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Oklahoma lawsuit targets premium subsidy provision of health care reform law

Oklahoma lawsuit targets premium subsidy provision of health care reform law

The heart of the health care reform law — extending federal premium subsidies to millions of lower-income uninsured U.S. residents to buy coverage in insurance exchanges — could be destroyed if a suit filed last month by the Oklahoma attorney general is successful, observers say.

However, should the courts accept Oklahoma Attorney General Scott Pruitt's arguments that the premium subsidies can only be used to obtain coverage in state exchanges, the likelihood that employers would face financial penalties laid down by the Patient Protection and Affordable Care Act for not offering coverage or “affordable” care would be reduced dramatically.

A successful legal challenge “would be devastating. Millions of Americans would be deprived of coverage which Congress intended to provide,” said health care legal scholar Timothy Jost, a professor at Washington and Lee University School of Law in Lexington, Va.

While the ramifications of the suit pending in the U.S. District Court in Muskogee, Okla., are huge, the challenge brought last month has gotten little attention.

The suit challenges a key part of health care reform law regulations issued in May by the Internal Revenue Service. The regulations say eligible individuals will be able to use the subsidies to obtain coverage from state insurance exchanges or federal exchanges the federal government will set up in states that decline to do so.

So far, about 15 states have indicated they will set up exchanges, while most have not yet announced their decisions. States that have said that they will not establish exchanges include Florida, Louisiana, Texas and South Carolina, according to the Kaiser Family Foundation. States have until Nov. 16 to let federal regulators know if they intend to set up exchanges.


In the suit, Mr. Pruitt says there is nothing in the health reform law that authorizes premium subsidies for individuals obtaining coverage in federally established exchanges. Under the reform law, the U.S. Department of Health and Human Services is given the authority to establish exchanges in states that don't.

The health care reform law “leaves this policy judgment to each state and provides a mechanism for each state to choose the alternative it thinks better for its people,” according to the suit. “The final rule upsets this balance by providing, contrary to the act, that qualifying taxpayers” are eligible for subsidies if they enroll in an exchange “regardless of whether it is a state established exchange or an HHS-established exchange,” he said.

Some say the lawsuit is on target.

PPACA “is clear. It explicitly and repeatedly restricts” premium subsidies to exchanges established by states, said Michael Cannon, director of health policy studies at the Cato Institute, a libertarian think tank in Washington. The law “contains no language whatsoever authorizing tax credits through exchanges established by the federal government.”

Others disagree.

During a Cato Institute panel discussion in Washington this month, Mr. Jost said no one has found any statement by a member of Congress suggesting that the premium subsidies would be available only in state exchanges.


“A fair-minded judge, looking at the entire statute, its structure and legislative history will reach the same result” as the IRS in concluding that the law authorizes premium subsidies to be used for coverage purchased in federal exchanges, Mr. Jost said.

While the health care reform law is not a model of clarity, Oklahoma faces an uphill battle as courts generally give deference to federal agencies in their interpretation of law, said Paul Dennett, senior vice president-health care reform with the American Benefits Council in Washington.

What is clear is that the outcome of the lawsuit could be crucial for the future of the health care reform law, observers said.

If premium subsidies are not available in federally established exchanges, “No one would go to those exchanges. The whole structure created by the health care reform law starts to fall apart,” said Gretchen Young, senior vice president-health policy at the ERISA Industry Committee in Washington.

“The health care reform law would become a meaningless law,” added Chantel Sheaks, a principal with Buck Consultants L.L.C. in Washington.

Under the law, penalties against employers that do not offer coverage or do not offer affordable coverage would begin in 2014 only if an employee eligible for a premium subsidy through an exchange actually uses it.

But should the courts uphold Oklahoma's lawsuit, such employers would not face such penalties if their employees live in states that do not set up exchanges.

Under the law, employers are liable for a $2,000 per full-time employee penalty if they do not offer coverage. If employee premiums for individual coverage exceed 9.5% of their wages, the employer is liable for a $3,000 penalty for that employee.