In a surprising turn of events, on Friday, December 14th, a district court judge in the Northern District of Texas declared that the Affordable Care Act’s (“ACA”) individual mandate is unconstitutional and that, a result, the entire ACA is invalid. Although the ACA remains in effect for the time being and an immediate appeal to the 5th Circuit is a near certainty, the decision, if upheld, could be expected to have a significant impact on health care delivery. Following a high-level summary of the litigation, we highlight the major implications this ruling could have on employers and plan sponsors.
At this point, readers may be asking themselves the question – “Haven’t we been through this before?” The answer is yes, sort of. In 2012, the United States Supreme Court (the “Supreme Court”) issued its landmark ruling in Nat’l Fed’n of Indep. Businesses v. Sebelius (“NFIB”) declaring that although Congress’ passage of the ACA’s individual mandate (i.e., the requirement that certain individual obtain health coverage or face a penalty) would be unconstitutional under the U.S. Constitution’s Interstate Commerce Clause, the legislation was permitted under Congress’ taxing authority. Importantly, in NFIB, the Court recognized the importance of ACA’s individual mandate component, noting that Congress would not have passed the ACA without the individual mandate.
Various other challenges to the ACA were made in the intervening years, and for the most part, these challenges failed. Nevertheless, in 2017, Congress passed the Tax Cuts and Jobs Act (“TCJA”). Though the TCJA left the ACA largely intact, it “zeroed-out” the ACA’s individual mandate tax for years beginning on and after January 1, 2019. In other words, beginning January 1, 2019, even though the ACA still includes the individual mandate, there is no longer a tax to be imposed on individuals who choose not to obtain health coverage.
Shortly after the TCJA was passed, two individuals and twenty states commenced litigation (Texas v. United States) in the Northern District of Texas seeking to have the ACA declared unconstitutional. The plaintiffs argued that in the absence of a tax component within the individual mandate, the individual mandate could no longer stand as an exercise of Congress’ taxing authority. Instead, the individual mandate would need to be considered under the U.S. Constitution’s Interstate Commerce Clause, and the Supreme Court already held in NFIB that the individual mandate would be unconstitutional in that regard. Further, the plaintiffs argued that because the individual mandate is inseverable from ACA, as noted by the Supreme Court in NFIB, the entire ACA must be invalidated.
The defendants (led by a coalition of intervening states) disagreed, arguing that Congress’ intent in passing the TCJA was to eliminate the individual mandate, and because the TCJA was passed through budget reconciliation, the only pathway to achieve that result was to eliminate the tax component. Thus, the defendants argued that even if the individual mandate would be unconstitutional under the Interstate Commerce Clause, Congress essentially removed (or severed) the individual mandate from the ACA. To now say that the individual mandate was inseverable would be counter what Congress intended to do, the defendants argued.
In a Memorandum Opinion and Order issued on December 14th, the district court ruled in favor of the plaintiffs, holding that the individual mandate, in the absence of a tax component, is unconstitutional and, therefore, the entire ACA is invalid. The district court explained that the individual mandate and its tax component are two separate things, and noted that it was unwilling to infer what Congress’ intent was beyond simply providing a tax cut. The district court did not issue a stay of its ruling.
Implications for Employers and Plan Sponsors
Given that the district court did not enjoin the ACA and an appeal to the 5th Circuit Court of Appeals is likely, employers and plan sponsors should maintain the status quo until this litigation is resolved (most likely by the Supreme Court). Nevertheless, should the district court’s ruling be upheld, the key implications for employers and other group health plan sponsors are summarized below.
- No Employer Shared Responsibility. Large employers (i.e., those with 50 or more full-time employees) would no longer need to offer coverage to 95% percent of their full-time workforces in order to avoid significant penalties under the employer-shared responsibility mandate. This would provide employers and plan sponsors more flexibility when determining which groups of employees are eligible for benefits. Additionally, large employers would no longer be required to offer coverage meeting the minimum value and affordability standards. Reporting under the ACA would no longer be required either.
- Preexisting Condition Exclusions. Presumably, invalidation of the ACA’s prohibition on preexisting condition exclusions would resurrect the HIPAA portability rules in place prior to the ACA. Under the HIPAA portability requirements, preexisting condition exclusions could be applied only to individuals who do not have sufficient creditable coverage under another health plan.
- Cost-Sharing Design. Plans would be given greater flexibility to apply cost-sharing on participants. For example, preventive services could be subject to cost-sharing. There would be no limits on out-of-pocket maximum levels. Emergency care received at an out-of-network facility could be subject to cost-sharing at a higher level than care received at an in-network facility. Finally, plans could again apply annual and lifetime dollar limitations.
- Coverage of Adult Children. Employers and plan sponsors would no longer be required to extend health coverage to dependent children until age 26. Prior to the ACA, many plans extended coverage only to adult dependent children who were enrolled in school up to a certain age. Plans could revert back to that design, subject to Michelle’s Law (the requirement that coverage continue for up to twelve months when a dependent child leaves school for medical reasons).
- Administrative Changes. Various administrative reforms under the ACA would also no longer apply. For example, plans would not need to distribute summaries of benefits and coverage. Also, enhanced claims and appeals procedures would no longer be required, including the need to offer voluntary external review.
- Tax Implications. Perhaps the most significant tax implication is that tax on high-cost health care (the so-called “Cadillac Tax”) would finally be invalided after several legislative delays. Other impacts would be the removal of the Medicare surcharge for high-earners, elimination of the contribution limit on health flexible spending accounts, and reduced penalty for non-qualifying health savings accounts. Other non-health plan-related taxes, such as the medical device tax and the health insurance tax, would also be eliminated.
Many of the plan design and administrative changes that were mandated by the ACA remain popular. Thus, even if the district court’s decision is upheld, employer and plan sponsors have the discretion to keep some of the mandated changes in place even without the ACA. Additionally, it is possible that while the litigation works its way through various levels of appeal, that Congress will pass legislation reinstating many of the ACA’s popular provisions (e.g., the prohibition on preexisting conditions, coverage of adult children, free preventive care, and limits on cost-sharing). Individual states might also pass new coverage and administration mandates that would apply to fully insured group health plans. In fact, many states already have, among other coverage requirements, adult dependent coverage requirements, limits on cost-sharing, and external review mandates.
All of this creates a large amount of uncertainty, so as noted above, employers and plan sponsors should consider maintaining the status quo until the dust settles.