Healthcare Reform Update - April 2012

Summary of Supreme Court Oral Arguments on Healthcare Reform

Leading up to the week of March 26th, the United States Supreme Court resembled an ornate Apple store on the day of a new iPhone launch, as people had been lining up for days waiting to hear the historic oral arguments on the Patient Protection and Affordable Care Act (PPACA). The arguments lasted for approximately 6 hours over a three-day period, the longest argument in more than 40 years. Below is a daily breakdown of the arguments.

March 26, 2012 - Does the Supreme Court have Jurisdiction to Hear the Case?

On Monday, the Supreme Court heard 89 minutes of arguments on whether the legal challenges to the requirement that all Americans buy insurance must wait until after that part of the law has taken effect in 2014.

At issue, is whether the requirement that Americans buy insurance or pay a penalty is effectively a tax that can only be challenged after the penalty has been imposed. The Anti-Injunction Act, which was enacted in 1867, states, "no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person." Therefore, if the law's individual mandate penalty is determined to be a "tax," the Anti-Injunction Act may prohibit the Supreme Court from ruling on the matter until the tax is actually owed, in 2015.

The U.S. Court of Appeals for the Fourth Circuit held that it was not yet able to rule on the law's constitutionality, based in part on the Anti-Injunction Act. If the Supreme Court were to follow suit, it would provide the Supreme Court a way out of deciding the explosive issue during an election year.

Even though the Fourth Circuit found that it did not yet have authority to rule on the law's constitutionality, both the challengers of the law in the two principal cases before the court (the National Federation of Independent Business and a collection of 26 States) and the Obama Administration argued that the case should be decided on its merits. Moreover, while the Fourth Circuit case was not taken to the Supreme Court, the Supreme Court asked an independent counsel to present the case that the Anti- Injunction Act applies, potentially precluding the Supreme Court from ruling on the merits of the case at this time.

During argument, Robert Long, the attorney appointed by the Supreme Court to argue that the case should be delayed pursuant to the Anti-Injunction Act, said that the federal law "imposes a pay first, litigate later rule that is central to federal tax assessment and collection." Solicitor General Donald Verrilli, arguing on behalf of the Administration, urged the justices to decide the merits of the dispute and proclaimed "[t]his case presents issues of great moment." Representing the law's challengers, lawyer Gregory Katsas also argued that the justices should rule on the merits of the case and stated that "[t]he purpose of [the] lawsuit is to challenge a federal requirement to buy health insurance. That requirement itself is not a tax."

Eight of the nine justices took part in vigorous questioning. Only Justice Clarence Thomas, who has not asked a question from the bench for more than six years, remained silent. Based on the questions that the justices asked, most legal experts believe that it is highly unlikely that the justices would find that the Anti-Injunction Act bars the Supreme Court's review of the constitutionality of the individual mandate and its related penalty.

In questioning the attorneys that were arguing the case, Justice Breyer said that "[h]ere, [Congress] did not use the word tax" when they drafted the law, thus implying that the drafters of the law did not intent the penalty to be a tax. Justice Ginsburg said that "[t]his is not a revenue-raising measure because, if it's successful, nobody will pay the penalty and there will be no revenue to raise."

While attorney Long maintained that the penalty is a tax, which barred the Supreme Court from deciding the case at this time, Justice Sotomayor asserted that she had found a number of cases where a waiver by the government had allowed a tax case to proceed. Moreover, Justice Scalia suggested by his line of questioning that allowing the case to go forward would not broadly undercut federal tax policy. In furtherance of this position, Justice Sotomayor asked Long "[w]hat is the parade of horribles?" if the Supreme Court decides that the Anti-Injunction Act does not bar the Supreme Court from ruling on the merits of the case. Justice Scalia quickly responded, "[t]here will be no parade of horribles."

Bottom line: Most legal experts believe that the justices will not find that the Anti-Injunction Act bars the Supreme Court from ruling on the merits of the case. As such, these experts are confident that the Supreme Court will rule on PPACA's constitutionality. March 27, 2012

Did Congress exceed its Authority when it Enacted the Individual Mandate?

On Tuesday, the Supreme Court heard 120 minutes of argument on the central question of the case. At issue was whether Congress overstepped its powers by adopting the individual mandate. While the Administration defended the individual mandate as a constitutional effort by Congress to address a national crisis, the plaintiffs in the underlying case, led by the 26 States, argued that the individual mandate is an unprecedented intrusion of congressional authority.

The Administration's main argument that Congress had the power to pass healthcare reform (and particularly the individual mandate) was based upon Congress's Constitutional power to regulate interstate commerce. Article 1, Section 8 of the U.S. Constitution provides, in pertinent part, that "Congress shall have Power…to regulate Commerce with foreign Nations, and among the several [s]tates, and with Indian Tribes." The Administration argued that because everyone will use health care during their life, Congress could validly require people to buy health insurance in order to limit the costs imposed by the uninsured on all of the other people in the market.

The 26 States that opposed healthcare reform argued that the law is an unprecedented law that rests on an extraordinary and unbounded assertion of federal power. According to them, the Constitution grants Congress the power to regulate commerce, not the power to compel individuals to enter into commerce. The States asserted that if Congress can not only regulate individuals once they decide to enter into commerce, but can compel them to enter commerce in the first place, then there is nothing left of the principle that Congress' powers are defined and limited, as Congress could simply force within its regulatory reach all those who would remain outside it.

In analyzing the questions raised by the Justices in response to each side's general legal position, it is important to first note that the Supreme Court is composed of five conservative justices (those appointed by Republican Presidents) and four liberal justices (those appointed by a Democratic President). Of the five so-called conservative justices, Justice Kennedy is often the swing vote on cases that divide the justices along ideological lines. As such, most legal experts were eager to obtain insight into the Supreme Court's eventual ruling on PPACA based on Justice Kennedy's line of questions.

Unfortunately, for the Administration, early in the oral arguments, Justice Kennedy indicated that the Administration may have a heavy burden to prove that the individual mandate is constitutional, when he told Solicitor General Verrilli: "Assume for the moment that this is unprecedented, this is a step beyond what our cases have allowed, the affirmative duty to act to go into commerce. If that is so, do you not have a heavy burden of justification? I understand that we must presume laws are constitutional, but even so, when you are changing the relation of the individual to the government in this, what we can stipulate is, I think, a unique way, do you not have a heavy burden of justification to show authorization under the Constitution?"

Thereafter, Justice Kennedy gave General Verrilli a reminder that the law does not require a person to affirmatively act in order to rescue someone. However, Justice Kennedy noted that in the case of the individual mandate, "the government is saying that the federal government has a duty to tell the individual citizen that [he or she] must act, and that is different from what we have in previous cases and that changes the relationship of the federal government to the individual in the very fundamental way."

General Verrilli was also bombarded with skeptical questions by some of the other conservative justices on the Supreme Court. Chief Justice Roberts, implying that the Administration's position would preclude any limits on Congressional power to regulate, asked General Verrilli whether Congress could force Americans to buy burial insurance since everyone will eventually die. To emphasize that the Administration's position may prevent any boundaries upon Congressional power, Justice Scalia asked General Verrilli whether Congress could mandate the purchase of broccoli to promote health. "Health insurance is a means of paying for healthcare," Verrilli said, "and broccoli isn't a means for paying for anything."

Countering some of the questions from the Supreme Court's conservative members, Justice Breyer asserted that if the country had an equivalent burial insurance market, perhaps it would be appropriate to require people to obtain burial plans. Justice Ginsburg, citing the brief filed by the Administration, stated, "people who don't participate in this market are making it much more expensive for those that do." Justice Ginsburg suggested that health care is different from other products, because uninsured people are passing their costs to others. Justice Scalia countered, "[y]ou could say that about buying a car. If people don't buy a car, the price [for people that buy cars] will pay will be more."

In one line of questioning, Justice Ginsburg compared the mandate to the requirement that everyone enroll in and pay for Social Security, rather than permitting individuals to purchase individual annuities in the private market. While referencing Social Security, Justice Ginsburg noted, "[t]here's something very odd about that, that the government can take over the whole thing and we all say, oh yes, that's fine, but if the government wants to preserve private insurers, it can't do that."

For his part, General Verrilli, in attempting to defend the individual mandate, said that it was not "a purchase mandate," but rather an effort to regulate something that nearly all Americans will need at some point in their lives. "This is just a question of timing, because of the particular features of this market," General Verrilli said. Scalia fired back at General Verrilli stating that the law is "not regulating healthcare, [it is] regulating insurance. And that is different. [The law is] compelling somebody who isn't already in that market." Justice Scalia proclaimed, "[g]overnment is supposed to be a government of limited powers … What is left if the government can do this? What can it not do?"

While the ferocity of skeptical questions from the conservative justices appeared to have surprised General Verrilli, at the end of the oral arguments, Justice Kennedy made a statement that indicated he could be persuaded to find the healthcare market place to be a unique market that may require unique solutions. Specifically, Justice Kennedy, towards the end of oral arguments, said, "the government tells us that's because the insurance market is unique. And in the next case, it'll say the next market is unique. But I think it is true that if most questions in life are matters of degree, in the insurance and health care world, both markets - stipulate two markets - the young person who is uninsured is uniquely proximately very close to affecting the rates of insurance and the costs of providing medical care in a way that is not true in other industries. That's my concern in this case."

Bottom line: Prior to oral arguments, many legal experts believe that the individual mandate would be ultimately found to be constitutional. However, immediately after oral arguments on March 27th, many legal experts and members of the media stated that there was a real possibility that the individual mandate may be found unconstitutional given the ferocity of skeptical questions from the five conservative justices.

March 28, 2012 Morning Session - If the Individual Mandate is Unconstitutional, is it Severable from the Rest of the Law?

On the last day of oral arguments, the Supreme Court considered the final two issues it agreed to hear - severability and the expansion of Medicaid.

The Court heard 90 minutes of arguments on the issue of severability in the morning session. Under consideration was whether the entire law can stand if the Supreme Court determines that the individual mandate is unconstitutional, or should the entire law be struck down. Two lower courts were divided on this issue with the court in the Eastern District of Virginia deciding that the individual mandate could be severed while the court in the Northern District of Florida deciding that it could not. In the past, courts have generally used a two-part test to determine if an invalid provision can be reasonably severed from a law that did not contain a severability provision: (1) whether the other provisions will function as intended by Congress without the invalid provision; and (2) if the law without the invalid provision were given to Congress, whether they would prefer to have no law or the law with the provision removed. Courts recognize that making this determination is a difficult task since it entails attempting to determine Congressional intent.

The Obama Administration argued that even if the individual mandate is determined to be unconstitutional, the remaining provisions of the law will function as intended by Congress - with two exceptions. They argued that two provisions - guaranteed issue and community rating - are inextricably linked to the individual mandate and would be severed, but the remainder of the law would stand. Guaranteed issue requires insurance companies to issue a health policy to anyone who applies without a pre-existing condition limitation. Community rating means insurance companies would be required to charge applicants the same rates within a specific geographic area such as a state with a limited variation permitted based age. The Administration argued that the guaranteed-issue and community-rated provisions will not work without the individual mandate since without the mandate the insurance companies will not be able to get enough healthy individuals to purchase insurance to cover the cost of unhealthy individuals who do purchase insurance. They contend that the remainder of the law is not dependent on the individual mandate and point to provisions such as changes in Medicare and coverage of preventive care under many health insurance policies.

The attorney representing the 26 States challenging the law began his argument by stating, "If the individual mandate is unconstitutional, then the rest of the Act cannot stand." The 26 States agree that the individual mandate is essential to the operation of the guaranteed-issue and community-rating provisions. However, they argue that the individual mandate is also essential to the operation of numerous other provisions such as the exchanges, tax subsidies, and the employer pay-or-play mandate. The attorney also stated ". . .provisions that have constitutional difficulties or are tied at the hip to those provisions that have the constitutional difficulty are the very heart of this Act."

A third attorney, appointed by the Supreme Court, argued that the individual mandate - if determined to be unconstitutional - could be severed from the rest of the law leaving the remaining provisions including the guaranteed-issue and community-rating provisions intact. He argued that the removal of the mandate would not automatically result in coverage being unaffordable because of adverse selection; the law contains a number of other provisions such as federal subsidies and annual enrollment periods to control for adverse selection.

During questioning, several justices seemed to indicate that they are receptive to the idea that some portions of the law could survive if the individual mandate is found to be unconstitutional. However, based on the questions asked, several of the justices did not appear convinced that the individual mandate alone can be severed. Some seemed to, if not agree, at least understand, the Administration's contention that the individual mandate along with guaranteed-issue and community-rating could be severed while leaving the rest of the law intact. Justice Ginsburg said, "So why should we say, it‘s a choice between a wrecking operation, which is what you are requesting or a salvage job. And the more conservative approach would be salvage rather than throwing out everything." Justice Ginsburg also indicated that if other portions of the law need to be changed, Congress could change them.

Other questions indicated a strong concern about striking selected provisions and what process and criteria would be used to determine which provisions could remain. Justice Scalia stated that, "[w]hether we strike it all down or leave some of it in place, Congress is going to have to reconsider this, and why isn't it better to have them reconsider it - what I should say - in toto, rather than having some things already in the law which you have to eliminate before you can move on to consider everything on balance?" and "[i]s this not totally unrealistic? That we're going to go through this enormous bill item by item and decide each one?" During later questioning Justice Scalia said, "[m]y approach would say if you take the heart out of the statute, the statute's gone." Justice Alito asked the attorney for the Administration "[w]hat is the difference between guaranteed issue and community rating provisions, on the one hand, and other provisions that increase cost substantially for insurance companies?"

Bottom line: Based on the extensive questioning by the justices, it became clear that they do not envision an easy answer to this question. Several Justices seemed to favor striking the entire law if the individual mandate is determined to be unconstitutional. Others seemed to favor leaving some sections of the law intact, but appeared to be apprehensive about the process and criteria to be used to decide which sections could stand.

March 28, 2012 Afternoon Session - Is the Expansion of Medicaid Coercive in Violation of the Tenth Amendment to the Constitution?

On Wednesday afternoon, the Court heard 60 minutes of arguments on the expansion of Medicaid. PPACA requires states to expand their Medicaid programs significantly to cover all individuals at or below 133% of the federal poverty level beginning in 2014. While coverage under Medicaid varies by state, in some states certain individuals such as childless adults with low incomes are not currently eligible.

The Obama Administration argued that: (1) the "spending clause" and the "appropriations clause" in the Constitution give Congress broad authority to set conditions on the receipt of federal money, (2) this expansion is not coercive, (3) this change is no different than several previous changes to Medicaid such as a 1984 mandatory expansion, and (4) states are free to drop out of the Medicaid program. The attorney for the 26 States challenging the Medicaid expansion argued that it exceeds Congress' power to set conditions on the receipt of federal funds in violation of the Tenth Amendment. They argued that this current expansion is different from prior expansions and is coercive based on three factors: (1) the sheer size of this program; (2) that participation in the Medicaid program as a whole could be predicated on acceptance of this expansion; and (3) that it is linked to the individual mandate, which is not voluntary. Much of the arguments and most of the questions focused on the last two points.

At the start of the questioning Justice Kagan commented that the Federal government is picking up 90%1 of the cost of expansion and asked "[s]o that really reduces to the question of why is a big gift from the Federal Government a matter of coercion?" In response, the attorney for the 26 States contended that the law gives the Secretary of Health and Human Services (the "Secretary") discretionary authority to withdraw all Medicaid funds from any state that does not accept this expansion. The Obama Administration argued that the Secretary does not have unlimited discretion and would be unlikely to withdraw all Medicaid funds given that a key goal of PPACA is universal coverage. The attorney for the 26 States countered that the Secretary had at one time in the past sent a letter to the State of Arizona saying that they would risk all Medicaid funds if they withdrew from the Children's Health Insurance Program (CHIP)- which he described as a relatively small portion of the Medicaid program.

Justice Scalia asked the Solicitor General arguing the case for the Obama Administration if it was conceivable to him, " it was not evidently to Congress, that any state would turn down this offer, that they can't refuse?" and if he can't conceive of a state saying no ".. that sounds like coercion to me." The Solicitor General responded by saying that Congress could predict that the states would not say no - based on the 90% Federal funding level, but that prediction is not coercion.

The attorney for the 26 States also argued that the Medicaid expansion is linked to the individual mandate, which is not voluntary. If a state does not accept the expansion, then there would be no Medicaid in that state and no other way for some individuals to satisfy the coverage requirement under the individual mandate. In response, the Obama Administration argued that the suggestion that without this Medicaid expansion some individuals would have no way to satisfy the individual coverage mandate is inaccurate; those individuals would have access to substantial federal subsidies to purchase coverage and based on their income levels are unlikely to face a penalty.

1 100% funding in 2014-2016 for those gaining coverage under the expanded Medicaid eligibility, reducing to 95% in 2017, 94% in 2018, 93% in 2019 and 90% for 2020 and subsequent years with special adjustments for states that already cover low income childless adults under Medicaid.

Bottom line: Although none of the lower courts, which considered the case, decided that the Medicaid expansion was coercive, the questions posed by the justices during oral arguments make it clear that they are giving it serious consideration.

The intent of this analysis is to provide general information regarding the provisions of current healthcare reform legislation. It does not necessarily fully address all your organization's specific issues. It should not be construed as, nor is it intended to provide, legal advice. Your organization's general counsel or an attorney who specializes in this practice area should address questions regarding specific issues.