- Associated Press - Wednesday, May 14, 2014

RICHMOND, Va. (AP) - A federal appeals court heard arguments Wednesday in a lawsuit claiming the Obama administration’s health care reform law provides tax subsidies only to people who buy insurance through state-run exchanges.

Four Virginia residents are challenging an Internal Revenue Service regulation that makes the subsidies available to low- and moderate-income residents regardless of whether they buy policies through state exchanges or one established by the federal government. Virginia is among 34 states that chose not to establish its own health insurance exchange.

U.S. District Judge James Spencer upheld the IRS regulation in February, and the residents appealed. A federal judge in the District of Columbia ruled the same way in a similar lawsuit in January.

Michael A. Carvin, an attorney for Virginia plaintiffs, told a three-judge panel of the 4th U.S. Circuit Court of Appeals that the Affordable Care Act clearly states that the credits are available to reduce the cost of policies purchased “from an exchange established by the state.” He said the provision was intended to encourage states to establish exchanges, but after most states declined the government adopted a broader interpretation.

Government attorney Stuart Delery argued a reading of the entire law makes it clear that Congress intended for the tax credit to be available on both federal and state exchanges.

“It is not plausible that Congress expected these federal tax credits to be available only on some but not all exchanges,” he said.

The plaintiffs are challenging the IRS regulation because without the tax subsidies, they would qualify for a hardship exemption from the law’s requirement that they either buy insurance or pay a penalty.

“They don’t want to be forced to buy a product they don’t like,” Carvin said.

Judge Andre Davis, who served on the three-judge panel that rejected Virginia’s lawsuit challenging the health care law in 2011, noted the sweeping effect a ruling in Carvin’s favor would have in a five-state judicial circuit where only Maryland operates its own exchange.

“You want to kick millions of people in four states off the insurance rolls so your clients don’t have to pay a few dollars extra?” Davis asked.

Carvin said his clients would “suffer classic pocketbook injury” if the IRS rule stands.

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