Editor's Note: In a dramatic conclusion to the heated debate surrounding the American Health Care Act (AHCA), the bill was withdrawn after it became clear that House leadership did not have enough votes to pass it. There is much speculation about what will happen next, including pressing questions around whether efforts will ramp up to give states more flexibility and if Affordable Care Act (ACA) taxes will get pulled into discussions on tax reform. In addition, repeal and replace discussions appear to be continuing in Congress and the White House.

Congress also will be taking up other potential vehicles for healthcare change, such as the Children's Health Insurance Program (CHIP) reauthorization. Regardless of any Congressional action, the Trump Administration has significant administrative authority to change Medicaid and ACA implementation. Whatever happens, there could be substantial effects on healthcare law. On March 7, Manatt Health presented a new webinar, summarized below, examining how the new Administration could impact healthcare litigation. Click here to view the webinar free on demand and here to download a free copy of the webinar presentation.


The ACA Executive Order

President Trump signaled his support for dismantling the ACA by issuing an Executive Order on his first day in office. (NOTE: With the withdrawal of the AHCA on March 24, Republicans acknowledged that Obamacare will remain "the law of the land" for the foreseeable future.)

Trump's Executive Order directs federal agencies to minimize regulatory and economic burdens of the ACA but does not issue any new legal authority to make changes to key provisions. To the extent possible, agencies will ease or eliminate ACA requirements imposed on individuals, as demonstrated by the Internal Revenue Services (IRS) reverting back to allowing taxpayers to file tax returns that do not report on coverage status. Agencies must, however, continue to comply with the process requirements of the Administrative Procedure Act, meaning they must follow multiple steps to change any regulations.

Competing Visions for Replacing the ACA

As we saw in the days leading up to the withdrawal of the AHCA, Republicans have competing visions for replacing the ACA. While united on repealing and replacing the ACA, Republicans continue to differ widely on the details and how ACA replacement relates to broader entitlement reform. There are three key factions in both the House and the Senate, though the Senate tends to be a bit more moderate:

  • ACA repair-oriented. Supportive of moderate adjustments to the ACA, members of the repair-oriented segment—which includes some Democrats—are proponents of maintaining some ACA provisions and minimizing market disruptions.
  • Entitlement reform-oriented. This group—which includes Speaker of the House Paul Ryan and Secretary of Health and Human Services (HHS) Tom Price—is supportive of wholesale replacement of the ACA but mindful of political consequences. Its members are seeking broader action on entitlement reform across public programs, such as Medicaid, Medicare and the Marketplaces.
  • Budget-oriented. The budget-oriented faction—which includes the Freedom Caucus—views ACA repeal as a short-term imperative and members are strong advocates for aggressive entitlement reform and reduced federal spending.

Medicaid Administrative Actions: New Waiver Requests Expected

Before the ACA, there were a number of waivers granted by the Obama Administration. These past waivers:

  • Gave states flexibility to charge premiums as long as they were no more than 2% of income.
  • Allowed cost sharing in the Medicaid population, somewhat similar to what was allowed in the Marketplaces.
  • Provided for health savings accounts and in some states, such as Indiana, wellness behavior incentives.
  • Allowed work referrals but not the requirement for people to have a job as a condition of receiving Medicaid insurance.
  • Permitted benefit and coverage changes, such as premium assistance for people to buy into the Marketplace, which Arkansas and New Hampshire put into place. Several states also tried using premium assistance to combine Medicaid coverage with employer-based coverage.

Going forward, there are likely to be more Section 1115 waivers. Upcoming proposals may include:

  • Charging premiums above 2% of income.
  • Losing coverage for non-payment of premiums for those at or above 100% of the federal poverty level (FPL).
  • Locking people out for nonpayment of premiums. (Indiana has a six-month lockout for those who fail to pay their premiums. New waivers may go beyond that.)
  • Putting restrictions on eligibility, such as work requirements, time limits on benefits, and enrollment caps.
  • Locking people out for failure to renew eligibility.
  • Allowing states to limit formularies, decide whether to cover new drugs and exclude some FDA-approved drugs from formularies.

The Patient Freedom Act

Introduced in January [prior to the AHCA] by Senators Bill Cassidy (R-LA) and Susan Collins (R-ME), the Patient Freedom Act could be viewed as a default position to repeal and replace. It is a complex proposal that gives states three options—all of which include the flexibility to pursue waivers or actions under state law:

  • Option 1: ACA Preservation permits a state to preserve the ACA as it is today, except that the aggregate value of the subsidies cannot exceed the value of the federal subsidies the state would have received under Option 2 (below).
  • Option 2: State Alternative provides Health Savings Account (HSA) credits to individuals enrolled in commercial coverage and ineligible for other federally-funded programs. HSAs may be used to fund medical care expenses, including premiums and cost sharing. The total federal subsidy is 95% of premium and cost-sharing subsidies available to a state's individual market enrollees. The subsidy is increased for states that do not adopt Medicaid expansion.
  • Option 3: ACA Rejection allows states to pursue their own approaches to coverage, without federal funding.

Medicare: The Political Third Rail

Many Republicans support fundamental changes to Medicare. Medicare, however, is the political third rail, making short-term changes in legislation unlikely. We don't foresee any changes in Part D benefits nor do we anticipate payment cuts for providers.

There may be some administrative changes. The CMS Innovation Center will most likely continue, perhaps with more voluntary experiments. If Medicare reaches a certain spending level, the Independent Payment Advisory Board (IPAB) is likely to be triggered, initiating spending restrictions.

Employer-Sponsored Coverage: The Most Stable Healthcare Market

The employer market—which covers more than half the country—is the most stable, so any changes will be carefully considered to avoid disruption. Both the employer and individual mandates are likely to be repealed, with minimal impact on coverage The "Cadillac tax"—unpopular with both Republicans and Democrats—has been delayed for another five years.

Some changes to insurance reforms, such as eliminating annual limits, could affect employer coverage. Young adult coverage—allowing people to stay on their parents' insurance until age 26—is likely to remain in place, but the primary impact is on the individual market. Finally, the Republicans favor longer-term changes that will equalize the tax advantages for individual and group insurance. Equal taxes for group and individual insurance is going to continue to be a major issue.

What May Happen Next?

With the AHCA withdrawn, one possible scenario would be for Republicans to mimic the repeal bill they passed in 2015 that was vetoed by then-President Obama. In this scenario, Republicans would use the budget reconciliation process to address pressure points, including repealing the individual and employer mandates; premium and small business tax credits; cost-sharing reduction payments to insurers; Medicaid expansion for adults earning less than 138% of FPL; and taxes on individuals, insurers and providers, including the "Cadillac" and medical device excise taxes.

Increased Lawsuits Stemming from Reduced Medicaid Funding

We are likely to see cost controls of some type on future Medicaid spending, most likely in terms of per capita funding—capped funding on a per-enrollee basis, with potentially different caps for certain groups, such as children or the disabled. There already is disparity between states that have robustly expanded their Medicaid programs and states that have staunchly resisted expansion—and block funding would result in even starker differentiation.

If Medicaid expansion is repealed, there is an open question as to what the government's funding liability will be to states that have made significant expenditures expecting substantial financial support from the federal government. That question may play out in court, the political arena or both.

Medicaid providers, particularly hospitals, are most likely to be the litigants, given their interest in reducing uncompensated care rates. There is also the possibility that beneficiaries will bring suit, alleging that their entitlements were diminished without due process of law. As Medicaid funding becomes more limited, states may try to limit their coverage pools—such as by capping enrollment or increasing cost-sharing—which also could be the subject of beneficiary suits, alleging that these restrictions disproportionately impact some groups more than others.

Where Do Insurance Companies Stand on Repealing the Individual Mandate?

Insurers generally have taken the position that the individual mandate is critical to their ability to provide benefits. Any proposals are likely to include the requirement to continue coverage for preexisting conditions and to keep people on their parents' plans until they are 26. But it is unlikely that they will force people to buy coverage if they don't want it. If this is the scenario that comes to pass, litigation seems likely, given the financial stakes for insurers.

Repeal Could Decrease Employee Lawsuits

One of the most hotly litigated issues under the ACA is the requirement for employers to provide preventive contraceptive services without cost-sharing to the employee. This requirement is not imposed by statute or regulation but is on a list administered by the HHS's Health Resources and Services Administration (HRSA). The Trump Administration can simply remove contraceptive services from the list, and there would no longer be an issue.

The broader question is whether an employee has a right to these services under other provisions of law, such as under the Employee Retirement Income Security Act (ERISA). Even if no federal law applies, there are plenty of state laws that provide cause of action. Contraception is unlikely to go away as an issue, but suits may be framed in different ways.

Repeal Could Drive Contractual Litigation

Contractual litigation will likely arise in the event repeal does ultimately happen, because underlying agreements may not have anticipated repeal. Examples are litigation between states and contractors, if states dismantle their exchanges and litigation from contracts (such as shared risk agreements) that took the continued existence of the ACA as an implicit promise of the agreement.

What Would Happen to Prior Lawsuits?

Once a case has been decided and the appeal, if any, has been satisfied, the decision is law and would not be affected by complete or partial repeal. If there were a repeal of the ACA, these cases would most likely become historical footnotes. They would become moot, once the relevant provision of the ACA was repealed, though they could serve as precedent in other cases.

Status of Ongoing Lawsuits Regarding ACA Implementation

There is a statute under federal law requiring state Medicaid plans to provide networks and payments that are sufficient to enlist enough providers to offer an equivalent level of care and services as is available to the general population in the same geographic area. If some form of block grants or per capita caps were enacted, there could be litigation alleging that reducing Medicaid payments resulted in providers no longer being willing to enroll in the Medicaid program, and therefore, that the number of providers is insufficient to provide care.

This is an argument that has been tried before in California and the Supreme Court, which determined that there was not a right of action on the part of beneficiaries and providers to litigate against state spending cuts to the Medicaid program. Therefore, this approach is unlikely to succeed, though we could see it come up again in the litigation context.

Status of the Section 1557 Prohibition Against Discrimination Based on Gender Identity or Termination of Pregnancy

Section 1557 of the ACA prohibits discrimination on the basis of gender identity or termination of pregnancy. On December 31, 2016, Judge Reed O'Connor issued an order granting a preliminary injunction preventing the government from enforcing the prohibition in the Final Rule on Nondiscrimination in Health Programs and Activities, 81 Fed. Reg. 31376 (May 18, 2016), against discrimination on the basis of gender identity or termination of pregnancy.

The preliminary injunction is currently under interlocutory appeal to the Fifth Circuit. (The appeal was initiated by the American Civil Liberties Union (ACLU) and the River City Gender Alliance, not by the government.) If Section 1557 is repealed, the decision becomes moot.

If gender identity protection under Section 1557 were to go away, there's nothing to stop a state from taking over that protection. A state could technically just paste Section 1557 into its own code.

A number of states—including California, New York and Massachusetts—already have enacted laws and/or policies providing that denials of coverage for treatment of gender identity disorder may be discriminatory. It is likely that litigation on this issue will proceed at the state level.

The same holds true for contraception, with states willing to step in to ensure coverage, even if a replacement bill does not. California, Maryland, Vermont and Illinois already have codified the contraceptive mandate in state law, and New York, Minnesota, Colorado and Massachusetts are pursuing similar measures.

The Outlook for Pharmaceutical Litigation

Based on the significantly increased value of pharmaceutical stocks after President Trump's election, many have speculated that the industry stands to gain more from a Trump presidency than it would have from a Clinton presidency. Therefore, the possibility of litigation seems lower than for other constituencies. On the other hand, President Trump has criticized the pharmaceutical industry on issues such as rising prices. It remains to be seen whether we will see any changes in pharmaceutical litigation. On the litigation side, the biggest impact on any business may well be how it relates to this Administration and whether it falls in or out of favor.


Whatever changes may come, stakeholders are hoping they will be both gradual and predictable. When asked if they are going to participate in the Marketplaces in 2018, many insurers have said that their decisions will be based on whether the situation has begun to settle down and be more predictable. If changes are happening that they can't anticipate, they are more likely to be risk averse. It is important for Congress and the White House to understand that they can't keep everything unsettled for too long without causing real disruption in the market.