If Health Reform Law Survives, Litigation Will Continue

Unless the Supreme Court decides to eliminate the Patient Protection and Affordable Care Act in its entirety, Florida v. Sebelius is not the end of health care reform litigation, but only the beginning. Lawsuits are already pending challenging everything from the contraception mandate to the black lung benefits provisions to the structure of the Independent Payment Advisory Board, as Reuters reported last week. More will follow.

In tomorrow’s USA Today, Cato’s Michael Cannon and I discuss another potential lawsuit that will be filed if the health care law survives: A challenge to the IRS rule providing tax credits and premium assistance for qualifiying health insurance plans sold on federally run exchanges. As I noted here and here, the text of the PPACA only authorizes tax credits and premium assistance for insurance plans purchased in state-run exchanges. If a state refuses to create an exchange, the federal government is supposed to create a “fallback” exchange, but the law does not provide for tax credits and premium assistance for insurance plans purchased on these “fallback” exchanges. The IRS rule tries to fix this by rewriting the statute, without any textual warrant. I discussed the rule in this Cato video.

The IRS rule may be illegal, but that doesn’t mean there will be a lawsuit. As a general rule, taxpayers lack standing to challenge the misuse of federal funds or preferential tax treatment given to others. Were tax credits and premium assistance the only consequence of the IRS rule, there would be no viable litigation. As the law is written, however, the IRS rule triggers other consequences that will provide a basis to challenge the rule. The PPACA contains an “employer mandate” that requires larger employers to provide minimum health coverage to their employees. Those who fail to do so must pay a financial penalty. This penalty is not automatic, however. Rather it is triggered by the issuance of a tax credit. So by expanding tax credit eligibility to federal exchanges, the IRS is exposing employers in states without their own exchanges to financial penalties, and this should be sufficient for an affected employer to file suit.

if and when a lawsuit is filed, I am reasonably confident the IRS rule will fall. The text of the statute is clear. When Michael Cannon and I first wrote about these provisions, and the then-proposed IRS fix, we considered the possibility that the PPACA’s text, however clear, was inadvertent. Having now had the opportunity to review the relevant legislative history, we are convinced the limitation of tax credits and premium assistance to state-run exchanges was intended as an incentive for states to create their own exchanges. The evidence in the record on this point is abundant and clear, which would explain why the IRS has had such a hard time citing any specific text or history in support of its rule.

As things turned out, a substantial number of states find the PPACA’s incentives insufficient, and are refusing to play along. The mistake PPACA supporters made was not in drafting the statute’s text but in assuming states would go along with the federal plan. This may mean the PPACA cannot be implemented as intended, but it would take more than that to justify the IRS rule.

UPDATE: Michael Cannon has more here.