Challenge to Premium Assistance for Individuals Who Purchase Insurance on Federally Established Exchanges Allowed to Proceed in D.C. District Court

by King & Spalding
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A D.C. district court judge ruled that a case can proceed challenging the IRS rule allowing individuals who purchase insurance on exchanges established by the Federal government (and not by a State) to be eligible for premium subsidies.  See Halbig v. Sebelius, Civ. No 13-623 (RWR) (D.D.C.); see also ACA § 1321(c) (authorizes the federal government to establish fallback Exchanges in states that do not establish their own).  The statutory provision governing the premium subsidies provides that such subsidies are available to those who enroll in coverage “through an Exchange established by the State under section 1311.” 26 U.S.C. § 36B(c)(2)(A)(i).  Plaintiffs argue that since Federal exchanges are not “established by the State” and are not established “under section 1311” but rather are established as a fallback provision in § 1321, premium subsidies cannot be provided to individuals who purchase insurance through them.  If the Plaintiffs are successful on the merits of their case, it would have far-reaching implications since 34 States have declined to establish their own exchanges and either partnered with the federal government or forced the government to handle it alone.

The IRS regulation being challenged states that subsidies shall be available to anyone “enrolled in one or more qualified health plans through an Exchange,” and then defines “Exchange” to mean “State Exchange, regional Exchange, subsidiary Exchange, and Federally facilitated Exchange.”  See Health Insurance Premium Tax Credit, 77 Fed. Reg. 30,377, 30,378, 30,387 (May 23, 2012).  The government reasons that the federal government is merely “standing in the shoes” of the state government in establishing the exchanges.  Plaintiffs contrast the specific reference to exchanges “established by the State,” used in the context to premium subsidies, to multiple other references in the statute to generic “exchanges” and argue that the limitation was meant to “encourage states to establish Exchanges.”

The Federal government challenged the case for lack of standing.  Plaintiffs argued, however, that at least one of the Plaintiffs, David Klemenic, would be irreparably injured under the IRS rule.  Under the ACA, an individual is dispensed from the mandate of having to buy insurance (i.e., the individual mandate) if the premium payments, including subsidies and other discounts, would exceed 8% of the individual’s income.   Mr. Klemenic is a resident of West Virginia, a state with a federally run exchange.  He alleges that absent the premium subsidy provided by the IRS interpretation, his premium payments would exceed 8 percent of his income and he would be exempted from the individual mandate and any penalty for failing to have insurance.  With the subsidy, however, his premium payments would only equal about 5.1 percent of his income and he would be subject to the mandate and have to either purchase insurance or face a penalty. 

To the government's advantage, the court denied the Plaintiffs’ request for a preliminary injunction to prevent the government from enforcing its policy pending the outcome of the case.  Instead, the court suggested it would expedite proceedings with the goal of issuing a decision soon. 

In August, a federal judge in Oklahoma allowed a similar challenge by that state to proceed.

The Plaintiffs’ Motion for Preliminary Injunction is available here and the Judge’s single page denial of that request but allowing the case to proceed is available here

Reporter, Daniel J. Hettich, Washington D.C., +1 202 626 9128, dhettich@kslaw.com.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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