Having barely survived near-death experiences, Obamacare faces another legal challenge

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Concerned citizens hold signs to protest health care reform while standing along Davis Highway in Pensacola, Fla., on Sept. 7, 2009.

Article Highlights

  • The latest threat to full implementation resurfaced Thursday in a new lawsuit in DC’s federal district court

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  • The administration’s main tactic is to keep running out the legal clock until Obamacare is too far along to be stopped

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  • Obamacare’s troubled past is catching up with its unworkable future.

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President Obama’s most important domestic policy achievement – Obamacare — has already barely survived a number of near-death experiences since Congress narrowly passed the Affordable Care Act (ACA) three years ago. They include a split decision at the Supreme Court, repeated congressional efforts to repeal it, continued unpopularity with voters, widespread resistance by state government officials, daunting implementation challenges, and stiff economic headwinds.

The latest mortal threat to Obamacare’s full implementation next January resurfaced last Thursday in the form of a new lawsuit filed in federal district court in the District of Columbia. A diverse group of individuals and small business owners in six different states seek to overturn an Internal Revenue Service rule that illegally authorizes tax subsidies for health exchanges established by the federal government. Without access to those taxpayer dollars, Obamacare’s plan to impose coverage mandates on individuals and employers in the 33 states that have declined to establish their own state health exchanges, along with the ACA’s broader federal regulatory scheme for health insurance, would face two choices: Collapse into chaos or renegotiate an overdue rendezvous with reality.

Reading the Entrails of Messy Legislative History

The basic legal problem for the Obama administration is that even a heavily Democratic Congress back in 2010 wrote a different law than the one it wants to enforce. The complex legislation was not just unwise and unsound. It was poorly drafted, with many moving parts that never fit together as it was desperately pushed through Congress by any means necessary.

Much of the legislative history remains a muddle, because the Democratic leaders in Congress had to abandon regular procedures and swallow the incomplete version of the law passed by the Senate in December 2009. Obama subsequently pushed Congress to pass the only law it 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 at all.

In any case, the ACA’s statutory text provided for two types of health exchanges (recently renamed “marketplaces” in true Orwellian fashion): State exchanges and “backup” federal exchanges in states that declined to establish their own ones. Two astute legal scholars, Tom Christina and James Blumstein, first noticed in December 2010 at an American Enterprise Institute forum that the ACA actually authorized federal premium assistance tax credits only for the state exchanges. More extensive research by Jonathan Adler and Michael Cannon provided a very plausible explanation: The Senate bill favored state exchanges and it expected all fifty states to embrace their establishment. It provided for federal exchanges in a separate section of the law, as a last-minute recognition that the federal government could not “command” states to set up their own exchanges. Instead, the potential loss of tax credits for the new insurance coverage could operate as an inducement, if necessary, for states to choose to comply.

Challenges to the IRS Rule

President Obama and his allies have tried to excuse this matter as just another “glitch” or “bump” in the law that they could work around through regulatory reinterpretation. In fact, the IRS tried to do this in its May 2012 final regulation covering this provision.

However, last September the state of Oklahoma launched a new challenge to the legality of the recently-adopted IRS rule. Oklahoma attorney general Scott Pruitt asked for a declaratory judgment and preliminary injunction that would overturn the rule as contrary to the plain text of the ACA and the intent of Congress, as well as adopted improperly. The state had declined to establish its own exchange and was asserting its sovereign right to carry out the choice it was given by Congress.

The Oklahoma case has moved slower than initially expected, the federal government’s motion to dismiss the complaint for procedural reasons remains before a federal district court judge.

The new D.C.-based case provides a different mix of plaintiffs, all based in states that have not approved a state exchange. These plaintiffs raise more personalized types of likely injuries they would suffer if the IRS rule enables enforcement of individual or employer mandate penalties against them when they continue to decline to purchase federally-required insurance next year.

For example, the employer mandate applies to businesses with 50 or more employees that either do not offer any federally-qualified coverage to their employees, or fail to offer such coverage that is “affordable.” But its penalties are only triggered if one of those employees then actually receives exchange-based coverage instead that includes a premium assistance tax credit subsidy.

The individual mandate does not apply to persons who are uninsured and lack qualified coverage offers from an employer (or Medicaid), if exchange-based coverage for them under Obamacare would be “unaffordable.” This exemption applies to the “net” premiums costs they would face, which accounts for any federal tax subsidies they might receive. Hence, the unaffordability threshold – their out-of-pocket premium costs above 8 percent of family income — is effectively higher if federal premium assistance tax credits are available. But in states with only federal exchange coverage, more individuals would be exempt from the individual mandate if the IRS rule is overturned and no such subsidies are available. (A similar set of federal subsidies to reduce cost-sharing liabilities for lower-income insured individuals also would be unavailable in states without their own exchange if the IRS rule is declared illegal).

Some of the individual plaintiffs in the DC case also argue that they actually want to purchase unqualified catastrophic coverage with greater cost sharing, rather than just refuse to buy any coverage at all. But they still will not be allowed to do so, if their subsidy-enhanced income level makes them subject to the mandate for more comprehensive and more expensive coverage that is federally-approved as “essential.”

Defenders Tactics: Delay, Deflect, Deny

Legal defenders of Obamacare have relied primarily on 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 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’ exchanges) and conclude that the IRS is carrying out what Congress intended. The main tactic is to keep running out the legal clock until Obamacare is too far along to be stopped, and taxpayer subsidies for coverage can’t be rolled back politically.

Forecast: It’s More than a Flesh Wound

The case against the IRS rule is not air tight. Each type of plaintiff (state, employer, individual) brings assets and liabilities to court; particularly in terms of legal standing to challenge the federal exchange subsidies. States are injured less directly and have to overcome federal law supremacy arguments. Employers hoping to dodge mandate penalties come close to seeking premature relief from a future “tax” on them. Individuals may seem to be turning down assistance in gaining potential coverage while claiming they are being hurt by it. But the combination of all these parties and their claims, along with the strained interpretations needed to overcome the plain language of the ACA text, is stronger as a whole than the individual components.

Obamacare was constructed out of political fables, budgetary gimmicks, interest group deals, legal contortions, and procedural shortcuts. Its troubled past is catching up with its unworkable future.

It will take just one judge committed to the rule of law to start releasing the air out of this balloon, as major implementation deadlines approach. We should not expect all of Obamacare to evaporate overnight. But stripping away one of the core legal fictions that tries to prop up its unworkable edifice of federal mandates, regulations, and subsidies will accelerate a return to the political bargaining table to rebalance the rights and responsibilities of all parties. Until then, picture the similar image of the Black Knight in “Monty Python and the Holy Grail” getting chopped down limb by limb, while crying out boldly, :”It’s Only a Flesh Wound!”

Tom Miller is a resident fellow at the American Enterprise Institute and author of “When Obamacare Fails: The Playbook for Market-Based Reform.”

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