Economics, Health Care

Split decision in Oklahoma exchange case: On to the next round

Image Credit: Shutterstock

Image Credit: Shutterstock

On Monday, August 12, federal district court judge Ronald White ruled that the State of Oklahoma’s legal challenge to an Internal Revenue Service rule authorizing payment of federal premium assistance tax credits in federally-established health exchanges under the Affordable Care Act (ACA) can move forward. State Attorney General Scott Pruitt has argued in the Eastern District of Oklahoma case that the IRS rule violates the statutory text and plain meaning of the ACA. The State seeks a judgment declaring the rule illegal and enjoining its enforcement.

If successful, this not only would prevent distribution of tax credits for new coverage next year in the federally facilitated exchange in Oklahoma, it also would negate the enforcement of the ACA’s employer coverage mandate and limit the practical reach of the law’s individual coverage mandate. Most of all, it would signal serious problems ahead for similar federal exchanges in more than 30 other states that have declined to establish their own ACA-compliant state exchanges.

The Oklahoma court’s ruling involved a motion to dismiss the entire case by the federal government defendants, on grounds of lack of standing and subject matter jurisdiction. More specifically, Judge White dismissed two counts in the amended complaint but upheld three other ones that now will move ahead for consideration under upcoming motions for summary judgment later this year.

The two counts dismissed were not essential to Oklahoma’s case. The first one was more or less a leftover from the original case filed in 2011 that challenged the ACA’s individual mandate as unconstitutional. Addressing it on the merits might have allowed some legal housekeeping in the wake of the 2012 Supreme Court decision upholding the individual mandate as a tax, rather than as federal regulatory authority within the commerce power of the Constitution. However, Judge White analogized the State’s challenge in this regard as similar to the unsuccessful one mounted by the State of Virginia in a case ultimately dismissed for lack of standing by the 4th Circuit Court of Appeals in late 2011. At best, he saw any possible right of action under a recently added provision of the Oklahoma Constitution as applying only to individuals, not the state government.

The other count dismissed on Monday involved the legal argument that application of the IRS rule (and the mandates it would trigger) to employees of the State of Oklahoma was unconstitutional. The Eastern District court disposed of this by citing a 1985 Supreme Court precedent to the contrary as the governing law (Garcia v. San Antonio Metro Transit Authority).

Still standing, so to speak, even after taking several punches from the court, are three other counts of Oklahoma’s case. They involve, respectively, claims that the IRS rule was (1) beyond the power or authority of the federal agency to issue, (2) in violation of the federal Administrative Procedure Act (for being arbitrary, capricious, an abuse of discretion, not authorized by law – take your pick), and (3) potentially trying to commandeer state government authority in an unconstitutional manner by allowing the federal government to set up its own exchange in Oklahoma as a “state-administered” exchange — as defined in section 1311 of the ACA.

Any success in the State Attorney General’s arguments on one of these points could still cripple the federal exchange operations in Oklahoma, and encourage dozens of other states to mount similar challenges and continue to refuse to authorize their own state-administered exchanges. (The latter type of exchanges in pro-Obamacare states still could dispense federal tax credits, as intended under the ACA). It appears that some of the biggest hurdles on the legal standing front have been overcome, including several clear-cut rulings in other federal appellate courts that the 19th-Century Anti-Injunction Act poses no barriers to legal challenges that could overturn the employer coverage mandate.

However, Judge White’s ruling also stripped away the primary legal rationale for the State of Oklahoma’s claims as an injured plaintiff. He signaled that the State lacked standing to assert its claims within two of the three remaining counts, as a “state” asserting its sovereign rights as a sole decision maker on the exchange establishment issue (particularly as arguably expanded under this part of the ACA). This narrow view of state standing means that successful arguments going forward will have to highlight the burdens and compliance costs imposed on the state in its other role as a large employer potentially subject to the ACA. They must also meet a higher standard of evidence than what was required to survive a motion to dismiss, in which all of the plaintiff’s allegations are presumed to be true on their face.

More troubling than the Oklahoma court’s cramped concept of standing for the State plaintiff were several secondary shots it took at complementary arguments made by the attorney general. For example, Judge White referred to the excellent legal work of Jonathan Adler and Michael Cannon as “a polemical law review article.” He also suggested that he might revisit some of the defendants’ claims of lack of standing during future consideration of a motion for summary judgment.

But to adapt some advice that had mixed success in another theater of war last decade, “You go to battle with the judge and the remaining case you have, rather than the one you’d like to have.” The next round in the Eastern District of Oklahoma will require the State plaintiff and its legal allies to tighten their arguments to demonstrate the real harm ahead to the state government as an employer in the event of a fully operational federal exchange in the state. They also need to prevail on the merits regarding what the ACA actually intended about which tax credits were authorized for particular types of health exchanges.

Ironically, Judge White earlier this year refused to allow a Texas-based employer to intervene as an additional plaintiff in the Oklahoma case. That employer now is one of a half-dozen individual and employer plaintiffs in a similar lawsuit filed last May in the federal district court for the District of Columbia. Both cases continue their “race” to a final court decision on the merits, before the ACA’s tax subsidies begin to flow through federally-administered health exchanges in January 2014. The legal clock for Obamacare is still ticking.

Tom Miller was involved in the early legal strategies behind the Oklahoma lawsuit and similar potential challenges to the IRS rule. He has written about them previously in articles for Forbes.com, The Hill, and AEIdeas.org.

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