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Supreme Court upholds Affordable Care Act’s individual mandate in 5-4 vote

In a 5-4 ruling, the Supreme Court has held the individual mandate provision of the Affordable Care Act to be constitutional (National Federation of Independent Business v Sebelius, June 28, 2012, Roberts, J). The landmark health care reform legislation was not upheld as a valid exercise of Congress’s power under the Constitution to regulate interstate commerce. Instead, the mandate, codified as Sec. 5000A of the Internal Revenue Code, was upheld as within Congress’s power under the Taxing Clause.

“The Affordable Care Act’s requirement that certain individuals pay a financial penalty for not obtaining health insurance may reasonably be characterized as a tax. Because the Constitution permits such a tax, it is not our role to forbid it, or to pass upon its wisdom or fairness,” Chief Justice Roberts wrote for the majority. Roberts was joined by Justices Ginsburg, Breyer, Sotomayor, and Kagan to reach this result.

Implementation of the sweeping reform of the U.S. health care system will continue in the wake of the Supreme Court’s vote. In the short term, the Court’s ruling decides the fate of the Affordable Care Act (P.L. 11-148) — at least until November. Those taking the longer view might come to see the debate over the individual mandate as the latest battle in the Court’s long-running dispute over the power of Congress to enact sweeping legislation via its Commerce Clause authority.

Sweeping reform challenged. Under the ACA, starting in 2014 most Americans are required to carry health insurance, either through their employer; a public program such as Medicare, Medicaid or TRICARE; or by purchasing health insurance as an individual in the private health insurance market. Individuals purchasing insurance will have a choice of health plans to purchase, which will vary in coverage and price, with all plans having a minimum essential benefits package. Any individual required under the law to purchase health insurance who refuses to do so will be subject to a penalty, or tax, for any month during a year in which he or she didn’t have coverage. The penalty or tax would be based on the individual’s income but would not be more than the cost of a basic health insurance plan in the person’s geographical area.

The ACA also required states to expand their Medicaid programs by 2014 to cover all individuals under the age of 65 with incomes below 133 percent of the federal poverty line. States also would have to provide to all Medicaid beneficiaries a new “essential health benefits” package that would basically match the benefits that a basic health plan in the private health insurance market would offer. The federal government will pay 100 percent of the cost of the newly eligible under Medicaid through 2016. After that, the federal government’s share of the payment to cover the newly eligible would drop to 90 percent. States that do not expand Medicaid coverage to the newly eligible faced loss of all federal funding for Medicaid.

Twenty-six states, several individuals, and the National Federation of Independent Business filed a legal challenge to the constitutionality of the ACA’s individual mandate and the Medicaid expansion. The Eleventh Circuit held Congress lacked authority to enact the individual mandate but upheld the Medicaid expansion as a valid exercise of Congress’s spending power. The appeals court left the rest of the Act intact. The Supreme Court granted cert and scheduled a rare three days for oral argument last March to consider whether Congress has constitutional authority to enact the legislation.

Because the five justices agreed to uphold the mandate, they did not need to decide whether it was severable from the rest of the health reform law. In addition, the provisions expanding Medicaid have been narrowed but not invalidated. While the Court upheld the ACA’s expansion of Medicaid eligibility, it limited the financial penalty that Congress can impose on states that do not follow the eligibility expansion requirements of the ACA. The Court also concluded (as a threshold matter) that the Anti-Injunction Act did not bar the suit. The remainder of the ACA, including all reforms of the individual and group insurance markets, remains intact.

Commerce Clause. Only four Justices (Ginsburg, Breyer, Sotomayor, and Kagan) saw the mandate as an appropriate use by Congress of its commerce power. Speaking for this group, Justice Ginsburg began by noting that Congress enacted the ACA in part to address a national problem: the burden placed upon the national health care market by the large number (50 million in 2009) of uninsured Americans. Given the difficulty those with preexisting conditions have in acquiring health insurance in the private market, the so-called “guaranteed issue” and “community rating” provisions contained within the ACA play a key role in addressing this problem. However, in order to avoid an adverse selection problem for insurers, Congress also created the individual mandate.

Reviewing the line of Commerce Clause precedents set by the Supreme Court since the mid-1930s, Ginsburg explained that the Court must presume a statute under review to be constitutional and must strike it down “only on a ‘plain showing’ that Congress acted irrationally.” In her view, Congress had a rational basis for concluding that the “uninsured, as a class, substantially affect interstate commerce,” thus requiring a national remedy. Having found such a rational basis for legislative action, the Court’s analysis under the Commerce Clause should end.

The Chief Justice rejected the view enunciated by the left-leaning Justices and concluded that the individual mandate fails under the Commerce Clause. Certainly, Roberts noted, the Constitution gives Congress the power to “regulate Commerce.” But, rather than regulate existing commercial activity, the mandate compels individuals to “become [emphasis in original] active in commerce by purchasing a product, on the ground that their failure to do so affects interstate commerce.” Permitting Congress to regulate individuals precisely “because [emphasis in original] they are doing nothing would open a new and potentially vast domain to congressional authority.”

Roberts rejected the argument that a health care mandate is permissible because eventually everyone will participate in the health care market. Everyone, Roberts noted, will likely participate in many types of markets, including, for example, the one for food (such as broccoli), but that mere fact does not authorize Congress to direct them to purchase products in a given market today.

“No matter how ‘inherently integrated’ health insurance and health care consumption may be, they are not the same thing: They involve different transactions, entered into at different times, with different providers,” Roberts wrote. “And for most of those targeted by the mandate, significant health care needs will be years, or even decades, away. The proximity and degree of connection between the mandate and the subsequent commercial activity is too lacking to justify an exception of the sort urged by the Government. The individual mandate forces individuals into commerce precisely because they elected to refrain from commercial activity. Such a law cannot be sustained under a clause authorizing Congress to ‘regulate Commerce.’”

“Any police power to regulate individuals as such, as opposed to their activities, remains vested in the States,” Roberts said. Thus, a law like the individual mandate will not pass muster under the Commerce Clause.

Necessary and Proper Clause. In addition, Justice Roberts continued, the mandate cannot be upheld under the Necessary and Proper Clause as an essential component of the health insurance reforms. Prior cases upholding laws under this clause “involved exercises of authority derivative of, and in service to, a granted power,” he wrote. “The individual mandate, by contrast, vests Congress with the extraordinary ability to create the necessary predicate to the exercise of an enumerated power.

“Just as the individual mandate cannot be sustained as a law regulating the substantial effects of the failure to purchase health insurance, neither can it be upheld as a ‘necessary and proper’ component of the insurance reforms,” Roberts concluded.

Taxing power. The Chief Justice then turned to the argument that the mandate could be upheld as authorized by Congress’s Article I power to “lay and collect Taxes.” As noted above, he found this argument to be persuasive, as did the liberal Justices. “Congress’s authority under the taxing power is limited to requiring an individual to pay money into the Federal Treasury, no more. If a tax is properly paid, the Government has no power to compel or punish individuals subject to it. We do not make light of the severe burden that taxation — especially taxation motivated by a regulatory purpose — can impose. But imposition of a tax nonetheless leaves an individual with a lawful choice to do or not do a certain act, so long as he is willing to pay a tax levied on that choice.”

Although under the ACA the mandate was characterized as a “penalty” and not a tax, Congress’s power to impose the requirement stems from its authority to tax. The mandate may thus be reasonably characterized as a tax and is therefore permitted by the Constitution.

As of now: up and running. Except for the curtailment of the Medicaid expansion, all provisions of the ACA remain in effect after the High Court’s ruling. This includes the market reforms already in effect (e.g., adult child coverage; phase-in of annual/lifetime limits; and the requirements for preventive care), as well as the reporting and disclosure requirements already rolled out by the regulatory agencies (e.g., the new appeals process and the summary of benefits and coverage requirements; compliance with the latter must begin no later than September 23, 2012). In addition, the regulatory agencies presumably will continue to prepare for implementation of provisions not effective until 2014, including finalizing the requirements for the essential benefit package, continuing to work on the nondiscrimination rules, and other efforts.

Also still alive at this point is the requirement that states have up and running by 2014 a health benefit exchange that will allow those seeking health coverage to compare qualified plans and choose the one that works best for them. Fewer than 20 states to date have established an exchange; many were waiting for the ruling from the High Court. However, it’s not likely that states that have resisted enacting the legislation necessary to create an exchange will rush to do so now. Instead, they may await the outcome of the next test for the Affordable Care Act: It’s scheduled for November 6, 2012.

Well before the Court’s controversial ruling today, Republicans vowed to repeal the ACA. Media reports indicate that the Republican-controlled House plans to hold a repeal vote on July 11, widely considered a merely symbolic effort since it would no doubt fail in the Democratic-controlled Senate.

Impact on employers. “Since the Supreme Court found the entire healthcare law constitutional, it should now be ‘business as usual’ from an employer’s standpoint,” according to Benjamin Lupin, director of compliance for Corporate Synergies Group, LLC. However, what that actually means can vary, depending on whether the employer has been taking an active role in complying with the law through 2011 and 2012. For those who have, “there shouldn’t be much to be concerned with based upon the Court’s ruling,” he said. “If, however, an employer was waiting for the Court’s decision before taking the actions needed to comply with the law, the time is now to ‘get into gear’ and think about 2012 requirements and the approaching 2013 and 2014 requirements.”

“For 2012, this means that employers will need to make sure that they are issuing summaries of benefits and coverage (SBCs) after September of 2012 and continuing to gather information to report on 2012 W-2s,” he explained. “Employers will also need to make sure their ERISA plan documents are in order. In addition, contributions to FSA accounts will be limited to $2,500 in 2013, and employers will need to prepare for the upcoming release of the state exchanges for review in 2013 and implementation in 2014, and will need to decide whether or not they will ‘pay or play’ moving forward.”

Lupin also cautions that although the ruling permits actions to continue (or begin) to be taken by employers to become compliant with the ACA, “we are still in the early stages of the implementation of this law.” The November election results and future regulations implementing the law will continue to give employers much to think about and plan for during the next several years. “Since we now know that the law is constitutional, it becomes vital for all employers to ensure compliance with the law,” he advised. “There are sure to be audits by the government to make sure that the law is being followed (and to raise revenue) and no employer wants to end up on the front page because of a failure to comply with the law.”

Impact on employees. President Obama’s remarks on the much-anticipated decision sum it up nicely: “First, if you’re one of the more than 250 million Americans who already have health insurance, you will keep your health insurance—this law will only make it more secure and more affordable. Insurance companies can no longer impose lifetime limits on the amount of care you receive. They can no longer discriminate against children with preexisting conditions. They can no longer drop your coverage if you get sick. They can no longer jack up your premiums without reason. They are required to provide free preventive care like check-ups and mammograms—a provision that’s already helped 54 million Americans with private insurance. And by this August, nearly 13 million of you will receive a rebate from your insurance company because it spent too much on things like administrative costs and CEO bonuses, and not enough on your health care.”

The President also noted that young adults under the age of 26 can stay on their parents’ health care plans and seniors receive a discount on their prescription drugs. For those who do not yet have insurance, starting in 2014, the ACA will offer “an array of quality, affordable, private health insurance plans to choose from,” he said. “Each state will take the lead in designing their own menu of options, and if states can come up with even better ways of covering more people at the same quality and cost, this law allows them to do that, too.”

After states have set up these “exchanges,” according to the President, “insurance companies will no longer be able to discriminate against any American with a preexisting health condition. They won’t be able to charge you more just because you’re a woman. They won’t be able to bill you into bankruptcy. If you’re sick, you’ll finally have the same chance to get quality, affordable health care as everyone else. And if you can’t afford the premiums, you’ll receive a credit that helps pay for it.”