At the end of March, the U.S. Supreme Court heard arguments on the constitutionality of a provision in the Patient Protection and Affordable Care Act (ACA) that requires most U.S. residents to maintain health care coverage for themselves and their dependents. Individuals who fail to do so pay a penalty to the Internal Revenue Service (IRS) when they file their federal tax returns. This requirement becomes effective January 1, 2014, and is referred to as the “individual mandate.” The Supreme Court is expected to hand down a decision this June. Below is a summary of the main questions before the Supreme Court, the arguments made on behalf of the respective parties—the federal government on one hand, 26 states and private petitioners on the other—and what employers should do in this uncertain legal environment.
Questions Before the Supreme Court
With respect to the individual mandate, there are three questions before the Supreme Court:
- Does the Supreme Court have the right to rule on the constitutionality of the individual mandate?
- Does Congress have the power under Article I of the Constitution to enact the individual mandate?
- If the individual mandate is an unconstitutional exercise of Congress’s enumerated powers, to what extent, if any, should other provisions of the ACA go down with it?
Does the Supreme Court have the right to rule on the constitutionality of the individual mandate?
As a general rule, individuals who wish to challenge a tax or penalty must pay first and litigate later. Certain provisions of U.S. tax law are designed to prevent courts from interfering with the federal government’s right to assess and collect taxes, and compel taxpayers to raise their objections in suits for refunds. If these provisions apply to the individual mandate, no court, including the Supreme Court, could restrain the assessment or collection of the penalty before it is due and before the exhaustion of the procedures that apply to the assessment and collection of a tax. No person will be liable for the penalty until the due date for the 2014 federal income tax return (April 2015). The U.S. Court of Appeals for the Fourth Circuit held last year that the courts, at this juncture, cannot rule on the constitutionality of the individual mandate. Some experts believe the Supreme Court will disagree.
Is the individual mandate constitutional?
The states and private litigants argue that the requirement to purchase insurance or pay a penalty is not a permissible regulation of interstate commerce. They argue that while Congress has the power to regulate commerce, the power to regulate commerce does not include the power to compel individuals to enter into commerce. Such a requirement, the states argue, is an unprecedented use of Congress’s power. A decision to not purchase health insurance constitutes inactivity, which is not connected to interstate commerce. The states and private litigants argue that there is no way to uphold the individual mandate without doing irreparable damage to our basic constitutional system of governance. If this is to remain a system of limited and enumerated federal powers that respects individual liberty, accountability, and the residual dignity and sovereignty of the states, the individual mandate cannot stand.
On the other hand, the federal government maintains that it is clearly within Congress’s power to regulate activities that substantially affect interstate commerce. In the government’s view, the individual mandate regulates an economic activity—the manner in which individuals finance participation in the health care market. In other words, the economic activity that is being regulated is the individual’s decision whether to self-insure health care expenses or purchase insurance. The government pointed out that, in enacting the law, Congress found that an individual’s decision to self-insure results in the shifting of substantial costs and risks to other market participants, and that the individual mandate is a reasonable means to prevent this.
If the individual mandate is unconstitutional, what about the rest of the ACA?
According to the states and private litigants, the entire ACA should be struck down if the individual mandate is found to be unconstitutional because, without the mandate, the remainder of the law will not function as Congress intended. If the states’ position is correct, this means that a number of the provisions that are already in effect (e.g., the age 26 coverage mandate, first dollar coverage of preventive care services for non-grandfathered plans, no preexisting condition exclusions, no lifetime or annual dollar limits with respect to essential health benefits, etc.) will no longer be in effect.
On the other hand, the federal government’s position is that most of the ACA can remain in effect if the individual mandate is declared unconstitutional. According to the federal government, only the guaranteed issue and community rating provisions would fall with it. According to the government, the remainder of the ACA is unrelated to the individual mandate and should remain law if the individual mandate is declared unconstitutional.
What Should Employers Do?
Until the Supreme Court rules on the constitutionality of the individual mandate, employers should postpone any serious consideration of changes to health plans based on the provisions of the ACA that will become effective January 1, 2014. However, employers should make every effort to ensure compliance with the provisions of the ACA that are currently in effect. We understand the U.S. Department of Labor is beginning to actively investigate plans and employers for compliance with the provisions of the ACA. The good news is that the agencies responsible for the ACA’s administration and enforcement (i.e., the U.S. Departments of Health and Human Services, Labor, and Treasury), have stated in guidance that their efforts will emphasize assisting rather than imposing penalties on plans, issuers, and employers that are working diligently and in good faith to understand and come into compliance with the ACA.