Exchange Lawsuits Move Forward

A lawsuit challenging premium subsidies in federal exchanges survived a procedural hurdle Tuesday, with U.S. District Court Judge Paul Friedman rejecting the federal government’s motion to dismiss and promising a ruling by February 15th.

The case, Halbig v. Sebelius, is one of four outstanding lawsuits challenging an IRS rule allowing premium subsidies in states refusing to create an exchange. If successful, the challenge would not only stop the employer mandate in most states, but would protect some Americans from the individual mandate to buy federally-approved health insurance. Because exchange subsidies are estimated to cost $1.075 trillion through 2023, blocking them in the 34 states that have refused exchanges would additionally reduce federal spending.

The D.C. plaintiffs in Halbig contend that the IRS rule runs contrary to the express language of the ACA, which only authorizes the distribution of subsides in state-run exchanges. The distinction between federally- and state-run exchanges, they argue, was an intentional feature of the law to encourage states to establish exchanges, and that the IRS ignored the distinction when it became apparent that most states would nonetheless refuse. The consequence, plaintiffs argue, is that the distribution of subsidies in federally-run exchanges subjects them to the individual mandate by disqualifying them from the law’s unaffordability exemption. A similar case, King v. Sebelius, will be heard later this month in Virginia.

Notably, a sister case, Pruitt v. Sebelius, cleared a similar hurdle in August. In Pruitt, Oklahoma Attorney General Scott Pruitt challenges the same IRS rule, but additionally argues that the distribution of subsidies triggers penalties against businesses that would otherwise be exempt from the “employer mandate,” thereby undercutting job creation and growth.

Another case, Indiana v. IRS, was filed earlier this month by Indiana Attorney General Gregory Zoeller and 15 public school districts on similar grounds. In Indiana, plaintiffs argue that the IRS rule’s “unauthorized subsidies” would serve as a trigger for employer mandate penalties, and that public schools fear they “do not have the financial resources” to fulfill the employer mandate’s coverage requirements.

Ironically, with these cases gaining momentum and the potential for additional states and individuals to join or file lawsuits, the law’s undoing may come from same vehicle it was saved by—the courts.

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