Pulling the Rug Out – Lawsuits Challenge the Legality of Federal Exchange Subsidies (Part II)

This post continues the discussion of the handful of lawsuits challenging the legality of the federal subsidies for people shopping on the federally run insurance exchange in states that elected not to run exchanges themselves.  See Part I here.

To recap:  There is a statutory hole in the ACA that – if the plaintiffs in the pending lawsuits are to be believed – makes federal subsidies provided to individuals shopping on the federally run insurance exchange illegal.  Needless to say, this would be a huge blow for the ACA in the states that elected not to operate their own exchanges.

I think there might be a way out of this for the federal government.  My first thought when reading about these lawsuits was “but who has standing?”  Here’s what I mean by that.  In general, you can’t go to federal court to challenge federal or state government spending – there won’t be standing (yes, there is an exception for spending that violates the Establishment Clause, and yes, you can probably imagine a scenario where someone comes up with a creative theory on why they are injured by spending and thus have standing, but bear with me).  But this situation is different because the subsidy mechanism involves more than federal spending; there’s also a penalty component.  Basically, the shared employer responsibility payment statute says that if a large employer doesn’t offer insurance to its employees, and a single employee is eligible for subsidies on a government-run insurance exchange, the employer must pay a penalty equal to the size of that subsidy times the number of its full-time employees.  The Internal Revenue Service has interpreted that to apply in states that run their own exchanges, as well as in those letting the federal government do it.

And there’s the potential window of opportunity.  As long as the GOP controls the House of Representatives – and perhaps just enough senators to filibuster – there can’t be a legislative fix to the ACA.  But there’s nothing stopping the IRS from pulling the rug out from under the plaintiffs in these cases.  How can they do that?  By promulgating new regulations switching course and exempting employers in the federally run exchange states from penalties under this part of the ACA.  Do that, and the plaintiffs in various pending lawsuits would no longer face exposure.  Now, the standing ship has probably sailed – the general rule in federal court is that if standing exists at the start of a case, it will always exist.  But there’s another legal doctrine – mootness – that applies when post-filing events occur to render a lawsuit pointless.  Here, if the IRS removed the employer penalty, the government could then argue that the cases are moot because the impending injury justifying the lawsuits no longer exists.

I should add two caveats.  First, there is an exception to mootness – voluntary cessation – that applies when the event causing mootness is within the control of the party asserting the defense and could re-occur.  Second, there is a creative argument that even individuals receiving subsidies might be “injured” insofar as the subsidies effectively push the price of coverage low enough for the individual mandate to apply to them.  I’m not sure what I think about that, but at the very least, reversing the current IRS interpretation would kick the pending lawsuits out of the federal courts (setting aside the voluntary cessation defense).

Image courtesy of Flickr by Evil Erin