Enrollment counselor Nancy Gonzalez, left, helps the Alejo family, Hugo, left, his wife , Emedtiat and daughter Karla, 11, right, sign up for health insurance through the California's new health insurance exchange in Sacramento, Calif.
Enrollment counselor Nancy Gonzalez, left, helps the Alejo family, Hugo, left, his wife , Emedtiat and daughter Karla, 11, right, sign up for health insurance through the California’s new health insurance exchange in Sacramento, Calif. (Photo: AP / Rich Pedroncelli)

Conservative foes of the Affordable Care Act hope to convince an appellate panel on Tuesday that federal subsidies offsetting the cost of health insurance are available only for policies purchased by individuals through state-created exchanges — not through exchanges created by the federal government.

The federal government steps in and creates exchanges when states decline to form their own. Federal exchanges now operate in two-thirds of the states. The subsidies are actually premium tax credits.

If successful in limiting federal subsidies, the challengers in Halbig v. Sebelius, which will be heard by a panel of the U.S. Court of Appeals for the D.C. Circuit, will have eliminated a major pillar on which the federal health care law rests.

“It really goes to the heart of the Affordable Care Act, which is whether federal exchanges can grant premium tax credits to people whose incomes are between 100 and 400 percent of the federal poverty level,” said health law scholar Timothy Jost of Washington and Lee University School of Law.

Recent projections by the Congres­sional Budget Office estimate that by 2018, 20 million people who buy nongroup policies through the exchanges will receive the tax credits.

If the challengers succeed, Jost added, the poor are effectively deprived of health insurance. “It would mean in states with federal exchanges, the employer-responsibility provisions wouldn’t apply and many people would be exempted from the individual-responsibility provisions.”

In Halbig, there are no constitutional knots to unravel. Instead, the challengers, led by Jones Day’s Michael Carvin, argue that a provision in the Affordable Care Act (ACA) that details how the tax credits are to be computed establishes that the credits are only available on an exchange “established by the State.”

The Internal Revenue Service, however, said those tax credits are available on federal exchanges as well in its regulations implementing the ACA.

Carvin contends the IRS regulations fail under the rule that where a statute is “clear and unambiguous,” that is the end of the matter for courts and agencies. “The ACA states that subsidies are available only for coverage purchased on state-established Exchanges, but the IRS Rule wholly eliminates that prerequisite,” he writes in his brief. “The Rule is therefore invalid.”

Although district court judges in Wash­ington and Richmond, where Carvin is handling a nearly identical case, King v. Sebelius, have rejected his arguments, he said, “I’m hoping we have a pretty good shot” in the D.C. Circuit where he will go before Judges A. Raymond Randolph, Thomas Griffith and Harry Edwards.

Carvin is no stranger to the ins and outs of the still controversial health care law. He represented the National Federation of Independent Business in the 2012 landmark Supreme Court ACA challenge, NFIB v. Sebelius in 2012. The Halbig and King cases are coordinated and funded by the conservative nonprofit public policy organization the Competitive Enterprise Institute.

Carvin’s clients in Halbig also have strong conservative connections. The owner-employer of the plaintiff restaurant companies — Allen Tharp — is president of the San Antonio Tea Party; Innovare Health Advocates’ owner is conservative Dr. Charles Willey, a frequent public critic of ACA; Jacqueline Halbig is a former President George W. Bush appointee as associate director of the White House Office of Faith-Based and Community Initiatives; Sarah Rumpf is communications manager for the conservative Texas Public Policy Foundation; and David Klemencic was a plaintiff in NFIB v. Sebelius. Their home states — Missouri, Texas, Virginia and West Virginia — have not created insurance exchanges.

GRANTS OF AUTHORITY

In the D.C. Circuit, Carvin bolsters his argument by noting that Congress provided “distinct grants of authority” to state exchanges in Section 1311 of the law and to federal exchanges in Section 1321, and in another section on reporting the subsidies the act distinguishes between state and federal exchanges. The latter, he says, “conclusively proves” that when Congress wanted to refer to both, it knew how to do it.

The government, defending the district court decision, counters with a “holistic” argument, saying that the phrase “established by the State” cannot be viewed in isolation. The act’s cross-referenced sections, structure and purpose to make health insurance accessible to all, it contends, demonstrate Congress’ intent to make the tax credits available for both state and federal exchanges.

The government also challenges Klemencic’s standing in the case and contends the restaurant group is barred from suing the IRS because of the Anti-Injunction Act.

The challengers’ legal argument in Halbig, King and two cases pending in district courts in Oklahoma and Indiana grew from an idea suggested by Ogletree, Deakins, Nash, Smoak & Stewart partner Thomas Christina during a 2010 panel discussion. That idea was developed, refined, published and advocated by Jonathan Adler of Case Western University School of Law and Michael Cannon of the Cato Institute. “I think their work was very instrumental,” Competitive Enterprise Institute general counsel Sam Kazman said. “That was the case both initially and since that time as well. We are relatively good friends with Tom, so there was a mutual circle of interest.”

Adler and Cannon filed an amicus brief supporting Halbig, as did the Cato Institute, eight Republican members of Congress who voted against ACA, and nine states without state exchanges, among others. The government is supported by AARP, a number of economists, health deans, chairs and faculty, congressional leaders who supported ACA and many state legislators, the American Constitution Society and others.

Contact Marcia Coyle at mcoyle@alm.com.