The Latest Challenge to the ACA

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“Judge O’Connor . . . ruled the ACA unconstitutional because a tax that raises revenue is no tax, the text of the ACA doesn’t include a severability clause, and even proponents of the law have long argued that the mandate, guaranteed issue, and community rating together are integral to the successful operation of insurance markets.”

William G. (Bill) Stuart

Director of Strategy and Compliance

January 24, 2019

It certainly struck the Affordable Care Act with a bolt of lightning and dominated the news cycles. A federal district judge in Texas overturned the ACA during the tail end of the annual open-enrollment period. Yet Americans – most with taxpayer subsidies – continued to purchase coverage in ACA marketplaces.

So what’s going on?

Our story begins earlier in this decade with the passage of the ACA in March 2010. Not a single Republican supported the bill for varied reasons. Immediately after passage, the National Federation of Independent Business (NFIB), a trade organization that represents small businesses, filed a lawsuit challenging the constitutionality of the law. That challenge was ultimately decided by the Supreme Court in June 2012.

The relevant issue for this discussion is the challenge to the individual mandate, which imposes a financial penalty on any American who doesn’t purchase coverage. The Obama administration made two arguments in support of the mandate.

First, it argued that the penalty was a proper application of Congress’s power to regulate commerce, not its taxing authority. The Constitution grants Congress the power to regulate interstate commerce, and the Court has given it broad authority to do so. In the most famous case, the Court upheld federal restrictions on crops grown by families for their private consumption on the grounds that, absent the personal gardens, these families would buy crops at grocery stores that engaged in interstate commerce.

Second, it said if the Court rejected Congress’s authority under the commerce clause, then the penalty really is a tax after all. Thus, the individual mandate should be held constitutional under the taxing clause.

A majority of the Court held that the individual mandate couldn’t be defended under the commerce clause and was therefore unconstitutional. Chief Justice Roberts, however, returned to the taxing power and declared that the penalty was, indeed, a tax that Congress had the power to impose. His decision upheld the constitutionality of the mandate.

A quick aside to readers: Don’t be confused, as this New York Times writer is, about what these Court rulings mean. The Supreme Court has never ruled the ACA constitutional – nor can it. Court cases involve very specific provisions of the law. The Court has upheld as constitutional the handful of ACA provisions that have been challenged and left unresolved by lower courts.

Fast forward to 2017. After several attempts to overturn the ACA and many efforts to amend the law, Republicans passed the Tax Cut and Jobs Act. This law altered the tax code for corporations and individuals. One provision reduced the penalty under the individual mandate to $0. The mandate is still on the books, and a future Congress can reimpose a penalty through any piece of legislation, but for now, there is no financial penalty – and therefore no government revenue – for failure to purchase coverage.

After the Tax Cut and Jobs Act passed, 20 states filed suit against the ACA. Their argument is simple:

  • The individual mandate survived constitutionally when the Supreme Court declared the penalty a tax.
  • Taxes are designed to raise revenue.
  • A tax rate of $0 raises no revenue.
  • Therefore, the individual mandate can no longer be upheld based on the taxing clause.

Their suit then went further:

  • The ACA doesn’t contain a severability clause – a standard provision in the legislation that says that if one provision is the law is subsequently declared unconstitutional, that provision can be severed (removed) from the law without affecting the constitutionality of the remaining provisions.
  • Proponents of the ACA have maintained from the beginning that the individual mandate, guaranteed issue (all applicants receive coverage), and community rating (rates aren’t based on individual claims experience or projected risk) are integral to the proper functioning and economic viability of the law.
  • Therefore, with one of these three key provisions now unconstitutional, the law can’t function and therefore is overturned.

That’s a big leap for a lot of people. And not only for proponents of the ACA. Many organizations that have fought the ACA in court don’t believe that the case has merit. And many Republicans in Congress who voted for the Tax Cut and Jobs Act deny that they did so knowing that it contained a smart bomb aimed at the ACA.

Judge Reed O’Connor heard arguments from both sides – the 20 states that want the individual mandate ruled unconstitutional and the 18 states that defended the law. He had three choices.

First, he could uphold the law, perhaps concluding that a tax is still a tax even when it doesn’t raise revenue.

Second, he could declare the individual mandate unconstitutional but ruled that the other provisions of the law stood, perhaps by concluding that the generous taxpayer subsidies encourage most eligible Americans to purchase coverage and even the threat – and actual application – of a penalty didn’t deter some people from foregoing coverage.

Third, he could overturn the ACA in its entirety by adopting the position that the 20 states advanced as summarized above.

Judge O’Connor, a George W. Bush appointee in a conservative federal district, chose the third option. He ruled the ACA unconstitutional because a tax that raises revenue is no tax, the text of the ACA doesn’t include a severability clause, and even proponents of the law have long argued that the mandate, guaranteed issue, and community rating together are integral to the successful operation of insurance markets.

The judge also ruled that the ACA can remain in place – thus deferring any potential disruption to insurance markets and coverage – until the case wends its way through the federal court system. This action prevents any disruption to care, coverage, or payments as the case is appealed.

What Can Be Done?

What can the judicial, executive, and legislative branches do in response to this decision?

Judicial. The 18 state attorneys general who support the ACA immediately filed an appeal to be heard by the Fifth Circuit Court of Appeals. Once that court renders its decision (probably this summer), the losing side is expected to appeal immediately to the Supreme Court. The Supreme Court would then decide whether to hear the case, most likely in 2020.

The Court has already ruled on the constitutionality of three key ACA provisions. As noted above, it determined that the individual mandate was constitutional. In the same 2012 decision, it ruled that the federal government couldn’t require states to expand Medicaid eligibility as the ACA proposed. And three years later, it ruled that advance-premium tax credits (premium subsidies for lower-income ACA marketplace shoppers) could be used to purchase coverage on marketplaces run by the federal government, not just those operated by state governments, as the ACA language required.

The Court faces the same three choices as the district and circuit courts: Uphold the provision, rule the individual mandate unconstitutional but retain the rest of the law, or rule this provision unconstitutional and inseverable from the rest of the ACA – thus overturning the entire law.

Executive. The executive branch has no authority to rule on the constitutionality of the individual mandate. In fact, the Trump administration didn’t defend the existing federal law in this suit – an unusual but hardly unprecedented action. The ACA gives the executive branch wide latitude in issuing rules to add flesh to the skeletal ACA, but the Trump administration can’t alter the text of the law itself or rule on its constitutionality.

Legislative. The ACA was passed by Congress. And Congress can change the law at any time. That’s what much of the last decade has been about. Democrats have sought to repair unworkable and underfunded portions of the law through the legislative process. But they haven’t held both chambers of Congress and the presidency since January 2011 (following their loss of the House of Representatives largely as a result of voter reaction to the ACA in the 2010 mid-term elections).

Republicans have tried on a handful of occasions to overturn the law, but they did so knowing that President Obama would veto the legislation. And once they consolidated power in January 2017, they were unable to agree on a package of amendments to the law.

Even bipartisan efforts have failed. Witness attempts to fund Cost-Sharing Reduction (CSR) payments, the program that reduces out-of-pocket costs for poorer Americans who purchase Silver plans on ACA exchanges.

Congress didn’t design this program so that it was funded outside the normal appropriation process (like Social Security, Medicare, Medicaid, and advance-premium tax credits are). Instead, Congress must budget funds annually to pay for the program. It never has. Proposed legislation to reimburse insurers for the cost of CSR subsidies collapsed in 2017. So insurers bear this cost, which they cover by raising Silver premiums.

Congress has the power to change any provision in the law. And voters have the opportunity every two years to change the make-up of Congress. They did so by changing the majority party in the House and Senate in the 2010 mid-term elections, only months after Democrats passed the ACA. They then elected a Democrat majority in the House last November after Republican attempts to amend the ACA were unsuccessful.

One of the Democrats’ first order of business, when the 116th Congress convened last Thursday, was to empower the Speaker to intervene on behalf of the House. But this gesture is symbolic – the case itself is in the judicial branch now.

Best- and Worst-Case Scenario

What’s the best and worst outcome?

If you’re an ACA supporter, the best-case scenario is that the ACA survives this challenge – and future challenges that are sure to come. The worst case is that the ACA is invalidated. Premium subsidies and the Medicaid expansion are eliminated, thereby increasing the number of Americans without coverage. Pre-existing condition clauses and community rating are eliminated. And insurers can sell plans that carve out specific benefits that some consumers don’t want to purchase.

If you’re an ACA opponent, the best-case scenario is that the Supreme Court upholds Judge O’Connor’s – but be prepared for the chaos. The worst case is that the ACA is upheld as written. The federal government continues to spend hundreds of billions of dollars on a law that doesn’t deliver the results that it promised (coverage levels are far from projections), costs much more than expected, and leaves consumers with fewer coverage choices at much higher costs. And there is no urgency to design a better system that addresses costs, increases consumer choice, and encourages care that’s high in cost and quality.

What We’re Reading

There are other challenges to the ACA. Veteran observer Timothy Jost, JD, navigates a busy 2018.

Bob Laszewski, a Forbes contributor and one of the nation’s leading thinkers at the intersection of medical policy and politics, assesses the prospects for reform in the 116th Congress.

The Foundation for Economic Education, a forceful advocate for free markets since its founding following World War II, has published a short e-book arguing that the best way to reform medical coverage, finance, and delivery of care is to adopt a free-market approach.

Medicaid isn’t a sexy topic at cocktail parties or pick-up bars. There is, however, a lot of activity at the state level in this federal-state program. The Kaiser Family Foundation provides a viewer’s guide about what reform activity to look for in 2019.

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