McGuireWoods Healthcare Reform Guide: Installment No. 25 – An Employee Benefits Perspective on the Supreme Court’s Decision on the Healthcare Reform Law

McGuireWoods Healthcare Reform Guide: Installment No. 25

June 29, 2012

“Scarcely any political question arises in the United States that is not resolved, sooner or later, into a judicial question.”
—Alexis de Tocqueville, Democracy in America (1835)

“The Federal Government does not have the power to order people to buy health insurance. Section 5000A would therefore be unconstitutional if read as a command. The Federal Government does have the power to impose a tax on those without health insurance. Section 5000A is therefore constitutional, because it can reasonably be read as a tax.”
—Chief Justice John Roberts, National Federation of Independent Business v. Sebelius (June 28, 2012).

This is the 25th in a series of WorkCite articles concerning the Patient Protection and Affordable Care Act and its companion statute, the Health Care and Education Reconciliation Act of 2010 (collectively, PPACA).

In lawsuits brought by 26 state attorneys general, two private citizens and the National Federation of Independent Business, the U.S. Supreme Court ruled yesterday, in a 5–4 decision written by Chief Justice Roberts, that the individual mandate of PPACA is within Congress’s power under the Taxing Clause of the Constitution. National Federation of Independent Business v. Sebelius (June 28, 2012). Justices Breyer, Ginsburg, Kagan and Sotomayor joined in this part of the Court’s ruling.

A majority of the Supreme Court (Roberts, Scalia, Alito, Thomas and Kennedy) concluded that Congress lacked authority to impose PPACA’s individual mandate under the Commerce Clause. Nonetheless, Chief Justice Roberts joined with the four other justices to hold that PPACA’s “penalty” on individuals who fail to purchase health insurance could be viewed as a “tax” authorized by the Constitution.

A majority of the Supreme Court also concluded that PPACA’s expansion of Medicaid was constitutional so long as states are not denied existing federal funding if they fail to comply with the Medicaid expansion provisions under PPACA.

Individual Mandate Upheld as a Tax

Constitutional questions posed by PPACA arose even before the act was passed in March 2010. The first drafts of the legislation contained a tax on individuals who failed to purchase health insurance, based on Congress’s broad authority under Article I, Section 8 of the Constitution to “lay and collect taxes.” When sufficient votes could not be found for this tax, Congress instead enforced the individual mandate with a “penalty,” relying upon its authority to “regulate Commerce among the several states.” Attorneys in the Congressional Research Service advised Congress before PPACA was passed that the Commerce Clause was questionable constitutional authority for the individual mandate.

The federal government argued to the Supreme Court that the individual mandate was authorized by the Commerce Clause, but also argued that “the penalty is really a tax” on those who do not have health insurance, authorized by congressional taxing authority. Ultimately the latter argument persuaded Chief Justice Roberts to join with four justices and uphold the constitutionality of the individual mandate. These justices also concluded that the penalty was not a “tax” under the Anti-Injunction Act, which would have prevented a challenge to the “tax” at this time.

Five Justices State that Commerce Clause Would Not Support the Mandate

Roberts and four other justices (Kennedy, Scalia, Alito and Thomas) stated that the nonpurchase of insurance by individuals is not “commerce” and that the individual mandate could not be sustained under Congress’s power to “regulate commerce” or under the Necessary and Proper Clause of the Constitution. These justices reasoned that such an interpretation of the Commerce Clause would undermine the principle that the federal government has limited and enumerated powers. Justices Ginsburg, Breyer, Kagan and Sotomayor dissented from this part of Chief Justice Roberts’ opinion and would have held that the Commerce Clause authorizes Congress to require individuals to purchase health insurance.

Justice Thomas, joined in dissent by Justices Kennedy, Scalia and Alito, would have found the individual mandate unconstitutional under both the Commerce Clause and Taxing Clause of the Constitution. These justices would have held PPACA invalid in its entirety on the grounds that the mandate could not be severed from the rest of PPACA because “we have no reliable basis for knowing which pieces of the Act would have passed on their own.”

Constitution Prevents PPACA from Cutting off Medicaid Funding of States that Fail to Expand Medicaid

Opponents had argued that PPACA abused Congress’s spending power by threatening to cut off all Medicaid funds of any state that failed to expand Medicaid coverage. A majority of the Supreme Court (including Justices Breyer, Kagan, Scalia, Alito, Thomas and Kennedy) agreed with Chief Justice Roberts that PPACA’s sanction of cutting off all Medicaid funding was “a gun to the head” that exceeded congressional authority under the Spending Clause of the Constitution. “Congress has no authority to order the States to regulate according to its instructions.”

The majority of justices agreed with Chief Justice Roberts that PPACA’s constitutional violation could be remedied by precluding the federal government from cutting off all Medicaid funds to any state that chooses not to participate in the Medicaid expansion, which did not require striking down other portions of PPACA.

What Happens Now?

Although there may be an attempt at legislative modification of PPACA, employers need to comply with the requirements in place today and prepare for those requirements that are scheduled to take effect in future years.

For 2012, this includes the requirement to provide a summary of benefit coverage to health plan participants and the requirement to include in Form W-2s information regarding the value of employer-provided health plan coverage (beginning with the 2012 Form W-2, which must be provided by no later than January 31, 2013). In addition, employers with self-funded health plans must pay an annual fee of $2 ($1 for the first year of implementation) times the average number of covered participants under the health plan.

Beginning in 2013, employees must be provided a notice explaining the availability of health exchanges, which will become available in 2014. Other compliance issues to address for 2013 include:

  • Contributions to FSAs become subject to a $2,500 annual limit (to be indexed for inflation in future years).
  • The Medicare Part A Hospital Insurance (HI) tax rate increases from 1.45 percent to 2.35 percent on wages in excess of $200,000 (for a taxpayer filing an individual tax return) or $250,000 (for taxpayers filing a joint return).
  • A 3.8 percent Medicare contribution tax on unearned income for higher-income taxpayers takes effect.
  • An employer may no longer deduct prescription drug expenses paid for Medicare retirees to the extent the employer receives the subsidy provided under Part D of Medicare.
  • Health insurance providers will not be able to deduct annual compensation in excess of $500,000 paid to any officer, director, employee or persons who provide services for or on behalf of the insurer.
  • Health plans will need to comply with “administrative simplification requirements” (operating rules for electronic healthcare transactions, including plan eligibility and healthcare claim status).

Beginning in 2014, states must establish health exchanges that meet certain federal standards to facilitate the purchase of qualified health plans by individuals and small groups. Other compliance issues to address for 2014 include:

  • Employers that provide coverage under a group health plan and pay part of the cost of that coverage must also provide “free choice” vouchers to “qualified employees.”
  • Plans may not impose pre-existing condition exclusions for any enrollee, expanding the current restriction on limits for children under age 19.
  • Plans cannot have waiting periods that exceed 90 days. Although not specifically required to take effect this year, it is possible that the rule requiring automatic health plan enrollment for employers with greater than 200 employees also could be made effective as early as this year.
  • Plans (except for “grandfathered” plans) cannot discriminate as to coverage or participation against a healthcare provider. This does not require plans to offer the services of any willing provider.
  • Cost-sharing provisions of a medical plan (except for grandfathered plans) cannot exceed specified dollar limits (which are subject to indexing in later years).
  • Plans (except for grandfathered plans) are generally required to permit participation in clinical trials, cannot deny coverage for routine costs of care provided under clinical trials and may not discriminate based on participation in a clinical trial.
  • The limit on wellness plan discount rebates is increased from 20 percent to 30 percent of the cost of employee-only coverage, and the Department of Health and Human Services is authorized to increase this limit to up to 50 percent of the cost of such coverage.
  • If an employer chooses not to offer coverage, or offers “unaffordable” coverage (to be defined), the employer is subject to penalties.
  • Employers that provide “minimum essential coverage” under their plans must report certain information annually to the secretary of the Treasury and to covered individuals, including the participants and dependents covered under the plan, their dates of coverage, information about the coverage provided and other information the secretary may require through regulations.
  • Employers are required to annually certify whether they offer their full-time employees the opportunity to enroll in a plan providing minimum essential coverage and, if they do offer such coverage, the length of waiting period imposed under the plan, how many months during the year coverage was offered and certain other information concerning the plan, as well as information concerning the employer’s full-time employees.

Beginning in 2017, states may permit large employers to purchase coverage through exchanges if the employers make all their full-time employees eligible for such coverage.

Beginning in 2018, a 40 percent nondeductible excise tax will apply for “cadillac plans,” where employment-based health coverage has an aggregate value exceeding $10,200 for individual coverage or $27,500 for family coverage.