Kudlow's Corner

Oklahoma lawsuit to derail Obamacare?

Legal fights to derail health care?
Legal fights to derail health care?

Democrats contend that the Affordable Care Act is settled law and have told Republicans to get over it, but now a fresh wave of legal challenges threaten to chip away at the president's signature achievement.

The U.S. Supreme Court issued a ruling in 2012 that upheld most of Obamacare, including a core element of the law, the individual mandate that requires people to buy insurance or face a penalty. The justices said that portion of the law was legal because the penalty for failing to get insurance amounts to a tax, but now those federal penalties have become a legal sticking point.

Perhaps the most closely watched lawsuits are those in the District of Columbia, Virginia, Indiana and Oklahoma, challenging the law's insurance subsidies and penalties, which are essential to make Obamacare affordable in the first place.

(Read more: 'Hit the reset button' for Obamacare: Democrat)

The Affordable Care Act, which was passed by Congress and signed by President Barack Obama in 2010, provides federal subsidies and threatens tax penalties on individuals and businesses in state health-care exchanges, but as Oklahoma Attorney General Scott Pruitt told CNBC on Tuesday night, the law does not provide for subsidies within the federal exchange.

"Congress was very clear from the very beginning, they wanted states to be involved and they wanted to incentivize that, by saying that these subsidies would only flow through state exchanges. The administration miscalculated, 34 states have said no," Pruitt told "The Kudlow Report."

"The IRS has come on in afterwards and said 'we'll fix that,' adopting a rule that says whether a state adopts an exchange or not doesn't matter. They're going to issue the subsidies in all 50 states, and the corresponding penalties."

Proponents of Obamacare say the law intended for the subsidies to apply nationwide, but a federal judge ruled this summer that Oklahoma's attorney general had the legal standing to sue the federal government over its handling of federal subsidies in federal exchanges.

"Our lawsuit is about giving meaning to the statute. Congress knew that they could not commandeer, they could not require the states to set up the exchanges, they had to provide this carrot." Pruitt told Larry Kudlow. "And because of this miscalculation by the administration, on the number of states that would participate, they've now come in by administrative fiat to try and fix it."

(Read more: Physician says Obamacare is causing 'chaos' for doctors)

If Oklahoma's lawsuit is successful, millions of people in 34 states could be denied the government subsidies designed to help low- and middle-income people pay their health-insurance premiums starting next year. Pruitt says he's not challenging the constitutionality of Obamacare, but rather how the executive branch has unilaterally changed the implementation of the law after it passed.

"It's fifth-grade civics. If a law needs to be changed, Congress has to do it. An administrative agency exists to administrate a law, not to modify it, not to change it, not to improve upon it, but to administer it as Congress has passed it," Pruitt says.

"Judges recognize that rule of law matters and that our system of government works, our checks and balances work, only when Congress is the only branch legislating. This is something that is very important to the structure of the ACA, but the rule of law also, and I'm hoping the courts will recognize that."

Neither the White House nor Justice Department responded to requests for comment on the pending Oklahoma case.

Oral arguments in a similar, private lawsuit Halbig v. Sebelius got underway in a D.C. federal district court on Tuesday and another case in Virginia could be decided by the end of the year. The U.S. Supreme Court also recently agreed to consider two cases in which business have objected to covering birth control for employees on religious grounds.

—By CNBC's Ben Thompson. The Associated Press contributed to this report. Follow him on Twitter @BenThompson00.