On June 28, 2012, the US Supreme Court ruled on constitutional challenges to the Patient Protection and Affordable Care Act (PPACA), as amended by the Health Care and Education Reconciliation Act (HCERA), collectively known as the Affordable Care Act (ACA). The Court upheld the ACA's individual mandate as a valid exercise of Congress's power under the Taxing Clause, but limited the law's expansion of Medicaid.
In a highly anticipated decision, the US Supreme Court ruled on June 28, 2012, that the Affordable Care Act's (ACA's) individual mandate is a constitutional exercise of Congress's power to tax. Under the individual mandate, beginning in 2014, individuals must purchase health coverage that provides minimum levels of coverage or make an annual payment. The Court also limited the ACA's expansion of Medicaid, concluding that the government cannot threaten States that fail to expand their Medicaid programs with the loss of their existing Medicaid funding.
Background
The decision is the culmination of lengthy litigation that:
Began shortly after the ACA was enacted in March 2010, when a group of plaintiffs that included 26 states, private individuals and a lobbying organization challenged the law's constitutionality.
Was followed by a series of conflicting district and appellate court decisions.
Ultimately reached the Supreme Court, which:
agreed in November 2011 to review certain issues in two consolidated challenges to the law; and
heard more than six hours of oral arguments over three days in March 2012.
The Court's decision includes an opinion by Chief Justice Roberts, with some subparts joined by a majority of the justices, and separate concurring and dissenting opinions.
Anti-Injunction Act Does Not Apply
Addressing a jurisdictional question, the Court first determined whether the dispute was barred by the Anti-Injunction Act (AIA), an Internal Revenue Code rule that prohibits pre-enforcement actions to enjoin the collection of federal taxes. The Court:
Deferred to Congress's description of the ACA's "shared responsibility payment" for failure to satisfy the individual mandate as a penalty.
Reasoned that the payment need not be considered a "tax" for purposes of the AIA.
The AIA therefore did not apply to the dispute, permitting the Court to reach the merits of the case.
Individual Mandate Not Valid under Commerce Clause
Five justices, including Chief Justice Roberts, rejected the government's argument that:
Congress can require individuals to purchase health insurance under its commerce power.
Failing to buy insurance affects interstate commerce.
The Chief Justice's opinion stated that the individual mandate could not be sustained under the commerce power because:
The mandate does not regulate existing commercial activity.
Construing the Commerce Clause to permit Congress to regulate individuals for doing nothing would expand Congressional authority too far.
The Court also rejected the argument that Congress's commerce authority allowed it to dictate an individual's conduct in the present based on anticipated future activity (that is, that everyone will participate in the health care market at some point in their lives).
Individual Mandate Upheld under Taxing Clause
However, a five-justice majority agreed that the individual mandate was a valid exercise of Congress's power under the Taxing Clause, notwithstanding the payment's label under the ACA as a penalty. The majority concluded that the payment required for not obtaining health insurance under the individual mandate was properly characterized as a tax. According to the Court, the fact that the payment was described in the ACA as a penalty rather than a tax did not determine whether the payment was an exercise of Congress's taxing power. Applying a functional test, the Court reasoned that:
For most individuals, the payment amount would be much less than the price of insurance.
The payment did not depend on willful noncompliance.
The payments will be collected solely by the IRS using normal means of taxation, without methods suggesting punitive sanctions.
That the individual mandate sought to influence decisions about whether to buy health insurance did not make it an invalid exercise of Congress's taxing power. Also, the Court concluded that the individual mandate payments were not a direct tax requiring apportionment among the states.
Medicaid Expansion Funding
The justices were divided on whether the ACA's expansion of Medicaid exceeded Congress's authority. These rules would:
Expand the scope of the Medicaid program.
Increase the number of individuals the states must cover.
Opposing the expansion, the states argued that Congress was impermissibly coercing them to accept the Medicaid expansion by threatening to withhold their Medicaid funding, both existing and new, if the states failed to accept accompanying conditions. Joined by two other justices, the Chief Justice:
Acknowledged that the ACA dramatically increased states' obligations under Medicaid.
Characterized Congress's financial inducements as a "gun to the head" for the states.
Concluded that Congress cannot punish states that decide not to participate in the expanded Medicaid program by withdrawing their existing Medicaid funding.
However, states that voluntarily accept funds from Congress under the ACA's Medicaid expansion could be required to comply with Congress's conditions on use of the funds.
Practical Implications
For employer-sponsors of group health plans, the Court's decision means that for now, and subject to the outcome of the fall elections, the ACA requirements will continue to take effect under the timeframes set out in the March 2010 law and subsequent implementing guidance (see Practice Note, Effective Dates and Summary of Key Provisions under the Affordable Care Act (ACA) Chart). Employers that took a wait-and-see compliance approach in advance of the Court's ruling will now need to implement those ACA requirements having 2012 and 2013 compliance dates (for example, the summaries of benefits and coverage (see Practice Note, Summaries of Benefits and Coverage under the ACA) on a compressed schedule. Of course, a number of the ACA's requirements are already in effect (for two examples, see Practice Notes, Coverage for Adult Children to Age 26 under the ACA and Internal Claims and Appeals under the ACA), though in many cases the agencies must finalize rules that were issued in interim form. Also, additional guidance is still needed for several of the ACA requirements, including:
At least some of this guidance can be expected in the coming months, particularly now that the Supreme Court has ruled on the ACA's constitutionality. Finally, it should be noted that the ACA is also the subject of another legal challenge involving the requirement, under the law's preventive services rules, to provide coverage for contraceptives without cost-sharing.