Bench & Bar of Minnesota is the official publication of the Minnesota State Bar Association.

A Gap in the Armor? Affordable Care Act Faces Challenges

As the Affordable Care Act takes effect this month two lawsuits, pending in the Eastern District of Oklahoma and the D.C. District, challenge whether premium subsidies can be distributed through federal (as well as state) exchanges. While plaintiffs’ challenge is by no means assured of success, the potential implications of such an outcome underscore the uncertainty attending implementation of the act.


When the Supreme Court found the Affordable Care Act constitutional, the collective sigh was practically audible.1 Some were relieved, some resigned. For most, however, National Federation of Independent Business v. Sebelius girded the Affordable Care Act with an air of impenetrability. Attention turned away from defending or defeating the act, and the machinery of implementation roared to life.

Yet the act remains vulnerable. Speaker of the House Nancy Pelosi—a proponent of the act—once remarked that “[Congress has] to pass the bill so you can find out what’s in it … .”2 In a law sufficiently complex, reticulated, and laden with compromise that its backers openly acknowledge its complexity, an Achilles’ heel could hide. And in two lawsuits now pending in federal district courts, opponents of the Affordable Care Act purport to have found one.3 Through it, the plaintiffs indirectly assault the heart of the Affordable Care Act—the provisions intended to broadly expand health insurance coverage by making it “affordable.”

Premium Subsidies

Premium subsidies are the Affordable Care Act’s primary mechanism for expanding health insurance coverage. These “refundable tax credits” are generally available through exchanges established under the act to individuals with no “affordable” employer coverage.4 Exchanges are administrative entities established by states or, in the absence of state action to establish an exchange, the federal government.5 Exchanges operate websites through which individuals may purchase health insurance.6 Individuals with household income between 100 percent and 400 percent of the federal poverty line are eligible for subsidies that reduce the cost of premiums.7 This range covers a wide swath of society. Both an individual making $11,490 annually and a family of four with $94,200 in annual income are eligible for subsidies, which are projected to average $5,290 per subsidized individual in 2014.8

The Affordable Care Act’s employer shared responsibility tax—also known as the employer mandate—complements the act’s premium subsidies.9 With government-subsidized coverage available to their employees, employers could shift employee health care costs to the government. By penalizing employers that do not offer affordable coverage to their full-time employees and dependents, the employer shared responsibility tax provides an incentive for employers to continue (or begin) offering coverage.10 But there is no utility in penalizing an employer whose employees receive no subsidies, so the act levies a penalty only when at least one full-time employee receives a subsidy.11 An employer is therefore immune to the shared responsibility tax if federal subsidies are categorically unavailable to its employees. For instance, an employer that pays all its employees more than 400 percent of the federal poverty line cannot be subject to the shared responsibility tax.

Similarly, the individual mandate provision of the Affordable Care Act supports the expansion of health insurance coverage by imposing a penalty on individuals for failing to obtain health coverage.12 However, if no “affordable” coverage is available, an individual is exempt from the mandate.13 This exemption dovetails with the act’s premium subsidies, because subsidies will render coverage “affordable.” If federal subsidies are not available, however, many individuals who would otherwise be subject to the individual mandate would find insurance unaffordable and would be exempt.

Together, premium subsidies, the employer shared responsibility tax, and the individual mandate form a system designed to expand health insurance coverage significantly. The employer shared responsibility tax preserves employer-sponsored coverage, the primary existing source of health insurance. The individual mandate encourages those without employer-sponsored coverage to obtain insurance. And premium subsidies make coverage affordable for those subject to the individual mandate.

To effectuate this system, the IRS issued a regulation under which premium subsidies may be distributed through any exchange, regardless of whether established by the federal government or a state. The lawsuits here seek to block that regulation, cutting off subsidies in 34 states. But the Affordable Care Act’s system for expanding health coverage is highly interdependent. Without one provision, the others fail to have the intended effect. Consequently, while premium subsidies are directly at issue here, the attack on premium subsidies in fact constitutes a challenge to the entire system.

The Challenge

The cases at the center of this discussion are Oklahoma ex. rel. Pruitt v. Sebelius in the Eastern District of Oklahoma and Halbig v. Sebelius in the District Court for the District of Columbia.14 The plaintiffs are the State of Oklahoma in Pruitt and an amalgam of private individuals and businesses in Halbig (together, the plaintiffs). Though the plaintiffs and courts differ, the claims and issues are the same. The plaintiffs contend that premium subsidies may not be distributed through exchanges established by the federal government.15 In their view, the Affordable Care Act permits premium subsidies only in state exchanges. The defendants—the Department of Labor, the Department of Health and Human Services, and the Department of the Treasury (together, the federal government)—contend that the plaintiffs have no right to challenge the IRS rule.16

Standing is a significant threshold issue. Pruitt and Halbig challenge a rule that has not yet been enforced. Additionally, the IRS rule affects most of the plaintiffs only indirectly. The State of Oklahoma, for instance, will never receive a subsidy through a federally facilitated exchange. In the federal government’s view, therefore, the plaintiffs are not—or, at least, have not yet been—harmed by the IRS rule. Thus they have no standing to oppose it. Even if they had standing, the harm to the plaintiffs involves taxation. Consequently, the federal government’s stance is that the proper venue for a challenge to this rule is a tax refund suit, which would delay this matter till at least 2016.

To each of the federal government’s standing arguments, the plaintiffs have a retort—some better than others. Strongest, however, is that of the employer plaintiffs. They assert a current harm from having to pay lawyers, insurance brokers, and administrators to redesign employee benefit systems to accommodate the employer shared responsibility tax. Because they are located in states that have not established exchanges, the plaintiffs would be immune to the shared responsibility tax and would not incur these compliance costs but for the IRS rule. On August 12, 2013, the Eastern District of Oklahoma appeared to accept this argument from the State of Oklahoma when it denied the federal government’s motion to dismiss for lack of standing.17 This initial ruling clears the path for a decision on the merits.

Exchanges & Subsidies

At this writing, the federal government has not yet pled its case on the merits. We can only speculate on the outcome, and we have only one side of the story to inform our speculation.

The plaintiffs have argued that the text of the Affordable Care Act authorizes subsidies only to individuals who enroll in health insurance through an exchange established by a state. The act does not authorize these subsidies in the context of a federally facilitated exchange, and the IRS has no power to unilaterally promulgate a regulation enabling hundreds of billions of dollars in spending.

A persuasive riposte to the plaintiffs’ claims is not immediately obvious. The IRS’s sole authority to issue premium subsidies derives from Section 36B of the Internal Revenue Code, which permits subsidies with respect to policies “enrolled in through an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act.”18 Section 1311 instructs the states—and the states alone—to establish exchanges.19 It is Section 1321 that instructs the federal government to establish exchanges when states elect not to do so.20 Thus the plaintiffs assert that Section 36B does not authorize subsidies through a federal exchange, and the IRS rule allowing subsidies to flow through federally facilitated exchanges is inconsistent with the act and invalid.

In its motion to dismiss Halbig, the federal government hinted at its substantive theory for opposing the plaintiffs, stating:

 The plaintiff’s reading of the Act is wrong; Congress made clear that an Exchange established by the federal government stands in the shoes of the Exchange that a state chooses not to establish.21

 From this, we infer that the federal government may argue that when acting under Section 1321, it assumes the persona of a state and thereby acts under Section 1311. But that renders superfluous the phrase “established by the State under section 1311” in Section 36B. If an exchange established by the federal government could be a conduit for subsidies, there would be no need for language in Section 36B regarding the identity of the establishing entity. Furthermore, the drafters of the Affordable Care Act seem to have recognized that there could be ambiguity regarding whether an entity could be deemed a “state” for purposes of Section 1311; Section 1343 provides that territories of the United States will be treated as states under Section 1311 if they establish exchanges.22 With no similar provision applying to the federal government, countering the plaintiffs’ contention that the federal government cannot establish an exchange under Section 1311 will not be easy.

Over the Horizon

Strong as the plaintiffs’ textual arguments appear, they may yet be overcome. As stated previously, the Affordable Care Act is complex, reticulated, and laden with compromises. The federal government may find provisions of the act treating federal and state exchanges identically, which could introduce a shade of ambiguity into the otherwise clear text of Section 36B. Generally, the IRS has the authority to construe ambiguous statutes to the extent that its interpretations are not arbitrary or capricious. Under that standard, the IRS’s rule may well stand. Furthermore, time favors the government. If decisions in Pruitt and Halbig do not issue before January 1, 2014, the IRS will begin distributing subsidies through federal exchanges. Millions of individuals across the country will begin receiving health insurance predominantly paid by the government. Courts will then face the reality that invalidating the IRS regulation would affect millions of transactions distributing billions of dollars. Not only could citizens in more than half the states stop receiving subsidized health insurance, they may need to pay back subsidies averaging more than $5,000 per person per year—a practical impossibility. These circumstances could influence a court’s opinion such that the federal government’s arguments, which might not have prevailed in a cool, detached, purely logical context, could appear substantially more compelling.

If the plaintiffs succeed and Congress does not amend the Affordable Care Act, a set of dramatic results would follow. Federal premium subsidies would not be available to individuals in the 34 states that have elected not to establish their own health insurance exchanges under the act.23 Employers in those states would not be subject to the shared responsibility tax, and the scope of the individual mandate would be significantly circumscribed. Absent a penalty for failing to expand health coverage to all employees working 30 hours or more (and their dependents), employers would have no reason to maintain or expand the health insurance coverage they offer to employees. Without the attraction of subsidies or the compulsion of a mandate, individuals in these states would have little impetus to obtain insurance through federally facilitated exchanges. In short, the health insurance landscape in two-thirds of the states would look much as it has for many years, with employers providing the bulk of health insurance and individuals without employer coverage often eschewing insurance altogether. Though the act would still impose a bevy of new requirements and restrictions on insurers, the eponymous sea-change in health insurance that many had expected from the Affordable Care Act—broadly available “affordable” coverage—would simply fail to materialize.


Pruitt and Halbig are significant developments in the evolution of the Affordable Care Act. Hundreds of billions of dollars and the underlying purpose of the act, i.e., a step toward a single-payer system, hang in the balance.24 If the plaintiffs win, the Affordable Care Act, which had seemed a fait accompli, will be back on the table. Even then, it seems unlikely that the act would be defeated entirely. To claw back a system of nationwide subsidies, however, proponents of the act would probably need to make concessions diminishing the law significantly. Some would hail this result, and others would decry it. Unpredictable as the outcome here may be, it is almost certain to be interesting.

The author acknowledges with warm thanks the contributions of Amanda Cefalu, Benjamin Garbe, and Bryan Morben who assisted in preparation of this article.

Michael Joliat is an associate at Anderson, Helgen, Davis & Nissen, PA in Minneapolis, Minnesota. He focuses his practice on business law, employment law, and employee benefits. He received his law degree from DePaul University College of Law in Chicago, Illinois and also holds a Certificate in Taxation from the College of Law, and a degree in mathematics from the University of Colorado in Boulder, Colorado. 



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