Objecting to what they term an "Obamacare power grab," a group of small business owners and individuals in six states filed suit today against the Internal Revenue Service over a rule that expands health insurance subsidies.
The plaintiffs say the IRS regulations "actually serve to financially injure and restrict [their] economic choices" and are arbitrary and capricious, according to the complaint filed in U.S. District Court for the District of Columbia by Jones Day partner Michael Carvin, who co-argued the U.S. Supreme Court cases challenging the Affordable Care Act in March 2012.
The suit against the IRS focuses on health care exchanges - state-level clearinghouses that are supposed to make it easier for people to buy insurance. The federal government doesn’t have the power to force states to set up such exchanges, but the law provides incentives for them to do so.
“The biggest carrot was the offer of premium-assistance subsidies from the Federal Treasury—refundable tax credits to help a state’s low-and moderate-income residents buy insurance—if that state set up its own Exchange,” according to the complaint.
However, 33 states have decided not to establish their own exchanges, leaving it to the federal government to do it for them. According to the plaintiffs, that means poor residents in those states are not eligible for the tax credit subsidies.
But the IRS found otherwise, and made the tax credits available to everyone, whether they got insurance through a state or federal exchange. “The relevant legislative history does not demonstrate the Congress intended to limit the premium tax credit to State Exchanges,” the IRS stated in the Federal Register last May when the rule was finalized.
The plaintiffs are crying foul. “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,” Carvin said in a news release announcing the suit, which is being coordinated by the Competitive Enterprise Institute.
The reason the subsidies matter, the plaintiffs argue, is because they require more people to buy health insurance—people who, absent the tax credit, would be off the hook because they’re too poor. (If the annual cost of health insurance is more than 8 percent of a person’s household income, he or she doesn’t have to buy it.)
“The Subsidy Expansion Rule, by making insurance less ‘unaffordable,’ subjects them to the individual mandate’s requirement to purchase costly, comprehensive health insurance that they would otherwise forego,” according to the complaint.
Name plaintiff Jacqueline Halbig, for example, is a consultant in Virginia, which does not have an exchange. Without the subsidy, she wouldn’t have to buy insurance because she doesn’t make enough money. But with the subsidy, Halbig loses her exemption and will be forced to “purchase more insurance than she wants” or pay a penalty. “Either way, Halbig’s financial strength and fiscal planning are immediately and directly affected by the exposure to costs and/or liabilities.”
It’s not just individuals who are affected. According to the complaint, the subsidies also mean some employers will have to pay a fine for failing to following the law’s “employer mandate” to provide insurance. “Critically, that payment is triggered only if such employees receive federal subsidies by purchasing coverage on an Exchange,” Carvin wrote in the complaint. “Thus, the IRS Rule also has the effect of triggering the employer mandate payment for businesses.”
The plaintiffs are asking the court to find the subsidies rule illegal under the Administrative Procedures Act and to bar its enforcement.