Obamacare Tax Subsidy Challenge Dismissed by Federal Judge

Jan 15, 2014 2:47 pm ET

(Updates with judge’s conclusion in second paragraph.)

Jan. 15 (Bloomberg) -- People who buy insurance on health exchanges run by the federal government are eligible for tax credits to reduce their premiums, a U.S. judge ruled, dismissing claims that only state-run exchanges can offer the subsidies.

“The plain text of the statute, the statutory structure and the statutory purpose make clear that Congress intended to make premium credits available on both state-run and federally facilitated exchanges,” U.S. District Judge Paul Friedman in Washington said in a ruling today dismissing a lawsuit.

The ruling undercuts what one supporter of the Obama health-care law called an “existential” threat to the law. Opponents say it forces consumers and businesses to participate in a program their state governments opted out of.

The tax credits are intended to help low-income people pay for health insurance bought on the exchanges set up through the Patient Protection and Affordable Care Act. There are 14 state- run exchanges, while 36 states are covered by the federal exchange.

Friedman’s ruling is “a major blow to the states that chose not to participate in the Obamacare insurance exchange program” Sam Kazman, general counsel of the Competitive Enterprise Institute, a group that advocates for limited government, said in an e-mailed statement. “This decision guts the choice made by a majority of the states to stay out of the exchange program.”

‘Real Cost’

The subsidies “hide the real cost of Obamacare” by enabling some insurance customers to pay artificially low rates, Kazman said in a phone interview. The subsidies also indirectly burden businesses because they could be subject to financial penalties when their employees receive the tax credits, according to Kazman.

They also create an incentive to cut full-time employees to reduce potential penalties, he said.

The institute is helping to pay for the lawsuit. The plaintiffs today filed a notice that they will appeal the ruling.

The ruling blunts an attack on the foundation of the law, according to Ron Pollack, executive director of Families USA, a consumer health-care organization that filed a brief in support of the Obama administration.

“This, in our view, has been the greatest existential litigation threat to the Affordable Care Act,” Pollack said in a conference call with reporters following release of Friedman’s decision.

The case is Halbig v. Sebelius, 13-cv-00623, U.S District Court, District of Columbia (Washington).

--Editors: Andrew Dunn, Michael Hytha