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Federal district court judge James Spencer determined yesterday that a lawsuit challenging the legality of federal tax subsidies in exchanges established by the federal government under the Affordable Care Act (ACA) will move ahead to a final ruling on the merits, perhaps as soon as early January 2014.
In King et al. v. Sebelius et al., three individuals living in the state of Virginia claim that, absent any eligibility for those premium assistance tax subsidies, they would be exempt from the law’s individual mandate penalty that begins in 2014. They explain that they would be entitled to obtain a certificate of exemption before January 1, 2014, which would authorize them either to purchase catastrophic insurance coverage or forego any coverage without fear of incurring a penalty.
However, eligibility for the federal subsidies would have the opposite effect, even though they do not want to purchase ACA-compliant insurance in 2014. The amount of those income-based tax credits would have the effect of reducing their “net premium” costs of ACA-required coverage below their income-related “affordability” thresholds for exemption from the individual mandate.
At yesterday’s hearing in Richmond, Virginia, the plaintiffs sought a preliminary injunction against an Internal Revenue Service (IRS) rule that authorized distribution of federal tax subsidies for coverage in new health exchanges under the ACA that are established by the federal government in states (like Virginia) that have decided not to establish their own ACA-qualified exchanges.
Judge Spencer denied the plaintiffs’ motion for a preliminary injunction, as another federal district court judge did in a related case (Halbig et al. v. Sebelius et al.) last week in the District of Columbia. However, the plaintiffs’ attorneys, led by Michael Carvin of Jones Day (in both cases), accomplished their primary objective of ensuring that they would receive a relatively quick decision on the overall legal merits of their claims. In the Richmond case, Judge Spencer essentially bypassed the arguments of the federal government defendants that the case should not proceed further due to lack of legal standing by the plaintiffs. He concluded that this “case is ripe enough” to proceed toward a final ruling on summary judgment, and he ordered expedited legal briefing on any remaining legal issues to be completed by December 6. He indicated that he then would issue a final ruling, without any further hearings, perhaps by January 1, 2014 (when the individual mandate and new exchange coverage under the ACA officially begin).
This is the second legal challenge to the IRS rule and the federal exchange subsidies to move forward in the federal courts within the last two weeks. On October 22, Judge Paul Friedman ruled against the federal government’s motion to dismiss similar claims in the Halbig case, and he set December 3 as the next date for a full hearing on both sides motions for summary judgment. He also indicated that he would issue a final ruling no later than February 15, 2014; if not sooner.
Here’s the bottom line for both legal challenges thus far. The federal government’s attempts to delay and avoid a legal ruling on the merits of the claims against the validity of the federal exchange subsidies (which would seriously derail plans for the ACA’s version of health insurance change in up to 36 states) have been unsuccessful. Although several potential roadblocks may be ahead at the summary judgment stage of the two cases, the main action will involve persuading either court that the clear meaning of the statutory text in the law passed by Congress in March 2010 is that only exchanges “established by a state” are eligible for federal premiums assistance tax credits for exchange-based coverage.
Neither judge has provided a firm indication thus far as to how he will rule on that crucial issue. But even a split decision in these two cases (apart from two other similar challenges in federal district courts in the 7th and 10th federal judicial circuits) might make the Obama administration’s current problems with simply operating minimally functional federal exchanges seem like temporary headaches compared to more crippling legal maladies. Without access to federal tax subsidies, federal-run exchanges would wither away. The respective coverage mandates on employers and individuals under the ACA also would be substantially weakened (although they still could operate in states running their own ACA-qualified exchanges). This would fundamentally reframe future debate over the role and nature of state-run ones, as well as other less-centralized health insurance reform alternatives.
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