On June 28, 2012, the U.S. Supreme Court issued its much-anticipated decision in National Federation of Independent Business v. Sebelius, No. 11-393 (U.S. June 28, 2012).  In a sharply divided opinion, a majority of the court upheld the constitutionality of the individual mandate to purchase “minimum essential” health insurance coverage in the Patient Protection and Affordable Care Act of 2010, as amended (PPACA) as a valid exercise of Congress’s taxing power.  The decision has been applauded by many sectors of the health care industry including the American Hospital Association.  The PPACA attempts to address the anomaly that while the right to receive necessary health care has been recognized in EMTALA and other legislation, that right is directly contradicted by the lack of funding for such treatment for the approximately 50 million Americans without health insurance.

However, Chief Justice Roberts, writing for the majority in National Federation, also concluded that the PPACA’s proposed Medicaid expansion violated the U.S. Constitution by threatening states with the loss of all their existing Medicaid funding if they decline to comply with the expansion.  In a new doctrinal development, the court held that this was “a shift in kind, not merely degree” in the Medicaid program and was unconstitutionally coercive to the states.  It noted that the expansion would transform Medicaid from a program that required states to cover only certain discrete categories of needy individuals - such as pregnant women, children, needy families, the blind, the elderly and the disabled - to one that requires the states to meet the health care needs of the entire nonelderly population having an income below 133 percent of the poverty level.  For the average state, the loss of the federal portion of its entire Medicaid funding would represent more than 10 percent of the state’s overall budget.  In short, while the federal government may apparently still condition the receipt of new funding on a state’s acceptance of new conditions, the court held that the federal government may not “withdraw existing Medicaid funds for failure to comply with expansion requirements.” The court concluded the PPACA went beyond Congress’s well-established power to create incentives to a whole new level of undue influence or compulsion that was not constitutionally acceptable.  The fact that the PPACA provided that the federal government would pay 100 percent of the costs covering the newly eligible beneficiaries in the expanded Medicaid program through 2016, decreasing to no less than 90 percent in subsequent years, did not change this conclusion. 

The severability clause found in 42 U.S.C. § 1303 of the Social Security Act provides that if any portion of that chapter should be found invalid, then the remainder shall not be affected.  For this reason and based on its reading of the underlying congressional intent, the court upheld the remainder of the reforms included in the PPACA.  Because the states could not be penalized for failing to participate in the Medicaid expansion by losing all their Medicaid funding, some states may choose not to participate.  The decision thus renders the Medicaid expansion optional but still available to any state that is willing to participate.

In this light, what does the future hold for health care reform?  As a result of the Supreme Court’s decision, the Medicaid program is now at the center of the debate about health care reform and PPACA.  We do not yet know whether the administration will approach Congress to correct the constitutional failing by further legislation, and the outcome of such an attempt is not at all clear.  The November election ensures that the debate and uncertainty will continue.  Nor can we predict how many states will choose to opt out of the expanded Medicaid program, though several governors have expressed such an intent.  Given the recent developments with our own Medicaid program and the competitive political climate, North Carolina’s participation in Medicaid expansion is by no means clear.

Even with the high level of federal funding for new Medicaid beneficiaries, there may be nondoctrinaire reasons for financially strapped states to consider opting out.  For instance, some states anticipate that the expansion will encourage substantial numbers of currently eligible persons to apply for Medicaid as well.  Since the new funding assists only states with newly eligible beneficiaries, this development would result in an increased financial burden borne only by the states.  In addition, some states may wait for HHS to promulgate guidance on opting out, in a desire “to read the fine print” and learn exactly what they are getting into. 

What will be the result of states opting out of the Medicaid expansion?  Obviously, there will be persistent and large numbers of uninsured and the problems that result.  Any goal approaching universal coverage will not be realized in those jurisdictions.  Some have described the effect of nonparticipation by states as creating a “Medicaid Doughnut Hole” for people who do not qualify for Medicaid or a private health plan.  There is a tremendous state variation in the current adult eligibility under Medicaid – from below 25 percent to more than 200 percent of the federal poverty level.  Moreover, the subsidies for health information exchanges are not available to individuals who are below 100 percent of the federal poverty level.  If a low Medicaid-eligibility state opts out of the expansion and does not cover childless adults or others, it may create a coverage gap for those who are ineligible for either Medicaid or the federal tax credits.  Their income would be higher than the state’s current level of eligibility but lower than the 100 percent needed to qualify for exchange subsidies.

With all the other provisions of PPACA coming into effect over the next few years, it is very hard to determine how the court’s holding on the Medicaid expansion will affect hospitals.  The upholding of the individual mandate will hopefully result in an increase in the number of insured patients and a reduction in uncompensated “charity” care.  But along with the new uncertainty around North Carolina’s participation in the Medicaid expansion, which would certainly be a blow to North Carolina hospitals, are the reductions in disproportionate-share hospital funding that continue in effect and the substantial reductions in federal reimbursement that are slated to occur in the future under PPACA.  Surely the only thing that is certain as a result of the National Federation decision is continuing uncertainty in the near future for our hospitals and other health care providers.