Fifth Circuit Affirms Ruling That ACA's Individual Mandate Is Unconstitutional, But Orders Do-Over of District Court's Severability Analysis

Practical Law Legal Update w-023-3410 (Approx. 8 pages)

Fifth Circuit Affirms Ruling That ACA's Individual Mandate Is Unconstitutional, But Orders Do-Over of District Court's Severability Analysis

by Practical Law Employee Benefits & Executive Compensation

TCJA Legislation Led to Litigation Challenging Individual Mandate

As background, the plaintiffs in this litigation include 18 states and two individuals who are Texas residents. (Although Wisconsin was initially a plaintiff state, it was later allowed to be dismissed.) In early 2018, the plaintiffs sued the defendants, which included the Department of Health and Human Services (HHS), challenging the individual mandate's constitutionality after the ACA was amended by the TCJA. The plaintiffs sought a declaration that the ACA's individual mandate, which the Supreme Court upheld in 2012 as a valid exercise of Congress's taxing power, was no longer constitutional because of the TCJA provision that reduced to zero the payment for violating the individual mandate (Nat'l Fed'n of Indep. Businesses v. Sebelius (NFIB), 567 U.S. 519 (2012); see Legal Update, Supreme Court Upholds the ACA's Individual Mandate). The plaintiffs also argued that the balance of the ACA was not severable from the ACA's individual mandate. Several Democratic state attorneys general later intervened in the litigation to defend the ACA (the "intervenor states").

In December 2018, Judge Reed O'Connor of the Northern District of Texas ruled that:

The individual plaintiffs had standing because they were required to purchase health insurance as a result of the individual mandate.
The ACA's individual mandate is unconstitutional.
The remainder of the ACA was not severable from the individual mandate and was therefore invalid.

(Texas v. US, 340 F. Supp. 3d 579 (N.D. Tex. 2018).)

The district court ruling was appealed to the Fifth Circuit and the district court stayed its ruling pending appeal (see Legal Update, Texas Ruling Invalidating ACA Is Appealed to the Fifth Circuit; US House Moves to Intervene). Also, the US House of Representatives intervened to assist the intervenor states in defending the ACA.

Live Case or Controversy Present

Resolving an initial issue, the Fifth Circuit held in its December 2019 decision that there was a live case or controversy, as required under the US Constitution, before the court on appeal. The court concluded that both the federal government defendants and the intervenor states had independent standing to appeal.

Citing the Supreme Court's 2013 Windsor decision, the Fifth Circuit held that the federal defendants had standing to appeal the district court's ruling (see Legal Update, Supreme Court: DOMA Section 3 Is Unconstitutional and Proposition 8 Proponents Lack Standing). The Windsor litigation involved the validity of a federal statute that prohibited the surviving spouse of a same-sex couple from receiving a spousal tax deduction. A district court in that case determined that the statute was unconstitutional and ordered the government to issue a tax refund to the surviving spouse. Although the government agreed with the district court's conclusion, the US Treasury withheld the tax refund. The Supreme Court concluded that the Article III standing requirement was satisfied because, among other reasons, the district court's order compelled the US Treasury to pay money it would not otherwise have disbursed but for the order.

Characterizing the individual mandate litigation as on all fours with Windsor, the Fifth Circuit observed that in the case before it the federal government:

Continued to enforce the entire ACA.
Had not indicated that it would begin dismantling any part of the ACA without a final court order.

The Fifth Circuit concluded that—as in Windsor—the Texas district court's order would require the federal government to take actions it would not take but for the district court's order.

The Fifth Circuit held that the intervenor states also had standing because of the injury that would result to them from the district court's ruling, if given effect. The Fifth Circuit noted that, among other consequences, the states would be stripped of significant funding that they receive under the ACA (for example, under the statute's Medicaid expansion provisions).

The Fifth Circuit declined to decide whether the US House of Representatives had independent standing to intervene. The court cited case law under which intervenors need not independently possess standing if a party that is already in the lawsuit (here, the intervenor states) has standing and seeks the same "ultimate relief" as another intervenor (here, the US House).

Plaintiffs Have Article III Standing to Challenge ACA; Dissenting Opinion

In another section of its opinion, the Fifth Circuit concluded that both the state plaintiffs and the private citizen plaintiffs had standing to appeal. For example, the Fifth Circuit accepted the state plaintiffs' arguments that they had sustained financial injury that included administrative costs to the states, in their role as employers, of verifying which employees were covered by MEC and therefore did not need to make the individual mandate payment (26 U.S.C. §§ 6055 and 6056; see Practice Notes, Information Reporting of Health Insurance Coverage by Large Employers (Section 6056) and Information Reporting for Employers That Self-Insure and Insurers (Section 6055)). The court noted that the record contained extensive evidence that the individual mandate by itself had increased state employers' printing and processing costs regarding forms for ACA information reporting, in addition to costs for updating the state-employers' in-house management systems. As one example, the State of Georgia's CFO had reported that the state's overall compliance costs related to the ACA's reporting requirements were $3.6 million to date.

A dissenting judge in the decision strongly disagreed with the majority—in general, and on this issue in particular. To the dissenting judge, there was a lack of actual evidence tying any costs the state plaintiffs incurred to the unenforceable individual mandate coverage requirement. As a result, the dissenting judge asserted that the state plaintiffs could not show an injury traceable to the mandate's coverage requirement, so they did not have standing to challenge the mandate.

Individual Mandate Is Unconstitutional

On the merits, the Fifth Circuit—drawing heavily on the reasoning of the Supreme Court's 2012 NFIB ruling—agreed with Judge O'Connor's conclusion that the individual mandate is no longer constitutional.

Individual Mandate Now Lacks Essential Features of a Tax

Reviewing NFIB, the Fifth Circuit observed that the Supreme Court had upheld the individual mandate (read together with the mandate's payment for noncompliance) as a valid exercise of Congress's taxing power for four reasons:

The individual mandate payment included the "essential feature" of any tax in that it produced at least some revenue for the government.
The payment was paid to Treasury by taxpayers when they filed their tax returns.
The payment owed under the mandate was a function of "familiar factors" such as taxable income, number of dependents, and joint filing status.
The mandate was located in the Internal Revenue Code (Code) and enforced by the IRS, which collected the amount in the same manner as taxes.

(26 U.S.C. § 5000A(a)-(b).)

After the TCJA reduced the individual mandate payment to zero, however, the Fifth Circuit reasoned that the mandate could no longer be upheld under Congress's taxing power. Moreover, because the mandate no longer resulted in revenue, the Fifth Circuit concluded that it also failed to meet the other three attributes from NFIB. For example, the court indicated, because there are no longer individual mandate payments, those payments obviously are not paid to Treasury. And because the IRS no longer collects payments under the individual mandate, those payments cannot be collected in the same manner as taxes.

Next, the Fifth Circuit reasoned that the individual mandate, with its taxing power underpinnings removed, needed to be interpreted under what Chief Justice had described in NFIB as the "most straightforward" reading of the provision—that is, a command to purchase health insurance. But the Supreme Court had concluded in NFIB that under this reading, the individual mandate was an invalid exercise of Congress's power to regulate interstate commerce. Specifically, the Supreme Court had reasoned that although Congress may regulate commerce, it may not compel it.

From here, the Fifth Circuit rejected a series of arguments advanced by the intervenor states to uphold the mandate. For example, the states argued that the individual mandate, even with its related payment reduced to zero, still managed to meet the four reasons under the taxing power rationale. The states suggested, for example, that the mandate was still part of the Code and still had the potential to produce revenue. The Fifth Circuit dismissed these arguments as unsupported by NFIB, in which the justices had been clear that producing actual revenue was an essential attribute of any tax.

Regarding Severability, District Court Must Provide Additional Analysis

Having held that the individual mandate is unconstitutional, the Fifth Circuit next addressed the question of severability—an analysis that determines whether (or how much of) the remainder of the ACA is severable from the unconstitutional portion. Although the Fifth Circuit agreed with Judge O'Connor's ruling that the individual mandate was unconstitutional, it took issue with the depth of his severability analysis.

In this regard, the Fifth Circuit reviewed the existing two-part framework (under Supreme Court case law) for determining the severability of a statutory provision that is found to be unconstitutional. First, the Fifth Circuit noted, a court must assess whether the remaining (constitutional) provisions of a statute are fully operative as a law. Second, the court must decide whether Congress would have enacted the remaining provisions without the unconstitutional component. If the answer to this second question is no, then the provisions are not severable. (See Murphy v. NCAA, 138 S. Ct. 1461 (2018) (holding that the Professional and Amateur Protection Act was unconstitutional because one of its provisions violated the anti-commandeering doctrine and its other provisions were clearly intended to work together).)

The Fifth Circuit acknowledged the difficulty of applying the severability doctrine—particularly as to a complicated, lengthy, and subsequently amended statute such as the ACA. That said, the Fifth Circuit faulted the district court's December 2018 ruling for not explaining with sufficient precision how portions of the post-TCJA version of the ACA would "rise or fall" based on the individual mandate's constitutionality. Rather, the district court had simply found that the individual mandate was:

Essential to the ACA.
Not severable from any of the ACA's other provisions.

Though declining to address the individual mandate and every "nook and cranny of the ACA's 900 pages," the district court concluded in its December 2018 ruling that Congress would not possibly have created the ACA's regulatory framework without the individual mandate. Also, the district court focused largely on a 2010 Congressional finding that the individual mandate was essential to the ACA's overall structure, which included the ACA's guaranteed issue and community-rating provisions. (The ACA's guaranteed-issue provision requires insurers to accept all employers and individuals in a state that apply for coverage. The statute's community-rating rule prohibits insurers from discriminating against individual participants and beneficiaries based on health status factors (42 U.S.C. § 300gg-4 (Public Health Service Act (PHSA) § 2705); see Practice Note, Grandfathered Health Plans Under the ACA: ACA Provisions That Do Not Apply to Grandfathered Plans).)

As a result, the Fifth Circuit remanded the case to the district court to:

Describe more precisely which provisions of the ACA, as amended by the TCJA, cannot be severed from the individual mandate.
Evaluate the federal defendants' requested relief of either:
- enjoining enforcement only of those provisions that injure the plaintiffs; or
- declaring the ACA unconstitutional only regarding the 18 plaintiff states and the two individual plaintiffs (a request the Fifth Circuit referred to as "newly-suggested" by the government on appeal).

Practical Impact: ACA Health Plan Compliance for 2020

Issued less than two weeks before the start of the 2020 plan year for calendar-year health plans, the Fifth Circuit's long-awaited ACA ruling may have little practical effect (in the short term, at least) regarding how employer/plan sponsors carry out ACA compliance. However, the ultimate fate of the ACA's individual mandate and non-individual mandate provisions will continue to remain uncertain. It appears likely that the Fifth Circuit's decision will be challenged with an appeal to the Supreme Court. If not (or if the appeal is turned back), it will fall to Judge O'Connor to issue a follow-on decision that will almost certainly be appealed to the Fifth Circuit (and perhaps beyond). Either way, as we've witnessed so many times over the past decade with the ACA, that litigation will take time.

The final outcome of this second bite at the severability analysis remains to be seen. It's worth noting, however, that many of the ACA's health plan compliance mandates at issue in this analysis have been largely implemented for several years now �� in some instances even before the individual mandate became effective. (Regarding two such ACA requirements, which were expressly referenced in the Fifth Circuit's decision, see Practice Notes, Lifetime Limits, Annual Limits, and Essential Health Benefits Under the ACA and Coverage for Adult Children to Age 26 Under the ACA; see also Affordable Care Act (ACA) Toolkit.) In the Fifth Circuit's view, the district court opinion failed to explain how provisions such as these were "inextricably linked" to the individual mandate. As a result, it seems likely that the district court's follow-on ruling may address whether these provisions rise or fall with the individual mandate for severability purposes.

Fifth Circuit Affirms Ruling That ACA's Individual Mandate Is Unconstitutional, But Orders Do-Over of District Court's Severability Analysis | Practical Law