James Blumstein, were the first ones to notice at that point how the ACA actually authorized federal premium assistance tax credits only for state-established exchanges (in section 1311 of the law; federally established exchanges had been added separately in section 1321, but that provision did not authorize tax credits for them). Blumstein subsequently fleshed out more of the legal argument against federal tax credits through federally established exchanges at another AEI forum on September 15, 2011. Blumstein also developed at both forums the core legal arguments behind the successful challenge to the ACA’s Medicaid expansion in the Supreme Court in 2012.

It will only take one judge committed to the rule of law to start releasing the air out of the Obamacare balloon.

More extensive research by Jonathan Adler and Michael Cannon (picking up on the insights of Christina and Blumstein) later provided a very plausible explanation for the distinction between different types of health exchanges. The Senate bill not only favored state exchanges; it expected all 50 states to embrace their establishment. When the bill provided for federal exchanges in a separate section of the law to guard against legal challenges that it would otherwise be trying to command states to set up their own exchanges, the Senate was using the potential loss of tax credits for the new insurance coverage as an inducement, if necessary, for states to choose to comply. Thus, the Senate bill authorized the credits for state exchanges, but it chose not to do so for federal ones.

President Obama and his allies nevertheless tried to excuse this issue as just another “glitch” or “bump” in the law that they could work around through regulatory reinterpretation. The IRS tried to accomplish this in its May 2012 final regulation covering this provision. The regulation ignored the clear limitations in the law’s text for premium assistance subsidies. It redefined “exchange” to mean “state exchange, regional exchange, subsidiary exchange, and federally facilitated exchange.” That in effect eliminated the statutory language restricting subsidies to exchanges “established by the state under section 1311” of the ACA.

At that point, even before the Supreme Court’s final decision in NFIB v. Sebelius regarding the constitutionality of the ACA’s individual mandate and Medicaid expansion, several of us (the same legal team involved in an amicus brief filed in that case) went to work on contingency planning for a lawsuit that would challenge the IRS rule. The outlines of several counts of a potential lawsuit were drafted. On the afternoon of June 28, 2012, following the Supreme Court ruling that kept most of the ACA intact, a number of contacts to potential state government plaintiffs began. The Competitive Enterprise Institute (CEI) took the primary lead in finding funding and potential plaintiffs, as well as coordinating future litigation.

In July 2012, the initial publication of legal research by Adler and Cannon proved invaluable in bolstering the substantive arguments behind legal challenges to the IRS rule. Despite a number of frustrating misfires during the summer months in trying to encourage various state governments to initiate such a lawsuit, the state of Oklahoma finally stepped forward and decided on September 19, 2012, to amend a previous lawsuit in federal court to incorporate new counts seeking to overturn the IRS regulation. CEI’s public interest litigation program succeeded in developing the D.C.-based lawsuit in May 2013 and the Richmond-based litigation filed in September 2013, while enlisting the involvement of top litigator Michael Carvin of Jones Day as lead counsel. The Indiana-based lawsuit developed more slowly, after the election of Mike Pence as governor in November 2012 solidified that state government’s opposition to establishing a state-run exchange there.

What’s at Stake in the Courts and Beyond?

The main tactic remains to try to keep running out the legal clock until the architecture of Obamacare is too far along to be reversed and taxpayer subsidies to beneficiaries cannot be rolled back politically.

A number of key provisions in the ACA’s overall plan for increased federal control of health insurance decisions are linked to the IRS rule under challenge. The law’s employer mandate penalties only apply if and when an employee of a noncompliant firm actually enrolls in an exchange-based plan and receives a premium assistance tax credit. Individual mandate penalties do not apply to anyone who only faces coverage offers that cost more than 8 percent of their annual household income. Any receipt of a federal premium assistance tax credit reduces the net out-of-pocket premium that an individual must pay, whereas the absence of such credits in effect lowers the premium cost threshold for unaffordability and an exemption from the individual mandate’s penalty. Hence, any court ruling that finds such tax credits illegal in a state with a federally established exchange would negate or severely weaken mandate enforcement penalties in that jurisdiction. Lack of a subsidy also would make such ACA-based coverage far less attractive compared to other private market alternatives.

Although any particular federal court decision technically would only be binding in jurisdictions where the immediate parties to the case are located, and remain subject to subsequent appeals to higher courts, the “shock and awe” effects of any ruling against the IRS rule and federal tax credits in federally established exchanges would create a nationwide ripple of serious legal concerns about the future of similar coverage elsewhere in as many as 33 other states that have declined to establish their own ACA-compliant exchanges. It also would be likely to encourage many of those states to mount similar legal challenges and continue to refuse to authorize state-run exchanges. On the practical side, it would somewhat reduce the federal budget deficit (fewer dollars expended for premium assistance tax credits) and provide an early exit excuse for the currently malfunctioning federal exchanges. 

Even if the IRS rule is overturned as illegal, federal tax credits could still flow through state-established exchanges and some states might reconsider their current stance against creating their own exchanges. The relatively weak individual mandate still would apply to individuals offered affordable coverage from their employers, their state’s Medicaid program, or other federal health coverage programs. But stripping away one of the core legal fictions that tries to prop up the ACA’s unworkable edifice of federal mandates, regulations, and subsidies would accelerate a return to the political bargaining table to rebalance the rights and responsibilities of all parties.

What Are the Odds for a Successful Legal Challenge?

The sequence of lawsuits involving these issues reveal progressive improvements in framing more appealing sets of plaintiffs and tighter legal arguments. Thus far, it has been difficult to combine a full set of all three types of plaintiffs (a state government, an employer, and an individual insurance purchaser) within a single case, but two out of three isn’t bad (for all the cases but the Oklahoma-based one). As noted above, the Indiana case tells the best story and provides the best evidence of imminent harm, even though it’s rather late to the field.

Up to this point, legal defenders of Obamacare’s federal exchanges have relied primarily on stalling tactics and procedural arguments, claiming that potential plaintiffs lack standing to challenge the IRS rule (no immediate injury) or are barred from a legal remedy by the Anti-Injunction Act that applies to relief from federal tax liabilities. They also weave together selective portions of the ACA’s text to fabricate a different legislative history (even arguing that federal exchanges really are the same as state-established exchanges) and conclude that the IRS is carrying out what Congress intended (or at least comes close enough for government work). The main tactic remains to try to keep running out the legal clock until the architecture of Obamacare is too far along to be reversed and taxpayer subsidies to beneficiaries cannot be rolled back politically.

It turns out that even a heavily Democratic Congress ended up writing a different law than the one the Obama administration wants to enforce today.

The respective plaintiffs’ attorneys in the various cases have developed powerful counters to the federal government’s arguments, such as pointing out that employers are directly challenging the tax subsidies enabled by the illegal IRS rules, rather than the employer mandate penalties they might help trigger. They also emphasize that employer plaintiffs are being injured by the likely costs of compliance with the ACA’s rules, rather than its penalties for noncompliance. Several individual plaintiffs argue for the freedom to buy the type of non-ACA-approved insurance that they prefer, rather than just to go completely uninsured. Two related cases challenging other parts of the ACA in the Fourth Circuit and Tenth Circuit federal courts of appeal also have delivered rulings in recent months that bolster the arguments for legal standing by individuals and employers to challenge the law.

All of these cases are another reminder that much of Obamacare was constructed haphazardly out of political fables, budgetary gimmicks, legal contortions, and procedural shortcuts. Its troubled past keeps catching up with its unworkable future.

Winning the closing argument over what Congress did and did not intend in the exchange coverage provisions of the ACA remains ahead. Many federal judges still tend to defer to executive branch discretion in implementing vague or inconsistently written federal laws, particularly when the alternative involves calling a sudden halt to implementation of a president’s top domestic policy objective. But it will only take one judge committed to the rule of law to start releasing the air out of the Obamacare balloon, even as major implementation deadlines approach (that is, implementation at least in theory, if not apparently carried out very credibly in practice). Obamacare’s defenders would like to have observers believe that the glitches of implementation are not deep ditches, and that the continuing legal challenges to the ACA will produce at worst “only a flesh wound.” Meanwhile, the law’s excesses, evasions, and contradictions will keep getting chopped down, limb by limb.

Thomas P. Miller is a resident fellow at the American Enterprise Institute. He is the author of When Obamacare Fails: The Playbook for Market-Based Reform.

FURTHER READING: Miller also writes about healthcare reform in “Beyond Defeat or Defiance” and “Conservative Health Care Reform: A Reality Check.” Joseph Antos explains exchanges in “Obamacare: Destined to Flop? Part I” of his four-part series, while Michael R. Strain contributes “How to Repeal and Replace: From a Tax to Tax Credits.” Antos and Strain together ask the question “If You Don't Buy Insurance, Will You Really Pay the Tax?” Neil McCray collaborates with Antos to write “HHS Report on ACA Exchange Premiums: Putting the Best Face on a Bad Situation.” McCray also writes “On Health Care, the Left Is Right (and So Is the Right).”

Image by Dianna Ingram / Bergman Group


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