On December 18, the U.S. Court of Appeals for the Fifth Circuit (“Fifth Circuit”) issued its long-awaited decision in Texas v. United States. [1] The Fifth Circuit held that the Affordable Care Act’s (“ACA”) individual mandate to maintain health insurance is unconstitutional because it can no longer be justified under Congress’ taxing power after the penalty for failing to comply with the mandate was set to zero dollars. The Fifth Circuit, however, did not rule on the impact of such decision on the rest of the ACA. The Fifth Circuit remanded the case to the district court to determine what provisions of the ACA are inseverable from the individual mandate as well as the proper scope of relief. Although the long-term future of the ACA is likely to remain uncertain in 2020, the potential impact of the Fifth Circuit’s ruling is poised to shape the health policy debate. The K&L Gates’ Public Policy and Law and Health Care and FDA practices are ready to assist stakeholders assess the potential impact of the ruling and engage in the health policy debate.

Background 

National Federation of Independent Business v. Sebelius

In 2012, the Supreme Court upheld the ACA’s individual mandate to maintain health insurance as a constitutional exercise of Congress’ taxing powers. In the opinion, Chief Justice Roberts noted that “[t]he most straightforward reading of the [individual] mandate is that it commands individuals to purchase insurance.” [2] In this regard, the Court found that the mandate could not be upheld as a valid exercise of Congress’ power under the Commerce Clause because the clause does not give Congress the power to compel commerce. [3] The Court also found that it could not be upheld under the Necessary and Proper Clause because it greatly expanded federal power. [4]

However, the Court ultimately found that the individual mandate could be read as an option to purchase insurance or pay a tax that is justified under Congress’ taxing powers. Most importantly, the Court reasoned, the penalty yields “the essential feature of any tax: it produce[d] at least some revenue for the Government.” [5] The penalty is also “paid into the Treasury by taxpayers.” [6] Moreover, the penalty amount is “determined by such familiar factors as taxable income, number of dependents, and joint filing status.” [7] Finally, the “requirement to pay is found in the Internal Revenue Code and enforced by the IRS, which collected it in the same manner as taxes.” [8]

2017 ACA Amendments and Texas v. United States

In 2017, after numerous attempts to rollback the ACA, Congress set the amount that an individual must pay for failing to comply with the individual mandate to the lesser of “zero percent” of an individual’s household income or “0,” effective January 2019. [9] Shortly thereafter, 18 states and two private citizens brought suit in federal district court arguing, in part, that the individual mandate is no longer constitutional because the 2017 amendments to the ACA undermined the reading of the mandate as a tax. [10] Importantly, the plaintiffs argued that the individual mandate is essential and inseverable from the rest of the ACA.

The district court held that the 2017 amendments setting the amount for failing to comply to zero rendered the individual mandate unconstitutional. [11] In addition, the court held that the individual mandate could not be severed from the rest of the ACA, declaring the remaining provisions of the ACA inseverable and therefore invalid. [12] The district court did not grant a preliminary injunction. Instead, the court entered a partial final judgment and stayed judgment pending appeal.

Fifth Circuit’s Ruling 

Constitutionality of the Individual Mandate

Consistent with the district court’s ruling, the Fifth Circuit found that the 2017 amendments undermine the reading of the individual mandate as an option to purchase insurance or pay a tax. The Fifth Circuit noted that the tax attributes that the Supreme Court had identified in upholding the mandate no longer exist. Importantly, the court noted that the provision does not produce “at least some revenue for the Government.” [13] As a result, the court reasoned, it is no longer “paid into the Treasury by taxpayers” and the amount is no longer “determined by such familiar factors as taxable income, number of dependents, and joint filing status.” [14] Finally, the Internal Revenue Service cannot collect payment, so it cannot collect it in the same manner as taxes. [15]

Severability and Proper Scope of Relief

In contrast to the district court, however, the Fifth Circuit did not rule on the impact of this conclusion on the rest of the ACA. The Fifth Circuit noted that “it is no small thing … to declare duly enacted legislation passed by the elected representatives of the American people unconstitutional,” adding that the rule of law demands a “precise explanation of whether the provisions of the ACA are affected by the unconstitutionality of the individual mandate as it exists today.” [16]

In this regard, the Fifth Circuit commented that it had not been persuaded by the district court’s approach to the issue of severability, noting that the court had not explained fully how particular sections of the ACA “rise or fall on the constitutionality of the individual mandate.” [17] The Fifth Circuit noted that the district court’s opinion had focused on the 2010 Congress’ description of the mandate as “essential” to the goal of “creating effective health insurance marketplaces” in order to hold the entire ACA inseverable without discussing the post-2017 ACA scheme. [18] Accordingly, the Fifth Circuit remanded the case to the lower court to explain with precision how the rest of the ACA is impacted by the individual mandate, as well as the proper scope of relief.

What to Expect in 2020

Heading into 2020, the long-term future of the ACA remains uncertain. As an initial step, the district court must address the severability question and proper scope of relief and report back to the Fifth Circuit. California Attorney General Xavier Becerra, who has led a coalition of states in defending the ACA, has indicated that he will petition the Supreme Court to hear the case. [19] However, it is unclear whether the Court would weigh in, particularly before the district court’s decision. In either case, the provisions of the ACA are not expected to be enjoined for at least a year.

Even though we do not expect near-term enjoinment of the ACA for at least a year, the likely impact of the Fifth Circuit’s ruling is poised to shape the health policy debate in 2020, particularly with respect to the coming elections. Shortly after the Fifth Circuit issued its ruling, the White House issued a statement supporting the decision while emphasizing that it would not immediately affect anyone’s health care. [20] Looking ahead, although the White House has not advanced a replacement plan to date, the ruling may prompt the White House to formally endorse an ACA alternative, such as the plan recently released by the Republican Study Committee, or release a new proposal. It is also likely to play into the current debate leading up to the Presidential election surrounding options to expand public insurance, including Medicare-for-all, Medicare-for-more, and the public option. These discussions will likely set the stage for legislation to be proposed and considered in 2021 long after the Presidential election next November.

Conclusion

As the health policy debate intensifies in 2020, stakeholders should assess the likely impact of Texas v. United States and the possibility of health reform more broadly. The present uncertainty concerning the health policy landscape only highlights the importance of staying engaged and active as policy proposals begin to take shape. K&L Gates’ Public Policy and Law and Health Care and FDA practices are ready to assist stakeholders engage in the debate on these proposals and develop government relations and regulatory strategies to position them in the years ahead.