Health Care Reform: What the Supreme Court’s Decision on the Affordable Care Act Means for Employers
On June 28, 2012, the United States Supreme Court surprised nearly everyone by upholding almost the entirety of the Affordable Care Act (ACA). After briefly reviewing the decision in National Federation of Independent Business et al. v. Sebelius et al., and fully realizing that the longer term fate of the ACA will be subject to much political tinkering, if not an outright overhaul, this alert will focus on the issues that employers will be facing under the ACA.
Those employers hoping for a reprieve from having to comply with the ACA from its wholesale overturning by the Court will now have to address and adapt to its requirements. Those employers who have been seeking to comply can be grateful their efforts have not been in vain, but they will have to remain diligent, as there is still a host of guidance that will be needed in order for employers to know what adequate compliance will mean.
The message for employers, then, is that compliance with the ACA requirements and its upcoming deadlines need to be seriously addressed; the benefits of further delay have seriously diminished, while the costs of further delay have likely risen.
The Supreme Court Decision: A Brief Overview
Though Chief Justice Roberts wrote the “majority” opinion, there were four separate opinions issued, and many of the issues saw a shifting majority.
- The Anti-Injunction Act - This was the only issue before the Court on which all nine justices agreed. The Anti-Injunction Act (AIA) prohibits lawsuits seeking to constrain or enjoin the collection of any tax. To seek relief from a tax, you must pay it, and then sue for a refund. If the penalty for failing to purchase insurance under what has come to be called the “individual mandate,” was deemed a tax for purposes of the AIA, then the Court could not rule on the individual mandate until after 2014 in response to a suit by someone forced to pay the tax. But the Court held that the AIA was a congressionally imposed limitation and that Congress could determine the application of the AIA by calling the financial cost it imposes under any statute either a “tax” or a “penalty.” Because Congress chose to call the exaction under the individual mandate a “penalty,” it was not subject to the limitations of the AIA, and so the Court could proceed to address the merits of the case.
- The Individual Mandate Under the Commerce Clause - The key debate surrounding the individual mandate prior to this ruling was whether the mandate was within the scope of Congress’ commerce clause powers or whether it constituted a glaring example of Congressional overreaching. Chief Justice Roberts and the four justices who formed the “Joint Dissent” – Justices Scalia, Kennedy, Alito and Thomas – formed a 5-4 majority in striking down the mandate as Congressional overreaching. The majority rationale was that while the commerce clause empowered Congress to regulate commerce among the states, it did not authorize it to “create” commerce in order to regulate it. The Chief Justice, and the Joint Dissent, deemed individuals who chose not to purchase insurance as not being market participants, and as not having undertaken any activity that could subject them to a Congressionally imposed penalty.
In reaching this conclusion, the majority rejected the minority contention, and Congress’ findings under HIPAA, that the health care market was a unified market composed of both health providers and payers, and since everyone would participate in this market at some point in their lives, everyone was a market participant who chose to pay either through insurance or by “self-funding” out of their own pocket. The minority saw the majority’s activity/inactivity distinction as an artificial and unhelpful construct that was not justified by prior commerce clause cases and that did not comport with the economic realities of the health care market. The minority saw the health care market as unique in that even those who could not pay could obtain services (unlike more traditional commercial markets where those without means to pay also generally lack the ability to secure products or services and so do not become market participants). Given these aspects of the health care market, the minority saw the individual mandate as an unexceptional extension of Congress’ commerce clause authority.
The majority rejected this assessment, which, even if it represented a more viable view of the economics of the health care market (a concession the majority did not make), was deemed to be politically unpalatable and had to be rejected for that reason. Underlying the majority’s rationale, and its reliance on this activity/inactivity distinction, was a concern that were the commerce clause to be construed broadly enough to justify the individual mandate, there would be no limitations on Congress’ authority under the commerce clause.
- The Individual Mandate Under Congress’ Taxing Power - Before this decision was issued, if it was known that a majority of the Court had held the individual mandate unconstitutional under Congress’ commerce clause powers, most would have considered that the end of the story. The government had argued in the alternative, however, that the individual mandate was fully justified under Congress’ power to lay and collect taxes. Chief Justice Roberts agreed, as did four other justices – Justices Ginsburg, Breyer, Kagan and Sotomayor.
How, you may ask, can the mandate be upheld as a valid exercise of Congress’ taxing power, when the Court had already determined that the “shared responsibility payment” under the individual mandate was a penalty and not a tax? If you’re the Chief Justice, the answer is that the limitation on suits against taxes under the AIA represents a Congressional policy and the classification of the payment under the individual mandate as a penalty represents a different Congressional policy. Congress can, as a matter of policy, choose to classify an exaction as either a penalty or a tax for purposes of the AIA. But whether the exaction is a tax for constitutional purposes cannot depend on the label that Congress puts on it. Rather, when assessing if Congress is acting within the scope of its constitutionally authorized powers, the Court must look beyond any such labels and assess whether the payment is in fact a tax.
Viewed under this lens, the majority found that the shared responsibility payment under the individual mandate was a tax, not a penalty, and as such was constitutionally viable. The Joint Dissent did not agree, finding that if Congress called it a penalty, it was a penalty; re-labeling it as a tax was an impermissible way to remedy the mandate’s constitutional infirmity.
- Medicaid Expansion and Congress’ Spending Authority - So far the ACA has remained intact, and the vexing issue of what can or what must be severed from the statute has been avoided. Twenty-six states had challenged the ACA’s expansion of Medicaid coverage as unduly coercive, thus rendering it an unconstitutional exercise of Congress’ spending authority. A 7-2 majority – Justices Roberts, Scalia, Kennedy, Alioto, Thomas, Breyer, and Kagan – agreed with the states. This holding too was something of a surprise since it represented the first time the Court had found a Congressional act to be an unconstitutional exercise of its spending powers.
The rationale, as explained by the Chief Justice, was that the expansion of Medicaid beyond the initial classification of needy persons to cover all individuals under the age of 65 with incomes below 133% of the federal poverty line (FPL) was not simply an expansion of the current program, but something akin to the creation of a wholly new program. Even though the federal government was going to pay 100% of the additional cost for this program through 2016, it would gradually reduce this to 90% over time, and the added costs to the states would be a significant budgetary burden in light of what percentage of their budgets that the current Medicaid program costs the states. What seemed most coercive to the majority, however, was the authority granted to the Secretary of the Department of Health and Human Services to threaten to withhold some or all of a state’s current Medicaid funding, if it did not choose to participate in this expanded coverage program.
Justices Ginsburg and Sotomayor, however, did not see this Medicaid expansion as any different from the numerous other expansions the federal government had made to the Medicaid program over the years, and the power which the majority saw as so coercive (i.e., the Secretary’s power to rescind some or all of a states’ Medicaid funding if they elected not to participate) had always been part of Medicaid. This minority also emphasized that the entire Medicaid program had been, from the beginning, one in which the states could voluntarily choose to participate in or not. Given the numerous expansions of coverage in the past and the variations in federal funding over the years, the states could hardly claim that they were unaware of such possibilities and should not have been surprised by this one. Because they need not participate in the expansion, despite the generous federal funding, the states could not claim to be coerced.
This argument did not carry the day. So the question then arose whether and how this unconstitutional Medicaid expansion could be severed from the ACA as a whole. The Joint Dissent said it could not be severed, and as with the individual mandate which they deemed to be unconstitutional on any basis or rationale, the Joint Dissent’s solution was to scrap the entire ACA. Yet another majority – Justices Roberts, Breyer, Kagan, Ginsburg and Sotomayor – held that states that did not choose to participate in the expansion would forfeit the funding promised by the federal government for that expansion, but that the federal government could not deny them any funds for their current Medicaid programs. This remedy would successfully sever the unconstitutional coercive threat without undermining the ACA’s remaining permissible provisions or threaten the states’ current Medicaid programs.
What the Court’s Decision Means for Employers
For employers, this decision means that nothing has changed with respect to what the ACA requires they do, but any relief or hope that the law would be overturned can no longer provide a reason for inaction. Employers will now need to attend to the tasks and deadlines under the ACA, and if, after the elections, Congress chooses to modify these requirements, they must be prepared to deal with those changes when the time comes. Right now, the following matters require employer attention:
- W-2 Reporting - For the 2012 W-2 Forms to be distributed in January of 2013, employers will have to provide information on the cost of health care coverage provided to employees. For additional information, click to view the “IRS Updates W-2 Reporting Obligations” alert.
- Claims and Appeal Procedures - Effective July 1, 2012, (i) internal claims and review procedures must comply with the expanded requirements under the ACA, and (ii) external review procedures consistent with state law requirements (if the state law complies with the consumer protections found in the National Association of Insurance Commissioners model External Review Act), or the federal procedures found in the ACA must be implemented. Plan documents will have to be amended, accordingly. For additional information, click to view the “New Claim and Appeal Procedures” alert; click to view the “Interim Procedures for Federal External Claims Review” alert; click to view the “Extended Enforcement Grace Period for Certain Claims and Appeals Requirements” alert.
- Medical Loss Ratio Rebates - Employers should have procedures in place for allocating any rebates from insurers, including a determination if such rebates are “plan assets” under ERISA. Insurers will be distributing the medical loss ratio rebates shortly after August 1, 2012. For additional information, click to view the “How to Handle Medical Loss Ratio Rebates” alert.
- Preventive Health Services - Effective as of August 1, 2012, non-grandfathered group health plans will have to provide specified preventive health services, including contraceptive drugs and devices to female participants on a first dollar basis without cost sharing. There are exceptions to this contraceptive requirement for religiously-affiliated employers. Plan documents will have to be amended, accordingly. For additional information, click to view the “‘Recommended’ Preventive Care” alert.
- Summary of Benefits and Coverage - Effective for open enrollment periods beginning on or after September 23, 2012, and for new hires beginning on the first day of the plan year beginning on or after that date, employers will be required to distribute a four-page summary of benefits and coverage (SBC), designed according to a pre-determined format. The requirements for the SBC are detailed, specific and stringent, with serious penalties for non-compliance. Preparation for this should already be underway for any upcoming 2012 open enrollment period. For additional information, click to view the “New Requirement in 2012: Plans Must Provide a Summary of Benefits and Coverage” alert; click to view the “Updates on Changes to the Summary of Benefits and Coverage” alert.
- Quality of Care Reporting - Guidance has not yet been issued with respect to this requirement, but once issued, non-grandfathered plan sponsors will have to disclose information about plan benefits and health care provider reimbursement structures to participants during open enrollment periods. Depending on when guidance is issued, this report may have to be distributed for open enrollment periods in 2013.
- Nondiscrimination Rules for Insured Medical Benefits - Once guidance is issued, insured health care benefits will be subject to the same non-discrimination rules as now apply to self-funded health care benefits, though under an entirely different penalty regime. For self-funded benefits, the penalties fall exclusively on the highly compensated individuals who receive the discriminatory benefits. For insured benefits, the penalties will fall on the “plan,” effectively on the employer, and the penalties can be substantial. For additional information, click to view the “Application of Nondiscrimination Rules for Insured Health Plans Delayed” alert.
- Annual Limits - After January 1, 2014, group health plans will no longer be able to impose the current restricted annual limits on essential health benefits. Plan documents will have to be amended, accordingly. Those employers who applied for waivers of the restricted annual limits in place before that date will have until December 31, 2012 to resubmit applications for continuance of the waiver. For additional information, click to view the “New Guidance Issued on Pre-Existing Condition Exclusions, Lifetime and Annual Limits, Rescissions of Coverage and Patient Protections” alert.
- Contribution Limits on Flexible Spending Accounts - By the beginning of the first plan year beginning on or after January 1, 2013, cafeteria plans must be amended to provide for a $2,500 limit on salary reduction contributions to health care flexible spending arrangements. For additional information, click to view the “IRS Guidance on Applying the $2,500 FSA Salary Reduction Limit” alert.
- Retiree Prescription Drug Expenses - After January 1, 2013, employers who subsidize prescription drug benefits for retirees will not be able to take a tax deduction for the subsidy. For additional information, click to view the “New Taxes, Tax Credits/Subsidies and Other Tax Obligations – For Employers” alert.
- FICA Tax - In preparation for the January 1, 2013 effective date, employers will have to modify their payroll systems to provide for an increase in the hospital insurance portion of FICA by 0.9% for employees with compensation in excess of $200,000 ($250,000 if filing jointly). For additional information, click to view the “New Taxes, Tax Credits/Subsidies and Other Tax Obligations - For Individuals” alert.
- Notice of Exchange Options - Pursuant to guidance yet to be issued (but likely to be issued sometime just prior to, or early in, 2014), employers will have to provide employees with notice of the existence of the state or federal-run health care exchanges and the implications of obtaining coverage through those exchanges.
- Comparative Clinical Effectiveness Research Fees - These fees, payable by sponsors of self-funded plans and insurers, are to be paid by July 1, 2013. The fees are $1 times the number of covered lives for the period October 1, 2012 to October 1, 2013, and $2 per covered life for the period October 1, 2013 through October 1, 2019. For additional information, click to view the “Fees Payable by Group Health Plans for Comparative Effectiveness Research” alert.
- Plan Communication with Providers - By December 31, 2013, plans must be able to certify and document compliance with Department of Health and Human Services’ rules for electronic transactions between providers and health plans. For most plans, this compliance effort will be carried out by third party administrators or the plan’s health insurer, but plan sponsors will be responsible for filing the certification, or seeing that it gets filed.
- Employer Shared Responsibility Excise Tax (“Pay or Play”) - Pending guidance to be issued, employers with 50 or more full-time employees must provide health insurance or pay a monthly penalty equal to 1/12th of $2,000 per employee (not counting the first 30 employees). If the employer provides health insurance, but at least one full-time employee is enrolled in a health care exchange and is eligible for a premium subsidy or other tax credit, then the employer must pay a monthly penalty equal to 1/12th of $3,000 for each such individual, but the overall cost to the employer cannot be in excess of the penalty it would have had to pay if it did not provide any health care coverage at all.
Low income individuals can only qualify for the premium subsidies and/or tax credits if their employer-provided coverage fails to meet certain affordability requirements (i.e., it cannot cost the employee more than 9.5% of his Box 1 W-2 compensation) and certain value requirements (i.e., it must cover 60% of the average employee’s eligible expenses).
If, however, if it is determined that individuals who participate in federally-managed health care exchanges (as opposed to exchanges established and run by a state) are not eligible for subsidies, it may be that their employers would not be subject to the $3,000 penalty, as that penalty is only imposed on employers who (i) offer health care coverage, (ii) has employees who are enrolled through a health care exchange and (iii) those employees qualify for available subsidies based on the affordability and value requirements noted above. This issue is yet to be resolved, and may well have to wait on the outcome of expected litigation. For additional information, click to view the “New Taxes, Tax Credits/Subsidies and Other Tax Obligations – For Employers” alert.
- Wellness Rewards - After January 1, 2014, the maximum reward for participation in a wellness program may not exceed 30% (up from the current 20%) of the costs of employee-only coverage under the health plan, though this could increase to 50% pursuant to future guidance.
- Minimum Essential Coverage - Pending future guidance to be issued, employers will have to file an annual return notifying the government whether the benefits provided to full-time employees qualify as “minimum essential coverage.”
- Automatic Enrollment - Pending future guidance to be issued, after January 1, 2014 employers with more than 200 full-time employees will have to automatically enroll them in their group health plan, with an opt-out provision available to the employee.
- Elimination or Pre-Existing Coverage Exclusions or Limitation for Adult Participants - These currently are in force for children, but after January 1, 2014, pending further guidance to be issued, pre-existing exclusions or limitations will no longer be permitted to be imposed on adult participants. Plan documents will have to be amended, accordingly. For additional information, click to view the “New Guidance Issued on Pre-Existing Condition Exclusions, Lifetime and Annual Limits, Rescissions of Coverage and Patient Protections” alert.
- Waiting Periods - After January 1, 2014, pending future guidance to be issued, group health plans and insurers will no longer be allowed to impose waiting periods longer than 90 days. Plan documents will have to be amended accordingly.
- Tax on High-Cost Health Plans - After January 1, 2018, high cost health plans (i.e., those that cost more than $10,200 times a health cost adjustment percentage for single coverage and more than $27,200 times a health cost adjustment percentage for family coverage) will be subject to an excise tax equal to 40% of the amount by which the cost of coverage exceed these threshold amounts. For additional information, click to view the “New Taxes, Tax Credits/Subsidies and Other Tax Obligations – For Employers” alert.
- Reinsurance Program Fees - The third party administrator for self-funded plans and health insurer must pay an annual fee to be assessed by the Department of Health and Human Services. These fees will likely be passed along as higher premiums or administrative fees. To reduce the uncertainty of insurance risk in the individual market during the first three years of the health care exchanges, the fees will be available for reinsurance payments to health insurers that cover high risk individuals in the individual market. The fee is to be in place from 2014 through 2016.
What is Next for the States?
A few states have said they will not participate in this expanded Medicaid program and it is not clear how many of the 26 others (Michigan was one) that signed onto the lawsuit challenging the Medicaid expansion will join them. But what about states who reject participation in the expanded Medicaid coverage and/or state-run health care exchanges, but later decide to do so, or states that choose to participate and later decide to cease doing so? Will states be allowed to change their minds?
Health care providers in states that reject the Medicaid expansion will likely see a greater number of uninsured patients for which they may receive no compensation, thus forcing them to seek increased reimbursement from other payment sources. It is precisely this kind of cost shifting that the ACA was designed to eliminate, and it is not clear how this particular increased cost pressure will be mitigated. Health care providers will likely put political pressure on states to participate in the Medicaid expansion, but how successful that effort will be is uncertain.
A state’s refusal to participate in the Medicaid expansion will have a significant impact on low-income individuals in that state who earn less than 100% of the FPL. Congress likely assumed that those who made less than 133% of the FPL would be covered under Medicaid, and so it provided for federal subsidies only for those whose income fell between 133% and 400% of the FPL. Adults, who are not Medicaid eligible in states that reject the expanded coverage, and who earn less than 100% of the FPL, may not be eligible for premium subsidies under the health care exchanges.
Moreover, not all states will choose to establish and manage a health care exchange, including, most likely, many who will also opt-out of the Medicaid expansion. In states that do not establish a health care exchange, the federal government will establish and maintain one for the citizens of that state, but it is not at all clear, under the ACA, whether the same premium subsidies are available under the federally-run exchanges as are available under the state-run exchanges. The IRS has issued regulations allowing for such subsidies regardless of who runs the exchange, but this may be challenged as going beyond what the ACA provides.
In short, while answering many unanswered questions, this Supreme Court decision has clearly raised a host of new ones that will need to be answered in the very near future.
Employer Action Steps
Employer/plan sponsors need to start now to assess how these requirements will affect, among other things: (1) changes to their plan documents to reflect these new requirements, (2) changes to their payroll systems, (3) plan design changes aimed at cost reduction, adequacy of coverage, employee retention, avoidance of excise taxes, and/or qualifying for tax credits (small employers), (4) negotiating or renegotiating changes in contracts with plan service providers, (5) applying for and making allocation decisions with respect to any rebates or tax credits that may be available, and (6) assessing the continued provision of group health plan coverage to employees in light of the availability, if any, of coverage and subsidies to employees through the health care exchanges.
If you have any questions about the requirements of the ACA, and any compliance or planning actions that might be needed, or if you have any questions at all about your employee benefit programs, please contact one of our Employee Benefits attorneys.