Marking the end of a tumultuous decade of significant change in the healthcare industry, the US Court of Appeals for the Fifth Circuit issued its decision in Texas v. Azar on December 18, 2019. The decision portends potential chaos in health insurance coverage and puts the future of the entire Patient Protection and Affordable Care Act (ACA) in limbo. The Fifth Circuit upheld a portion of the Texas district court’s controversial decision that found the ACA’s individual mandate—which required individuals to purchase health insurance or pay a penalty—unconstitutional, but declined to address the rest of the law, remanding questions about the severability of those provisions and the appropriate remedy back to the district court for further analysis. For now, the decision appears to have little day-to-day impact.

The majority’s analysis relies on what it described as the “extremely fractured” ruling by the US Supreme Court in NFIB v. Sebelius to conclude that the individual mandate is now unconstitutional. In NFIB, Chief Justice Roberts upheld the individual mandate as a valid exercise of congressional authority as a tax, after having determined that it would not have been upheld as a command under the US Constitution.

The Fifth Circuit panel majority reasoned that once the shared responsibility payment was zeroed out by Congress in 2017, the core character of the individual mandate no longer functioned as a tax. Absent a revenue-raising objective, the individual mandate would function solely as a command. And as the NFIB majority, including Chief Justice Roberts, held therein, the command, on its own, is an unconstitutional exercise of congressional power. Thus, the individual mandate itself is unconstitutional.

Road to the Fifth Circuit

In addition to the individual mandate, the ACA implemented several reforms designed to address consumer protections in health insurance, such as protections for individuals with preexisting conditions (42 USC § 300gg-3); the “guaranteed-issue requirement,” which forbids insurers from turning customers away because of their health; and the community rating requirement, which keeps insurers from charging people more for insurance due to their preexisting medical conditions (42 USC §§300gg, 300gg-1, 300gg-13(a)(3)-(4)). Other reforms sought to lower health insurance by ensuring that all Americans participated in the insurance pool to prevent adverse selection and the skewing of insurance pools, as the above provisions brought more individuals into the insurance market. The ACA individual mandate and accompanying penalty were designed to aid in accomplishing this goal (42 USC § 5000A(a)). Critics of the penalty argued that it was not large enough to influence the purchase of insurance, and since its passage in 2010, the ACA insurance reforms have been slowly eroded.

Two major Supreme Court decisions have modified the practical application of the ACA, and since that time Congress has acted to amend the ACA. Texas v. Azar emanates from the 2017 Tax Cuts and Jobs Act (TCJA), which gutted the “shared responsibility payment” component of the ACA, reducing its amount to $0, effective January 2019 (26 USC § 5000A(c)). Two months after the passage of the TCJA, the plaintiff states and two individuals filed Texas v. Azar, in which the plaintiffs argued that the individual mandate was effectively nullified when the companion provision in the statute was reduced to $0. Once nullified, the plaintiffs argued that the shared responsibility payment failed to take the form of a tax. Failing to meet the requirements necessary to constitute a tax meant that the very constitutionality of the individual mandate was questionable under the Supreme Court’s determination in NFIB. It was this analysis that propelled Texas v. Azar forward.

Practically, the Fifth Circuit decision furthers the uncertainty that has plagued the healthcare and insurance industries since the 2010 passage of the ACA. Those reliant on the many provisions of the ACA can continue to hope that the law will “live to fight another day,” while masking quiet concerns over whether the ACA will survive at all. For those who have consistently fought the ACA, including the concept of the individual mandate, the legal constitutionality of the individual mandate has now been struck down at the appellate level. The matter of its linkage to the remainder of the statute is in question.

Major Questions About Severability and Remedy Remain Open

The severability question is now the most critical aspect of Texas v. Azar. It is in the severability analysis that the entire viability of the ACA now resides. And it is the very district court that initially struck the entire ACA down that must render this important severability analysis.

The Fifth Circuit remanded to the district court, finding that to “strike the delicate balance that severability analysis requires, the district court must undertake a similar inquiry for each segment of the post-2017 analysis that it ultimately declares unconstitutional—and it has not done so.” Texas v. Azar at 57.

The two-judge majority mused that “[i]t may still be that none of the ACA is severable from the individual mandate, even after this inquiry is concluded. It may be that all of the ACA is severable from the individual mandate. It may also be that some of the ACA is severable from the individual mandate, and some is not. But, it is no small thing for unelected, life-tenured judges to declare duly enacted legislation passed by the elected representatives of the American [p]eople unconstitutional. The rule of law demands a careful, precise explanation of whether the provisions of the ACA are affected by the unconstitutionality of the individual mandate as it exists today.” Id. at 60.

The Fifth Circuit instructed the district court to look at severability in conjunction with three distinct areas of the law:

  1. The closely intertwined consumer protection provisions of the ACA specifically citing the individual mandate (Section 5000A(a)); the guaranteed-issue requirement, 42 USC §§ 300 gg, 300 gg-1; and the community rating requirement, 42 USC 300g-4.
  2. The other insurance provisions of the ACA: “insurance regulations and taxes,” “reductions in federal reimbursements to hospitals and other Medicare spending reductions,” the insurance “exchanges and their federal subsidies,” and the “employer responsibility assessment,” id. at 50.
  3. A third category that includes a wide-ranging list of provisions described as “minor,” such as taxes on certain medical devices or provisions requiring the display of nutritional content at restaurants.

The court also requested an analysis that takes into account the many amendments and changes made to the ACA since its original passage in 2010, requesting a “careful, granular approach to carrying out the inherently difficult task of severability analysis in the specific context of this case.” Finally, the Fifth Circuit implored the district court to follow its recent ruling in Collins v. Mnuchin, 938 F.3d 553 (5th Cir. 2019) (en banc) in a footnote.

It is hard to discern any rationale for the court’s extensive discussion of how the district court should engage in its severability analysis when it left it to the district court to analyze, other than using it as a way to signal to the district court how much chaos the it could create by continuing to hold that the entire ACA is unconstitutional. The Fifth Circuit goes out of its way to point out to the district court the folly of holding “minor” provisions also unconstitutional, failing to engage in its own analysis. The real question is whether there will be any move by the GOP in Congress to manage the eventual fallout should the district court ultimately find that the individual mandate, held unconstitutional by the Fifth Circuit, renders the entire ACA unconstitutional.

Of equal interest is the dissenting opinion authored by Judge Carolyn King, which deals with the arguable flaws associated with the core determination that the individual mandate itself is unconstitutional. The dissent quarreled with the determination of the majority opinion that the $0 fee renders the provision null and void as a tax. Rather, Judge King argued that the tax is just a tax for $0 and that the TCJA does not mean that the statute could not someday be amended to increase the tax amount again. Moreover, she argued that a reading in which the shared responsibility payment is no longer valid due to its effective elimination does not also render the individual mandate itself invalid. The dissent read the two separate statutory provisions as remaining separate, despite the fact that the two provisions were originally intended to work in concert. The dissent argued that in 2017, Congress knew exactly how to gut the individual mandate, and the remaining provisions of the ACA, for that matter, but chose not to do so. “All the TCJA did . . . was change the amount of the shared-responsibility payment to zero dollars. . . . [T]hat the coverage requirement now does nothing should be the end of this case,” said Judge King. “Today the shared responsibility payment’s meaning has not changed—it still gives individuals the choice to purchase insurance or make a shared responsibility payment—but the amount of that payment is zero dollars, which means that the coverage requirement now does nothing.” Id. at 80.

It is important to note that the final position of the government before the Fifth Circuit, which it took only upon appeal, is that any determination by the courts as to Texas v. Azar should be limited solely to the plaintiffs in the case, namely the states of Texas, Alabama, Arizona, Florida, Georgia, Indiana, Kansas, Louisiana, Mississippi, Missouri, Nebraska, North Dakota, South Carolina, South Dakota, Tennessee, Utah, West Virginia, and Arkansas and individuals Neill Hurley and John Nantz.

Uncertain Effects

The decision in Texas v. Azar is confusing for a number of reasons, not the least of which is the continually morphing defense positions that the defendants, the US Department of Health and Human Services and the Internal Revenue Service, have taken during its journey through the courts. Additionally, due to the reversal of the defendants’ positioning, the group of intervening states forced themselves into the lawsuit in an attempt to protect the ACA provisions that were under assault by both the plaintiffs and, to a growing degree, the government agency defendants. These procedural legal machinations all but assured that a lengthy analysis of standing would be included in the Fifth Circuit’s decision. This analysis chose to forgo the lengthy standing discussion. The intervening states include California, Connecticut, District of Columbia, Delaware, Hawaii, Illinois, Kentucky, Massachusetts, New Jersey, New York, North Carolina, Oregon, Rhode Island, Vermont, Virginia, Washington, and Minnesota.

The actual impact of the decision itself is not readily apparent. The decision did not alter the availability of insurance on the exchanges, in the individual market, or offered by employers. The popular “consumer” provisions of the ACA have not changed: guaranteed issue, the prohibition on applying preexisting conditions to insurance coverage availability, coverage for young adults up to age 26, community rating, and the availability of insurance subsidies. The continued expansion of Medicaid programs from state to state will move forward, having been determined by another equally impactful Supreme Court challenge to the Medicaid expansion provisions within the ACA. At most, the Fifth Circuit held unconstitutional an individual mandate that carried no financial penalty or other consequence. Thus, there is no impact from the decision to date, and it may be many months or even years before the issues remanded to the district court are resolved.