Could Halbig et al v. Sebelius Sink Obamacare?

Innovare may be Latin for innovate, but the values at Innovare Health Advocates are traditional: An “Old School” commitment to delivering “Healthcare the Way it Ought to Be.”

The Missouri-based health practice is run by Dr. Charles Willey, a staunch tea party conservative who’s been mentored by former Sen. Jim Talent, one of his patients. “I’ve personally, for a long time, been interested in politics,” he told a radio show in 2010, noting that he’d been leading efforts “to get doctors excited about resisting Obamacare.”

But Willey’s doing more than just resisting the health law these days — he’s become an active player in Halbig et al v. Sebelius, a lawsuit that threatens a key element in the Affordable Care Act: Whether the tax subsidies slated to help many Americans purchase coverage through many insurance exchanges are even legal under the ACA’s language.

(Innovare Health is one of the small businesses that has joined the suit.)

And the stakes are higher than most people realize, according to Michael Greve, a law professor at George Mason University.

“If the statute means what it says, Obamacare’s machinery simply doesn’t apply in half the country,” Greve contends.

“This is for all the marbles.”

Law’s Language a Sticking Point

Conservative scholars say it’s obvious in the text of the Affordable Care Act, right as rain. (Italics added by columnist.)

    Sec. 1401.The premium assistance amount determined under this subsection with respect to any coverage month is the amount equal to the lesser of—(A) the monthly premiums for such month for 1 or more qualified health plans offered in the individual market within a State which cover the taxpayer, the taxpayer’s spouse, or any dependent (as defined in section 152) of the taxpayer and which were enrolled in through an Exchange established by the State under 1311 of the Patient Protection and Affordable Care Act, or(B) the excess (if any) of 

    (i) the adjusted monthly premium for such month for the applicable second lowest cost silver plan with respect to the taxpayer, over

    (ii) an amount equal to 1/12 of the product of the applicable percentage and the taxpayer’s household income for the taxable year.

Got that?

In short: Certain Americans will be able to get tax credits through the ACA to help purchase health insurance through state-run insurance exchanges. So far, so normal.

But what’s not there is also key: There’s no mention of getting tax credits to help buy insurance through the federal exchanges. In fact, you can scan the entire text of the ACA, including the key provisions in Sections 1311 and 1321, and find no mention of subsidies being made available through federally run exchanges.

While that could be a major sticking point, considering that two-thirds of the states have opted out of running the exchange themselves, the IRS has said it doesn’t matter. Under the agency’s proposal, subsidies will be available nationwide.

But Halbig et al v. Sebelius — and an earlier lawsuit filed by Oklahoma’s attorney general, Pruitt v. Sebelius — are challenging the IRS interpretation of the law.

Plaintiffs’ Argument: Law Is Clearly Written

The argument was first advanced by conservative scholars Jonathan Adler and Michael Cannon, who parsed Sections 1311, 1321, and 1401 of the ACA and came away convinced they’d found a glitch.

According to Adler and Cannon, the ACA’s authors intentionally chose to exclude subsidies for federal exchanges — an attempt to dangle a carrot for states to run their own exchanges, they contend. In their eyes, the IRS is acting illegally without congressional authorization.

Some supporters of the ACA say that the law’s critics are grasping at straws after last summer’s defeat at the Supreme Court. But Cannon and Adler point out that they first voiced their concerns many months before that.

The “IRS rule we are challenging is at war with the act’s plain language and completely rewrites the deal that Congress made with the states on running these insurance exchanges,” according to Michael Carvin, the lawyer for the plaintiffs in Halbig.

ACA Supporters: Intent of Law Is Clear

Tim Jost of Washington and Lee has been perhaps the most vocal defender of the IRS’ interpretation. And he’s consistently dismissed the challenges, suggesting that the language around subsidies represents one of the ACA’s many drafting errors, and noting that Congress clearly intended to have tax credits available in all the states. For example, other measures related to the insurance markets — like requiring insurers to meet new community rating requirements — apply in every state, regardless of who’s running the exchange.

The theory advanced by Adler and Cannon “has little chance in succeeding in the courts,” Jost concluded in a post for Health Affairs last year.

Abbe Gluck, a professor at Yale Law School, agrees that the law’s structure and legislative history “amply support the IRS’s position.”

But “if more is wanting,” she adds, “the [Congressional Budget Office] evidence makes it a slam dunk.” Namely, the CBO estimates and score of the ACA consistently assumed that all qualifying purchasers on the exchanges would receive subsidies to purchase health coverage.

Given the oddity of turning down free subsidies — although the plaintiffs say that the ACA’s tax provisions mean that the subsidies are hardly free — some liberal supporters charge that these court challenges are less about damage to income and more about politics. Like Innovare Health’s Willey, the plaintiffs in Halbig — who all hail from states that have yet to set up insurance exchanges — are generally notable for their conservative track records.

The lead plaintiff, Jacqueline Halbig of Virginia, was appointed by President George W. Bush to be deputy director of the center for faith and community-based initiatives. David Klemencic, a West Virginia-based member of the National Federation of Independent Business, was one of the plaintiffs in the NFIB’s lawsuit over the mandate’s constitutionality. Sarah Rumpf of Austin, Texas, describes herself as a “Republican operative” on her blog.

Observers: Case is Worth Watching

While the earlier challenges to Obamacare captivated the nation, there’s been relatively little attention paid to these two lawsuits. In part, that’s because they’re still far from the Supreme Court; the cases were only filed in the last year and are on the District Court level. And the resolution of last summer’s legal saga over the individual mandate, coupled with President Obama’s re-election, seemed to cinch the ACA’s survival and put to rest constitutional questions.

But a handful of experts acknowledge that there’s a real possibility the courts will find in favor of the plaintiffs, possibly issuing an injunction and throwing a wrench in the ACA’s implementation.

Simon Lazarus, senior counsel at the Constitutional Accountability Center, told The Hill‘s Sam Baker that the conservative majority on the Supreme Court might even overturn the IRS’ approach to insurance subsidies if it gets the chance.

Nicole Huberfeld, a professor at the University of Kentucky College of Law, thinks the challenges raise “an interesting federalism conundrum,” she says, noting the difference in how Oklahoma and the federal government have chosen to interpret the ACA’s language on tax credits.

And given the mix of other tax provisions and federalism questions in the ACA, a win in Halbig or Pruitt could encourage “additional interest in testing the legality of the law,” she adds.

Meanwhile, plaintiffs’ lawyers for Halbig last week filed a motion for summary judgment, asking for the case to be decided now given the looming implementation of the ACA’s coverage mandates.

“Plaintiffs need a determination on the merits far enough in advance of Jan. 1, 2014, to allow them to conform their behavior to the law,” they wrote.

Dan Diamond (@ddiamond) is Managing Editor of the Daily Briefing, a CaliforniaHealthline columnist, and a Forbes contributor. This  post originally appeared in California Healthline.

29 replies »

  1. Peter 1:

    Penalties were among the sources used to fund the ACA, not the only source.

  2. If you are broke, how is the govt. going to fine you? If all of us are well off and can afford the ACA, we obviously would not take it, we would take private insurance coverage.

  3. Interesting. Hope to see this decided soon at supreme court. I am dying to see how John Roberts does “a penalty is a tax is not a penalty” stunt again.

    Maybe he could borrow from the liar-in-chief Bill Clinton by answering that the whole thing depends on the meaning of “is”.

  4. “Can you think of a law that *does* reroute penalties to some deserving org, as opposed to government coffers?”

    Gee, would FEMA be a deserving org? How about all the free money that flows back to the states – from “government coffers”?

  5. “Any penalties should be given to safety net institutions instead.”

    Isn’t the “government” a “safety net institution”?

  6. John Goodman and AEI did have a tax credit plan where if a person did not use their tax credit, then the value of the credit was given to a safety net institution.

    I did not follow their whole plan, but this part of it made great sense.

  7. “The worst thing about any of the penalties is that they just flow to the government and can pay for wars or civil service pensions. Any penalties should be given to safety net institutions instead.”

    Great, intriguing point. Can you think of a law that *does* reroute penalties to some deserving org, as opposed to government coffers?

  8. I forgot to add that there was one more projected shot of money that the CBO used to pretend-balance the ACA’s budget.

    They made the assumption that if employers did send people off to the exchanges, they would do so with a slight raise in salary since the employer was spending less on insurance.

    In other words, if the employer was now spending $1 million on health insurance for 200 employees, and it dropped coverage, then at some point the employees would get $1 million in taxable raises. This would bring in
    about $150,000 in new income tax revenue and pay for the subsidies.

    That seems to me to be a stretch on several counts. Most obvious would be the company that dropped health insurance, and used the savings to open a new factory in Mexico.

  9. Jardinaro makes a good point. The last two major health bills from Congress
    (EMTALA and Medicare Part D) were not just underfunded, they were completely unfunded.

    The logic seems to be, if there is any, that Americans will grow to like these benefits and will eventually agree to higher taxes if that is what it takes to keep these benefits from going away.

    Not a very grown up approach, but the voters often elect persons who treat them like children.

    Incidentailly — there was a paragraph in the Cannon-Adler paper cited here which said that the penalty for staying uninsured would be over $5000 per individual and $18,000 per family by 2018. I doubt that the mandate will last that long but you never know.

    The worst thing about any of the penalties is that they just flow to the government and can pay for wars or civil service pensions. Any penalties should be given to safety net institutions instead.

  10. “I agree, it is not enough to cover the additional cost and the CBO itself says it is not enough but at the time the bill passed that is what they allowed for revenue.”

    This should have been no surprise as there were sufficient hearings, if the Republicans had chosen to participate instead of being obstructionist. How anyone, even at first glance, could have assumed the penalties would pay for the subsidies is just incredulous.

    I’m not happy with how the bill forces people to buy into the most the most expensive system in the world and does little to bring down costs. The individual market is already seeing a 30% increase in premiums to cover the coverage provisions. Those that don’t qualify for a subsidy (me) will more than likely pay the penalty.

  11. this is from the article

    “But “if more is wanting,” she adds, “the [Congressional Budget Office] evidence makes it a slam dunk.” Namely, the CBO estimates and score of the ACA consistently assumed that all qualifying purchasers on the exchanges would receive subsidies to purchase health coverage.

  12. The entirety of the revenue provisions are on pages 143 – 161 and 793 – 820 of the act. There are no other provisions for revenues. I agree, it is not enough to cover the additional cost and the CBO itself says it is not enough but at the time the bill passed that is what they allowed for revenue. It should not surprise anyone that Congress passed a bill that was not properly funded.

  13. Peter1, Click the CBO link I dutifully provided you. And read the statute which link I also provided.

  14. We all know about Goggle. You are the one making a statement we do not think is plausible, or based on fact. It’s up to you to provide reasonable links to support your claim, not a 974 page link.

    Your other links only take a position (opinion) that the ACA is not authorized to extend a subsidy to a federal exchange, not that the penalties were meant to fund the subsidies, as you claim.

  15. My understanding is the CBO does not assume anything. Rather, they score based on assumptions (however ridiculous) they are given and without ability to anticipate any dynamics as is 10 million 26 year old males will not pay $4,000 a year for a policy they currently are not electing to buy for $1,000 a year.

  16. There is this thing called Google:


    The author, Dan Diamond, of this post conveniently provided these links in the body of his post.




    Adler and Canon’s paper provides an excellent exposition on the nuts and bolts of PPACA financing on pages 126-133. If you read Adler and Canon first and Jost second, you will find Jost argument to be convoluted at best.

  17. ” You can read the CBO reports and you can read the statute itself.”


  18. but what would you say about the CBO score then? The CBO clearly assumed that every state would have access to the tax credits.

  19. Peter1 and Bob Hertz, I share your incredulity. But that is the way the law was written and the way it is supposed to work. You can read the CBO reports and you can read the statute itself.

  20. Bob, maybe Jardinero1 is confusing the funding of subsidies to including healthy people with insurance in the system – that don’t use health care but pay premiums. That I can follow.

    “In the analysis, Austin Frakt, a health care economist at Boston University, examined the effectiveness of the penalty enacted under Massachusetts’ 2006 health reform law. He found that once Massachusetts’ $537 penalty took effect, the state’s health care system offset the cost of every sick person with three healthy people.”

  21. Peter is correct about the penalties not coming close to the cost of the subsidies.

    Using very rough numbers, which is all I have time for this morning,
    assume that 20 million persons join the exchanges, and the average subsidy is $5000 a year.

    (if not in 2014, then soon enough.)

    That is $100 billion in costs.

    Compare this to the penalties.

    The penalties on corporations with more than 50 employees were never expected to produce more than $20 billion in revenue. (since the great majority of large employers already provide health insurance.)

    The new 30-hour loophole will dilute those penalties further.

    The penalties in the mandate cannot possibly produce more than about $10 billion in revenue, even if they are actually collected.

    The new Medicare taxes on persons making more than $250,000 in salary or capital gains are a good idea, but these monies are supposed to help Medicare not the ACA — at least technically.

    In other words, did anyone outside the Democratic leadership really believe that the penalties would cover the subsidies?

    Obama may have decided that passing the ACA deceptively was better than failing to pass it honestly. And history may reward him for that.

    But the fiscal facts are what they are.

  22. How much actual health will be foresaken so that armies of wingnut lawyers can get paid 3-4 figures per hour for untold thousands of FTE hours fighting over these piddly lexical arcana?

    This poignant lawsuit needs to be kicked to the curb adjacent the ER (where it will be found, extremis notwithstanding, ineligible for EMTALA coverage).

    (And, I’m no fan, net, of the PPACA)

  23. Peter1, That is the way the law was written. That is the way it was to be funded. Ask those who wrote the law.

    That is also the way the President was able to say that the law provided coverage without having to raise taxes. That is also the way that every Congressman who voted yeah, could justify his vote to his more tax angry constituents.

  24. “Those paying the penalties would fund those receiving the subsidies.”

    You jest? How in anyone’s math would the penalties come close to cancelling out the subsidies.

  25. Matthew, The tax penalty on a business is triggered when an employee of the business get’s the subsidy. That’s why they have standing.

    The way the law was constructed was to make it self funding. Those paying the penalties would fund those receiving the subsidies. Congress provided no other appropriations for the subsidies except for the penalties and some other taxes on medical devices and cadillac insurance plans.

    The problem with the media narrative about this case is that it is presented, once again, as those in favor of the PPACA against all of those opposed to the PPACA. As a case before the court, it is about the limits of rulemaking by federal agencies and commissions. The issue is very, very narrow in scope and boils down to whether the IRS or any other agency can make a rule which violates the plain text of the law. Any court looking at this case will view it that narrowly. Any decision it makes will have an impact on the ability of other federal agencies and commissions to make rules.

  26. Does Halbig et al. have standing to sue? From what I can tell, all tax and other punitive portions of the ACA will happen regardless, and the only thing at stake in this case is whether Halbig’s fellow citizens will get subsidies. Therefore, they cannot demonstrate any material harm and have no standing to sue. The suit needs to come from congress itself, which is the only entity harmed under Halbig’s interpretation.

  27. No subsidies for federally established exchanges is not a glitch, or an oversight, or a scrivener’s error. The administration and democrat controlled congress tested the idea of forcing states to set up exchanges and determined they could not, constitutionally. Back then, before reelection, I guess the Constitution still mattered. So, they wrote the bills and the final Act with a carrot to the states that established exchanges (the subsidy) and the stick for those states that did not (no subsidy). In all the wrangling to avoid Scott Brown’s vote, the congress did change the language to allow subsidies in DC or US territories that set up exchanges, but did not change the stick (no subsidies). Only known statement of congressional intent clearly states no subsidies for federally established exchanges..
    “The only statement anyone has found in the legislative history that addresses this point comes from the Act’s lead author, who affirmed that Congress did intend to withhold tax credits in federal Exchanges. During a September 23, 2009, mark-up of his bill, which ultimately became the PPACA, Senate Finance Committee chairman Max Baucus (D-MT) refused to consider a Republican amendment regarding medical malpractice on the grounds it fell outside the Committee’s jurisdiction. Sen. John Ensign (R-NV) protested, asking how Baucus’ bill could do other things that lie outside the Committee’s jurisdiction, like direct states to create Exchanges. Baucus responded the bill creates tax credits, which are within its jurisdiction, and makes eligibility for those tax credits conditional on states creating Exchanges. Conditional necessarily means that Baucus intended to withhold tax credits in states that did not create their own Exchanges.”

    IRS and administration are illegally and unconstitutionally rewriting the law with their own rules and have stated their intent to collect taxes not authorized by congress.
    Why is obama administration allowing the IRS to violate PPACA?

  28. Interesting angle. The AAPS has a lawsuit going also challenging the constitutionality of PPACA. It may have the best chance of succeeding.