IRS Re-Finalizes Regulations Forcing Obamacare Subsidies on Federal Exchanges

Seemingly in response to this letter from Chairmans Darrell Issa (R-CA) and Dave Camp (R-MI) on January 29 to the Treasury and IRS, on February 1, the IRS again finalized the Obamacare subsidy regulations that flagrantly deviate from the statutory authority.  This issue continues to simmer relatively under the radar since I last wrote about it in August. To refresh everyone’s memory, Obamacare’s core redistributionist provisions are its refundable premium tax credits and cost sharing subsidies available for individuals to purchase coverage on state exchanges starting in 2014.  The credits will be available to anyone with annual income under 400% of the federal poverty line who isn’t covered under an employer-sponsored plan.  To put that in perspective, a family of four today earning up to $92,200 per year would be eligible for the credits.

Federal Exchanges Excluded
Here’s the kicker: Obamacare specifically limits these credits and subsidies to individuals who purchase coverage on an exchange established by the state.  Below is the actual, unambiguous provision from PPACA [emphasis added]:

Section 1401:
‘‘(2) PREMIUM ASSISTANCE AMOUNT.—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

Section 1311 describes exchanges established by the state.  The federal government has the authority to establish and operate an exchange where the state declines to do so - but that federally-facilitated exchange authority is contained in Section 1321 of PPACA - not Section 1311.

Strategic Miscalculation?
How did we end up in this position?  Even the Obama administration realized they couldn’t constitutionally commandeer the states to establish and operate an exchange.  But it also didn’t want to place all the burden on the federal government to run these insurance exchanges, particularly because insurance regulation has always been a function of the state, and state insurance departments would be much better organized to run the show.  Plus, when the exchanges inevitably don’t function properly, it will be the state’s fault, not Obama’s.

The federal government instead uses its spending power to essentially accomplish the same purpose.  Sometimes it pushes too far and crosses the line into coercion (e.g., the Obamacare Medicaid expansion), but it almost always gets away with it.  The flaw in Obamacare is how Congress and the administration decided to structure that spending power incentive for the states to do as they wanted.

The first part was to entice states with an up-front injection of money to establish the exchange.  But the funds quickly disappear, leaving the states to foot the bill for an exchange that they have almost no control over how to structure, but all the cost and responsibilities to manage.

The second incentive was to provide the premium credits and cost-sharing subsidies only to individuals residing in states that play along by setting up an exchange.  Remember, federal law still prohibits purchasing insurance across state lines.  This is a disaster for attempts to inject market forces to the health insurance industry, but it does make it easier for states to undermine Obamacare.  The thought was probably that states would face enormous pressure to establish an exchange by its citizens clamoring for the subsidies available to them only if their state establishes an exchange.  The reaction has generally been the opposite in red states.

Why 28 States Have Refused to Establish an Exchange
At this point, only 18 states have opted in.  According to FreedomWorks’, Utah just became the 28th state to officially refuse to establish an exchange.  These numbers can’t be anything close what the administration anticipated in 2010 when the law was deviously rammed through Congress.  Part of the reason for such staunch state resistance is that refusing exchanges is a way for state governors with conviction and/or ambition to demonstrate their opposition to the law.  A number have also appropriately voiced their discontent with acting as a subcontractor for the federal government.

But there’s also another big kicker.  Under PPACA itself (i.e., not the regulations), employers in any state that does not establish an exchange can avoid the employer mandate to offer certain qualifying coverage to full-time employees or be subject to massive penalties.  Why?  Because those employer mandate penalties are triggered by an employee going onto the exchange and receiving credits or subsidies because the employer didn’t offer Obamacare-approved coverage.  Those exchange credits and subsidies are only available under a state-run exchange.  In other words, under PPACA an employee can’t trigger the employer mandate’s pay or play penalties in a state that has not established an exchange.  Talk about a competitive advantage for business in your state.

How the Treasury Regulations Unconstitutionally Reinvent Obamacare
Realizing its huge mistake, the executive branch is in full power-grab mode to correct the issue without an act of Congress.  Obamacare can’t effectively function without the credits and subsidies to make coverage “affordable” (read: paid by someone else) for all Americans who will soon have to satisfy their individual mandate.  And how do we pay Obamacare without forcing employers to foot much of the bill?

The quick fix of course is to implement the law with regulations that entirely disregard whether an exchange is established by the state or run by the federal government.  The IRS initially finalized the regulations in May of last year, offering this feeble defense of its interpretation:

The statutory language of… the Affordable Care Act support the interpretation that credits are available to taxpayers who obtain coverage through a State Exchange…and the federally-facilitated Exchange. Moreover, the relevant legislative history does not demonstrate that Congress intended to limit the premium tax credit to State Exchanges. Accordingly, the final regulations maintain the rule in the proposed regulations because it is consistent with the language, purpose, and structure of…the Affordable Care Act as a whole.

What’s Being Done to Stop It
In August, the Chairman Issa’s House Oversight and Government Reform Committee grilled IRS Commissioner Doug Shulman over this “interpretation” of PPACA.  Shulman was defiant.  He somewhat suspiciously stepped down shortly thereafter.

Since then, Chairmans Issa and Camp have repeatedly requested further documentation from Shulman’s successor, Acting Commissioner Steve Miller.  The response: almost nothing.  Finally, fed up with the lack of cooperation, Issa and Camp sent the following letter on January 29 reiterating their requests for:

1. All legal analysis, internal or external, conducted by the IRS which authorizes IRS to grant premium-assistance tax credits in federal Exchanges; and
2. All documents and communications between IRS employees and employees of the White House Executive Office of the President or any other federal agency or department referring or relating to the [IRS Rule].

The letter set a deadline of February 5 for the IRS and Treasury Department to respond before the Committees consider the use of compulsory process.  How did the IRS respond?  On February 1, it re-finalized the regulations, stating: “After consideration of all the comments, the proposed rule is adopted without change by this Treasury decision.”  In other words, credits and subsidies will continue to flow through the federal exchanges.  No word yet on whether Issa or Camp received any additional information from the IRS.  I wouldn’t count on it.

On the state front, the Oklahoma Attorney General Scott Pruitt is challenging the regulations in court.  He recently filed this amended complaint in the Eastern District of Oklahoma seeking declaratory and injunctive relief finding the IRS regulations implementing the credits and subsidies on a federal exchange to directly conflict with the unambiguous statutory language in PPACA.

The amended complaint does a good job articulating the issue succinctly in starting:

Thus, if  the Final Rule  is  permitted to stand, federal subsidies will  be  paid  under circumstances  not  authorized  by the  Congress;  employers will  be subjected  to  liabilities  and obligations under circumstances not authorized by Congress; and States will be deprived of the opportunity created by the Act to choose for itself whether creating a competitive environment to promote economic and job growth is better for its people than access to federal subsidies.

At this point, there is little reason to trust the U.S. Supreme Court to fulfill its responsibility to uphold the Constitution in the face of the enormous political pressure to implement Obamacare’s most egregious usurpations of power.  But it is reassuring that there are a few courageous individuals out there who are still trying.  This is an issue poised to explode in 2014 when employers are first subject to the enormous penalty liabilities for failure to offer Obamacare-approved coverage.  Regardless of what the IRS regulations contend, Obamacare clearly does not allow for these penalties to apply in states that do not establish and maintain an exchange.

It seems that Republicans have abandoned any serious attempts to repeal or defund Obamacare.  Relying on Republican state governors to refuse to setup a state exchange may therefore be our last best hope to undermine the law from within.  State governors are already starting to cave on the Medicaid expansion option.  It will be crucial to keep pressure on them not to establish a stage exchange, particularly because HHS has abandoned any deadline for the states to apply.  This is likely the final stand.

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