Oklahoma Lawsuit Could Derail Obamacare

Companies in N.C. and 33 other states could not collect taxes to subsidize policies

by Dan Way

Source: Carolina Journal

As the enrollment period for Obamacare experiences a rocky start, Oklahoma Attorney General Scott Pruitt says his state's "very consequential" lawsuit against the mandates in the health insurance law could lead to a fiscal nightmare in 34 states.

Oklahoma's lawsuit claims the federal law limits the collection of tax penalties from large employers that do not provide health coverage for their employees to those states that created their own health-care exchanges. Those taxes are the main source of subsidies that will reduce premium costs for insurance bought on the health exchanges.

Companies in states such as North Carolina and Oklahoma, which are using the federal exchanges, cannot be taxed if they do not provide employee health policies, the lawsuit says. Residents of those states could not receive subsidies for purchasing health insurance on the individual market.

In May 2012, the IRS ruled that taxes can be collected for policies purchased on the federal exchanges. The Oklahoma lawsuit seeks to force the IRS to follow the letter of the law, barring the collection of tax penalties in states that have federal exchanges. If successful, the lawsuit could lead to rate shock for tens of millions of Americans.

"We believe that our position is strong on the merits. We believe that the IRS is acting clearly inconsistent with the statute, that they don't have the authority that they say that they have," Pruitt said.

"Section 1401 of the law says that the subsidy shall flow through the state health care exchange. So if there's no [state] health care exchange, there are no subsidies. If there are no subsidies, there are no [employer] penalties. So we feel like it should be a very persuasive argument," Pruitt said.

"We know this is the kind of case that likely will be appealed up the ladder even if we're successful at the lower court level. But we're going to petition to prayerfully persuade [higher courts] to join us on our side," Pruitt said.

Supporters of the law have suggested the discrepancy in the law was little more than a "drafting error," and the clear intent of the law was to allow subsidies through state and federal exchanges.

Nina Owcharenko, director of the Center for Health Policy Studies at the Washington, D.C.-based Heritage Foundation, called the Oklahoma lawsuit "a great case," and said "there will likely be more to come."

Obamacare also presents troubling "issues and concerns about privacy," Owcharenko said.

"There are issues of commandeering more federal mandates on the states as a result of the health care law, as well as, I think, lawsuits looking beyond the scope of what the impact is on the states, about whether the federal government has the authority to do the things it's doing," Owcharenko said.

She said one example of federal overreach is a decision by the Office of Personnel Management allowing members of Congress and their staffs to continue receiving a 75 percent federal subsidy towards their health care plans, which now must be purchased through Obamacare exchanges.

"Well the law is pretty clear [the subsidies are disallowed], but yet the OPM just said that through our rulemaking we'll just decide you can keep your subsidies," Owcharenko said.

While he believes Oklahoma has a worthy case, John Goodman, president and CEO of the Dallas-based National Center for Policy Analysis, is pessimistic about its chance for success.

"It will be very, very difficult for the Supreme Court to take apart Obamacare," Goodman said.

"I'm not saying [the justices] won't do it, but if they were to rule for the state of Oklahoma, they would be basically ruling that in all of these states, the 34 of them where the federal government is running the exchange, that the mandate doesn't really apply to business," Goodman said.

"That would be a very tough thing for the Supreme Court to do," he said.

Goodman concurs with Pruitt's contention that a plain reading of the Patient Protection and Affordable Care Act, as Obamacare formally is known, supports the Oklahoma lawsuit.

"I agree with him, but if you notice what happened the last time this went to the Supreme Court, [Chief] Justice Roberts got very, very creative in saving Obamacare," Goodman said.

Roberts' surprise ruling said the government's individual mandate for nearly everyone to purchase health insurance was constitutional because it was funded by a tax, rather than a penalty for refusing to purchase insurance, as the government had argued.

"Politics is probably not the right word" to describe the court's ruling, Goodman said. "It's Roberts ... going out of his way to make [Obamacare] happen."

The health care law will be a driving force in the 2014 mid-term elections, he said.

"It will be the major issue, and if Republicans are smart, they will start ... talking about [alternatives] instead of just talking about repeal," Goodman said.

"Republicans need to win a few elections, and if they always lose we're not going to be able to change the law in a significant way," he said.

Still, Pruitt remains confident in the Oklahoma suit, buoyed by an Aug. 12 ruling by a federal court in Oklahoma. U.S. District Court Judge Ronald White rejected a motion by the federal government to dismiss the case.

"The federal government challenged our standing to bring the lawsuit," Pruitt said."We were very happy with the decision Judge White came down with to allow us to prosecute the case, and said that we did have standing. ..."

Oklahoma's lawsuit is "a very important case, a very consequential case. We're the edge of the spear, if you will, on this particular implementation piece," he said.

Oklahoma opted not to create a state exchange, "and the IRS is seeking to take that decision away through the rule making, and that violates the APA, the Administrative Procedures Act, and it violates the clear authority that Congress gave them, or in this case did not give them, under the Affordable Care Act," to collect employer taxes to subsidize exchange premiums, Pruitt said.

"There are 34 states across the country that have said 'no' to the state health care exchange, and so the precedent that can be set in Oklahoma could, in fact, do that which is being debated in Congress this very day. The very discussion right now is whether to defund the Affordable Care Act, and I think that discussion is meritorious," Pruitt said.

"I'd rather them discuss repeal, but at least that's one step towards repeal," he said.

"If we're successful in maintaining this litigation, then 33 states across the country can lay claim to our case to say that the IRS can not enforce the employer mandate penalty in those states because those states did not set up a [state-run] health care exchange," Pruitt said.

Other conservative health care experts who have studied the implications of Obamacare are warning that the law should be dissolved.

"If we are not successful in this fight to save the states from Washington's takeover of health care, it will make every other fight we care about almost politically impossible," said Tarren Bragdon, executive director of the Naples, Fla.-based Foundation for Government Accountability.

"On the right the debate is one of public policy. On the left it's about raw political power," Bragdon said.

Earlier this year, Gov. Pat McCrory, and state Senate leader Phil Berger, R-Rockingham, would not say if they believed North Carolina should support Oklahoma's lawsuit. At the time, the office of state House Speaker Thom Tillis, R-Mecklenburg, did not respond to questions on the subject.