Obamacare subsidies at the center of rehearing petitions , Supreme Court review

By Michael Scott Leonard, Senior Legal Writer

From Westlaw Journal Health Law: Less than a month after two federal appeals courts delivered a same-day circuit split concerning the scope of the Affordable Care Act’s insurance subsidies and employer mandate, one of the cases has landed at the U.S. Supreme Court’s doorstep and the other may be headed for rehearing.

In a brief filed Aug. 18 with the District of Columbia U.S. Circuit Court of Appeals, Jacqueline Halbig and her co-plaintiffs have asked the en banc court not to reconsider a divided panel ruling blocking an Internal Revenue Service rule that implemented the subsidies and mandate in all 50 states and Washington.

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A rehearing would only delay the inevitable, Halbig argues.  Preserving the circuit split by allowing the D.C. Circuit decision to stand would make the IRS rule virtually a lock to end up before the Supreme Court, which could resolve the issue with its fourth major Obamacare decision, she says.

“Continued uncertainty over the validity of the IRS rule at issue is simply not tenable, given its enormous consequences for millions of Americans, hundreds of thousands of businesses, dozens of states, and billions of dollars in monthly federal spending,” the response brief says.  “Only the Supreme Court can lift that doubt.”

The brief opposes a rehearing petition the Obama administration filed 10 days after the D.C. Circuit sided with Halbig, finding July 22 that tax credits should be available only in states operating their own health exchanges.  The Affordable Care Act gave each state the choice of setting up an insurance marketplace or letting the federal government administer an exchange on its behalf, and 34 states chose to leave their programs at least partly in federal hands.

“[T]he ‘words of a statute must be read in their context and with a view to their place in the overall statutory scheme,’ and a court must strive to harmonize statutory provisions, not just to avoid absurdity,” the U.S. Department of Justice wrote in its Aug. 1 motion brief, citing Utility Air Regulatory Group v. Environmental Protection Agency et al., 134 S. Ct. 2427 (2014).  “The majority ignored those teachings, risking ‘disastrous consequences.’”

If it stands, the ruling could strip eligibility from more than 4.5 million people currently slated to receive or already receiving  Obamacare tax credits through the federal exchange, The New York Times reported July 22.

Other cases moving forward

Another group of plaintiffs, led by David King, asked the high court July 31 to review the unanimous 4th U.S. Circuit Court of Appeals decision tossing its identical suit just hours after the D.C. Circuit announced its Halbig ruling.

Meanwhile, two pending suits involving the same issues are moving forward in federal trial courts in Indiana and Oklahoma, states that have challenged the Obama administration’s decision to subsidize insurance for people who obtain it through state-run marketplaces as well as the federal Healthcare.gov exchange.

Indiana won the right to proceed past the pleadings with some of its claims Aug. 12 when U.S. District Judge William T. Lawrence of the Southern District of Indiana held that the state had preliminary standing to challenge the IRS rule as a large employer subject to compliance costs.

But Judge Lawrence’s ruling, like an August 2013 decision by U.S. District Judge Ronald A. White of the Eastern District of Oklahoma, rejected the state’s argument that it had standing to sue on behalf of its citizens or under the 10th Amendment in its “quasi-sovereign” capacity.

The Oklahoma case, which is at the summary judgment stage, is awaiting a supplemental brief by the state and its co-plaintiffs.  Oklahoma ex rel. Pruitt v. Burwell et al., No. 6:11-cv-00030, leave to file supplemental brief granted (E.D. Okla. Aug. 8, 2014).

The subsidies and the mandate

All four cases concern the contested relationship between the Affordable Care Act’s subsidies clause, codified at 26 U.S.C. § 36B, and its “employer mandate,” 26 U.S.C. § 4980H, which requires most businesses with 50 or more workers to subsidize “minimum essential” health insurance for them or face a tax penalty.

Under 26 U.S.C. § 4980H(a)(2), an employer is not subject to the mandate until one of its employees qualifies for need-based tax credits, which most low- and middle-income Americans become eligible for when they obtain coverage through a health care exchange “established by [a] state.”  The subsidies cover insurance customers who earn less than four times the federal poverty rate.

The central dispute in all four cases is over the meaning of the phrase “established by [a] state.”

The plaintiffs argue that the provision’s “plain language” expressly withholds subsidies from people who enrolled in the federal insurance marketplace through the website Healthcare.gov instead of obtaining coverage through a state-run exchange.

According to the suits, the mandate applies only alongside the subsidies because it exists mainly to help pay for them.  By withholding subsidies from states participating in Healthcare.gov, Congress hoped to pressure them into establishing their own exchanges, the plaintiffs say.

But 34 states resisted that pressure, the suits claim, deliberately choosing higher health care premiums without the employer mandate over cheaper coverage with the mandate.

By offering the subsidy — and therefore triggering the mandate — nationwide, the IRS has ignored those policy choices, the plaintiffs say.

Implementing the law with so little fidelity to its express terms amounts to de facto legislating, which violates separation-of-powers principles, they argue.

‘Stands in the shoes’

But the Obama administration has countered that what the law’s opponents see as an elaborate and intentional incentive structure is in fact one of the many instances of imperfect drafting that inevitably arise over the course of nearly 3,000 pages.

It is clear from the Affordable Care Act’s overall context, purpose and structure that the federal government “stands in the shoes” of a Healthcare.gov-participating state with respect to the law’s subsidies clause, the Justice Department says.

“[T]he plaintiffs continue to insist that the court read one phrase in 26 U.S.C. § 36B(b)(2)(A) in isolation, without reference to the remainder of that section, the larger structure of the Affordable Care Act or the act’s purpose and history,” the Obama administration wrote in a brief last November, referring to the provision’s “established by [a] state” language.  “All established canons of statutory interpretation demand precisely the opposite approach.”

To adopt the plaintiffs’ reading would lead to “absurd results” across the board, the government argues, rendering crucial Obamacare provisions either meaningless or redundant.  Under that interpretation, for instance, no one at all would be eligible to obtain insurance through the federal exchange, according to the administration, which would make the entire law nonsensical.

“The majority felt constrained to adopt an interpretation requiring [absurd] results because of what it labeled the ‘plain meaning’ of Section 36B,” the Justice Department wrote in its Aug. 1 motion for en banc rehearing of the Halbig case.

“But the majority discerned that plain meaning only by disregarding the Supreme Court’s repeated admonitions that ‘statutory construction is a holistic endeavor,’” the government said, citing Adoptive Couple v. Baby Girl, 133 S. Ct. 2552, 2563 (2013).  “[T]he majority derived its ‘plain meaning’ by focusing exclusively on a few provisions in isolation.”

‘Urgent need for Supreme Court review’

In their brief opposing rehearing, the Halbig plaintiffs argue that the issue is too important to leave to the federal appeals circuits.  Even if the appellate courts ultimately come down on the same side, Halbig says, each will do so at its own pace, and uncertainty over the subsidies’ fate will linger for years.

By overturning its panel, the full D.C. Circuit would eliminate the current circuit split, in effect discouraging the high court from taking the case, according to the brief.

“This is the quintessential case in which the urgent need for Supreme Court review weighs strongly against en banc consideration,” Halbig says.  “The significance of the IRS rule makes prompt and definitive resolution a national imperative, and only the Supreme Court can provide it.  By contrast, en banc rehearing would waste a great deal of resources and cause significant delay, contrary to the public interest.”

Halbig et al. v. Burwell et al., No. 14-5018, appellants’ response filed (D.C. Cir. Aug. 18, 2014).

Indiana et al. v. Internal Revenue Service et al., No. 1:13-cv-01612, 2014 WL 3928455 (S.D. Ind. Aug. 12, 2014).

King et al. v. Burwell et al., No. 14-114, petition for cert. filed (U.S. July 31, 2014).