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Policy: Entitlements

Obamacare subsidies at stake in two new federal court cases

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Diana Furchtgott Roth,Columnists,Obamacare,Supreme Court,Health Care,Medicare and Medicaid,Entitlements,Analysis,Food Stamps,Justice Department,Healthcare.gov,Law,Subsidies

Forget the broken healthcare.gov website and the skyrocketing price of health insurance. Will the courts end Obamacare by disallowing subsidies on federal exchanges?

Judge James R. Spencer of the U.S. District Court for the Eastern District of Virginia in Richmond agreed to rule speedily on whether people who sign up for health insurance in the federal exchanges in 34 states can get subsidies.

This follows a similar decision by Judge Paul L. Friedman of the U.S. District Court for the District of Columbia on Oct. 21.

Under the letter of the Affordable Care Act, subsidies for health insurance premiums are only available for state exchanges. Sixteen states plus the District of Columbia have set up such exchanges.

But in May 2012 the Internal Revenue Service extended subsidies to federal exchanges, simply by defining an exchange as a “State Exchange, regional Exchange, subsidiary Exchange, and Federally-facilitated Exchange.”

Several groups are challenging the extension of subsidies to federal exchanges. Now, Judges Spencer and Friedman separately ruled that these cases can go forward.

This is a setback for the Justice Department, whose attorneys had argued that courts should not hear the cases because the plaintiffs supposedly have no standing. It is a win for attorneys Michael Carvin and Jacob Roth of Jones Day.

If the judges rule that federal exchange subsidies are not allowed, few people will sign up because coverage will be unaffordable.

Americans are already complaining about the higher price of insurance. Federal exchanges will not be viable without subsidies.

Without subsidies for health insurance, there will be no individual or employer mandate in those 34 states that declined to create exchanges.

People who do not want to be forced to buy health insurance, or health insurance that conforms to government standards, could move to states without exchanges. Firms that do not want to provide health insurance could set up operations in these states.

Alternatively, some of these 34 states might decide to create exchanges on their own, since it would be the only way they can get subsidies for their residents.

Two district court decisions will likely be issued in December or January. After that, the cases will go to two appellate courts.

Either side will be able to appeal once the district courts enter their judgments. Whoever loses will immediately appeal.

Some legal experts believe the courts will rule that subsidies are allowed in the federal exchanges, just as in 2011 when the Supreme Court ruled that it was constitutional for the government to tax those who do not sign up for health insurance.

With the 2011 ruling, the Supreme Court preserved the individual mandate. But the issues before Judges Spencer and Friedman are very different.

The individual mandate was a constitutional question. The question of subsidies on federal exchanges is not a constitutional question, but rather one of the meaning of the law.

As Judge Friedman said on Oct. 22, “In this case we have a final regulation, it’s purely legal. What does it mean? Is it consistent with the statute or isn’t it?”

The consequences of the judges’ decisions will go to the heart of entitlement spending. Does the executive branch, via an IRS ruling, have the right to expand an entitlement to cover an additional two-thirds of American states?

If so, then the executive branch also has the right to expand or shrink other entitlements, such as the Supplemental Nutrition Assistance Program (food stamps), Social Security, unemployment insurance, Medicaid, and Medicare.

If courts allow the federal exchange subsidies to stand, no one knows where the government's power grab will end.

Examiner Columnist Diana Furchtgott-Roth (dfr@manhattan-institute.org), former chief economist at the U.S. Department of Labor, is a senior fellow and director of Economics21 at the Manhattan Institute for Policy Research.
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