http://www.marketwatch.com/story/court-could-block-obamacare-subsidies-in-34-states-2013-10-25?siteid=yhoof2

Oct. 25, 2013, 6:01 a.m. EDT

Court could block Obamacare subsidies in 34 states
By Diana Furchtgott-Roth

The administration is interpreting the Affordable Care Act in extraordinary ways, and the courts are beginning to take note.

On Tuesday Judge Paul Friedman of the U.S. District Court for the District of Columbia said he would rule on whether people who sign up for health insurance on federal exchanges in 34 states can get subsidies.

Under the Affordable Care Act, subsidies are only available for state exchanges. But through regulation the Internal Revenue Service has extended subsidies to federal exchanges too.

Separately, the White House signaled on Wednesday that it is postponing for a few months the penalties for people who do not sign up for health insurance — even though earlier this month President Barack Obama attacked congressional Republicans who sought to postpone penalties for a year. Also see: Obamacare penalties to be delayed.

Several groups are challenging the federal subsidies. Judge Friedman ruled that their case could go forward, disappointing the administration. The Justice Department argued that the court should throw out the case because the plaintiffs had no standing. After the judge’s ruling, the plaintiffs are standing tall.

Next week, Judge James R. Spencer of the U.S. District Court for the Eastern Division of Virginia in Richmond is expected to rule on the same challenge from another group of plaintiffs. In August, U.S. District Judge Ronald White allowed Oklahoma to proceed with a similar case against the subsidies.

The implications are immense. Family plans will cost $20,000 a year in 2016, according to the IRS. If Americans on the federally run exchanges do not qualify for health-insurance subsidies, few will sign up. Plans will be simply unaffordable. Obamacare will collapse not because of Congress, but due to flaws in the structure of the law.

The text of the Affordable Care Act states that people who buy health insurance from state exchanges get subsidies if they earn under 400% of the poverty line, currently $94,000 for a family of four. Most applicants will qualify for some subsidy.

According to the law, subsidies are available to those who get their health insurance “through an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act.” Or, in another section, those “enrolled in through (sic) an Exchange established by the State under section 1311.”

How many uninsured people are eligible for assistance under the Affordable Care Act?
Congress put state subsidies in place to encourage states to set up exchanges. Still, only 16 states and the District of Columbia took the carrot and set them up, fewer than anticipated.

A different section of the act (Section 1321) allows the federal government to set up exchanges in states that have not done so. It is these federal exchanges that have made headlines due to their technical problems. But nowhere does the law say that people on these federal exchanges can receive tax subsidies.

No problem, said the IRS in a May 2012 ruling. The IRS extended the subsidies to those getting health insurance on any exchange by defining an exchange as a “State Exchange, regional Exchange, subsidiary Exchange, and Federally-facilitated Exchange.”

This IRS ruling may have had the unintended consequence of discouraging states from setting up exchanges. States had nothing to gain, and a lot to lose, if the exchanges did not work efficiently. Governors may well have calculated that if Uncle Sam were going to set up exchanges and give their residents the same level of subsidy, why set up their own exchanges? If problems occur, as is happening now, the federal government takes the blame, not the governor or Legislature.

Two groups of Virginia and District of Columbia residents are suing the government, arguing that extending the subsidies to federal exchanges puts them at a disadvantage.

Without the subsidy, their attorneys argue, the cost of health insurance would be greater than 8% of their income, meeting the definition of unaffordable coverage. This would enable them to receive a certificate of exemption from the requirement to purchase health insurance. It would also enable them to buy catastrophic health insurance, low-cost insurance against major illness.

Otherwise, lower cost catastrophic health insurance is only available to those under 30 years of age.

In response, 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. With the subsidies in the federal exchanges, the plaintiffs would pay $20 monthly for insurance, rather than hundreds of dollars monthly for catastrophic health insurance.

Judge Friedman disagreed with the Justice Department. Ruling from the bench, he denied the request for a preliminary injunction to block the subsidies, but made it clear that he understands the timing and intends to expedite the case to final judgment. That is the ideal approach, because it means he will rule on the merits by mid-February, and whoever loses can appeal to the D.C. Circuit Court of Appeals.

The denial of the government’s motion to dismiss was the important development, because the government was desperate to avoid having any court consider the merits of the case. However Friedman and Spencer resolve the issue, it will ultimately be up to the appellate court (or Supreme Court) to decide. This week’s actions ensure that will happen in the next two months, rather than in six months, or a year, or in 2017 (as the government wanted).

One major question is spending authority. If Congress did not authorize subsidies for federal exchanges, does the IRS have the right to spend the money?

In the motion for preliminary injunction in the federal court in Washington, attorneys Michael Carvin, Jacob Roth, and Jonathan Berry of the law firm Jones Day argued compellingly that “far from properly implementing the ACA, the IRS chose to ignore ‘the will of Congress as evinced in the statute’s text’ and proceeded to promulgate a rule that purports to authorize billions of dollars in federal subsidies.”

With Friedman’s ruling, the court will decide by February on the IRS’s newfangled interpretation of subsidies for federal exchanges. Without these subsidies, the federal exchanges in 34 states will collapse not because of the technical problems now dominating the news, but because the insurance will be unaffordable.
Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor, directs Economics21 at the Manhattan Institute.
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