Congress, Experts Question Legality of Obamacare Exchange Subsidies

IRS, Democrats defend administration’s decision to extend subsidies to all exchanges

July 31, 2013

The Obama administration cannot legally offer federal subsidies to help people buy insurance on federally run health insurance exchanges, legal experts and Congressional Republicans argued Wednesday, potentially threatening the central feature of Obamacare.

Obamacare mandates that each state have a health insurance exchange where people can buy insurance, and the federal government is providing subsidies to help qualifying people buy health insurance on these exchanges.

The law says that the government can provide subsidies for insurance sold on an "Exchange established by the state." Thirty-four states have refused to set up their own exchanges, leaving the federal government set them instead.

The Obama administration has interpreted the law to allow them to offer subsidies to people buying insurance on exchanges run by the federal government as well as the state governments.

Both legal experts and Republicans on the health care subcommittee of the House Oversight Committee contended that the administration’s implementation of the subsidy provision is beyond the scope of the law and Congress’s intent.

"At issue today is an example of the administration rewriting the law to meet political objectives," said subcommittee chairman James Lankford (R., Okla.).

Congress originally limited the subsidy only to state-created exchanges to induce the states to set up their own exchanges, argued Jonathan Adler, a law professor at Case Western Reserve University.

Oklahoma Attorney General Scott Pruitt agreed with Adler.

"When Congress passed the health care act, they presented states a choice," Pruitt told the congressmen. "That choice was to establish a state health care exchange or to opt for a federal exchange. The ACA included with that choice a set of consequences and benefits."

If states opted to create an exchange themselves, then their citizens would receive federal subsidies to buy insurance on the exchange, but employers would also be subject to fines for not offering affordable health insurance, Pruitt argued. However, if they opted against the exchange, they would not receive subsidies and employers would not be subject to fines.

Pruitt has launched a lawsuit against the administration arguing that they do not have the power to offer the subsidies on federally run exchanges. Experts predict that Oklahoma’s lawsuit, if successful, could fatally cripple the law.

The administration argued that the law permits its interpretation.

"Treasury and IRS believe that the final regulations interpret the statutory language in a manner that is appropriate to its context and consistent with the purpose and structure of the statute as a whole," said Emily McMahon, deputy assistant secretary for tax policy at the Treasury Department.

Simon Lazarus, a legal expert at the Constitutional Accountability Center, argued that other parts of the law clarify that federally run exchanges count as state exchanges for the purposes of the subsidy.

Lazarus also argued that the administration’s interpretation fits with the intent of the rest of the bill, which was to increase enrollment in health insurance.

Lazarus called the idea that the law’s crafters would create part of the bill so that it would fail if states did not comply "so absurd that I can’t imagine why any judge would spend three minutes with it."

Adler countered that the bill contained precisely this "sabotage" trigger with Medicaid, by stripping all Medicaid money from the states if they did not agree to expand the program. The Supreme Court subsequently struck this provision down, saying it was too coercive.

Subcommittee ranking member Jackie Speier (D., Calif.) objected to the idea that people could have different access to federal programs in different states, based on what the state leaders decide.

"While I do represent a district in California, I also feel an obligation towards all the people in the United States of America, and that’s the way I look at this legislation," Speier said.