Later this month, judges in Washington, D.C., and Richmond, Va., are expected to deliver rulings on whether Americans who buy insurance in federally run health exchanges in 34 states qualify for subsidized premiums.
The IRS ruled in May 2012 that these Americans are eligible to receive premium subsidies. But this regulation contradicts the letter of the law in the Affordable Care Act.
The implications are immense. With family plans costing $20,000 a year in 2016, according to the IRS, few Americans will enroll without premium subsidies because insurance will be simply unaffordable.
The Affordable Care Act states that people who buy health insurance from state exchanges get subsidies if they earn under 400 percent of the poverty line, currently $94,000 for a family of four.
The Congressional Budget Office estimates that 19 million people will get subsidized coverage from the exchanges in 2023, compared to 5 million people without subsidies.
If Judge Paul L. Friedman of the U.S. District Court for the District of Columbia and Judge James Spencer of the U.S. District Court for the Eastern District of Virginia rule against the IRS, Obamacare could collapse due to flaws in the law, not congressional action.
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 an exchange established by the state under section 1311.”
Subsidies were put in place to encourage states to set up exchanges. But only 16 states and the District of Columbia have set them up, fewer than forecast by CBO.
A different section of the Obamacare law (Section 1321) allows the federal government to set up health exchanges. But nowhere does the law state that people on 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 in any exchange by defining an exchange as a “State exchange, regional exchange, subsidiary exchange, and federally-facilitated exchange.”
Sam Kazman, general counsel for the Competitive Enterprise Institute, which is assisting in coordinating the lawsuit, told me, “The IRS is now attempting to cover up those distinctions through an unauthorized rule that treats all states identically, thus engaging in an end run around this program’s massive unpopularity. “
Some Virginia and D.C. residents are suing the government, arguing that extending the subsidies to federal exchanges puts them at a disadvantage.
Without subsidies, the cost of health insurance would be greater than eight percent of their income, meeting the definition of unaffordable coverage.
So they would be exempt from the mandate to buy health insurance, and the penalties for not doing so. They would be able to buy catastrophic health insurance, low-cost insurance against major illness.
Otherwise, lower-cost catastrophic health insurance is only available to those under 30.
In response, Department of Justice attorneys argue that the law is ambiguous, so the IRS has the right to extend subsidies to those in federal exchanges.
Plus, they say, plaintiffs are not harmed through subsidized insurance because they would pay $20 monthly for insurance, less than for catastrophic insurance.
The major question is spending authority. If Congress did not authorize subsidies for federal exchanges, does the IRS have the right to spend the money?
Jones Day attorneys Michael Carvin, Jacob Roth and Jonathan Berry argue that “the IRS rule effectively appropriates billions of dollars without authorization.”
Will the courts let the IRS get away with its billion-dollar heist?Diana Furchtgott-Roth, a Washington Examiner columnist and former chief economist at the Department of Labor, is a senior fellow at the Manhattan Institute for Policy Research. She can be reached at firstname.lastname@example.org.