Editor: On June 28, the U.S. Supreme Court upheld most provisions of the Affordable Care Act (the Act), with its landmark decision in National Federation of Independent Business v. Sebelius. Please provide a general overview of the opinion and its impact for employers.
Napoli: In very broad terms, the Act was largely upheld, though one major provision was struck down. Specifically, the mandatory Medicaid expansion provision was held unconstitutional, which will have some impact on employers. However, the individual mandate itself was held to be constitutional. For employers and plan sponsors, it’s back to “business as usual” in terms of implementation efforts.
The individual mandate was ruled constitutional based on Congress’s taxing power. The ruling was somewhat surprising, given that many viewed this case as resting on the Commerce Clause, under which the majority of the Court ruled that the individual mandate would be unconstitutional. Once the Commerce Clause decision was made, the Court sought other reasonable grounds on which to uphold the individual mandate, and that’s where the taxing-power argument came into play.
Editor: Mark, we understand that you clerked at the U.S. Supreme Court. Tell us about the inner workings of the Court, including the chief justice’s role, and how the Court comes to arrive at an opinion – or multiple opinions in this case. Is it possible for justices to change their vote or view on an issue?
Harris: Following the oral argument in any case, the justices meet in a conference and vote on the case. While no one is immediately locked into their votes, a final decision must be reached quickly because those justices in the majority (or at least one of them) have to start working on the main opinion, and justices who disagree must begin drafting their dissents.
By the time the conference for this case was held – as a reference point, oral arguments were completed by the end of March – the justices presumably knew how it was going to be decided. Responsibility for writing opinions is assigned by the most senior justice in the group. The only exception to the seniority rule is that the chief justice always decides who will author the opinion or dissent from the group in which he is a member. It was clear that if the chief justice was in the majority, he would author that opinion himself, as is the custom in cases of great national significance.
In this case, the justices worked on their opinions for a few months following the conference. The resulting opinion was very complicated, with partial concurrences and dissents on different aspects of the law and a lot of cross-referencing within the document.
Editor: What are the essential components of the individual mandate and the Court’s treatment of this provision?
Harris: The centerpiece of the Act, the individual mandate, can be distilled into two short sentences. First, starting in 2013, every individual, with a few exceptions, shall maintain minimum health insurance coverage. Second, failure to comply triggers a penalty. Justice Roberts’ decision for the Court turns on how those sentences interact and on understanding the nature of the “penalty” as a tax.
Editor: We note that the Massachusetts individual mandate has been in place for six years. Why is this mandate a concern at the federal level but not at the state level?
Harris: This case has often been described as being about the limits of governmental control over an individual. Famously, it has been asked, can the government force a person to eat broccoli? The answer for states is yes, which is evidenced by Massachusetts’ own individual mandate. States have broad “police powers” to protect their citizens. This case is specifically concerned with the more limited powers of our federal government, which must justify all its actions as falling within some enumerated power in the Constitution.
Editor: With respect to the individual mandate, please discuss the constitutional issues at stake and what the various justices held.
Harris: Three constitutional provisions are involved. The Court upheld the mandate based on the power to levy and collect taxes. The other provision under consideration was the Commerce Clause, which provides that Congress has the power to regulate interstate commerce. A third constitutional provision that’s worth mentioning, because the opinions discuss it, is the Necessary and Proper Clause, which says that Congress can make all laws which shall be “necessary and proper” for executing its powers.
The Roberts opinion first reviews the Commerce Clause argument as it applies to the individual mandate, with the chief justice speaking for the majority in asserting that commerce power does not extend that far. Placed in perspective, this is truly a historic holding. The Commerce Clause has long been construed as being extremely broad, with almost no area of economic legislation falling outside its scope. Everybody agrees that the Act is pure economic legislation. The last time the Court struck down purely economic legislation that expanded the limits of the Commerce Clause was in the 1930s.
To be precise, the majority opinion stated that the Commerce Clause can reach commercial activity, but it cannot reach commercial inactivity. People who don’t want to buy health insurance are choosing not to participate in that market, and Congress cannot force them to participate, using its commerce power. In short, Congress cannot create commerce.
The administration argued that the individual mandate was essential to pay for the Act as a whole. It maintained that even if the individual mandate itself isn’t justified by the Commerce Clause, the overall law clearly affects commerce. Therefore, Congress has the power to choose the mechanisms to implement its policy decisions. The Court rejected that argument, stating that if Congress lacks the power to enact the individual mandate, then merely being part of a larger scheme of regulation is not going to bring it within the Commerce Clause.
The dissent on this point was written by the liberal wing of the court, Justices Ginsburg, Sotomayor, Breyer and Kagan, who essentially disagreed with the majority’s entire approach to the Commerce Clause. It’s a well-established principle in constitutional law that Congress simply needs a “rational basis” for considering economic legislation to be necessary and in the public’s interest in order to enact it under the Commerce Clause. In writing the dissent, Justice Ginsburg asserted that it was beyond question that the rational-basis standard was satisfied here.
Justice Ginsburg’s dissent supported the administration’s argument in support of broader goals, such as near-universal coverage and discouraging “free riders” of sufficient means who use the emergency room without paying the system that supports it.
Editor: Please expand on Justice Ginsburg’s dissent.
Marathas: It is interesting to note that, relative to the Roberts opinion, the Ginsburg dissent may become a footnote in history. Since the 1942 Wheat Case (Wickard v. Filburn), Congress has expanded the federal government’s reach seemingly without limitation; there has been no limiting principle assigned to the Commerce Clause since Wheat Case introduced the notion that individual activity can be regulated under the Commerce Clause even if the individual is not engaged directly in interstate commerce activity. Now, the Roberts Court has established a limiting principle on the concept of inactivity without addressing the standard-of-review issue raised by the dissent. It appears to have drawn a line on the Commerce Clause cases, seemingly rendering the standard-of-review question raised by the dissent moot. At the same time, however, the Roberts Court may well have opened up a new line of federal authority under the Tax and Spend Clause.
The implications of this development are compelling, particularly in light of the current, or any future, economic downturn. For example, in an attempt to rescue a critical U.S. industry during hard times, the government could use its taxing authority to force consumers with certain levels of income to purchase products or pay a penalty if they refuse.
Editor: Does this decision also mean that, as a matter of law, the government cannot force consumers to purchase products based on its authority within the Commerce Clause?
Harris: It does. Courts are well known for reinterpreting earlier decisions in the context of new circumstances to find daylight for new decisions. Now, five justices have clearly disallowed a rationale under the Commerce Clause for forcing consumers out of inactivity.
Interestingly, Justice Ginsburg questioned why Justice Roberts needed to address the Commerce Clause at all, given that he was going to uphold the individual mandate under the taxing power. In determining whether a law is constitutional, the Court doesn’t usually discuss rationales that don’t support its holding.
In this case, the Chief Justice maintained that he had to discuss the Commerce Clause issue because the individual mandate reads like a mandate and not like a tax. Given the Court’s obligation to give a statute every possible chance to survive, he invoked the taxing power as the dominant authority; however, he also included his reasoning under the Commerce Clause as crucial to his holding, not as mere dicta.
Napoli: The Ginsburg dissent asserted that the mandate does not offend the Commerce Clause because the healthcare market fully encompasses the health insurance market. If the broader market is properly regulated by the Commerce Clause, then so is the smaller market. During oral arguments, Justice Kennedy disagreed and characterized each market as separate and distinct. He reasoned that while everyone participates in a regulated healthcare market, they cannot be pushed into a completely separate insurance market.
Harris: And Justice Kennedy’s argument has now become the law.
Editor: On what basis did the majority decision uphold the individual mandate under the power to tax?
Harris: Recognizing the Court’s obligation to save a statute wherever possible, the Chief Justice asked, “If the mandate fails the constitutionality test under the Commerce Clause, was there another power under which it could pass?” He then made a very clever move in reconceptualizing the mandate as an exercise of the tax power and characterizing the failure to obtain health insurance as another taxable item.
Editor: How did Justice Roberts get around the Anti-Injunction Act, which prohibits a litigant from challenging a tax that has not yet been assessed? As we know, the individual mandate is not effective until 2014.
Harris: While Congress can use any language it likes in drafting a law, the Constitution (and hence the courts) does not defer to Congress’s characterizations of its own enactments. On the other hand, Congress chose to use the word penalty in the individual mandate, and it also drafted the Anti-Injunction Act as applicable to taxes. The Chief Justice reasoned that if Congress did not see fit to call the individual mandate a tax, it must have intended to exclude the mandate from the operation of the Anti-Injunction Act.
The Chief Justice then cited prior occurrences of the Court not deferring to congressional labels and suggested several reasons as to why the individual mandate should be classified as a tax from a constitutional standpoint: Funds are paid to the Treasury; payment is enforced by the IRS; this activity is reported on tax returns; and the mandate generally resembles a tax provision – for instance, it raises revenue and has no scienter requirement.
On this point, Justices Scalia, Thomas, Alito and Kennedy strongly disagreed in their joint dissent, and they challenged Justice Roberts on this change of view as to use of the terms “penalty” versus “tax.” They rejected the notion that what the law defined as a penalty could now be redefined as a tax. A reflection of their conviction is the fact that all four Justices signed the opinion, rather than one writing on behalf of the group. Further, the opinion included some very aggressive language, such as: “we have never held – never – that a penalty imposed for violation of the law was so trivial as to be in effect a tax.”
Editor: Let’s turn to the Medicaid expansion provisions of the Act and their impact on employers. Peter, would you start the discussion?
Marathas: The Act expands Medicaid by requiring the states to provide federally prescribed health insurance to all individuals under the age of 65 with an income of less than 133 percent of the federal poverty level for purposes of obtaining insurance. Under the Act, states refusing or failing to comply would lose not only the new funding associated with the group just defined, but also all Medicaid funding that they presently receive.
The Roberts opinion ruled that although the spending clause of the Constitution grants certain powers to Congress, this Medicaid expansion borders on coercion and, thus, is unconstitutional. The Court stated, “When pressure turns into compulsion, the legislation runs contrary to our system of federalism.” It found that the severability provisions in the Medicaid statutes permitted the Court to tell the government that while compulsion was unconstitutional, new funding could be offered to states that adopted the expanded Medicaid program.
In 2014, employers with more than 50 full-time equivalent employees will be penalized if they don’t provide all employees with affordable care and if, instead, employees seek subsidized benefits from the state exchanges. Because the state can opt out of the enhanced Medicaid benefits with no penalty applied to existing benefits, more people will be looking to their employers for affordable care. This is a significant issue for employers and will be a cost driver in 2014.
Napoli: Placed in perspective, it is estimated that 20 million individuals will be picked up by the Medicaid provision, so to the extent that states do not accept the expansion, many of those individuals will need coverage through their employers.
Marathas: Further, employers face uncertainties created by ambiguity in the Act and by its delegation of substantial authority to federal agencies to draft regulations. Add to this tip of the iceberg the fact that states will also issue regulations. For instance, Massachusetts already has a very robust regulatory scheme.
Provisions of the Act will be tested in court, as is the case already with 40-plus Catholic employers (universities, schools and hospitals, among others). They are suing the Department of Health and Human Services (HHS) under the First Amendment, claiming that the Act violates their First Amendment right to religious freedom by ordering them to pay for birth control and birth termination services under the auspices of preventive care. Since that is a First Amendment challenge, there is no doubt in my mind that it will find its way to the Roberts Court.
Editor: We understand that the Act allows the federal government to step in and establish federally funded exchanges in states that have opted against implementing state exchanges. Please describe this area of the Act and whether it might be challenged in court.
Marathas: Starting in 2014, insurers in each state will offer their products through web-based exchanges that enable consumers to compare and select offerings.
While the Act provides for initial federal funding to help set up state exchanges, ultimately those exchanges will have to sustain themselves through either user fees or state support. By 2013, the Act requires each state to make a plan for setting up an exchange. If the plan is not launched by 2014, the Act authorizes the federal government to go into the state and set up an exchange for it, which could trigger litigation by states that brought the Supreme Court case.
In addition, employers in states in which the federal government established the exchange may be able to challenge the assessment of any penalty tax based upon one of their employees receiving a subsidy in that federal exchange. These employers may consider suing to enjoin the assessment of the penalty. The Act’s penalty provisions cross-reference the section of the Act dealing with “state exchanges” and not the section of the act dealing with “federal exchanges.” The federal agencies have attempted to “clarify” this by saying that the penalty applies to both. My guess is that some employers in Texas or Louisiana or another state that does not establish an exchange might want a court’s opinion on whether a federal agency has that authority to “clarify” a statute.
Editor: What is the impact on employers with respect to their current health plans and future compliance efforts?
Marathas: The bottom line for employers is that they need to start thinking strategically. Unfortunately, due to many uncertainties, it is difficult to predict how costs will increase under the Act. There are too many rules as yet unwritten. As a hedge, they must start monitoring current group health plans in light of the Act so they are not faced with avoidable premium increases when provisions take effect in 2014.
With respect to compliance under the Act, the Department of Labor already is conducting audits, and HHS is empowered to do audits, which it will start soon. Add in the IRS’s well-established audit process, and it is clear that employers need to focus on compliance right now. As with any new law, the agencies likely will focus on reasonable efforts, rather than hitting employers with penalties. That said, companies will be in a difficult position if they have to report to a federal regulator that they have not yet started to plan compliance under this new and very complicated federal law.
Our advice to employer clients is to immediately contact payroll vendors, CPAs and insurers and to start planning for the Act’s requirements with respect to payroll issues and insurance coverage plans. A sampling of issues to address sooner rather than later includes requirements for reporting premium values on W-2s, new caps on flexible spending accounts, open-enrollment notices, automatic enrollment for new employees and various payroll taxes for high-income individuals.
We expect and need more guidance on the “pay or play” mandate, which will take effect in 2014, including greater clarity on what constitutes “essential” benefits and “affordable” coverage. As mentioned, employers face a big cost issue in either providing affordable care or paying a penalty for employees who seek it through state insurance exchanges.
Editor: Please discuss other compliance-related strategies that may be triggered by the Act, such as workforce realignment, retiree-only plans and the retiree medical exit strategy. What issues and litigation risks do employers face?
Napoli: In response to the pay-or-play mandate, some employers – particularly in industries with a high-turnover, lower-wage workforce – have started to implement a workforce-realignment strategy. This involves assessing whether full-time employees might be replaced by part-time staff for certain types of work, thereby reducing the number of employees covered under the pay-or-play mandate.
The Act defines a full-time employee as an individual who works 30 or more hours, which will require further adjustment by employers who currently view part-time employees as those working under 40 hours. Either working hours will need to be cut, or former part-time employees will have to be reclassified as full-time.
Shapiro: This workforce-realignment strategy may present class action litigation risk with respect to ERISA Section 510, which can be found at 29 U.S.C. Section 1140. Section 510 forbids employment decisions that have, as a prohibited animus, any negative effect on benefits. Class action plaintiffs could argue that reducing employee hours to fewer than 30 will reduce healthcare benefits.
Another important risk of litigation involves communications from fiduciaries about health plans as the Act becomes effective, including the potential for misstatements to employees about benefits and plan administration in this rapidly changing environment.
Napoli: Fiduciary breach claims may also arise with respect to retiree-only plans and retiree medical exit strategy issues. Under the Act, retiree-only plans that cover fewer than two active employees who may be covered as dependents of retirees are exempt from the mandate; thus, some employers are solving this problem by spinning off separate plans.
The retiree medical exit strategy goes one step further in representing a way for employers to use the exchanges as a soft-landing option for eliminating the need to provide medical coverage altogether. In essence, employers can set up health reimbursement accounts and fund them with the $2,000 penalty for each retiree who then seeks benefits through the exchanges.
Shapiro: Again, employers should take this step with awareness of the potential class action litigation risks if retirees end up with inferior benefits. An independent review organization (IRO) exists to make final decisions on adverse benefit determinations with respect to ERISA plans. The plaintiffs’ bar will argue that the IRO has the power to review and make a determination as to whether an adverse benefit decision or a rescission of coverage is a violation of fiduciary obligations under ERISA. Employers must determine if plan fiduciaries are legally vulnerable and assess the implications for risk management, including the adequacy of insurance coverage.
Editor: Are there other areas of litigation risk for fiduciaries?
Napoli: Yes. One pertains to the maintenance of a plan’s grandfathered status, which may eliminate the need to comply with certain of the Act’s coverage mandates. If the plan sponsor takes the position that a plan is grandfathered, participants must be notified in accordance with specific regulations via a summary plan description or document. Should such a disclaimer not be provided, the plan may lose its grandfathered status, leading to the risk that a beneficiary could challenge the plan administrator for continuing to treat the plan as grandfathered – i.e., by not providing coverage and enhanced benefits under the Act as mandated through ERISA.
Shapiro: Clearly, the plaintiffs’ bar will be looking for ways to exploit technicalities as to whether a plan fiduciary has successfully maintained grandfathered status, and we expect litigation because the stakes here are very high.
Napoli: Finally, we also expect increased litigation arising from enhanced whistleblower protections under the Act, which applies the federal whistleblower statute to violations of the Act. Thus, if employees or plan participants feel that their rights are being violated, such as by being punished for raising an issue regarding implementation of the Act, they can file a claim under the whistleblower statute and seek special damages.
Typically, punitive or special damages are not available under ERISA, which generally limits available remedies and, therefore, can serve as a welcome shield for employers. That benefit is now eliminated with respect to claims asserted by whistleblowers under the Act, which may have a particularly significant impact in the areas of workforce realignment, the retiree-only plan and its spin-off, the retiree medical exit strategy.
Editor: Do you have any final thoughts for our readers?
Shapiro: I was struck by Justice Roberts’ comment that “… we possess neither the expertise nor the prerogative to make policy judgments. Those decisions are entrusted to our Nation’s elected leaders, who can be thrown out of office if the people disagree with them. It is not our job to protect the people from the consequences of their political choices.” This statement reminded me of Justice Roberts’ comment in Conkright v. Frommert, “People make mistakes. Even administrators of ERISA plans.”
Napoli: On the practical side, I would like to conclude with some thoughts on next steps, starting with a thorough review of plan documents and summary plan descriptions. The Act is forcing employers to review and understand their plans and address compliance issues accordingly, and employers are well advised to consider all compliance options during this process.
As we’ve discussed, many regulations were created by the Act, and many more are still to come. We’ve seen that regulatory agencies are seeking comments from employers and providers, so we are encouraging clients to speak up about their firsthand experience with regulatory issues. While the agencies don’t always agree with an employer’s position, in our experience, they have been open-minded and have given genuine consideration to our comments. In some instances, they have modified their position based on feedback, so it is a worthwhile exercise.
Published August 7, 2012.
