King et al v. Sebelius et al

Filing 52

MEMORANDUM OPINION. Signed by District Judge James R. Spencer on 2/18/14. (jtho, )

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF VIRGINIA
RICHMOND DIVISION

DAVID KING, et al.,
Plaintiffs,

Civil Action No. 3:i3-CV-630
KATHLEEN SEBELIUS, et al,
Defendants.
MEMORANDUM OPINION

THIS MATTER is before the Court on a Motion for Summary Judgment filed by
Plaintiffs (ECF No. 5) and a Motion to Dismiss filed by Defendants (ECF No. 30). Plaintiffs
move the Court for Summary Judgment alleging that a regulation promulgated by the Internal
Revenue Service ("IRS"), which extends eligibility for premium assistance subsidies1 under the

Patient Protection and Affordable Care Act ("ACA" or "Act") to individuals who purchase health
coverage through federally-facilitated Exchanges, exceeds the IRS's statutory authority, is
arbitrary and capricious, and is contrary to law in violation of the Administrative Procedure Act
("APA"), 5 U.S.C. § 706. Defendants in turn move the Court to dismiss Plaintiffs' Complaint and

uphold the relevant regulation. For the reasons below, the Court will GRANT Defendants'
Motion to Dismiss and DENYAS MOOT all remaining Motions.
I.

STATUTORY AND FACTUAL BACKGROUND

A. Statutory Background

The ACA includes a series of measures intended to expand the availability of affordable
health insurance coverage. These measures include: (1) the creation of health insurance
exchanges ("Exchanges") that facilitate the purchase of insurance by individuals and small

groups; (2) the availability of premium tax credits to assist individuals with the purchase of

1 The terms "tax credits," "premium assistance subsidies," and "premium assistance" are used
interchangeably throughout this Memorandum Opinion.

insurance on the Exchanges; and (3) the Minimum Coverage Provision, which requires most
individuals either to maintain qualifying coverage or to pay a tax penalty for failure to do so. The
IRS has also promulgated a regulation ("IRS Rule") that grants premium tax credits to
individuals in all Exchanges, regardless of whether they are state-run or federally-facilitated.
1. The American Health Benefit Exchange System
The ACA creates health insurance Exchanges, organized along state lines, to serve as a
marketplace for the purchase of health insurance by individuals and small businesses. See 42
U.S.C. § 18031(b)(1). The Exchanges are intended to help qualified individuals and small

businesses "to benefit from the pooling of risk, market leverage, and economies of scale that
large businesses currently enjoy." Centers for Medicare & Medicaid Services, Initial Guidance to
States

on

Exchanges,

http://www.hhs.gov/cciio/resources/files/guidance_to_states_on_

exchanges.html (last visited Feb. 3, 2014). In part, the Exchanges: (1) certify the qualified health
plans offered on the Exchanges; (2) determine the eligibility of individuals to enroll in these
qualified health plans; (3) determine the eligibility of individuals for advance payments of the
ACA's premium tax credits and cost-sharing reductions; and (4) certify that individuals are
exempt from the penalty under the Act's Minimum Coverage Provision. 42 U.S.C. §§

18021(a)(1), 18022; 42 U.S.C. § 18031(d)(4); see generally 45 C.F.R. § 155.200.

Exchanges will offer plans providing different levels of coverage, designated as "bronze,"
"silver," "gold," and "platinum" coverage. 42 U.S.C. § 18022(d). A bronze level plan is the lowest
level of coverage offered under 42 U.S.C. § 18022(d)(1). Exchanges may also offer "catastrophic"
coverage plans. 42 U.S.C. § 18022(e); see 45 C.F.R. § 156.155. Enrollment in catastrophic

coverage is limited to persons who are under 30 years of age, or for whom an Exchange has
certified to be exempt from the Minimum Coverage Provision due to hardship or the lack of

affordable insurance options. 42 U.S.C. § 18022(e); 45 C.F.R. § 156.155(a).
States may establish and operate these Exchange pursuant to 42 U.S.C. § 18031 ("Section

1311"), or the federal government may establish and operate an Exchange in place of the state

where a state has chosen not to do so consistent with federal standards pursuant to 42 U.S.C. §
18041 ("Section 1321"). Thirty-four states, including Virginia, have decided not to establish their

own Exchanges pursuant to Section 1311. See State Decisions for Creating Health Insurance
Marketplaces, Kaiser State Health Facts, http://kff.org/health-reform/state-indicator/healthinsurance-Exchanges/ (last visited Feb. 3,2014).
2.

Premium Tax Credits

Among other incentives, the ACA provides premium tax credits under 26 U.S.C. § 36B
("section 36B") to help low and middle income individuals afford the cost of insurance
purchased through the Exchanges. The Exchanges provide advance payments of premium tax

credits directly to an eligible individual's insurer, thus lowering the net cost of insurance to the
individual. 42 U.S.C. §§ 18081-18082. The amount of premium assistance that an Exchange may
provide for an eligible individual is based, in part, on the premium expenses for the health plan
"enrolled in [by the individual] through an Exchange established by the State under [section]

1311." 26 U.S.C. § 36B(b)(2)(A). The amount of the premium tax credit available to a taxpayer
under section 36B varies depending on the taxpayer's household income. However, premium tax
credits are not available for the purchase of catastrophic coverage. 26 U.S.C. § 36B(c)(3)(A).
3. The Minimum Coverage Provision and Exemptions

Under the ACA's Minimum Coverage Provision, non-exempt individuals are required

either to maintain a minimum level of health insurance or to pay a tax penalty. 26 U.S.C. §
5000A. This penalty in 2014 is one percent of an individual's yearly income or $95 for the year,
whichever is higher, 26 U.S.C. § soooA(c)(2)-(3), but it "cannot exceed the cost of 'the national

average premium for qualified health plans' meeting a certain level of coverage." Liberty Univ.,
Inc. v. Lew, 733 F.3d 72, 84 (4th Cir. 2013) (quoting 26 U.S.C. § soooA(c)(i)(B)). Certain
individuals may be exempt from the mandate to maintain a minimum level of health insurance

under 26 U.S.C. § soooA(e). Among other exemptions, the Minimum Coverage Provision
penalty does not apply to individuals who would need to contribute more than eight percent of

their household income toward coverage. 26 U.S.C. § soooA(e)(i)(A). The determination of an

individual's household income toward coverage is calculated after taking into account any
allowable section 36B premium tax credits. 26 U.S.C. § 5000A(e)(i)(B)(ii).

An individual who applies for an exemption and is denied may pursue an administrative

appeal of that denial before a Department of Health and Human Services ("HHS") appeals
entity. 42 U.S.C. § 18081(f). An appeal may be taken only after the applicant first exhausts any

appeals that may be available in the Exchange. 45 C.F.R. §§ 155.505(b)(2), (c). This process is
independent of the IRS's assessment of any penalty under the Minimum Coverage Provision.
See 26 U.S.C. § soooA(g).
4. The IRS Rule

The IRS Rule grants subsidies to anyone "enrolled in one or more qualified health plans
through an Exchange." See Health Insurance Premium Tax Credit, 77 Fed. Reg. 30,377, 30,37778, 30,387-89 (May 23, 2012); 26 C.F.R. § i.36B-2(a)(i). The IRS Rule defines "Exchange" to

mean "State Exchange, regional Exchange, subsidiary Exchange, and Federally-facilitated

Exchange." Id. at 30,378. According to IRS regulations, the term Exchange has "the same
meaning as in 45 C.F.R. § 155.20." 26 C.F.R. § i.36B-i(k). Finally, 45 C.F.R. § 155.20 defines
Exchange to mean:
a governmental agency or non-profit entity that meets the applicable standards of
this part and makes [Qualified Health Plans] available to qualified individuals
and/or qualified employers. . . . regardless of whether the Exchange is
established and operated by a State (including a regional Exchange or
subsidiary Exchange) or by HHS.

45 C.F.R. § 155.20 (emphasis added). As such, individuals in federally-facilitated
Exchanges are currently eligible for the premium tax credit under the IRS Rule.
B. Factual Background2

2 For the purposes of Defendants' Motion to Dismiss, the Court assumes all of Plaintiffs' well-pleaded
allegations to be true, and views all facts in the light most favorable to Plaintiffs. T.G. Slater & Son v.
Donald P. & Patricia A. Brennan, LLC, 385 F.3d 836, 841 (4th Cir. 2004) (citing Mylan Labs, Inc. v.
Matkari, 7 F.3d 1130,1134 (4th Cir. 1993)); see Fed. R. Civ. P. 12(b)(6).

i.

David King

David King ("King") was 63 years old on January 1, 2014; he is married with no

dependents; he smokes tobacco products; and he has a projected household income of $39,000
for 2014. King is not eligible for government or employer-sponsored coverage, so the cheapest
coverage available to him is the cheapest bronze coverage approved for sale to him on the

federal Exchange in Virginia. Because the cost of the cheapest bronze coverage approved for sale
to King on the federally-facilitated Exchange in Virginia will exceed eight percent of King's
projected household income for 2014, he would (absent any subsidy) be eligible for a certified
exemption from the Minimum Coverage Provision penalty for 2014. King is, however, eligible
for a subsidy that would bring him within the ambit of the Minimum Coverage Provision. King

does not wish to comply with the Minimum Coverage Provision.
2. Douglas Hurst

Douglas Hurst ("Hurst") was 62 years old on January 1, 2014; he is married with no

dependents; and he has a projected household income of $35,000 for 2014.3 Hurst is not eligible
for government or employer-sponsored coverage, so the cheapest coverage available to him is

the cheapest bronze coverage approved for sale to him on the federally-facilitated Exchange in
Virginia. Because the cost of the cheapest bronze coverage approved for sale to Hurst on the
federally-facilitated Exchange in Virginia will exceed eight percent of Hurst's projected

household income for 2014, he would (absent any subsidy) be eligible for a certified exemption
from the Minimum Coverage Provision penalty for 2014. Hurst is, however, eligible for a subsidy
that would bring him within the ambit of the Minimum Coverage Provision. Hurst does not
want to comply with the Minimum Coverage Provision.
3.

Brenda Lew

Brenda Levy ("Levy") was 63 years old on January 1, 2014; she is single; and she has a

projected household income of $43,000 for 2014. Levy is not eligible for government or
3 Due to counsel's error, the Complaint alleged the wrong figure.
5

employer-sponsored coverage, so the cheapest coverage available to her is the cheapest bronze
coverage approved for sale to her on the federally-facilitated Exchange in Virginia. Because the

cost of the cheapest bronze coverage approved for sale to Levy on the federally-facilitated
Exchange in Virginia will exceed eight percent of Levy's projected household income for 2014,
she would (absent any subsidy) be eligible for a certified exemption from the Minimum
Coverage Provision penalty for 2014. Levy is, however, eligible for a subsidy that would bring

her within the ambit of the Minimum Coverage Provision. Levy does not want to comply with
the Minimum Coverage Provision.
4.

Rose Luck

Rose Luck ("Luck") was 55 years old on January 1, 2014; she is married; she smokes
tobacco products; and she has a projected household income of $45,000 for 2014. Luck is not
eligible for government or employer-sponsored coverage, so the cheapest coverage available to
her is the cheapest bronze coverage approved for sale to her on the federal Exchange in Virginia.
Because the cost of the cheapest bronze coverage approved for sale to Luck on the federally-

facilitated Exchange in Virginia will exceed eight percent of Luck's projected household income

for 2014, she would (absent any subsidy) be eligible for a certified exemption from the Minimum

Coverage Provision penalty for 2014. Luck is, however, eligible for a subsidy that would bring
her within the ambit of the Minimum Coverage Provision. Luck does not want to comply with
the Minimum Coverage Provision.
II.

LEGAL STANDARD

Rule 12 of the Federal Rules of Civil Procedure allows a defendant to raise a number of

defenses to a complaint at the pleading stage, including failure to state a claim. A motion to
dismiss for failure to state a claim upon which relief can be granted challenges the legal

sufficiency of a claim, rather than the facts supporting it. Fed. R. Civ. P. 12(b)(6); Goodman v.
Praxair, Inc., 494 F.3d 458, 464 (4th Cir. 2007); Republican Party ofN.C. u. Martin, 980 F.2d
943. 952 (4th Cir. 1992). A court ruling on a Rule 12(b)(6) motion must accept all of the factual

allegations in the complaint as true, see Edwards v. City ofGoldsboro, 178 F.3d 231, 244 (4th
Cir. 1999); Warner v. Buck Creek Nursery, Inc., 149 F. Supp. 2d 246, 254-55 (W.D. Va. 2001),

in addition to any provable facts consistent with those allegations, Hishon v. King &Spalding,
467 U.S. 69, 73 (1984), and must view these facts in the light most favorable to the plaintiff,
Christopher v. Harbury, 536 U.S. 403,406 (2002).

To survive a motion to dismiss, a complaint must contain factual allegations sufficient to

provide the defendant with "notice of what the... claim is and the grounds upon which it rests."
BellAtl. Corp. v. Twombly, 550 U.S. 544,555 (2007) (quoting Conley v. Gibson, 355 U.S. 41,47
(i957))- Rule 8(a)(2) requires the complaint to allege facts showing that the plaintiffs claim is
plausible, and these "[fjactual allegations must be enough to raise a right to relief above the

speculative level." Twombly, 550 U.S. at 555 & n.3. The Court need not accept legal conclusions
that are presented as factual allegations, id. at 555, or "unwarranted inferences, unreasonable
conclusions, or arguments," E. Shore Mkts., Inc. v. J.D. Assocs. Ltd. P'ship, 213 F.3d 175, 180
(4th Cir. 2000).
III.

ANALYSIS

A. Justiciability
1.

Standing

The doctrine of standing is comprised of two analytical strains. See Elk Grove Unified
Sch. Dist. v. Newdow, 542 U.S. 1,11 (2004). The first regards Constitutional limitations on the

Court's adjudicative capacity and is rooted firmly in Article HI. There, the judicial power of the
United States is said to extend only to a limited class of "cases" and "controversies." U.S. Const,

art. Ill, § 2. To establish Article III standing, it must be shown: (1) that the plaintiff suffered the
invasion of a legally protected interest; (2) that there is a fairly traceable causal connection
between the injury alleged and the conduct challenged; and (3) that there is a reasonable

likelihood that the injury alleged could be redressed by a favorable decision from the court. See
Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992). "[Tjhreatened injury must be certainly

impending to constitute injury in fact," and "[allegations of possible future injury" are not
sufficient. Clapper v.Amnesty Int'l USA, 133 S. Ct. 1138,1141 (2013) (quotation marks omitted)
(quoting Whitmore v. Arkansas, 495 U.S. 149,158 (1990)).

There is also prudential standing where "[t]he interest [a person] asserts must be
'arguablywithin the zone of interests to be protected or regulated by the statute' that he says was
violated." Match-E-Be-Nash-She-Wish Band of Pottawatomi Indians v. Patchak, 132 S. Ct.
2199, 2210 (2012) (quoting Assoc, of Data Processing Serv. Orgs., Inc. v. Camp, 397 U.S. 150,
153 (1970)); see also Taubman Realty Grp. Ltd. P'ship v. Mineta, 320 F.3d 475, 480 (4th Cir.

2003). This test is not especially demanding, and any benefit of the doubt goes to the plaintiff.
Patchak, 123 S. Ct. at 2210. "[T]his inquiry must be determined not by reference to the overall
purpose of the statute in question but, instead, by reference to the particular provision(s) of law
upon which the plaintiff seeks redress." Mineta, 320 F.3d at 480 (citations omitted); see also
Bennett v. Spear, 520 U.S. 154, 175-76 (1997). "The test forecloses suit only when a plaintiffs

'interests are so marginally related to or inconsistent with the purposes implicit in the statute
that it cannot reasonably be assumed that Congress intended to permit the suit.'" Patchak, 132

S. Ct. at 2210; TAP Pharm. v. U.S. Dep't ofHealth & Human Servs., 163 F.3d 199,203 (4th Cir.
1998).

a. Article III Standing

Defendants assert that Plaintiffs cannot establish standing because they are not being

economically injured by the IRS Rule. Instead, they characterize Plaintiffs' actions as the
rejection of a benefit in an attempt to manufacture harm where there is none. Plaintiffs assert
that they are harmed economically because the IRS Rule denies them an exemption from the
Minimum Coverage Provision and, thus, the option not to buy any health insurance at all.
Plaintiffs argue that, as a result of the IRS Rule, they will incur some financial cost because they

will be forced to buy insurance or pay the Minimum Coverage Provision penalty. In the

alternative, Plaintiffs also assert that being forced to buy insurance and having to contact
insurers are cognizable Article III injuries.

The Court assumes that "the merits of a dispute will be resolved in favor of the party

invoking... jurisdiction in assessing standing and, at the pleadingstage, 'presumes that general
allegations embrace those specific facts that are necessary to support the claim.'" Equity In
Athletics, Inc. v. Dep't of Educ, 639 F.3d 91, 99 (4th Cir. 2011) (quoting Lujan v. National
Wildlife Federation, 497 U.S. 871, 889 (1990)). It follows that Plaintiffs have standing because

their economic injury is real and traceable to the IRS Rule. Halbig v. Sebelius, No. CV 13-0623
(PLF), 2014 WL 129023, at *6 (D.D.C. Jan. 15, 2014). Lastly, Plaintiffs clearly meet the third
prong of the standing doctrine because this Court has the power to redress their injuries by
invalidating the IRS Rule.*
b. Prudential Standing

The prudential standing doctrine has been stated in many different forms and iterations.
Under Fourth Circuit jurisprudence, the relevant focus is on the particular provision of the law
upon which the plaintiff seeks redress. See Syngenta Crop Prot., Inc. v. EPA, No. l:02-CV-334,

2011 WL 3472635, at *7-8 (M.D.N.C. Aug. 9, 2011) (citing Mineta, 320 F.3d at 480). To

determine whether a plaintiffs interests are within the zone of interests to be protected, the
court must "first discern the interests 'arguably... to be protected' by the statutory provision at
issue" and "then inquire whether the plaintiffs interests affected by the agency action in
question are among them." TAP Pharm., 163 F.3d at 203 (quoting Nat'l Credit Union Admin, v.
First Nat'l Bank & Trust Co., 522 U.S. 479,492 (1998)).

Plaintiffs bring suit under the APA to invalidate the IRS Rule. (See Compl. HI 8,40). The
ostensible purpose of section 36B is "[t]o ensure that health coverage is affordable," and "to help

offset the cost of private health insurance premiums." S. Rep. No. 111-89, at 4 (2009); see also

•» To the extent that Plaintiffs assert that they are being injured as taxpayers because the IRS Rule
improperly allowed the outlay of billions of dollars in tax credits, their argument fails. See Howard v.
111th U.S. Cong., No. 2:09-CV-25, 2009 WL 1704421, at *3 (W.D.N.C. June 12, 2009).

H. Rep. No. in-443, vol. II, at 977 (2010). Finally, the IRS Rule pertains to eligibility of
individuals for a tax credit under section36B, as an integral component to the ACA.
Plaintiffs are directly regulated by section 36B and, thus, the IRS Rule interpreting it,
because they are "applicable taxpayers" under the section. As taxpayers that are eligible for tax

subsidies under section 36B, Plaintiffs' interests are affected by the IRS Rule. The Supreme
Court has explicitly stated that the test is not meant to be especially demanding and that any
benefit of doubt should go to the plaintiff. Patchak, 123 S. Ct. at 2210. It would be a stretch of

the imagination to assert that Plaintiffs' "interests are so marginally related to or inconsistent

with the purposes implicit in the statute that it cannot reasonably be assumed that Congress
intended to permit the suit." Id. As such, Plaintiffs have prudential standing.
2.

The Administrative Procedure Act and the Tax Refund Alternative

Defendants characterize Plaintiffs' claim as seeking relief that would declare that they

have no potential tax liability for 2014 under the Minimum Coverage Provision. They argue that
this matter is effectively a tax liability suit and that Plaintiffs must comply with the tax refund
scheme under 26 U.S.C. § 7422 and challenge the tax under the Tucker Act, 28 U.S.C. § 1346(a).

In response, Plaintiffs argue that they should be able to bring suit under the APA and that a
post-enforcement tax liability suit is an after-the-fact remedy that is not an "adequate"
alternative to a pre-enforcement injunctive suit under the APA.
Plaintiffs have the better of these arguments because "the tax refund mechanism is

inferior to an APA suit and fails to provide complete relief to these plaintiffs." Halbig, 2014 WL
129023, at *7. While a tax refund suit would provide an adequate judicial remedy in some ways,
it is inferior to an APA suit because it fails to provide complete relief to these plaintiffs.
"Relegating plaintiffs' claims to a tax refund action would force plaintiffs to make a choice
between purchasing insurance, thereby waiving their claims, or foregoing insurance and
incurring the tax penalty, which they will recover much later, and only if they prevail. They also
will be deprived of the opportunity to obtain prospective certificates of exemption." Id. Further,
10

an "administrative challenge would be futile, as the Secretaryof the Treasury can be expected to
deny plaintiffs' complaint as contrary to the issued IRS regulations."Id.

Moreover, Plaintiffs' claim is not a tax liability suit. In a similar case, Hobby Lobby
Stores, Incorporated v. Sebelius, corporations sought to enjoin the enforcement of an HHS

regulation that required them to provide their employees with health plans that included
preventative care. 723 F.3d 1114, 1127 (10th Cir. 2013). The Tenth Circuit held that the

corporation's suit was not "challenging the IRS's ability to collect taxes

Rather, they [sought]

to enjoin the enforcement of one HHS regulation." Id.; see also Halbig, 2014 WL 129023, at *8.

Similarly, here Plaintiffs are challenging the IRS Rule and not the IRS's ability to collect taxes.s
3. Ripeness
"A claim should be dismissed as unripe if the plaintiff has not yet suffered injury and any
future impact 'remains wholly speculative.'" Doe v. Va. Dep't of State Police, 713 F.3d 745, 758-

59 (4th Cir. 2013) (quoting Gasner v. Bd. of Supervisors, 103 F.3d 351, 361 (4th Cir. 1996)).
Determining whether administrative action is ripe for judicial review requires courts to evaluate

and balance (1) the fitness of the issues for judicial decision and (2) the hardship to the parties
of withholding court consideration. Nat'l Park Hospitality Ass'n v. Dep't of Interior, 538 U.S.

803, 808 (2003). "A case is fit for judicial decision when the issues are purely legal and when
the action in controversy is final and not dependent on future uncertainties." Doe, 713 F.3d at
758 (quoting Miller v. Brown, 462 F.3d 312, 319 (4th Cir. 2006)). The fitness prong prevents a

court from considering a controversy until it is presented in "clean and concrete form." Id.
(citing Rescue Army v. Mun. Ct. of Los Angeles, 331 U.S. 549, 584 (1947)). The hardship prong

is measured by the immediacy of the threat and the burden imposed on the plaintiff. Id.;
Lansdowne on the Potomac Homeowners Ass'n, Inc. v. OpenBand at Lansdowne, LLC, 713

F.3d 187, 199 (4th Cir. 2013). In considering the hardship to be balanced against the fitness of

s It is clear that the Anti-Injunction Act does not preclude Plaintiffs from brining suit for the purpose of
avoiding a potential tax penalty under the Minimum Coverage Provision. Ndr7 Fed'n of Indep. Bus. u.
Sebelius, 132 S. Ct. 2566, 2583-84 (2012).
11

the issues for review, a court may consider the cost to the plaintiff of delaying review. Doe, 713
F.3d at 758; see also id. at 759.
a.

Fitness for Review

Defendants assert that even if Plaintiffs had standing, the suit is not ripe because the IRS
has not yet applied its regulation to Plaintiffs' circumstances. Defendants argue that this matter

is not fit for resolution because the Court cannot determine Plaintiffs' potential liability for the
tax penalty under the Minimum Coverage Provision. Instead, they assert that Plaintiffs' claims

will be ripe after they are taxed because they can then bring a refund action. Plaintiffs reply by
arguing this action is presumptively reviewable and ripe because it is a purely legal claim in the
context of a facial challenge to the IRS Rule.

Plaintiffs' claim is more accurately described as a broad-based attack on an entire
regulatory scheme rather than one based on the possibilities of a particularized application. See
Appalachian Power Co. v. Train, 566 F.2d 451, 458 (4th Cir. 1977) ("If the regulations are

alleged to be invalid as written, we think they must be reviewed expeditiously... if the challenge
is simply to the manner in which the regulations may be applied in a [] proceeding, then the
proper time for review would be on appeal from the issuance or denial....").
In Hodel v. Virginia Surface Mining & Reclamation Association, the Supreme Court

illustrated the difference between general questions that may be ripe for decision upon

enactment of a challenged statute and more specific questions that must await concrete
applications. 452 U.S. 264, 294-97 (1981). In Hodel, the Supreme Court found ripe, and
rejected, a facial challenge to the Surface Mining Control & Reclamation Act of 1977. Id. at 295-

97. However, it found that more specific claims of uncompensated takings of land were not ripe
for review because their determination rested on valuation, estimates of economic impact, and
other factual inquiries regarding particular property. Id. at 296-97. Similarly, in Public Utilities
Commission of the State of California v. United States, the United States argued that California
could not require common carriers to obtain Commission approval before agreeing to carry
12

government shipments at negotiated rates. 355 U.S. 534, 538-39 (1958). The Supreme Court

found the Government's claim ripe and upheld the claim before any actual application of the
administrative procedure at issue. Id. at 539.

As stated previously, Plaintiffs will suffer harm as a result of the IRS Rule because they
would be subject to the Minimum Coverage Provision penalty or would be forced to buy
insurance that they do not want. While the Plaintiffs in this matter are each unique, for the
purposes of standing, the Complaint seeks to invalidate the IRS Rule as a whole.6 Plaintiffs are

challenging the facial validity of the IRS Rule, which is a final agency rule that is beginning to
affect individuals, including Plaintiffs. Halbig, 2014 WL 129023, at *y. As such, Plaintiffs' claim
is fit for review.

b. Hardship Determination

Plaintiffs' claims are within the ambit of clearly defined Fourth Circuit precedent under
Arch Mineral Corporation v. Babbitt and other similar cases. See, e.g., Arch Mineral Corp. v.
Babbitt, 104 F.3d 660 (4th Cir. 1997). In Arch Mineral Corporation, a corporation allegedly

owed fees and penalties to the Office of Surface Mining Reclamation and Enforcement ("OSM")
because it purchased a mine that was delinquent and abandoned. Id. at 662. The corporation's
liability was based on an ownership or control rule that had yet to proceed through all of OSM's
administrative channels. Id. at 666. After receiving letters from OSM declaring liability based a

presumed link between the corporation and a seller, the corporation sued for injunctive and

declaratory relief. Id. OSM argued that the case was not ripe because it had not decided as to
whether to bring an enforcement action against the corporation. Id. at 665-66. However, the
Ninth Circuit determined that, for multiple reasons, there was little doubt that OSM intended to
enter the corporation into the applicant/violator system in the immediate future. Id. at 666.

6 Defendants also contend that, to the extent that Plaintiffs seek a certificate of exemption, this Court is
not empowered to award such an exemption because Plaintiffs must apply to the Virginia Exchange for
that certificate. Defendants' argument is inapposite because this opinion is not in any way a
determination of the validity of Plaintiffs' specific applications.
13

Thus, the corporation was faced with a "Hobson's choice" of being listed on an

applicant/violatorsystemor paying the relevant penaltiesand suing for a refund. Id. at 669 n.2.

In this instance, Plaintiffs risk impending hardship because they face the certainty of
either incurring the cost of buying insurance or paying the penalty pursuant to a violation of the
Minimum Coverage Provision. See Ail. Marine Corps Cmtys., LLC v. Onslow Cnty., N.C., 497 F.

Supp. 2d 743, 749 (E.D.N.C. 2007) ("There is no doubt that injury to plaintiff is more than a
mere potentiality and that if defendants prevail in this action they will immediately proceed to
tax the properties. No further factual development is necessary, and withholding judicial
consideration would cause hardship to the parties and would serve no useful purpose."). This
choice is immediate because Plaintiffs must apply for an exemption in the Virginia Exchange in
early 2014. Even assuming that the financial burden imposed on Plaintiffs is slight, at least some

hardship is present. Moreover, Plaintiffs are challenging the IRS Rule, which is a final agency
rule that is beginning to adversely affect individuals, including Plaintiffs. As such, this matter is
ripe for review. See Halbig, 2014 WL 129023, at *7.

B. Statutory Interpretation
"Chevron deference is a tool of statutory construction whereby courts are instructed to

defer to the reasonable interpretations of expert agencies charged by Congress to fill any gap
left, implicitly or explicitly, in the statutes they administer." Nat'l Elec. Mfrs. Ass'n v. U.S. Dep't

ofEnergy, 654 F.3d 496,504 (4th Cir. 2011) (quoting Am. Online, Inc. v. AT&T Corp., 243 F.3d
812, 817 (4th Cir. 2001)) (internal quotation marks and alterations omitted). Chevron deference
requires a court to undertake a two-part analysis to review an agency's regulation. Chevron
U.SA., Inc. v. Natural Res Def. Council, Inc., 467 U.S. 837 (1984). At the first step, a court must

look to the "plain meaning" of the statute and determine if the regulation responds to it. Id. at
837, 842-43. If it does, the inquiry need not continue. Id. At the second step, if the statute is

silent or ambiguous, a court must determine whether a given regulation is a permissible
construction. Id. at 843; Nat'l Elec. Mfrs. Ass'n, 654 F.3d at 504.
14

l.

Chevron Step One

Under Chevron, if a statute is unambiguous regarding the question presented, the
statute's plain meaning controls. Morgan v.Sebelius, 694 F.3d 535,537 (4th Cir. 2012). In order

to be ambiguous, disputed language must be "reasonably susceptible of different
interpretations." Nat'l R.R. Passenger Corp. v. Atchison Topeka &Santa Fe Ry. Co., 470 U.S.
451, 473 n.27 (1985). At the first step of Chevron, a court may also employ traditional tools of

statutory construction to ascertain whether Congress has expressed its intent regarding the
precise question at issue. Chevron, 467 U.S. at 843 n.9; Nat'l Elec. Mfi's. Ass'n, 654 F.3d at 504.
a. The Meaning of "Exchange" as Used in Section 36B

The statutory provision that authorizes premium tax credits provides that "[i]n the case
of an applicable taxpayer, there shall be allowed as a credit against the tax imposed by this
subtitle for any taxable year an amount equal to the premium assistance credit amount of the
taxpayer for the taxable year." 26 U.S.C. § 36B(a). Section 36B(b)(2) states that the premium
assistance amount determined under the subsection with respect to any coverage month is the

amount equal to the lesser of

(A) the monthly premiums for such month for 1 or more qualified health plans
offered in the individual market within a State which cover the taxpayer, the
taxpayer's spouse, or any dependent (as defined in section 152) of the
taxpayer and which were enrolled in through an Exchange established by the
State under [section] 1311 of the Patient Protection and Affordable Care Act,
or

(B) The excess (if any) of—
(i) the adjusted monthly premium for such month for the applicable second
lowest cost silver plan with respect to the taxpayer, over
(ii) an amount equal to '/w of the product of the applicable percentage and the
taxpayer's household income for the taxable year.
26 U.S.C. § 36B(b)(2). The term "Exchange" is not defined in section 36B. See 26 U.S.C. § 36B.
Plaintiffs assert that the text of section 36B is unambiguous and that the plain meaning

of the phrase "established by the State under [section] 1311," in section 36B(b)(2)(A) indicates

that Congress intended to refer exclusively to state Exchanges, as opposed to federallyfacilitated Exchanges. In essence, Plaintiffs' theory is that: (1) state and federally-facilitated
15

Exchanges are referred to separately under Section 1311 and Section 1321; (2) section

36B(b)(2)(A) referssolelyto Section 1311 when addressing tax subsidies; (3) the omissionof any
mention of Exchanges under 1321 in section 36B(b)(2)(A) was intentional; and (4) the ACA
sometimes refers generically to "an Exchange" or "an Exchange established under this Act" in

other provisions. Defendants argue that the word "Exchange" necessarily means "Exchange
established under [section] 1311" regardless of whether the Exchange is run by a state or is
federally-facilitated.

At first blush, each party presents seemingly credible constructions of the language in
section 36B. Viewed in a vacuum, it seems comprehensible that the omission of any mention of
federally-facilitated Exchanges under section 36B(b)(2)(A) could imply that Congress intended
to preclude individuals in federally-facilitated Exchanges from receiving tax subsidies. However,

when statutory context is taken into account, Plaintiffs' position is revealed as implausible,
b. Plaintiffs' Reading and the Resulting Anomalies in the ACA
Courts have a duty to construe statutes as a whole. See, e.g., Graham Cnty. Soil & Water
Conservation Dist. v. United States ex rel. Wilson, 559 U.S. 280, 290 (2010). Plaintiffs

essentially assert that Congress struck a bargain in which it decided to favor state-run

Exchanges and contemplated that participants in federally-facilitated Exchanges would not
receive tax credits. Plaintiffs aver that Congress's bargain backfired when, to the surprise of all,
many states did not opt to create and run their own Exchanges. As such, Plaintiffs

fundamentally contend that, to the extent that their reading of section 36B harms the

implementation of the ACA, any adverse consequences are the result of a miscalculation by
Congress. In contrast, Defendants argue that their interpretation of section 36B is correct
because it furthers Congress's intent to provide affordable health insurance for all. Defendants

support their argument, in part, by setting forth numerous statutory anomalies that Plaintiffs'

reading would incur. Plaintiffs attempt to mitigate these anomalies by either declaring that they
do not matter or that they are minimally disruptive to the implementation of the ACA.
16

As a threshold matter, the ACA provides that if a State has not established its own

Exchange by January l, 2014, the Secretary of the HHS will create '"such Exchange' - that is, by
definition under the statute, 'an American Health Benefit Exchange established under [section

1311].'" Halbig, 2014 WL 129023, at *13 (quoting 42 U.S.C. § 18041(c); 42 U.S.C. § 300gg9i(d)(2i)). Plaintiffs' reading of section 36B grows even weaker when other sections of the ACA
are taken into account. So as not to belabor the point, the Court will address the more

anomalous results of Plaintiffs' reading of section 36B at length and simply refer in passing to
other provisions.
i.

The Eligibility Provision

Section 1312 of the ACA sets forth provisions regarding which individuals may purchase
insurance from the Exchanges. 42 U.S.C. § 18032. Under Section 1312(a)(1), eligible individuals
may enroll in any qualified plan to which they are eligible. However, Defendants note that part
of the definition of the term "qualified individual" requires that the individual reside in a State
that establishes an Exchange under Section 1311 ("Residency Requirement"). See 42 U.S.C. §
i8032(f)(i)(A)(ii). As such, Defendants aver that, under Plaintiffs' reading of section 36B, no

person in a state with a federally-facilitated Exchange could become a "qualified individual."
First, Plaintiffs argue that as a result of the failure of states to establish their own

Exchanges, it is natural that individuals living in states with federally-facilitated Exchanges
would be ineligible because the eligibility provision only applies to state-run Exchanges under
Section 1311. Second, they aver that, even if the eligibility provision is read to apply to persons in

federally-facilitated Exchanges, the Residency Requirement should be construed as inapplicable
to people in states with federally-facilitated Exchanges.
Plaintiffs' insistence that the Court should read the Residency Requirement out of the

ACA or not apply Section 1312 to federally-facilitated Exchanges is a telltale sign that their

17

reading of section 36B is wrong.? If construed literally, the eligibility provision would be
nullified when applied to states with federally-facilitated Exchanges, rendering the provision
superfluous.

ii.

Reporting Requirements Under Section 36B(f)(3)

Section 36B(f)(3) directs: "[e]ach Exchange (or any person carrying out 1 or more
responsibilities of an Exchange under section 1311(f)(3) or 1321(c) of the Patient Protection and

Affordable Care Act)" to provide certain information to the Secretary and to the taxpayer with
respect to any health plan provided through the Exchange including:
(A) The level of coverage described in section 1302(d) of the Patient Protection
and Affordable Care Act and the period such coverage was in effect.
(B) The total premium for the coverage without regard to the credit under this
section or cost-sharing reductions under section 1402 of such Act.
(C) The aggregate amount of any advance payment of such credit or reductions
under section 1412 of such Act.
(D) The name, address, and TIN of the primary insured and the name and TIN of
each other individual obtaining coverage under the policy.
(E) Any information provided to the Exchange, including any change of
circumstances, necessary to determine eligibility for, and the amount of, such
credit.

(F) Information necessary to determine whether a taxpayer has received excess
advance payments.
26 U.S.C. § 36B(f)(3).

Defendants assert that under Plaintiffs' reading, federally-facilitated Exchanges would

perform an "empty act" because they would have to report the aggregate amount of any advance
payment of subsidies as zero, and would not have to report any individualized information
necessary to determine eligibility for subsidies. Plaintiffs counter with a collective "so what?"

(Pis.' Opp'n Mot. Dismiss 10,12). They aver, without support, that this provision is an example

of sensible draftsmanship because otherwise Congress would have had to draft separate sections
detailing reporting requirements.

7Various other provisions of the ACA also reflect an assumption that a state Exchange under Section 1311
exists in each state. See, e.g., 42 U.S.C. § I396a(gg); 42 U.S.C. § i397ee(d)(3)(B).
18

Plaintiffs' explanations are unpersuasive. Under their interpretation, section 36B(f)
would be superfluous with respect to federally-facilitated Exchanges under Section 1321 because
such Exchanges would not be authorized to deliver tax credits. "Section 36B(f) thus indicates

that Congress assumed that premium tax credits would be available on any Exchange, regardless

of whether it is operated by a state under [Section 1311] or by HHS under [Section 1321]."
Halbig, 2014 WL 129023, at *15.
iii.

Medicaid "Maintenance Efforts" and Clear Notice

Under the ACA, participating states shall maintain their then-existing eligibility

standards, until the effective date of the ACA's Medicaid eligibility expansion provisions. 42
U.S.C. § i396a(a)(io)(A)(i)(VIII). This "maintenance of effort" provision directs states, as a
condition for the receipt of federal Medicaid funds, not to impose any "eligibility standards,
methodologies, or procedures" under their Medicaid state plan, or any applicable waivers, that
are more restrictive than the standards that the state had in place as of the date the ACA was
enacted. 42 U.S.C. § i396a(gg)(i). This condition applies until "the date on which the Secretary
determines that an Exchange established by the State under [Section 1311] is fully operational."
Id. Under Plaintiffs' reading of section 36B, a state with a federally-facilitated Exchange would

never be relieved of this maintenance of effort requirement. Specifically, under Plaintiffs'
reading, states would be obligated by the ACA to maintain their Medicaid program in its current
form indefinitely because federally-facilitated Exchanges would never be "fully operational"
under Section 1311. Therefore, the HHS Secretary would never be able to release the "condition."
This would mean that state's Medicaid programs would be frozen until they opted to create their

own state-run Exchange under Section 1311, effectively forcing the states to take action.
Pursuant to the "Arlington rule," the federal government must provide clear notice

before it uses its Spending Clause powers to impose substantive conditions or obligations on
States that they would not otherwise be required by law to observe. Arlington Cent. Sch. Dist.

Bd. of Ed. v. Murphy, 548 U.S. 291, 298 (2006). "The reason for requiring notice is simple:
19

States cannot knowingly accept conditions of which they are unaware or which they are unable
to ascertain." Sossamon v. Texas, 131 S. Ct. 1651,1664 (2011) (quotingArlington Cent. Sch. Dist.
Bd. ofEd., 548 U.S. at 296) (internal quotation marks omitted).

Plaintiffs cite to various examples of the federal government conditioning funds on

desired actions (or as Plaintiffs put it, "a too good to turn down" offer). (Pis.' Opp'n Mot.
Dismiss 22). However, Defendants' argument based on the Medicaid "maintenance of effort" is

fundamentally different from one regarding the mere conditioning of federal funds on desired
actions. As Defendants suggest, this potential condition on state's power over their Medicaid

programs could be unconstitutional under any number of legal arguments including the

Arlington rule. This anomalous consequence of Plaintiffs' reading of the ACA and section 36B
indicates that Plaintiffs' interpretation is wrong.8
c. Congressional Intent and Legislative History

In an attempt to divine Congress's intent, both parties cite to various legislative history

materials including, but not limited to, past versions of the ACA, committee reports, reports by
the Congressional Budget Office ("CBO") and Joint Committee on Taxation ("JCT"), and finally,
even news media. It is firmly established that legislative history is one of the traditional tools of
interpretation to be consulted at Chevron's step one. Morgan, 694 F.3d at 538-39; see also Nat'l

Elec. Mfrs. Ass'n, 654 F.3d at 504-05.

The legislative history of the ACA is long and complex, and many of the past versions of
the ACA are not relevant to the current iteration of the ACA. See generally John Cannan, A
Legislative History of the Affordable CareAct: How Legislative Procedure Shapes Legislative
History, 105 Law Libr. J. 131, 136 (2013). The very structure of the ACA indicates that "the

8 Other persuasive anomalies arise under other sections including, but not limited to, 42 U.S.C. §
i397ee(d)(3)(C) (regarding children's health insurance plans); 42 U.S.C. § 18031(d)(4)(G) (regarding the
creation of an electronic calculator to determine compare the cost of different coverage options); 42
U.S.C. § i8o3i(d)(4)(I) (regarding information transmission to the IRS); 42 U.S.C. § 18083 (relating to
applications made redundant or useless); 42 U.S.C. § i397ee(d)(3)(B) (requiring HHS to determine, for
each state, whether health plans offered through "an Exchange established by the State under [section
1311]" provide benefits for children comparable to those offered in the state's CHIP plan).
20

Senate passed a bill that provided 'flexibility' to each state as to whether it would operate the

Exchange." Halbig, 2014 WL 129023, at *17 (citing 42 U.S.C. § 18041). The relevant legislative
history indicates that Congress did not expect the states to turn down federal funds and fail to
create and run their own Exchanges. Instead, Congress assumed that tax credits would be

available nationwide because every state would set up its own Exchange. See, e.g., CBO, An
Analysis of Health Insurance Premiums Under the Patient Protection and Affordable Care Act

(Nov. 30, 2009) (discussing Exchanges generally when calculating anticipated subsidies across
all states); Letter from Douglas W. Elmendorf, Director, CBO, to Rep. Darrell Issa, Chairman,
House Comm. on Oversight & Gov't Reform (Dec. 6, 2012) ("To the best of our recollection, the

possibility that those subsidies would only be available in states that created their own

exchanges did not arise during the discussions CBO staff had with a wide range of Congressional
staff when the legislation was being considered.").
What is clear is that there is no direct support in the legislative history of the ACA for

Plaintiffs' theory that Congress intended to condition federal funds on state participation.
Halbig, 2014 WL 129023, at *i6 (holding that there is no evidence in the legislative record that
the House, the Senate, any relevant committee of either House, or any legislator ever
entertained the idea of conditioning federal tax credits upon state participation in the creation of
the Exchanges). As previously discussed, had Congress intended to condition tax subsidies it

would have needed to provide clear notice. While on the surface, Plaintiffs' plain meaning
interpretation of section 36B has a certain common sense appeal, the lack of any support in the
legislative history of the ACA indicates that it is not a viable theory. The legislative history of the
ACA "reveals an intent to grant states the option of establishing their own Exchanges, rather
than an intent to coerce or entice states into participating." Halbig, 2014 WL 129023, at *17.
Further, the text of the ACA and its legislative history evidence congressional intent to ensure

broad access to affordable health coverage for all. See, e.g., 42 U.S.C. § i8o9i(2)(D)-(G); S. Rep.
No. 111-89, at 4; see also H.R. Rep. No. 111-443, vol. II, at 977.
21

2. Chevron Step Two and Statutory Interpretation

Assuming for the sake of argument that the text of section 36B is ambiguous, Plaintiffs'

arguments fail at Chevron step two. Chevron deference is afforded only when an "agency's
interpretation is rendered in the exercise of [its] authority [to make rules carrying the force of
law]." A.T. Massey Coal Co. v. Barnhart, 472 F.3d 148,166 (4th Cir. 2006) (citing United States
v. Mead Corp., 533 U.S. 218, 226-27 (2001)). Defendants assert that the HHS and IRS should

receive Chevron deference in their interpretation of section 36B and the ACA because the ACA is

a "shared-administration" statute and both HHS and the Department of the Treasury are in full
agreement about how to interpret the word "Exchanges" within the context of section 36B.

The ACA is a type of shared administration statute in which the HHS and Department of

the Treasury perform different functions. Each agency has specifically defined authority.9 Under
section 36B(g), Congress charged the Department of the Treasury with prescribing "such
regulations as may be necessary to carry out the provisions of this section." 26 U.S.C. § 36B(g).

Under Section 1321(a)(1), Congress charged HHS with setting the standards for meeting the
requirements of the section regarding the operation and enforcement of Exchanges and related
requirements. 42 U.S.C. § 18041(a)(1). The Department of the Treasury and HHS, however,

share some joint responsibility for administering parts of the Act regarding implementation of
the tax credit scheme. See 42 U.S.C. § 18082(a) ("The Secretary [of HHS], in consultation with

the Secretary of the Treasury, shall establish a program under which" advance determinations
and payments of tax credits are made.). The two agencies "work in close coordination ... to

release guidance related to Exchanges," and HHS has promulgated its own regulations
providing that participants on both state and federally-facilitated Exchanges are eligible for
advance payments of the credits. See 45 C.F.R. § 155.20; Health Insurance Premium Tax Credit,

9 In fact, the ACAcontains more than forty provisions that require, permit, or contemplate rulemaking
authority by federal agencies. See CBO, Regulations Pursuant to the Patient Protection and Affordable
Care Act (P.L. 111-148) (April 13, 2010).
22

76 Fed. Reg. 50,931-32 (Aug. 17, 2011). The IRS has imported HHS's definition of "Exchange"
into the IRS Rule. See 26 C.F.R. § i.36B-i(k).

In Collins v. National Transportation Safety Board, the D.C. Circuit explained that

there are three types of shared-enforcement statutes: (1) generic statutes that have "broadly
sprawling applicability [that] undermines any basis for deference"; (2) "statutes where agencies
have specialized enforcement responsibilities but their authority potentially overlaps—thus
creating risks of inconsistency or uncertainty"; and (3) "statutes where expert enforcement
agencies have mutually exclusive authority over separate sets of regulated persons." 351 F.3d
1246, 1253 (D.C. Cir. 2003). For the most part, the HHS and the Department of the Treasury
have mutually exclusive authority under the ACA. Such authority "does not work against the
application of Chevron deference." Id. Accordingly, the IRS is afforded Chevron deference in its
interpretation of section 36B. Additionally, the HHS is afforded Chevron deference in its
interpretation of the ACA. Moreover, in cases where "the subject matter of the statute falls
squarely within the agencies' areas of expertise, and the Regulations were issued as a result of a

statutorily coordinated effort among the agencies, Chevron is the governing standard." Halbig,
2014 WL 129023, at *12 (quoting Individual Reference Servs. Grp., Inc. v. FTC, 145 F. Supp. 2d
6, 24 (D.D.C. 2001), ajfd, Trans Union LLC v. FTC, 295 F.3d 42 (D.C. Cir. 2002)). As such,

Chevron deference applies here, where both the HHS and the Department of the Treasury,

through the IRS, have coordinated and created a consistent definition of "Exchange" as it
applies to the IRS Rule and related HHS regulations.
Even if this Court assumes that Plaintiffs' interpretation of the ACA, section 36B, and
related HHS regulations is reasonable, Plaintiffs have not met their burden to show that

Defendants' contrary reading is unreasonable. In light of the applicable legislative history of the

ACA and the above discussion of the anomalous consequences of Plaintiffs' reading of the ACA,
Defendants at the very least have presented a reasonable interpretation of HHS's regulations
and, thus, section 36B.
23

IV.

CONCLUSION

For the above reasons, Defendants' Motion to Dismiss will be GRANTED. All remaining
Motions will be DENIED AS MOOT.

Let the Clerksend a copy of this Memorandum Opinion to all counsel of record.
An appropriate Order shall issue.

JsL

James R. Spencer

United States District Judge
/A
ENTERED this

M.

.day of February 2014.

24