Case No. 13-623 Halbig et al v. Sebelius et al

(Reuters) – A group of individuals and businesses filed a lawsuit against the Obama administration’s healthcare overhaul on Thursday, hoping to stop the law in states that have not set up new insurance exchanges.

The complaint filed in the Washington federal court challenges federal rules issued in 2012 for implementing the president’s 2010 healthcare law which goes into full force in January 2014.

The 12 challengers, ranging from a hospital chain to a restaurant franchise, argue that Internal Revenue Service rules issued last year should be invalidated because they contradict what Congress originally intended.

A court win for the challengers could cast doubt over the IRS’s ability to enforce the healthcare law’s new tax penalties.

Under the healthcare law, a large employer must pay an excise tax penalty if it fails to provide minimum coverage for even one fulltime employee, forcing that employee to get a tax credit to buy health insurance through one of the new state exchanges.

Thirty-three of 50 states have proved either not ready or unwilling to establish their own insurance exchanges, forcing the federal government to create the marketplaces.

Some Republican-led states including Texas have refused to establish their own exchanges because of their political opposition to Obama’s signature domestic policy achievement.

The remaining 17 states and the District of Columbia are building their own exchanges.

The IRS is charged with distributing health insurance tax credits through the state exchanges.

But the complaint argues that the federally created exchanges cannot deliver the tax credits because the law does not say explicitly that they can.

The challengers are asking for a federal court order barring administration and enforcement of the healthcare law in these 33 states.

About 7 million people are expected to sign up for healthcare coverage in 2014 through the state-run and federal exchanges. Open enrollment begins on October 1 with full operations set for January 1. The number of exchange customers is expected to reach 26 million in 2022, according to the nonpartisan Congressional Budget Office.


“The IRS rule we are challenging is at war with the act’s plain language and completely rewrites the deal that Congress made with the states on running these insurance exchanges,” said Michael Carvin, a partner at law firm Jones Day who is representing the challengers.

A Treasury Department spokeswoman said in response to the lawsuit: “We are confident that providing tax credits to individuals in every state is supported by the statute and our authority to interpret it.”

The Supreme Court in June 2012 upheld most of the healthcare law.

The Obama administration was already facing pressure over the IRS rules, which some Republicans see as a way to abolish parts of the law after the Supreme Court ruling.

At a Republican-led congressional hearing last year, then-IRS Commissioner Doug Shulman acknowledged that “there is some contradictory language” in the healthcare law.

Thursday’s lawsuit is the latest court challenge attacking the healthcare law since the Supreme Court’s June ruling.

At least six other lawsuits against the healthcare law are pending in court’s around the country.

The case, No. 13-623 Halbig et al v. Sebelius et al, was filed in the U.S. District Court for the District of Columbia.

(Reporting by Patrick Temple-West; Additional reporting by David Morgan; Editing by Howard Goller and Cynthia Osterman)