MUSKOGEE, Okla. (CN) - The U.S. government cannot subsidize health insurance in states that refuse to set up their own Obamacare marketplaces, a federal judge ruled, setting the stage for a U.S. Supreme Court showdown.
Oklahoma sued the U.S. government in 2011 after passage of the Patient Protection and Affordable Care Act, which lets states opt out of creating their own health insurance marketplace. For states like Oklahoma that choose this option, the U.S. Department of Health and Human Services set up exchanges and operated them.
The Internal Revenue Service has a rule that extends premium-assistance tax credits to anyone "enrolled in one of more qualified health plans through an exchange," whether state- or HHS-run.
In its federal complaint, Oklahoma said that, as an employer of subsidy-eligible state employees, the rule puts it at risk of incurring penalties under the employer mandate.
U.S. District Judge Ronald White granted Oklahoma summary judgment in the case Tuesday.
"The court holds that the IRS Rule is arbitrary, capricious, an abuse of discretion or otherwise not in accordance with law, in excess of statutory jurisdiction, authority, or limitations, or short of statutory right, or otherwise is an invalid implementation of the ACA, and is hereby vacated" the 20-page opinion states. "The court's order of vacatur is stayed, however, pending resolution of any appeal from this order."
Though the U.S. government had said it could step in as the "state" under the law to set up exchanges, White disagreed.
"'State' cannot mean the federal government," White wrote. "This definition is dispositive when combined with the interpretive hurdle presented by the phrase 'established by.' In other words, the 'legal fiction' reading does not appear to comport with normal English usage."
White further disagreed with the federal government's claim that the denial of subsidies in federally run exchanges would "gut" or "destroy" Obamacare.
"On the contrary, the court is upholding the Act as written," White wrote. "Congress is free to amend the ACA to provide for tax credits in both state and federal exchanges, if that is the legislative will. As the Act presently stands, 'vague notions of a statute's basic purpose are nonetheless inadequate to overcome the words of its text regarding the specific issue under consideration.'"
White said it is a "core administrative-law principle" that a government agency cannot rewrite clear statutory terms "to suit its own sense of how the statute should operate."
Oklahoma Attorney General Scott Pruitt applauded the ruling as a "consequential victory for the rule of law."
"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," Pruitt said in a statement Tuesday. "That's not how our system of government works. The Obama administration created this problem and rather than having an agency like the IRS rewrite a law it didn't like, the administration should have done the right thing and worked with Congress to amend the law."
Read the Top 8
Sign up for the Top 8, a roundup of the day's top stories delivered directly to your inbox Monday through Friday.