Are Obamacare subsidies now in jeopardy?


(REUTERS/Jessica Rinaldi)

Federal judges in the D.C. Circuit Court of Appeals appeared split this morning on whether Obamacare allows federal subsidies in states with federal-run health insurance exchanges – a legal challenge that threatens the very structure of the law.

Opponents of the health care law argue that the text of the statute only authorizes people living in states with state-run exchanges to access insurance subsidies in the marketplaces, contrary to a 2012 IRS rule. Further, they say this was a design of the law and not a drafting error, meant to incentivize states into setting up their own insurance marketplaces.

During Tuesday morning oral arguments in Halbig v. Sebelius, it was immediately clear that there will be a split decision of the three-member panel, with two of the judges staking out opposing views on the subsidy question. Judge Harry Edwards, an appointee of President Jimmy Carter, accused the defendants of making a politically motivated attack on the law. Judge Raymond Randolph, an appointee of President George H.W. Bush, said the text of the law and legislative history clearly blocks subsidies from federal-run exchanges.

The subsidy question is central to the future survival of the law. Just 14 states and the District of Columbia are running their own exchanges in 2014, while the Department of Health and Human Services is operating 36 state exchanges.

About 85 percent of those signing up for insurance in federal-run exchanges have qualified for financial assistance to purchase coverage. Without those subsidies, the insurance would be less affordable, leaving those with the greatest health needs with more motivation to purchase coverage. That makes for a worse risk mix, driving up the cost of insurance to cover the sicker pool of people, creating what's known as an insurance "death spiral."

Of course, oral arguments aren't always a reliable indicator of how a judge will decide on a case. But it's safe to call Randolph's and Edwards's respective votes here, making Judge Thomas Griffith as the panel's apparent swing vote. Griffith, a President George W. Bush appointee, was the only judge who didn't seem to have his mind already made up, and he challenged the Obama administration on some key points.

The plaintiffs challenging the IRS rule said that the statute clearly refers to people accessing subsidies "established by the state" and makes no reference to the federal government providing subsidies. Griffith focused on this distinction, repeatedly questioning the administration's attorney, Stuart Delery, on the language. Delery argued that a full reading of the law indicates that Congress intended for HHS to set up fully operating exchanges, complete with subsidies, if the states didn't - but Griffith seemed skeptical on this point.

Delery also argued the congressional debate on the law more than four years ago shows that Congress always meant for federal-run exchanges to provide subsidies. Michael Carvin, arguing for the plaintiffs, said the distinction between state- and federal-run exchanges was clear at the time.

"[Congress] knew there were two kinds of exchanges," he said.

But Griffith, the apparent swing vote, seemed ready to ignore what happened during Congress's debate on the law's drafting.

"There doesn't seem to be any clear legislative history here," he said. "If [Congress] didn't legislate clearly enough, is it our job to fix the problem?" Griffith also questioned the administration's argument that should it lose the case, that the IRS rule would only be invalidated for the four Halbig plaintiffs.

It will likely be at least another couple of months before the appeals court issues its decision. Even if the administration loses, it could then request that the entire circuit court hear the case, slowing things down.

So far, though, challenges to the IRS subsidies have survived through two district court decisions. A D.C. district court judge who previously ruled in favor of the Obama administration said the legislative text and history all indicated that the federal subsidies were authorized in federal-run exchanges. There wasn't any discussion today of that decision from District Court Judge Paul Friedman, a President Bill Clinton appointee. A district court judge appointed by President Ronald Reagan upheld the IRS rule in a similar challenge in Virginia last month, and the appeal will be heard by the Fourth Circuit in April.

Two other cases in Indiana and Oklahoma are still awaiting a decision in federal district court.

Correction: This post has been updated with Judge Griffith's first name.

Jason Millman covers all things health policy, with a focus on Obamacare implementation. He previously covered health policy for Politico.
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