House Investigating Obamacare Subsidy Expansion

Committees say expansion of subsidies to federal exchanges is illegal

July 26, 2013

Two House committees sent a letter to Treasury Secretary Jack Lew on Thursday inquiring into another modification the administration has made to Obamacare as it readies for the law’s implementation.

The federal government is providing subsidies for qualifying people who buy insurance on the state-based health exchanges, whether federal or state governments run them. However, the law explicitly allows the subsidies to only be applied to purchases made on an exchange "established by the state."

The House Oversight and Government Reform and Ways and Means Committees wrote to Lew asking that a set of 50 emails on the department’s justification of the expansion be turned over to them by Tuesday, July 30. The committees have been investigating the expanded subsidies for several months, including conducting several reviews and briefings with Treasury staff, according to the letter.

"Although IRS’s rule has significant implications for individuals and the nation’s finances, IRS and Treasury have not been able to provide the committees with detailed information about the factors considered by IRS and Treasury that expanded availability of PPACA’s tax credits to federal exchanges," the committees wrote.

The letter comes as the administration has been under fire for delaying other provisions in the law, leading critics to argue it is unworkable. The administration announced during the first week of August that it was delaying the employer mandate and some verification requirements for people applying for the subsidies.

The letter cites a July 2012 study by the Congressional Research Service saying that a "strictly textual analysis of the plain meaning of the provision" would limit the subsidies to state-run exchanges only—and thus that the administration’s expansion would "likely be deemed invalid."

The subsidies were originally limited only to the states to induce them to create their own exchanges, said Merrill Matthews, a health policy expert at the Institute for Policy Innovation.

"When they passed the legislation, the assumption was that virtually every state would create their own exchange," Matthews said.

James Capretta, a health policy expert at the Ethics and Public Policy Center, said there is contention around the origin of the language under discussion, but that the language itself is clear at first glance.

Only 16 states and the District of Columbia actually ended up setting up their own exchanges, with the other 34 states passing the responsibility to the federal government.

One state that refused to set up an exchange is Oklahoma, which is now the plaintiff to a lawsuit arguing that the federal government cannot legally provide subsidies to federally run exchanges.

Oklahoma’s attorney general launched a lawsuit over this very issue in 2012, and the suit is currently pending in an Oklahoma district court.

"The Oklahoma lawsuit might be the best shot at undermining the legislation and essentially repealing it" for conservatives, Matthews said.

The federal government filed a motion to dismiss Oklahoma’s suit, arguing that Oklahoma does not have legal standing to sue and that the federally run exchanges are legally the same as the state-run ones. A spokeswoman for Oklahoma Attorney General Scott Pruitt said they expect a decision on the government’s motion in August.

Pruitt also hopes to have a full decision on the merits of the case before the subsidies start rolling out at the beginning of next year, the spokeswoman confirmed.

Striking down the subsidies could fatally cripple the law, Matthews and Capretta argued.

"Without them, it’s basically a car without gas," Capretta said.

The individual mandate—which sits at the heart of the law—only applies to people who have access to affordable health insurance, defined as less than 8.5 percent of yearly income, Matthews explained. The subsidies make the insurance plans offered through the exchanges affordable, but without the subsidies the plans would likely be too expensive for large swaths of people and they would not have to purchase insurance.

Beyond the legal requirement, the subsidies are a large inducement to purchase insurance and avoid the penalty, which will likely be less than the cost of health insurance.

Some have speculated that the administration waived the verification requirements for those seeking subsidies in order to boost the number of people buying insurance on the exchanges. If enough people do not purchase insurance on the exchanges, insurance costs will rise dramatically and the exchanges could collapse.