By Stephanie A. Kennan, Brian Looser, Vincent A. Dongarra and R. Brent Rawlings
On June 28, 2012, the Supreme Court of the United States issued its opinion in the case of National Federation of Independent Business et al. v. Sebelius, Secretary of Health and Human Services, et al. [enhanced version available to lexis.com subscribers], ruling on the constitutional challenges to the federal health reform law, the Patient Protection and Affordable Care Act, Pub. L. No. 111-148 (the ACA). The Court upheld the controversial "individual mandate" as constitutional under Congress's tax power and permitted the ACA's Medicaid expansion to continue, but only on a voluntary basis by the states.
The Anti-Injunction Act Does Not Bar a Decision
Question before the Court: Does the Supreme Court have the authority to consider the constitutionality of the individual mandate given the penalties for non-compliance do not take effect and would not have been paid until 2015? The Anti-Injunction Act (AIA) provides that the taxpayer must pay the tax before being able to challenge it. So is the penalty a tax?
Decision: The Court held that the AIA did not bar a decision because-for purposes of the AIA only-the penalty for failing to obtain health insurance under the individual mandate is not a tax. Chief Justice Roberts, writing the only portion of the opinion in which all the justices joined, disagreed stating that the AIA and ACA "are creatures of Congress's own creation. How they relate to each other is up to Congress, and the best evidence of Congress's intent is the statutory text." Opinion of Roberts, C.J. at 13. In other words, when analyzing the individual mandate under the rules of the congressionally-created AIA, it is more important that Congress referred to it as a "penalty" instead of a "tax," even though it effectively functions as a tax.
Policy Perspective of Decision: The Court's ruling on this question does not cause a change in policy or implementation.
The Individual Mandate is Constitutional as a Tax
Question before the Court: Can the federal government require Americans to obtain health insurance by January 1, 2014 or pay a penalty? The Court reviewed Congress's power to institute the individual mandate under the Commerce Clause, Necessary and Proper Clause, and the Taxing and Spending Clause.
Decision: The Court upheld the individual mandate, not under the Commerce Clause or the Necessary and Proper Clause, but as a valid exercise of Congress's enumerated power to collect taxes under the Taxing and Spending Clause.
The Court held that the individual mandate could not be sustained as a valid exercise of Congress's authority under the Commerce Clause because a necessary precursor of that authority is some existing activity that affects interstate commerce. The Court reasoned that the individual mandate does not regulate an existing activity; rather, it compels individuals to become involved in an activity and that "[C]onstruing the Commerce Clause to permit Congress to regulate individuals precisely because they are doing nothing would open a new and potentially vast domain to congressional authority." Opinion of Roberts, C.J. at 13.
The Court also dismissed arguments that the individual mandate could be sustained as a valid exercise of the Necessary and Proper Clause. The Court reasoned that, while the individual mandate may be "necessary" to the guaranteed-issue and community-rating provisions, it is not "proper" because the necessity is based upon the guaranteed-issue and community rating provisions themselves.
The Court ultimately concluded that the individual mandate was a valid exercise of the Taxing and Spending Clause. The Court reasoned that it has a duty to adopt any reasonable interpretation of the law that saves the law from being found unconstitutional. Granting deference to Congress, the Court determined that the individual mandate could be interpreted to be a tax because the penalty is paid through their tax returns, is determined based on factors similar to those used in determining taxes, and is enforced by the Internal Revenue Service. Having established that the individual mandate could be interpreted as a tax, it then determined that the tax was properly within Congress's authority under the Constitution.
The Court recognized that the individual mandate is described as a "penalty" in the ACA and that this label is fatal for purposes of applying the AIA because interpretation under the AIA requires deference to Congress's choice of language. However, constitutional analysis requires the court to look to function over form, so the use of the word "penalty" as opposed to "tax" is not as determinative as how the penalty is structured.
Policy Perspective: The Court's ruling does not cause a change in policy or implementation.
Some states chose to wait until the Court ruled on the individual mandate before acting on establishing state exchanges. To date, 14 states and the District of Columbia have authorized the creation of exchanges. Thirty three states have taken only initial steps or not acted at all. Three states have said they will not create an exchange.
However, upholding the individual mandate does not erase practical issues that have been raised about the individual mandate. Some health economists have argued that the penalties for not having insurance are so low, particularly in the first two year, that some people may opt to pay the penalty and forgo insurance. If that should happen, some are concerned that the individual mandate will not bring in enough health people to keep premiums stable. Chief Justice Roberts said from the bench in describing how the penalty was a tax that, "It is indeed likely that many [more] Americans will choose to pay the IRS than buy insurance."
Medicaid Expansion not Stricken from Law, but Made Voluntary
Question before the Court: Are the conditions placed upon states' for additional Medicaid dollars to cover more Americans coercive? The ACA expands Medicaid eligibility to legal residents earning less than 133 percent of the federal poverty level.
In its previous decisions, the Court has never invalidated a law as coercive under the Spending Clause. Here, the Court held that allowing the Secretary to withhold all Medicaid funds from states that fail to implement the proposed expansion crossed the line from encouragement to coercion, but did not go so far as to strike the provision in its entirety. Instead, the Court limited the unconstitutional application of that provision, so that states could, but would not be required to, pursue the proposed expansion. The Court made the distinction that for states deciding not to elect the Medicaid expansion, the Secretary can withhold only those funds designated to pay for the expansion, leaving funds designated for other portions of the states' Medicaid programs intact.
The Court held that the funds threatened to be withheld are so large that no state could sustain the financial impact of a decision to refuse the Medicaid expansion required by the ACA. For instance, federal Medicaid funds often account for over 10% of the States' overall budgets. According to the Court, to threaten the loss of such a large portion of the states' funding "is economic dragooning that leaves the States with no real option but to acquiesce in the Medicaid expansion." Opinion of Roberts, C.J. at 51-52.
The majority agreed with the States that the expansion was in reality a new program and that Congress was attempting to force the states to accept this new program or risk loss of funding for the existing Medicaid program. The Court noted that the expansion was, unlike previous expansions, "a shift in kind, not merely degree." Opinion of Roberts, C.J. at 53. Instead of being a program designed to meet the health care needs of specific populations, the expansion seeks to expand coverage to everyone at certain income levels as an element of a comprehensive national plan to provide universal health insurance coverage. By conditioning funding for the existing program on changing the focus of the program, Congress exceeded its powers under the Spending Clause.
The Court's ruling not only impacts who might be covered by the Medicaid expansion provisions, but also how this population may or may not interact with state exchanges.
Under the ACA, Medicaid eligibility is changed. The ACA establishes a new national floor of Medicaid coverage at 133 percent of the federal poverty level (FPL) with a standard five percent "income disregard" that effectively raises the limit to 138 percent of FPL. For the first three years, the federal government would fund the entire cost, and over time the federal portion would drop to 90 percent. The Medicaid expansion was designed to cover approximately 17 million people.
Twenty-six states challenged the constitutionality of the Medicaid expansion. It is anticipated that many, if not most, of those states will choose to not expand their Medicaid programs. In addition, the Court's ruling may make it more likely that some states will also wait to make a decision until the elections have taken place in November.
While the ruling allows States the option to not expand their Medicaid programs, it does not negate or make optional other Medicaid provisions that are independent of the expansion provisions. Those provisions include increased Medicaid reimbursement for primary care physicians, changes in drug coverage, drug rebates, a variety of demonstration projects, reductions in Disproportionate Share Hospital (DSH) payments as coverage increases, quality measures, and encouragement of home and community based care.
Several policy issues need to be addressed. First, do states need to affirmatively opt in or opt out of the expansion? If once the state expands its Medicaid program, can it reverse the decision later or fold those individuals into the state exchanges when federal funding declines? HHS will have to issue guidance to address these issues. In addition what is the financial impact on the overall cost of the decision on the ACA? The Congressional Budget Office (CBO) announced it would re-estimate the law's cost. Another cost-related question is whether or not the individuals who would have been covered by Medicaid will seek insurance through the state exchanges and how the overall cost of subsidies would be impacted. The uncertainty of Medicaid coverage or coverage through the exchanges for these individuals means there could be fewer covered people in the system than providers anticipated. .
Stephanie A. Kennan is Senior Vice President of McGuireWoods Consulting, LLC, Brian Looser is Assistant Vice President of McGuireWoods Consulting, LLC, Vincent A. Dongarra is an Associate at McGuireWoods, LLP and R. Brent Rawlings is an Associate at McGuireWoods, LLP.
McGuireWoods LLP provides a variety of legal services from 19 domestic and foreign offices. McGuireWoods Consulting LLC is a wholly owned subsidiary of the McGuireWoods LLP law firm. It does not provide legal services, representation or advice.
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