Supreme Court Upholds Affordable Care Act, Limits Medicaid Expansion Provision – A Rivkin Radler LLP Analysis

In what many are calling its most important decision since Bush v. Gore, the Supreme Court largely upheld the Patient Protection and Affordable Care Act (the “Act”). Chief Justice Roberts delivered the 5-4 ruling of the Court, upholding all of the provisions of the Act, except for a narrow portion of the Act’s Medicaid expansion. While the ruling is unlikely to end the political battle over the healthcare overhaul, it does begin to signal the end of the legal battle that began the day the Act was signed into law.

 In a surprising turn, the Court upheld the most critical and controversial provision of the Act, the much-discussed “individual mandate,” as a valid exercise of Congress’s power to tax under the Constitution. The individual mandate was originally included in the Act, and largely defended in subsequent court proceedings, as permitted under Congress’s power to regulate interstate commerce under the Constitution’s Commerce Clause. The argument put forth by supporters was that the large number of uninsured individuals who would eventually need health care sufficiently impacted interstate commerce to justify the federal government mandating that they either purchase health insurance or pay a penalty. Five of the conservative justices of the Court disagreed, saying that in this case, that by requiring an individual to purchase insurance, the federal government was actually creating the commerce it was meant to regulate; an unconstitutional expansion of the Commerce Clause. Alternatively, the Solicitor General argued that the federal government retained the power to enact the individual mandate under the Necessary and Proper Clause.  The Court similarly rejected the Necessary and Proper argument, stating that even if necessary, the federal government’s expansion outside its otherwise enumerated powers was not “proper.”  The twist that surprised many, however, was that Chief Justice Roberts joined the liberal wing of the Court and accepted federal government’s final argument, ruling that Congress’s taxing power was sufficient to justify the individual mandate.  While Chief Justice Roberts acknowledged that the penalty for not purchasing insurance is primarily intended to encourage people to buy insurance, rather than to raise money for the Treasury, it still can be construed as a tax.

Part of what made basing the ruling on the tax power so interesting is that a rather obscure law, the Anti-Injunction Act, precludes courts from ruling on tax challenges until the tax is actually levied. The penalty for not complying with the individual mandate does not go into effect until 2014, and hence the constitutionality of the individual mandate may not have been ripe for review. The Court, however, held that the terminology of the Act, which refers to the penalty for not purchasing health insurance if one is otherwise required to as an actual “penalty,” is fatal to the Anti-Injunction Act argument. Because the Act does not refer to the penalty as a tax, the Anti-Injunction Act does not apply. However, to determine if the penalty is considered a tax for constitutional purposes, the Court disregarded the formal use of term “penalty” and instead viewed its substance and application. Amongst other reasons, Chief Justice Roberts determined that since the penalty is not exceedingly burdensome, is paid while filing your income taxes, and is collected by the IRS, the practical effect of the penalty was that it is actually a tax, and thus was constitutionally permitted.

While the tax power argument allowed the individual mandate, and thus most of the Act to be upheld, the Court did partially strike down as unconstitutional the Medicaid expansion provision of the Act. Under the Medicaid expansion, states would be required to provide Medicaid to all individuals with incomes up to 133% of the federal poverty level.¹  The federal government would provide the increase of funding to the states for this expansion through 2016, when federal funding would begin to taper down to 90% of the cost. However, if a state chose not to expand its Medicaid program, it would lose all of its current Medicaid funding, and not merely the funding for the expansion. The Court held this to be unduly coercive to the States, and therefore unconstitutional. In essence, the Court ruled that states can simply choose to continue offering their current Medicaid program, or receive additional funding and expand their coverage as required under the Act.

What does this ruling mean for individuals, healthcare providers, and other in the industry? With substantially the entire Act upheld, nothing significantly changes for individuals or the healthcare industry. The provisions that have taken effect, such as Medicare reforms including Accountability Care Organizations (“ACOs”) and the Medicare Shared Savings Program (“MSSP”), will remain in full effect.²  The scheduled additions, such as the individual mandate and the health insurance exchanges, remain on track to be implemented in 2014. The ruling is good news for those in the healthcare industry that have already begun to participate in ACOs, the MSSP, and other programs enacted under the Act. For those that have been waiting to see if those and similar programs would remain after the final ruling on the constitutionality of the Act, it is a good time to think about how you as a provider, your group, and others in the healthcare industry can participate in these Medicare reforms.

The limits on Medicaid expansion present an interesting issue to insurers, individuals at or near the poverty line, and politicians. The expansion of Medicaid was designed to bridge the gap between the floor of the individual mandate and those already receiving Medicaid.³  One can safely assume that many states will not participate in the expansion, as 26 states brought suit to prevent the implementation of the Act. There will likely be a large group of people in states that do not expand their Medicaid programs that will either now be forced to buy insurance (if they are above the floor) or continue not to receive it (if they are below the floor and do not otherwise qualify for Medicaid). This is certainly a blow to the Obama administration’s goal to expand health insurance coverage as far as possible, but will be unlikely to affect the healthcare industry significantly. For those in New York, there should be no change, as New York State’s Medicaid eligibility is already substantially identical to the Medicaid expansion provision in the Act.

This ruling marks the end of the significant legal battle over the Act as whole, but it is certainly not the last day for arguments over it. Republicans continue to promise a statutory repeal of the Act once they gain a majority in Congress. It remains to be seen, however, if that will occur, and if the repeal would be successful even if they gain a majority in the Senate this November. Additional legal challenges to various portions of the Act will also continue. That being said, the Act has received its strongest endorsement since it was signed into law and it appears it will continue to substantially change the healthcare landscape into the future.

¹Currently, only certain groups of people with income caps as low as 37% to 64% of the federal poverty level, depending on state and group, are covered.

² Similar provisions for individuals, such as children being allowed to stay on their parent’s insurance to age 26, will also continue to remain in effect.

³ The floor for the individual mandate occurs at a specific dollar amount of income for the individual.