The nation was watching in October of 2011 as the Supreme Court ruled on the constitutionality of the Patient Protection and Affordable Care Act of 2010, widely known as Obamacare. However, in a less publicized lawsuit filed last year, a small number of individuals and businesses are asking the courts to resolve another crucial issue: whether an IRS rule authorizing federal subsidies in states that have declined to establish health insurance exchanges is illegal. Although complicated and technical, the illegality argument just may provide a victory to opponents of the law that the famous Supreme Court case could not deliver.
A complex regulatory scheme…
The Affordable Care Act establishes a complex regulatory scheme to achieve the goal of universal health care coverage. The law depends on states to help with implementation through state-run agencies called “exchanges.” If a state does not create an exchange, the Act authorizes a “fallback” exchange run by the federal government. The federal government cannot constitutionally compel states to establish exchanges; however, as an incentive, the Act provides certain federal tax credits and subsidies to households who purchase health insurance through a state-run exchange. The Act also establishes penalties for those who refuse to comply with the individual or employer mandates. However, it provides exemptions to those penalties for individuals who cannot afford coverage, as well as tax credits and subsidies to assist low-income households with the burden of the inevitably higher premiums resulting from the influx of high-risk individuals into the system.
…that just isn’t working.
Here’s the problem: the mandates, tax credits, subsidies and penalties are only applicable in states that establish a state-run exchange. As of the deadline provided in the Act, the vast majority of states declined to establish exchanges. Thus, the number of individuals and businesses participating and paying into Obamacare is drastically less than anticipated, and the system is being threatened with collapse.
Accordingly, on May 18, 2012, the IRS issued a rule that extends eligibility for tax credits and subsidies to states without exchanges, which forces individuals and employers out of the exemptions and makes them subject to the mandates. Simply put, the IRS is forcing individuals and employers into the system in order to implement the law via administrative fiat. Even though the Act was hastily passed without bipartisan support, its proponents made an enormous political miscalculation. Almost certainly overestimating support for the scheme, it never occurred to them that a vast majority of states would refuse to participate.
What does all of this mean for Obamacare? A lawsuit, of course. On May 2, 2013, four individuals and three small businesses filed suit in federal court alleging that the IRS rule is illegal, arguing that it forces them to buy costly health insurance that they would otherwise forego, and forces employers to offer insurance plans that they would not otherwise sponsor.
So why does it matter?
I am a plaintiff in this lawsuit. I am a self-employed, freelance attorney living in a state that declined to establish an exchange. Without the IRS rule, I would fall within an exemption to the individual mandate penalty.
But because the IRS rule illegally makes me eligible for a subsidy, I will be forced into the system. In other words, I will be forced to either pay a penalty or buy expensive insurance that I would not otherwise purchase. Personally, I consider this a gross violation of my constitutional rights and liberty. As an attorney, regardless of my personal beliefs about the merits of Obamacare, I believe that the government is acting illegally in order to reach a political goal.
As a result of the law’s vast implementation difficulties, the employer mandate has been repeatedly delayed, and the individual mandate was quietly delayed earlier this month, interestingly without so much as a press release. Still, the political and legal battle rages on. My attorneys filed a Motion for Summary Judgment last year, arguing that the matter needs to be decided immediately, as the mandates affected by the IRS rule were originally to take effect January 1, 2014. In late January, the trial court judge ruled against the challenge, citing a congressional intention to provide nationwide subsidies which overrides choices made by the individual states. An appeal was immediately filed, and an expedited hearing was held on March 25, just ahead of the last day of open enrollment in Obamacare.
On December 2, 2013, the national press finally took prominent notice of this latest legal challenge in the form of a front page story in the New York Times. Indeed, both supporters and proponents of Obamacare should take this lawsuit seriously. If the Supreme Court invalidates the IRS rule, it would be a significant victory for individuals and small businesses, but most importantly, a crucial defeat for the sponsors and proponents of Obamacare, who will hopefully understand that when it comes to fundamental individual liberties, political ends do not justify illegal means.