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Indiana government, school districts sue over IRS healthcare rule

By Terry Baynes

(Reuters) - The state of Indiana and 15 of its public school districts sued the U.S. government on Tuesday, challenging its use of federal tax subsidies and penalties to implement President Barack Obama's 2010 healthcare law.

The lawsuit claims that a rule issued in 2012 by the Internal Revenue Service that allows the federal government to provide tax subsidies for individuals to buy health insurance on federal exchanges contradicts what Congress originally intended in the Affordable Care Act, the law also known as Obamacare.

"The IRS rule injures the State by interfering with its statutorily and constitutionally protected policy choice not to create an Exchange," said the lawsuit, filed in the U.S. District Court for the Southern District of Indiana.

The lawsuit is one of at least three challenging the IRS rule, including one filed by Oklahoma's Republican Attorney General Scott Pruitt and another brought by a group of private employers in Washington, D.C.

If one of the lawsuits succeeds, it could pose a serious problem for the implementation of the healthcare law, as 34 states have opted out of creating their own exchanges, requiring the federal government's involvement.

A Justice Department spokeswoman declined to comment.

Republicans oppose Obama's healthcare restructuring, arguing that it is a massive government intrusion into private medicine that will cause insurance premiums to jump.

The lawsuits raise claims that the U.S. Supreme Court did not take up in June 2012 when, by a 5-4 vote, it upheld most of the law, including a requirement that individuals buy health insurance or pay a penalty. The requirement is scheduled to take effect on January 1.

The healthcare law states that individuals who obtain health insurance through an exchange "established by a state" qualify for a federal tax subsidy.

In their lawsuit, Indiana and its school districts argue that the purpose of that provision was to encourage states to set up their own exchanges. In 2012, however, the IRS added in its rule that the tax subsidies would be available to people who bought insurance on both state and federal exchanges.

As a result of the IRS rule, employers in Indiana, including state government employers, face significant penalties that are triggered when an individual worker receives a federal tax subsidy for purchasing insurance on the federal exchange. The employer mandate is scheduled to take effect on January 1, 2015.

The Indiana lawsuit claims that applying the subsidies and penalties in the state violates the Affordable Care Act and infringes on Indiana's right to state sovereignty under the U.S. Constitution's Tenth Amendment.

To avoid the risk of employer penalties, the state and its school districts are cutting the hours of part-time employees, including teachers, so that they do not qualify for health benefits under the employer mandate, the complaint said.

The Indiana plaintiffs have asked the court to block the IRS rule from taking effect and prevent the federal government from enforcing the healthcare law in Indiana.

The case is State of Indiana et al v. Internal Revenue Service et al, U.S. District Court for the Southern District of Indiana, No. 13-1612.

(Reporting by Terry Baynes in New York; Editing by Ted Botha and Paul Simao)

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