May 2 (Bloomberg) -- Opponents of the U.S. health-care overhaul filed a lawsuit challenging subsidies for low-income people without insurance, an approach that could threaten the success of the law in more than half the states.
The suit, filed today in federal court in Washington, revolves around an Internal Revenue Service rule that provides tax credits for people shopping for health insurance on new government-run marketplaces, called exchanges, regardless of where they live.
The plaintiffs, a group of businesses and individuals in states that have refused to build their own exchanges, say that the law allows subsidies only in exchanges run by state governments, not those run by the federal government.
The IRS “ignored the clear limitations that Congress imposed on the availability of the federal subsidies” by writing a rule providing them in all exchanges, they said in the complaint.
If successful, the suit may prevent subsidies for health insurance in a broad swath of the country, including Texas, Florida and Ohio.
Under the IRS rule, anyone earning less than four times the poverty level, or about $94,000 for a family of four this year, would be eligible for subsidies.
By providing the subsidies in the 33 states that declined to create exchanges, the health-care overhaul, known as the Affordable Care Act, makes insurance “less ‘unaffordable,’” according to the complaint. It subjects some people to “a requirement to purchase costly, comprehensive health insurance that they otherwise would forgo,” the plaintiffs claimed.
At the same time, the extension of the allegedly unlawful subsidies triggers financial penalties against some businesses that don’t offer health coverage to their employees, according to the complaint.
The lawsuit will probably fail because it focuses on narrow portions of the health-care law that can be read to support the plaintiffs’ position, rather than on the thrust of the entire document, said Timothy Jost, a law professor at Washington and Lee University in Lexington, Virginia, and a consumer representative to the National Association of Insurance Commissioners.
“Courts look at statutes as a whole,” Jost said. “It’s clear that Congress did not intend for federal exchanges to be treated differently.”
The attorney for the plaintiffs is Michael Carvin of Jones Day, who represented the National Federation of Independent Business in a challenge to the health-care law that was rejected by the U.S. Supreme Court in June.
The Competitive Enterprise Institute, a group that says it advocates for limited government, is coordinating legal and media work on the case, according to Sam Kazman, the Washington-based institute’s general counsel.
The health-care law is “already an incredibly massive program. For the IRS to expand it even more, without congressional authorization and in a manner aimed at undercutting state choice, is flagrantly illegal,” Kazman said in a statement.
The lawsuit was filed by seven individuals and businesses from six states -- Virginia, West Virginia, Tennessee, Missouri, Texas and Kansas -- that have chosen not to set up insurance exchanges. The federal government will operate exchanges in states opting out of establishing their own.
At least one similar case has been filed, by Oklahoma’s Republican Attorney General Scott Pruitt, who argued in a January 2011 complaint that the health-care law conflicts with the state’s constitution.
Oklahoma voters in November 2010 approved an amendment stating that a “law or rule shall not compel, directly or indirectly, any person, employer or health care provider to participate in any health care system,” according to Pruitt’s suit.
The Obama administration in December asked a judge to dismiss the case.
The case is Halbig v. Sebelius, 13-cv-00623, U.S District Court, District of Columbia (Washington).
The Oklahoma case is State of Oklahoma v. Sebelius, 11-cv-00030, U.S. District Court, Eastern District of Oklahoma (Muskogee).