The Supreme Court ended its 2011-2012 term with a profound decision on the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act (collectively the “Affordable Care Act” or “ACA”). The Court upheld the ACA by a 5-4 vote with the caveat that the federal government may not withhold existing Medicaid funds from states that refuse to adopt the legislation’s Medicaid expansion provision. The implementation of the ACA, which slowed as the nation awaited the outcome of this lawsuit, has been reignited by the Court’s ruling. Now, state governments, employers, insurance companies, and health care providers must determine how the ACA applies to them and what steps are necessary to fulfill its provisions.
Chief Justice Roberts delivered the Supreme Court’s holding. That holding contained four major parts described below:
1. First, the Court had to verify that the Anti-Injunction Act did not bar it from hearing this case. Under the Anti-Injunction Act, individuals must pay a tax before they can challenge it in court. If the ACA’s individual mandate exaction--a monetary sanction placed on individuals who choose not to purchase health insurance--is a “tax” under the Anti-Injunction Act, then a court cannot hear a challenge to the exaction until after it has been assessed, which in this case would be sometime in 2014. The Court held that the individual mandate exaction does not qualify as a “tax” because, in the ACA, Congress labeled this exaction as a “penalty.” Chief Justice Roberts reasoned that because Congress used the word “tax” in many provisions of the ACA but called this particular sanction a “penalty,” Congress did not intend the Anti-Injunction Act to apply to the individual mandate. Thus, the Court proceeded to the merits of the case.
2. The Supreme Court next considered whether Congress has the authority to enact the individual mandate. The Court held that the individual mandate cannot be sustained under the Commerce Clause of the United States Constitution. Chief Justice Roberts stated that Congress has the power “to regulate commerce, not to compel it,” and the individual mandate, rather than regulating existing commercial activity, “compels individuals to become active in commerce by purchasing a product.” As such, the law was found not to be a lawful exercise of the Commerce Clause. The Court also found that the Constitution’s Necessary and Proper Clause does not validate the individual mandate because such a determination would greatly expand federal power.
However, Chief Justice Roberts turned the tables on most court observers by upholding the individual mandate under the Taxing Clause of the Constitution. In doing so, he observed that the individual mandate does not “recognize any new federal power.” Congress can influence conduct through taxation and has done so before. Further, the Constitution does not guarantee that individuals may avoid taxation through inactivity, and the individual mandate resembles a tax in many ways. Using this logic, the five justice majority upheld the constitutionality of the individual mandate.
3. The Court next looked at the Medicaid expansion provision of the ACA, which requires state programs to expand Medicaid coverage to adults with incomes up to 133% of the federal poverty level by 2014. While the federal government will pay for this expansion through 2016, its contribution will gradually decrease thereafter. The ACA authorizes the federal government to withhold a state’s existing Medicaid funding¾which could amount to a substantial percentage of a state’s overall budget¾if that state refuses to comply with the expansion. The Court held that this stipulation violates the Constitution because it is like holding “a gun to the head” of the states. Chief Justice Roberts said, “Congress may use its spending power to create incentives for States to act in accordance with federal policies. But when ‘pressure turns into compulsion,’ the legislation runs contrary to our system of federalism.” Thus, the Court’s decision gives states the option of rejecting the expansion without losing existing Medicaid funding.
4. Finally, the Supreme Court had to determine whether its invalidation of the Medicaid expansion provision was severable from the remaining portions of the ACA, or whether the entire law is tainted by its holding. The Court determined that it was severable, stating that “…we do not believe Congress would have wanted the whole Act to fall, simply because some [states] may choose not to participate.”
Here is a brief look at some of the decision’s impacts:
Impact on States. The Court’s holding shifts the attention to the decisions of state governments, particularly whether they will opt to expand Medicaid under the ACA. Although the heavy initial federal subsidization of the expansion is persuasive, states also have to consider the additional costs associated with administering a larger Medicaid program. By 2020, federal subsidization of Medicaid expansion will level off at 90%, with states responsible for the remaining 10%. A few states, including Texas and Florida, have publicly announced their intent not to expand their respective Medicaid programs.
States must also focus on whether to establish Health Insurance Exchanges by January 1, 2013. The Exchanges, which can be created independently or in partnership with the federal government, are essentially competitive insurance marketplaces that allow individuals and small businesses to choose among various competing private health insurance plans. Because many states have suspended their implementation efforts pending the outcome of this case, they are not yet ready to run their own Exchanges and will probably have to rely upon a federally-established Exchange to serve their citizens. West Virginia has enacted legislation authorizing the creation of its own Exchange, and has received two federal grants totaling over $10 million to aid in its establishment. To date, the West Virginia Health Benefit Exchange, as it is known, remains largely in the planning and development phase. It will have to ramp-up its development efforts in order to meet the 2013 deadline.
States need to be aware of how their Health Insurance Exchanges will interact with the expansion of Medicaid. If a state opts out of the Medicaid expansion, some of its citizens might be too poor to receive Exchange subsidies and not poor enough to qualify for Medicaid, creating a coverage gap in the population.
Impact on Employers. As the ACA moves forward following the Court’s ruling, employers must also make decisions about the provision of health care. For employers with 50 or more full-time employees, the most important decision they face relates to the “play or pay” provisions of the Act. These provisions require employers to either “play” by providing minimum essential health benefit coverage to their full-time employees, or “pay” a penalty of up to $2,000 per each full-time employee. Employers will need to gain a clear understanding of these “play or pay” provisions, and how they fit together with the Health Insurance Exchanges and the various government subsidies available to individuals seeking coverage under them.
Also, employers that sponsor health plans must prepare to meet the other reforms coming into effect. Particularly, they will have to provide a uniform Summary of Benefits and Coverage upon an employee’s application, enrollment, and re-enrollment in the employer insurance plan (for plan years beginning on or after September 23, 2012); report the value of health coverage on employees’ W-2 Forms (beginning January 2013 for the 2012 tax year); and limit the amount of contributions to healthcare reimbursement flexible-spending accounts to $2,500 per year (beginning January 2013). The year 2014 will bring a new round of reforms that employers will have to administer, such as the 90-day limit on waiting periods for entry into employer plans, the complete elimination of pre-existing conditions, and the elimination of annual limits on benefits.
Impact on Insurance Companies. The Court’s decision offered a ray of hope to insurance companies. They will no doubt seek to rely upon premiums generated by the individual mandate to help cover increased claims activity incurred as a result of the elimination of annual and lifetime limits on benefits, and their inability to exclude enrollees with pre-existing conditions. However, if a significant number of healthy, non-Medicaid eligible individuals choose to pay the individual mandate penalty instead of obtaining coverage, insurers could still feel financial pressures. Insurance companies will also face ongoing scrutiny under the new medical loss ratio rules, which call for rebates to enrollees if ratios fall below 85% of total premium dollars spent on claims and activities to improve health care quality (or 80% for individual and small insurers).
Impact on Health Care Providers. Although most of the ACA’s impact upon the health care industry was not the subject of the Court’s ruling, health care providers will nonetheless feel the repercussions of the decision. Because the Court upheld the individual mandate, more people will likely become insured, resulting in a decrease in uncompensated care costs and an increase in the demand for primary care services. Existing resources will be strained to meet this new level of demand. Some of the more innovative programs encouraged by the ACA, such as the establishment of Accountable Care Organizations (“ACO’s”), may become a more legitimate and attractive alternative to the provider community as a result of the decision to uphold the ACA. Meanwhile, the conversion of the nation’s health information infrastructure from paper to electronic health record systems and exchanges remains ongoing, as providers struggle to keep pace with evolving meaningful use standards.
States that elect to opt out of the Medicaid expansion might create a gap of uninsured customers, a fact that could hit community and safety-net hospitals hard. This impact will be exacerbated by the ACA’s mandated reductions in reimbursement paid to health care providers in the coming years, including reductions to payments made under the Disproportionate Share Hospital (“DSH”) program for those treating a disproportionately high percentage of low income patients. These reductions will require careful planning and improved efficiencies within the system of care. Last but not least, the ACA has invested the government with enhanced enforcement tools to combat health care fraud and abuse. Compliance efforts by providers, while always important, now represent an essential survival tool in an era when seven-figure-plus penalties are announced by the government on a weekly basis.