This morning, the United States Supreme Court (the "Court") issued its long-awaited decision regarding the constitutionality of President Obama's health care reform law, the Affordable Care Act.

In today's ruling regarding Obama's signature domestic policy achievement, authored by Chief Justice John Roberts in a 5-4 decision, the Court declared that the majority of the law was constitutional, a major victory for President Obama and congressional Democrats and a ruling that ensures continued implementation of the law.

Interestingly, the Court did not rule that the individual mandate was constitutional under the Commerce Clause of the Constitution, but under the taxing authority vested by the Constitution to Congress. A different 7-2 majority of the Court did find that the Medicaid expansion as written would have been unconstitutionally coercive, but the Court remedied that problem by removing the ability of the federal government to take away existing Medicaid funding if states do not expand their programs in accordance with the Affordable Care Act's requirements. The decision thus could impact the ability of nearly 16 million individuals expected to receive health insurance coverage under the Medicaid program if individual States choose not to expand their Medicaid programs. These individuals might be able to obtain coverage through the health insurance exchanges.

The Court's decision will have far-reaching impacts on the US health care system, employers, businesses, and consumers, and the upcoming November 6 elections.

The Court ruled on the following issues:

  • Anti-Injunction Act. The statutory construction of the penalty imposed on those who do not have insurance did not render it a "tax" for purposes of the Anti-Injunction Act
  • Individual Mandate. The Court upheld the penalty for failure to obtain health insurance as a constitutional use of Congress's taxing powers, effectively upholding the individual mandate.
  • Severability. The Court did not need to rule on the issue of severability due to upholding the individual mandate.
  • Medicaid Expansion. The Court found the Medicaid expansion to be constitutionally coercive of states but invalidated the federal government's ability to withhold existing Medicaid funds for states that choose not to comply with the Affordable Care Act's Medicaid expansion.

Background on Lawsuit

On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act (Pub. L. No. 111-148). One week later, the Health Care and Education Reconciliation Act of 2010 (Pub. L. No. 111-152) was enacted. Together, these two laws comprise the Affordable Care Act. Twenty six states brought suit against the Department of Health and Human Services ("HHS") challenging the constitutionality of the law, among dozens of other lawsuits that were filed across the country. Over three days this March, the Court heard an unprecedented six and a half hours of oral argument to determine the constitutionality of the law. The following reviews the key issues debated before the Court and their final disposition.

Anti-Injunction Act

The Anti-Injunction Act prevents a taxpayer from challenging a tax in court before the taxpayer has been assessed the tax. The individual mandate becomes effective in 2014 and penalty payments will not be collected by the Internal Revenue Service until 2015. Both the Obama Administration and the states agreed that the Anti-Injunction Act does not preclude the Court's consideration of the case, however, the Court appointed counsel to argue for the application of the Anti-Injunction Act. The Court-appointed counsel argued that the Court does not have jurisdiction because the individual mandate penalty operates as a tax (i.e., it is assessed and collected in the same manner as an assessable penalty under the Internal Revenue Code). Thus, because the penalty essentially is a tax, court-appointed counsel argued that the challenge to its constitutionality is not ripe and the Court does not have jurisdiction to hear the case.

Court's conclusion: The Court construed the Anti-Injunction Act ("AIA") narrowly, holding that the statutory construction of the penalty imposed on those who do not have insurance did not render it a "tax" for purposes of the AIA. Nevertheless, as noted below, the Court also held that the nature of the penalty and its imposition were both constitutional and within Congress's power under its taxing authority.

Individual Mandate

The Affordable Care Act requires most US citizens to obtain acceptable health insurance coverage (i.e., "minimum essential coverage"), effective January 1, 2014. The individual mandate will be enforced by imposing annual penalties on individuals who fail to demonstrate that they have obtained and maintained minimum essential coverage throughout a given year. While the states contended that the individual mandate exceeds Congress's power to regulate interstate commerce, the Administration argued that the guaranteed issue and community rating insurance reforms require the individual mandate to be effective in operation. Thus, the mandate is a necessary and proper use of the Constitution's Commerce Clause and plays a critical role in a comprehensive regulatory scheme enacted by Congress.

Court's conclusion: The penalty for failure to obtain health insurance is a constitutional use of Congress's taxing powers.

Severability

The Affordable Care Act does not contain a severability clause. The Court was tasked with determining whether certain parts of the law are not severable from the individual mandate (and thus must fall with the mandate), or whether the individual mandate is severable from all other provisions of the Affordable Care Act. The Administration argued that the guaranteed issue and community rating insurance reforms should be eliminated if the individual mandate is declared unconstitutional, believing that these two reforms, absent a mandate to purchase insurance, would lead to substantial health insurance cost increases and reduced coverage (commonly known as the "death spiral" of rising premiums). The states argued that the entire Affordable Care Act should be declared invalid if the individual mandate is deemed unconstitutional, claiming that Congress would not have passed the law without the individual mandate. The Court appointed counsel to argue that the individual mandate alone is severable from the rest of the law. Under this argument, severability is presumed unless it is evident that Congress would not have enacted the law independently of the invalidated component.

Court's conclusion: Because the Court upheld the individual mandate, it was not required to, and did not rule on, the issue of severability.

Medicaid Expansion

Under the Affordable Care Act, beginning January 1, 2014, states must provide Medicaid coverage to individuals and families below 138% of the federal poverty level. The federal government will cover 100% of the added cost in 2014, 2015, and 2016. States will be required to cover 5% of the cost in 2017, transitioning to 10% in 2020 and beyond. The states argued that the mandatory Medicaid expansion is unconstitutionally coercive. If states do not agree to expand Medicaid coverage under the Affordable Care Act's requirements, they would lose all federal matching payments under the program, resulting in billions of dollars of lost funds and making it financially untenable for states to operate a Medicaid program. Thus, the only legitimate "option" for states is to agree to the expansion and the federal funds that flow with it. The Administration countered that the Affordable Care Act requires the federal government to finance the vast majority of the added costs of the Medicaid expansion and legal precedent has consistently held that Congress's spending power includes the power to fix the terms on which funds will be disbursed to the states.

Court's conclusion: While the expansion of Medicaid is unconstitutionally coercive, the Court resolved that issue by eliminating the federal government's ability to withhold existing Medicaid funds for states that choose not to comply with the Affordable Care Act's Medicaid expansion.

Quick Take: Sector Impact of Court's Decision

Health Care Sector

Insurance companies. The individual mandate was a compromise to the insurance reforms that require companies to offer coverage to all applicants regardless of health status, age, and without lifetime or annual limits on medical benefits (among other reforms). Insurance companies argued that without the mandate, people would wait to get insurance once they needed it, taking younger and healthier people out of the insurance pool and substantially raising premiums. Because the mandate was held constitutional, insurance companies stand to gain younger and healthier enrollees.

Medicare providers. In general, most providers who treat Medicare beneficiaries received provider reimbursement cuts to help pay the Affordable Care Act's coverage expansions. The law also contains numerous delivery system reforms and pilot programs designed to increase the quality, and reduce the cost of, care. The Medicare provisions of the Affordable Care Act remain in place, including the continued implementation of the Medicare Shared Savings Program and Pioneer Accountable Care Organizations.

Hospitals. The hospital trade associations agreed to annual Medicare reimbursement cuts and reduced Medicare and Medicaid DSH payments in exchange for an expected influx of newly-insured patients and reduced uncompensated care. While hospitals will gain newly-insured through private insurance, the number of estimated Medicaid beneficiaries may be lower in practice.

Pharmaceutical manufacturers. The prescription drug industry agreed to various reimbursement and monetary changes under Medicare and Medicaid, similar to the hospital industry, with the belief that the 32 million newly-insured individuals would equate to greater volume to offset any loss associated with these changes. These provisions include increased Medicaid drug rebates, expansion of the 340B drug discount program, and the Medicare Part D "Coverage Gap Discount Program," which eventually will fill in the Part D doughnut hole. If fewer Americans are insured due to the Medicaid expansion than previous estimates, pharmaceutical manufacturers will lose more customers, yet pay fewer Medicaid rebates.

Medicare Advantage organizations. Medicare Advantage plans received substantial cuts, most of which have not been fully implemented. To date, the cuts that have been realized have not resulted in fewer Medicare Advantage enrollees and a controversial quality bonus program has offset a non-inconsequential percentage of these cuts. Medicare Advantage plans will continue to see implementation of the Affordable Care Act.

Medicare Part D plans. The Medicare prescription drug benefit (Part D) did not see substantial negative changes under the Affordable Care Act. The closing of the doughnut hole and offering 50% discounts on brand name drugs under the Coverage Gap Discount Program comes at the expense of the pharmaceutical industry. Medicare Part D plans will continue to see implementation of the Affordable Care Act.

Medicaid program and Medicaid managed care plans. The Medicaid expansion under the Affordable Care Act is estimated to be responsible for half of the newly-insured once the law is fully implemented. As states increasingly rely on managed care to help control the costs of their Medicaid programs, these organizations stand to gain millions of new customers. Because the Court invalidated the penalty for states that do not comply with the Medicaid expansion, it is unclear whether certain states (especially the ones objecting to the Affordable Care Act) will expand their Medicaid programs, despite the fact that these expansions are largely funded with federal dollars. A reduced Medicaid expansion would result in fewer enrollees for Medicaid managed care plans.

Medical device manufacturers. The Affordable Care Act imposes a 2.3% excise tax on manufacturers and importers of medical devices. This provision was designed to raise revenue to help pay for the coverage expansions under the law. This excise tax will go into effect in 2013, unless Congress intervenes with legislation.

Taxes

The Affordable Care Act contains many new taxes on health care industry sectors and wealthier taxpayers. As with the provider cuts and other non-health related provisions in the law, these new taxes are designed to increase revenue to pay for the increased costs of providing health insurance to 32 million people (namely, the Medicaid expansion, premium tax credits, and cost-sharing reductions). These taxes, including the Court's determination that the individual mandate's penalty is a tax, will go into effect as originally scheduled absent congressional action.

Small Businesses

The Affordable Care Act creates health insurance exchanges to operate in each state beginning in 2014. Within each health insurance exchange, is a small business health options (SHOP) exchange, tailored to provide coverage to small businesses. The Affordable Care Act also contains a tax credit for certain small businesses to offset the cost of providing coverage. Small business employees will be required to obtain coverage even though their employers are not required to offer coverage. These provisions remain in effect.

Large Employers

Employers with greater than 50 employees will be required to provide acceptable health insurance to their employees beginning in 2014 (and their employees will be required to accept it). Employers also will be required to report on numerous elements of the health coverage offered to employees. These provisions remain in effect.

Consumers

Many of the health insurance reforms are geared toward making health insurance accessible to any prospective consumer. Subsidies, the exchanges, the Medicaid expansion, and delivery system and insurance reforms, among other provisions of the law, are designed to make health insurance coverage affordable for consumers. While the mandate, subsidies, and delivery system and insurance reforms remain constitutional, the penalty mechanism for states that do not expand their Medicaid programs was removed. Thus, while the Medicaid expansion remains in effect, the federal government may not penalize states by withholding funding for a state's entire Medicaid program. It is unclear what impact this will have on states (i.e., whether they will refuse to expand Medicaid), and the subsequent impact on such a state's consumers.

Political Impact of Decision

The Affordable Care Act was one of the key political issues impacting the 2010 mid-term elections and a large factor assisting the Republican takeover of the House of Representatives. The Court's decision and the continued politicization of the Affordable Care Act ensures that health reform will continue to play a role in the November 6 elections. The congressional response to the Court's decision, and whether President Obama remains in office or the Romney Administration comes to power in 2013 will shape the future of health care reform. Because of the Court's holding, both sides of the aisle and stakeholder groups of every stripe will step up their efforts to translate the Court's decision into an electoral victory. The outcome of this strategy is a complete unknown as most political observers expect the economy to primarily dictate who wins and who loses the elections.

For more information, please contact one of the key contacts listed to the right or your regular SNR Denton professional.

Webinar: Supreme Court Decision Analysis

The Supreme Court's decision on the constitutionality of the Affordable Care Act will impact the entire health care sector, small and large businesses, and individuals, and is likely to have far-reaching effects on the political makeup of Congress and the White House.

Please join us for a webinar on July 2 featuring firm lawyers and professionals, who will provide an overview of this landmark decision and an examination of the ruling's impact.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.