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My newsletter last week delved into the significance of two federal district court rulings as to whether Obamacare’s health insurance subsidies for individual market consumers can be distributed to those purchasing insurance through federal exchanges. Plaintiffs in two critical lawsuits (King v Burwell and Halbig v Burwell) argue that the plain text of the Patient Protection and Affordable Care Act clearly states that health insurance subsidies shall only be distributed to those purchasing insurance through exchanges established by a state.

There is significant evidence of cogent distinctions between sections 1311 (state exchanges) and 1321 (federal exchanges) of the federal health law. Even MIT economist Jonathan Gruber, the law’s primary architect, verbally affirmed that subsidies are purely conditional upon state exchange participation. In case you missed the media hype about Gruber’s remarks back in 2012, you can see/listen to videos here and here. His "What are you talking about? I never said that!" back peddling remarks can be viewed here


The timeframe for this legal matter to make its way to the Supreme Court could be as early as next June or years from now. By that point, millions more, in addition to the current 5 million policyholders, will have accessed subsidized coverage. This brings us to the $64,000 question — what will happen to federal exchange consumers who have been granted illegally subsidized health coverage if subsidies are overturned for policies purchased on federal exchanges?  

In that case, individuals would face the actual cost of bloated Obamacare plans. Of course this would be problematic (as a result of the Administration’s own wrongdoing), and Congress would then be tasked with reconsidering the way in which the law is written, as it possesses the legislative power to do so.

What often fails to be discussed is that subsidies actually increase the cost of health care, thereby increasing health insurance premiums. Ignoring the supply side of healthcare, while the demand for health services increases along with overconsumption of comprehensive plans, creates a vicious cycle.

Furthermore, it cannot be emphasized enough that these two lawsuits have bigger ramifications than potentially striking down Obamacare’s federal exchange subsidies. The plaintiffs argue that, since subsidies would not be available in federal exchange states, employers would be freed from Obamacare’s employer mandate.

For example, in a state that has established its own exchange (and where subsidies are therefore legal), if an employer with 50 or more full time workers does not provide health insurance, and one of the employees purchases an exchange plan and qualifies for a subsidy, then the employer is hit with a penalty.  Receiving a subsidy triggers a tax on the employer.

Meanwhile, if we apply the same scenario in a federal exchange state, the absence of subsidies would eliminate the law’s tax on large employers who either do not provide health coverage for their workers or who do offer coverage that is just below the law’s pricey standards.

The potential winners from these lawsuits in North Carolina are 400,000 North Carolinians who could be relieved of Obamacare’s individual mandate as well as over 10,500 employers and 2.5 million workers freed from the law’s employer mandate.

The administration allowed the power-hungry IRS to overstep its legal boundaries with regard to subsidies.  But let’s be honest here — is anyone surprised?

In May 2012, the IRS unilaterally amended regulations accompanying the already enacted health care legislation so that subsidies would be allocated in exchanges established under sections 1311 and 1321.

What the IRS has done is both illegal and unconstitutional.  Only Congress can pass on responsibility for legislative interpretation to another entity if a statute expresses ambiguity.  And before delegating such power, Congress must first deem legislation ambiguous or unclear.  However, Congress remained silent regarding the issue of subsidies flowing only into state exchanges.  Therefore, the IRS had no right to change the regulations, as the legislation was never deemed ambiguous or unclear by Congress in the first place.  Agencies have no inherent powers, only delegated ones. 

Numerous sources now predict that these lawsuits will put more pressure on federal exchange states to move toward creating their own state-based exchanges. Tom Miller of the American Enterprise Institute has also forewarned of a release of creative administrative rulings in which governors of federal exchange states can make that move without legislative negotiations.  

Yet states that make the switch would effectively be bailing out the Obama administration after its incessant lawlessness and further endorsing the law. It would be ideal for lawmakers instead to repeal unhealthy layers of regulations and mandates that existed well before Obamacare and support free-market solutions that provide affordable health insurance products for all.  

Click here for the Health Care Update archive.

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