In a split decision, the Supreme Court on June 28, 2012 upheld the Affordable Care Act’s (the ACA’s) “individual mandate,” which requires almost everyone to have health insurance coverage or pay a penalty. In a bit of a surprise, a majority of the Court based its decision on Congress’s power to levy taxes, saying that the penalty for not buying health insurance is a tax.
Also in a split decision, the Court upheld the constitutional challenge to the portion of the ACA requiring all states to drastically expand Medicaid coverage in order to receive new funding or even keep existing Medicaid funding (at the discretion of the federal government). Referring to this provision of the ACA as “a gun to the head,” the Court determined that the ACA unconstitutionally left States with no real option but to acquiesce in the Medicaid expansion. Thus, States can choose whether to participate in the Medicaid expansion and a choice not to participate will not risk existing Medicaid funding. The Court did not invalidate the ACA’s expansion of Medicaid, which still stands. The Court evaluated whether other aspects of the ACA would be invalidated and determined that the rest of the ACA “need not fall” in light of this constitutional holding.
The main opinion was written by Chief Justice John Roberts, who began by stating that the individual mandate exceeds Congress’s power to regulate commerce under the Commerce Clause. While four other Justices agreed with that conclusion, which would be a majority, a different majority upheld the individual mandate based on an independent ground — the government’s backup argument — that is, the mandate is within the taxing power of Congress.
Thus, there was no need for the Court to deal with the “severability” issue that occupied a lot of attention before the decision. Also, the Court opened itself to some criticism over semantics by upholding the mandate as a tax, but deciding that it was not a tax for purposes of the Anti-Injunction Act (the AIA). If the mandate was a tax for AIA purposes, the Court could have been prevented from deciding the case at this time.
The implications of this decision in the areas of health care, insurance, government relations, employee benefits, tax, and employment are described in separate sections below.
As a result of the Medicaid portion of the landmark decision, States now have a meaningful option whether or not to participate in the drastic expansion of Medicaid coverage contemplated by the ACA. Per the Court, under the ACA, States had no meaningful option but to acquiesce in the Medicaid expansion — they could not realistically decline knowing that approximately 10 percent of their total funding would potentially be withheld by the federal government.
As background, under current (pre-ACA) law, Medicaid offers federal funding to States to assist pregnant women, children, needy families, the blind, the elderly and the disabled in obtaining medical care. In order to receive Medicaid funding, States must comply with federal criteria. All States have chosen to participate in Medicaid. The ACA expands the scope of the Medicaid program and dramatically increases the number of individuals States must cover. Under the ACA, States must cover all individuals under age 65 with incomes below 133 percent of the federal poverty line. The ACA also establishes an “essential health benefits package” which States must provide to all new Medicaid recipients. The ACA further provides that the federal government will pay 100 percent of the costs of covering these newly eligible individuals through 2016. The government estimated that under the ACA, Medicaid spending would increase by approximately $100 billion per year, nearly 40 percent above current levels.
Medicaid After the ACA
Under the ACA, if a State does not comply with the ACA’s new coverage requirements, that State may lose not only federal funding for those requirements but may lose all of its Medicaid funds. The States challenged this, arguing that Congress is not allowed to use financial inducements (only reasonable, voluntary choices) to mandate how States will govern. The States argued that Congress exceeded its authority by the way it structured the Medicaid funding. The States pointed out that instead of simply refusing to grant new funds to States that will not accept the new provisions of the ACA, Congress threatened to also withhold existing Medicaid funds. Thus, the States argued, successfully, they did not have any meaningful choice other than signing up for the dramatic expansion in health care coverage.
Justice Roberts hints in his decision that perhaps all States will opt to sign up anyway, and this is why it makes no sense to conclude that other aspects of the ACA must fall with this ruling. In fact, that is what the early commentators seem to indicate as well — in all likelihood, many States will succumb to the pressure to participate in the Medicaid expansion that is likely to come from both consumers and the health care provider industry, both of whom benefit from expanded coverage for those who are hovering around the poverty line. States that opt not to participate in the Medicaid expansion may be denying federal subsidies in the form of premium tax credits to the very poorest citizens — those below the poverty line — given that the law was drafted with the assumption that all such citizens would be covered pursuant to the expanded scope of Medicaid.
Both aspects of the Court’s decision will benefit health care providers in this manner — there will be expanded insurance coverage (as the law originally contemplated) and expanded Medicaid coverage (assuming States opt in). We note that the expansion of Medicaid may pose a challenge for health care providers in terms of increased patient volumes and increased competition among providers for Medicaid funding. Anticipating these developments, health care providers have not been waiting around twiddling their thumbs — they have been reforming their operations because the writing on the wall was clear even before this law was enacted. Health care providers have instituted mechanisms to incent efficiency and quality of care, to enhance joint accountability between hospitals and physicians, to coordinate care between multiple providers and with payors, through mechanisms such as electronic medical records. The Court's decision does nothing to derail any of these ongoing reforms.
The Supreme Court’s decision means that the insurance-related provisions of the ACA remain the law, including those that have taken effect and those that have yet to take effect. As described in the Employee Benefits section of this update, some of the main provisions that have already taken effect require all group health plans — both insured and self-funded — to include the following provisions:
- Children can stay on their parents’ health plans until age 26.
- No lifetime dollar limits on “essential health benefits.”
- No unreasonable annual dollar limits on “essential health benefits.”
- No preexisting condition exclusions for children under 19.
- Nondiscrimination rules apply to insured plans as well as self-funded plans.
- Limits on rescission (allowed only for fraud or intentional misrepresentation of a material fact).
Some of the main provisions that the Supreme Court’s decision will allow to take effect in the future include:
- Guaranteed renewability and prohibition on health status discrimination (currently applicable only to groups, extended to all coverage beginning in 2014).
- Guaranteed issue rights (currently applicable to small groups, extended to all coverage beginning in 2014).
Mandatory Provisions for Group Health Plans
- All annual dollar limits on “essential health benefits” prohibited.
- Prohibition on preexisting condition exclusions expanded to all persons.
Loss Ratio Limits
- The proportion of premium dollars insurers spend on medical care must be at least 85 percent for large group plans and 80 percent for small group and individual plans.
- Insurers that do not meet these requirements must provide rebates to enrollees, the first of which are due to be paid this year.
Other Rating Restrictions
- Beginning with the 2014 plan year, the U.S. Department of Health and Human Services (DHHS), working with the states, must monitor all premium increases in health insurance coverage (whether or not offered through an Exchange).
Beginning with 2014 plan years, premiums for a qualified health plan may vary only by the following factors:
- Age – Within age bands defined by DHHS and NAIC, the highest premium for adults may be no more than 3 times the lowest premium.
- Rating area – One or more rating areas set by the state subject to DHHS review (or set by DHHS if a state does not act).
- Individual vs. family plans.
- Tobacco use – Premium for smokers may be no more than 1½ times the premium for a nonsmoker in the same age band, rating area, and type of coverage.
Health Insurance Exchanges
By 2014 each state must establish:
- American Health Benefit Exchange – facilitates the purchase of individual coverage.
- Small Business Health Options Program (SHOP) – facilitates the purchase of coverage by small employers (state may allow large employers to use the SHOP beginning in 2017).
Main function of exchanges is to offer qualified health plans, which must include the “essential health benefits package” unless it is a catastrophic coverage plan. An essential health benefits package generally must:
Offer coverage for specific categories of benefits, including:
- Preventive and wellness services (including chronic disease management).
- Emergency services.
- Maternity and newborn care.
- Mental health and substance use disorder services.
- Prescription drugs.
- Meet certain cost-sharing standards.
Provide specified levels of coverage pegged to full actuarial value of benefits:
- Bronze – 60 percent.
- Silver – 70 percent.
- Gold – 80 percent.
- Platinum – 90 percent.
- If a state does not create exchanges, DHHS will establish them for the state.
- Offer coverage for specific categories of benefits, including:
Government Activity Will Increase After Supreme Court Ruling on Healthcare Law
The Supreme Court’s decision will cast a spotlight on the governmental relations options now available to politicians. As a result of the Supreme Court decision, federal and state legislatures will reevaluate their healthcare policy — for example, whether to proceed with establishing exchanges or face the possibility of the federal government establishing the exchange on behalf of the state.
In Washington, the House of Representatives and Senate have scheduled hearings in July to consider reforms and amendments to the existing legislation. Specifically, Congress will debate many of the provisions in the ACA including the individual mandate, preexisting conditions, coverage for dependants under the age of 26, waiver of limits for healthcare coverage, healthcare co-ops, rebates to individuals relating to healthcare premiums and the current Medicaid program. Republicans are expected to attempt to repeal the ACA on July 11, but the legislation is not likely to proceed beyond the House of Representatives.
Billions of Dollars in Healthcare May Be Increased, Delayed or Diverted
In addition to the policy debates, a large amount of money is likely to be impacted by the Supreme Court’s decision.
Although fiscal conservatives urged the Obama administration and state officials to stop spending money approved in 2010 (following passage of the ACA), the administration has forged ahead spending nearly $3 billion in the last three months.
While much — if not all — of this funding was in the pipeline well before the Supreme Court’s decision, the timeline for handing out specific funds is flexible. This gives DHHS much leeway over the types and amount of dollars it can allocate.
The rate of expenditures is likely to increase now that the Supreme Court ruling is out, because money that is spent most likely won't have to be repaid regardless of what Congress or the states do before the election. However, the remaining funds could be frozen if a majority in the House and Senate vote to halt additional payments. That action is not likely this year but could happen next year if the Republicans reclaim the majority in the Senate.
The Supreme Court’s decision just stripped out parts of the enforcement mechanism for the Medicaid expansion and did not affect the funds DHHS has already released. However, many members of the House Appropriations Subcommittee on Labor, DHHS, Education and Related Agencies, are expected to author an appropriations bill that would immediately put future funding on hold.
The Politics of Healthcare
This comprehensive healthcare review by the Supreme Court comes on the eve of an intense political campaign between President Barack Obama and Republican nominee Mitt Romney. Both will be developing their own political platform on health care that will be unveiled in the coming weeks. Supporters and opponents of the law are laying the groundwork for the next political battle on health reform. Both sides will have a lot at stake in framing and “spinning” the Supreme Court’s decision as the President and Congress head into the final weeks of the legislative session and thereafter the fall campaign. The Obama administration has already declared “victory” and plans to move forward with deployment of the ACA. Alternatively, Mr. Romney has promised to “repeal and replace” the current healthcare law if he is elected President. Republicans and Democrats are clearly preparing for the fight in state legislatures and in Congress.
The Supreme Court’s decision strikes the Medicaid expansion enforcement part of the law but leaves the rest of the legislation intact. This poses a complex messaging puzzle for Republicans and Democrats. Polls found a lot of public confusion about the increase in healthcare costs, the individual mandate and the specifics of the ACA even before the Supreme Court’s decision. The Court’s split decision will likely only confuse people more. Therefore, healthcare providers need to engage public policymakers to ensure their interests and the interests of the millions of Americans they serve are protected. An overview of the Quarles & Brady Government Relations Team is below.
Employers to Continue Health Care Reform Implementation as Usual
The Supreme Court’s decision upholding the constitutionality of the individual mandate provides clarity for employers and their group health plans. Because the Court found the individual mandate to be constitutional, the entire ACA stands with respect to employers and their health plans. As a result, employers (or other plan sponsors) should expect ACA implementation efforts to continue as usual.
There are a number of near-term ACA requirements employers now must focus on, including the requirements to: (a) provide coverage for additional preventive services (effective for plan years beginning on or after August 1, 2012); (b) issue a summary of benefits and coverage (“SBC”), usually in connection with open enrollment (generally effective for open enrollment periods beginning on or after September 23, 2012 but other dates can also apply); and (c) comply with new Form W-2 reporting requirements for the 2012 plan year (i.e., W-2s distributed in January 2013). Provisions of the ACA already in operation (such as coverage for adult dependents up to age 26, the prohibition on rescissions and limits on pre-existing condition exclusions) remain in effect.
Employers should continue to wait for administrative guidance on a number of as-yet unanswered questions regarding certain provisions of the ACA, including quality of care reporting, automatic enrollment and new nondiscrimination rules for fully-insured health plans. Employers should also start considering the other ACA provisions taking effect in 2013 and later, such as the “pay or play” rules.
For a complete overview of the ACA’s requirements for employers and their health plans (whether self-funded or fully-insured), including the effective date of each provision, please click here. In addition, please click here for our Health Care Reform Pay or Play Guide.
The ruling keeps intact the tax-related provisions enacted in connection with the health care reform legislation.
The new Medicare contribution taxes of 0.9 percent on earned income and 3.8 percent on certain investment income are still scheduled to take effect beginning January 1, 2013 for those with incomes exceeding $200,000 ($250,000 for married filers). The new Medicare contribution tax on investment income (along with the expected increase in the long-term capital gains tax rate beginning January 1, 2013) may cause investors, including business owners, to consider accelerating the sale of their investments before the end of 2012 in order to avoid these tax hikes.
The decision also keeps intact other revenue raisers, including among others:
- the penalty for failure to comply with the individual mandate;
- the penalty for employers who fail to provide adequate health insurance coverage to employees;
- the increased limitation on the deductibility of unreimbursed medical expenses from 7.5 percent of adjusted gross income to 10 percent of adjusted gross income;
- the decreased contribution limits to health flexible savings accounts;
- the compensation deduction limit for health insurance providers;
- the excise tax on certain sales of medical devices;
- the annual fee on manufacturers and importers of branded prescription drugs for sale to specified government programs;
- the continued prohibition against reimbursing the cost of over-the-counter drugs (other than insulin) not prescribed by a doctor from a health reimbursement arrangement, health flexible spending account, health savings account (“HSA”) or medical savings account (“MSA”);
- the excise tax on certain “Cadillac” employer-sponsored health insurance plans beginning in 2018;
- the annual fee on certain entities that provide health insurance; and
- the increased penalty for certain non-medical distributions under an HSA or MSA.
The decision also keeps intact certain tax credits designed to further the ACA’s healthcare objectives, including the tax credit for small employers that pay at least half the cost of insurance for employees, the nonrefundable 50 percent investment tax credit for investments in qualifying therapeutic discovery projects made during tax years beginning in 2009 or 2010, and the refundable premium assistance credits for lower and middle income individuals who purchase health insurance.
The codification of the economic substance doctrine, and the penalties for failure to comply, remain in effect.
From an employment law perspective, the upholding of the ACA will have a negligible impact on employers. Employers should continue to provide, in accordance with the Fair Labor Standards Act (FLSA), “reasonable break time” allowing a nonexempt employee to express breast milk for a nursing child, as needed, for one year following the child’s birth. The Court’s decision leaves intact this provision of the ACA, which became effective in March 2010. Employers who are subject to this requirement should continue to follow the FLSA rules and any similar state laws which apply.
To view the complete text of the June 28, 2012 Supreme Court opinion on the Affordable Care Act, please click here.