Oklahoma Takes Obama Administration to Court Over IRS Rule

Published November 27, 2012

Oklahoma Attorney General Scott Pruitt has amended his state’s lawsuit against President Obama’s health care law to address a legal problem with the Internal Revenue Service’s distribution of insurance exchange subsidies—an issue which could effectively bar implementation of the law in certain states.

Pruitt’s new challenge focuses on penalties Oklahoma employers would face if they don’t offer affordable health coverage to their workers and how Obama’s law distributes tax credits for low-income Americans to purchase insurance through the insurance exchanges it is intended to create.

Under Obama’s law, state-run exchanges must be created so consumers can shop for insurance plans and apply for federal subsidies to be used toward the cost of premiums. The law penalizes employers that don’t offer affordable coverage to workers if those workers receive a federal subsidy. And if states decline to set up an exchange, the law allows for the federal government to do so instead.

Only fifteen states have taken significant steps toward creating exchanges, meaning thirty or more states may instead rely on a federal exchange, about which little is currently known. The text of the law allows only for the distribution of the subsidies in states where exchanges have been created by the state government, not the federal authorities. But the IRS is proceeding as if this is not the case.

IRS Ignoring the Law

According to Jonathan Adler, the Johan Verheij Memorial Professor of Law and director of the Center for Business Law and Regulation at Case Western Reserve University, Oklahoma’s challenge to Obama’s law is unique, the first of a second round of lawsuits following the initial case against the constitutionality of the individual mandate.

“The first wave of cases against Obamacare were constitutional challenges against the law’s statutes. Oklahoma’s case against Obamacare represents the second wave of cases that will focus against the implementation of the law—that is, whether or not the law is being implemented legally,” said Adler.

Adler says many of the problems with Obamacare resulted from the process in which it was passed, and much of the legislation has flaws that need to be corrected in order for it to function at all.

“Obamacare was cobbled together and then rushed through in an unorthodox way. What we’re finding out is that the law doesn’t necessarily work the way the legislators intended, so they are trying to rewrite the statutes after the fact,” said Adler. “The law is almost 3,000 pages, and it presents an enormous opportunity for litigation. To paraphrase former House Speaker Nancy Pelosi: As people read the bill and see what’s in it, they may not like it.”

Employers Could Shift States

Jonathan Ingram, director of Health Policy and Pension Reform for the Illinois Policy Institute, says if Oklahoma is successful in its lawsuit, he expects to see many entrepreneurs flee the states where they’re subject to the new employer tax and set up shop in states where they are not.

“How states proceed with this over the next few years is likely going to have a substantial impact on their economic competitiveness,” says Ingram.

Dr. Roger Stark, a physician and health care policy analyst at the Washington Policy Center, says a significant number of policy experts argue the relevant language of Obama’s law is flawed, but he warns that may not affect a court ruling.

“There is now a fairly substantial group in the United States that believes the language of Obama’s law does not allow a federal exchange to provide subsidies—only state-formed exchanges should receive the subsidies,” says Stark. “If Oklahoma fails, there will be other challenges, but the issue is whether the courts will take them up.”

Ingram expects more legal challenges regardless of the Oklahoma suit’s resolution.

“There are a number of challenges already underway in the federal court system, and it’s likely that these will continue to grow,” Ingram said. “Obamacare is almost 3,000 pages long; the regulations span thousands of pages more. Every word in a law is an argument, so don’t be surprised when laws with thousands of pages keep ending up in the courts.”

Answers for Concerned Employers

Jonathan Small, fiscal policy director for the Oklahoma Council of Public Affairs, says the U.S. Supreme Court has dealt with only a portion of the law thus far, leaving doubt that employers could be penalized for their employees obtaining insurance through one of the federal health care exchanges.

“Attorney General Pruitt should be commended for bringing this subsequent challenge to the ACA. He was elected because he said he would challenge the federal government whenever it overreached and brought harm to Oklahomans. We need to have more efforts to push back against the ACA because despite the claims it would make health care less expensive, it is indeed making it unaffordable for employees and employers alike,” said Small.

Small says the nation needs to move in a different direction to benefit employers and employees alike.

“We need to repeal and replace this law with a more pro-market one that will increase transparency in pricing and portability of insurance for employees so they’re not stuck at a job because of their employer-provided health insurance,” said Small.