United States District Court, E.D. Virginia, Richmond Division
[Copyrighted Material Omitted]
For David King, Douglas Hurst, Brenda Levy, Rose Luck, Plaintiffs: Jonathan Andrew Berry, LEAD ATTORNEY, Michael Anthony Carvin, Jones Day, Washington, DC; Jacob Moshe Roth, PRO HAC VICE, Jones Day (DC-NA), Washington, DC; Walter Dekalb Kelley, Jr., Jones Day (DC), Washington, DC.
For Kathleen Sebelius, in her official capacity as U.S. Secretary of Health and Human Services, United States Department of Health and Human Services, Jacob Lew, in his official capacity as U.S. Secretary of the Treasury, United States Department of the Treasury, Internal Revenue Service, John Koskinen, in his official capacity as Commissioner of Internal Revenue, Defendants: Elizabeth Catherine Wu, LEAD ATTORNEY, U.S. Attorney Office (Richmond), Richmond, VA; Joel McElvain, LEAD ATTORNEY, Department of Justice Federal Programs Branch, Washington, DC; Jonathan Holland Hambrick, Office of the U.S. Attorney, Richmond, VA.
For American Hospital Association, Amicus: Jessica Lynn Ellsworth, LEAD ATTORNEY, Hogan Lovells U.S. LLP (DC), Washington, DC.
For Families USA Amicus: Kristen E. Ittig, Arnold & Porter LLP (VA), McLean, VA.
For Commonwealth of Virginia, Amicus: Earle Duncan Getchell, Jr., LEAD ATTORNEY, Office of the Attorney General (Richmond), Richmond, VA.
For Jonathan H. Adler, Michael F. Cannon, Amicus: Mark Wendell DeLaquil, Baker & Hostetler LLP, Washington, DC.
James R. Spencer, United States District Judge.
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 subsidies  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 DENY AS 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 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/health-insurance-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. § 5000A(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. § 5000A(c)(1)(B)). Certain individuals may be exempt from the mandate to maintain a minimum level of health insurance under 26 U.S.C. § 5000A(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. § 5000A(e)(1)(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)(1)(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. § 5000A(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, 30,377-78, 30,387-89 (May 23, 2012); 26 C.F.R. § 1.36B-2(a)(1). 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. § 1.36B-1(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 Background 
1. 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.
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 Levy
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 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, ...