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Federal judge rules Obamacare subsidies illegal. Will Supreme Court weigh in?

US District Judge Ronald White said the IRS lacked the authority to enact a regulation that allows the federal government to provide tax credits to qualified health care policyholders through health care exchanges.

A federal judge in Oklahoma on Tuesday struck down a key provision supporting the Affordable Care Act, in yet another judicial move that threatens to derail President Obama’s vision of national health care reform.

US District Judge Ronald White said in a 20-page opinion that the Internal Revenue Service lacked the authority to enact a regulation that allows the federal government to provide tax credits to qualified health care policyholders through health care exchanges in every instance.

At issue in the lawsuit was whether the IRS regulation conflicted with the clear language of ACA, also known as Obamacare, which appears to limit the provision of federal tax credits to only those policy holders enrolled in a health care exchange set up and run by a state.

Two federal appeals courts reached conflicting opinions on the same issue in July, and the plaintiff in one of those cases is asking the US Supreme Court to take up the issue.

Judge White’s decision may prompt the high court to take a closer look at the case and consider whether to take it up immediately or wait for pending appeals to conclude.

At issue is a dispute over whether the federal government is authorized to issue tax credits and enforce the ACA’s employer mandate when the applicable health care exchanges are setup and run by the federal government rather than the states.

Under the ACA, Congress said that the federal government must issue tax credits to policy holders working through health care exchanges set up by the states.

What the law apparently doesn’t do is explicitly authorize the federal government to issue tax credits to policy holders when the underlying health care exchange is set up by the federal government.

This would not have been an issue if the states had set up their own exchanges, as Congress anticipated. Ultimately, 17 states volunteered. Thirty-four others refused.

To fill the void, the federal government stepped in and set up its own exchanges in the 34 states. But that raised the question of whether tax credits could be issued through non-state exchanges.

The Obama administration was confronted with a choice. It could have returned to Congress and asked lawmakers for an amendment to clarify the statute. This option was not particularly attractive with a Republican-controlled House of Representatives.

Instead, the administration had the IRS enact a rule that requires the US Treasury to provide subsidies for health plan coverage purchased on any and all exchanges – not just those established by a state.

Opponents of the health care reform effort have seized upon the IRS rule, the tax credit provision, and its limiting language and filed multiple legal challenges charging an abuse of executive power.

The Oklahoma decision is important because it establishes another split in the lower courts, making Supreme Court review more likely.

But unlike the other two cases, the Oklahoma decision belongs to a trial court and is expected to be appealed to the 10th Circuit in Denver before any petition to the Supreme Court would be filed.

Tuesday’s decision stems from a lawsuit filed by the State of Oklahoma and Attorney General Scott Pruitt.

The central issue in the case was whether the IRS acted properly in writing its new rule or whether the agency usurped law-making authority the Constitution reserves to Congress.

White concluded that the IRS overstepped its authority. “This court holds that the IRS Rule is arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law,” he wrote.

The judge said the agency acted “in excess of statutory jurisdiction, authority, or limitations,” or otherwise carried out an “invalid implementation of the ACA.”

By vacating the IRS rule the decision makes it impossible for the federal government to provide tax credits to participants in the federal exchange in Oklahoma and it also undercuts a key part of the enforcement provisions related to the mandate that large employers provide their workers with government-approved health care or face a tax penalty.

White stayed his ruling pending the outcome of an expected appeal.

“Today’s ruling is a consequential victory for the rule of law,” Mr. Pruitt, the attorney general, said in a statement. “The administration and its bureaucrats in the IRS handed out billions in illegal tax credits and subsidies and vastly expanded the reach of the health care law because they didn’t like the way Congress wrote the Affordable Care Act,” he said.

“That’s not how our system of government works,” Pruitt said.

The case is Oklahoma v. Burwell (11-30).