ALERT:HEALTH CARE REFORM BILL

HUMAN CAPITAL PRACTICE

June 2012 www.willis.com

WAITING FOR THE SUPREME COURT DECISION— WHAT WILL IT DO?The Supreme Court heard oral arguments in March on several Constitutional issuesregarding the Patient Protection and Affordable Care Act (PPACA) and is expected to issueits opinion this month. We think that the timing is right to discuss the potential decision,what the outcome might be and the possible fallout as the expected release date approaches.

BACKGROUND

The Supreme Court will consider several issues that federal courts have ruled on in the twoyears since the passage of PPACA, including:

n Does the individual mandate exceed Congressional authority to regulate interstatecommerce, or is it an essential part of a broader regulatory scheme?

n Can Congress forge national solutions to national problems despite individual origins?n Are insurance reforms, such as guaranteed issue and the prohibition of any preexisting

condition exclusion, Constitutional?n Is the penalty (as labeled in PPACA) for not complying with the individual mandate a

tax (with broad Congressional authority to levy such taxes) or a penalty (which is farmore limited under the Constitution)?

n If the individual mandate is overturned, what part of the rest of PPACA, if any, must alsobe invalidated, or must the entire Act be overturned as well?

n Do any individuals or employers even have the right to challenge the law?n Is the case ripe for review since no one has yet been forced to pay a penalty?

The Court asked that the advocates discuss four topics:

n Is the issue reviewable at this point?n Is the individual mandate an appropriate exercise of the Commerce Clause of the

Constitution?n If the individual mandate is unconstitutional, how much, if any, of the rest of PPACA can

remain (i.e., is the one unconstitutional provision “severable” from the rest of the Act)?n Is the Medicaid expansion an unconstitutional burden on the states? (Since this is of

less concern to employers we will not examine those arguments here.)

IS PPACA RIPE FOR REVIEW?

The Court seemed to have little concern regarding this question. The proponents of PPACAhad argued that under the Anti-Injunction Act, any tax levied by Congress would have to beassessed before the validity of the tax could be challenged. PPACA’s requirement thateveryone have health insurance coverage would be enforced by the collection of the penalty.The proponent appointed by the Court to advance this argument asserted that the penaltyshould be deemed a tax since it is to be assessed and collected by the IRS. He argued furtherthat because the penalty was in fact a tax (despite being called a penalty by Congress), the

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terms of the Anti-Injunction Act applied –meaning that it could not be challenged beforeit was actually assessed. The Justices allseemed skeptical that something specificallylabeled a penalty was really a tax just becauseit was collected by the IRS. In lower courtdecisions, justices had pointed out thatCongress knew how to designate something asa tax. In fact, PPACA itself includes many newtaxes. The Solicitor General (arguing on behalfof the federal government) agreed that thecase was not premature because the penaltywas not really a tax (although that wouldundermine its core argument, as Justice Alitoimplied in his questions).

Because of the Court’s skepticism, manyobservers think it unlikely that the Courtwould choose not to rule on the othersubstantive issues based on this distinction.

IS THE INDIVIDUAL MANDATECONSTITUTIONAL?

The underpinning of PPACA is contained inthe so-called “individual mandate” portion ofthe shared responsibility provisions ofPPACA. The proponents of PPACA realizedthat the insurance reforms designed to makecoverage more affordable for those that didnot have it (community rating requirements,the prohibition of preexisting conditionexclusions and the guaranteed issuerequirement) could not function financiallyunless everyone in the U.S. was in the pooland paying premiums (or at least having theiremployer or the government payingpremiums on their behalf ). That makes senseof course. If it is possible to get the samecoverage as everyone else can get any timewith no preexisting condition exclusion, thereis little incentive to actually pay a premiumfor the coverage before it is needed. In fact,similar reforms in Massachusetts did lead tohigher premiums even with a mandate(http://www.patriotledger.com/topstories/x1852604642/Massachusetts-individual-health-premiums-highest-in-Nation). Those higher costs have led tosome people gaming the system and buyingcoverage when it is needed and dropping itlater (presumably due to the high cost)

(http://www.lifehealthpro. com/2010/06/30/consultants-individuals-game-mass-health-insurance). Manycommentators have pointed out that we all can see that forinsurance to work in other markets, such as auto and housing, wecan’t wait until after the event to pay premiums.

PPACA proponents say that health insurance is different fromthose other markets because we know that we are all going to needhealth care at some point. Therefore, PPACA includes theindividual mandate that requires all individuals to have coverageor pay a penalty. The opponents of PPACA immediately objected tosuch a penalty as a violation of the U.S. Constitution because,instead of regulating commerce, it forces people to entercommerce. The proponents’ view is that since everyone willeventually get sick or injured, and since no one can be refusedtreatment (because of federal law), the individual mandate issimply regulating the means to finance care (via insurance) asopposed to forcing participation in commerce. They point to theCommerce Clause (which permits Congress to regulate commercebetween the states and to enact laws necessary and proper to carryout its enumerated powers) as enabling Congress to pass lawsnecessary to fulfill its health care financing requirement.

The opponents’ view is that the Constitution was designed tolimit Congress’s powers to those specifically enumerated in theConstitution, with the remaining powers left to the states or tothe people. For example, the so-called “police powers” permitMassachusetts to include a health coverage mandate in itslegislation without challenge under the federal Constitution.Since there is no provision in the Constitution that permitsCongress to force people to buy a private product, opponentsargue that the mandate is unconstitutional.

During oral arguments, the Justices evinced some skepticism ofthe idea that forcing people to purchase insurance (and a specifiedminimum level) or pay a penalty would be permitted under theConstitution.

Justice Kennedy asked if it is possible to create commerce inorder to regulate it. Since it is presumed that Justice Kennedy isthe swing vote, there is some indication that he might be skepticalthat the mandate is a Constitutional regulation of commerceversus an unconstitutional overreach. The conservative Justicespretty much piled on with that reasoning and kept asking theSolicitor General (arguing in favor of the mandate) that ifCongress can force people to purchase insurance, what can’t

Congress do? That is, they were searching, and asking theSolicitor General to delineate the “limiting principal” that showsthe outer limits of Congressional power. While Justices Ginsburgand Breyer (two of the Justices in the liberal wing of the Court)seemed to be helping the Solicitor General to make his arguments,even Justice Sotomayor asked the Solicitor General to clarify whyCongress does not have unlimited power if it can force people tobuy insurance.

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Those questions and the admittedly weak responses from the Solicitor General led manyto believe that the individual mandate will not survive the Supreme Court review. Thepotential for the individual mandate to be found unconstitutional was buttressed by oralargument the next day – where more liberal Justices seemed to make arguments thatwould allow the rest of the Act to stand even if the individual mandate is overturned. Thatcould be an indication that in the discussions the Court had prior to oral arguments theywere already leaning toward overturning the mandate.

IF THE INDIVIDUAL MANDATE IS UNCONSTITUTIONAL,MUST THE REST OF PPACA BE OVERTURNED, OR CANSOME OF PPACA BE RETAINED (AND IF SO, HOW MUCH)?

As mentioned above, the individual mandate is one of the essential pillars supporting theentire health reform scheme. If it strikes down the individual mandate asunconstitutional, the Supreme Court must decide whether the rest of the law must alsofall. The district court that originally ruled that the entire Act had to be overturned if theindividual mandate was unconstitutional noted that, unlike most laws, the PPACAlegislation was intentionally drafted without a severability clause and found that theindividual mandate was not severable – declaring the entire PPACA unconstitutional. TheEleventh Circuit Court of Appeals ruled differently – that the provisions were severable,and that is where the Supreme Court finds the question now.

Supreme Court precedent states that an unconstitutional provision may be severed fromother Constitutional parts of a statute unless it is “evident that [Congress] would not haveenacted those provisions which are within its power independently” of theunconstitutional provision. Other lower court decisions also noted the ambiguitysurrounding Congressional intent – but split on this issue – some decided the individualmandate was severable; others concluded all must “rise and fall” with the individualpurchase requirement.

PPACA proponents argued that provisions may only be invalidated on non-severabilitygrounds if Congress clearly would not have enacted the provisions in the absence of theindividual mandate. PPACA opponents argued that the entire PPACA should beinvalidated, if the individual mandate is found unconstitutional, because the remainder ofPPACA could not be implemented in a manner consistent with Congress’ originallegislative intent without the mandate.

The Justices clearly differed on the question of severability of the various provisions ofthe Act. Those questions were directed at the federal government’s position that if theindividual mandate is overturned, many other PPACA provisions should be preserved.Opponents took the position that the entire Act is so closely integrated and financiallydependent on the individual mandate that if the individual mandate is overturned, thenthe rest of the Act must necessarily be overturned as well.

Case law can be cited for the proposition that if a single provision of an act isunconstitutional, the entire act is unconstitutional and must be overturned (unlessCongress specifically provided otherwise in the act itself ). However, there is alsoprecedent for the Court to say that, if there are provisions of an act that can stand alonewithout regard to the unconstitutional provisions, then those provisions should be upheldwhile the unconstitutional provisions are severed from the remainder of the act. Thosepositions were discussed by the attorneys and the Justices weighed in frequently,challenging the various positions.

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Tellingly perhaps, the Justices on the liberalwing of the Court asked several questionswhich seemed to be directed at completeseverability, or at limiting severability tothose provisions directly linked to theindividual mandate (guaranteed issue,community rating and elimination ofpreexisting condition exclusions). JusticeSotomayor asked if it were not possible for theentire rest of the Act to stand. JusticeSotomayor asserted that yes, the costs wouldlikely go up, but there is some dispute aboutjust how much, and isn’t it really a legislativeact (therefore, something for Congress to fix)rather than something that can be done byjudicial fiat? The Congress could fix thedeficient part or start all over per itsprerogative.

Justice Scalia then made the point that it wasunlikely that Congress would have intendedfor the entire bill to be struck down justbecause one feature was invalid, even if thatintent was not specifically included in thelegislation. Justice Kagan and JusticeGinsburg also made points that manyprovisions of the law could be operationalwithout the individual mandate and that itwould be the more conservative approach tobe selective in the ruling rather thanoverturning the entire Act. Chief JusticeRoberts and Justice Kennedy also weighed inasking for the standard that could be used tosever parts of the bill and not others.

Finally, Justice Scalia asked if it would not becruel and unusual punishment for theJustices or their clerks to be forced to read theentire bill to make a determination provisionby provision.

Making any predictions about the Court’sruling on severability based on the questionsis difficult. However, it appears that since theAdministration argued for the invalidation ofthe insurance reforms in other forums if theindividual mandate were invalidated and allthe Justices seemed to agree that they weretied directly to the individual mandate (evenif not necessary) – if the individual mandate isoverturned, it is likely the rest of theinsurance reforms would also be overturned.With respect to the rest of the bill, includingthe employer mandates, however, despite a

number of amicus (friend of the court) briefs that argued theemployer mandate should be invalidated if the individualmandate is invalidated, judicial restraint would argue againstoverturning the other mandates or the entire bill.

HOW WILL THE COURT RULE?

It is pure conjecture of course (and perhaps colored by our ownbiases), but it appears from the line of questioning that theJustices are skeptical of the individual mandate and will likelyoverturn that provision. That prediction is also based on JusticeKennedy’s history of being skeptical of government power vis-a-vis the individual. He has historically found governmentaloverreach in the criminal area especially, and he retains thatskepticism of federal power generally. If he rules consistentlywith that outlook, the individual mandate will be overturned.

If the individual mandate is overturned, it follows from theJustices’ questions that they will likely overturn the insurancemandates as well. It seems unlikely they would overturn theentire Act. We would be left then with many employer mandatesbut no individual mandate.

As to the other questions, it appears that the Court iscomfortable with a ruling at this time that rejects the argumentthat the penalty is really a tax. Similarly, the Court seemscomfortable with the Medicaid expansion mandate despite thestates’ objection.

WHAT WILL EMPLOYERS BE REQUIRED ORPERMITTED TO DO IN RESPONSE?

These scenarios are offered to lay some groundwork for planning

under the various options. All are premised on Congressional

inaction following the Court’s ruling; although most

commentators feel that whatever the Court does, there will be some

Congressional response or at least an attempted response. How

that all plays out politically will depend on the fall elections and,

either way, the ruling will likely be a talking point for both sides

through election day and beyond.

WHAT IF THE ENTIRE ACT IS UPHELD?

In this scenario, the hypotheticals are largely the same as thoseemployers have been dealing with for the last two years. Whatwill our costs be? How much of those can be shared withemployees (and still stay under the affordability cap of 9.5% oftaxable income)? Who is a full-time versus a part-timeemployee? Can I afford to offer coverage to all my employees?What will the penalty actually be if I offer no coverage orunaffordable coverage? Will I have to continue to offer benefitsfor competitive reasons regardless of the costs – how will that

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affect other aspects of my total rewards package? Will it make sense for employees to havecoverage at work, or is it acceptable for them to go without coverage and seek it on theexchanges? Will the exchanges be available January 1, 2014 as promised? Will coverage onthe exchanges actually be an option for employees? Those and other questions have beenoccupying employer planning since before passage of PPACA. If the Act is completelyupheld, even with the political firestorm that will likely ensue from the Republican side,most employers will likely find it prudent to step up that planning once there is someadditional certainty after the Court’s decision. Some may be ready to update their healthcoverage strategy and start making incremental changes at this time – before the manymandates and requirements take effect as scheduled, January 1, 2014.

WHAT IF ONLY THE INDIVIDUAL MANDATE IS OVERTURNEDAND THE REST OF THE ACT IS LEFT INTACT, INCLUDINGTHE INSURANCE REFORMS?

What will happen if only the individual mandate is overturned? By all estimates, the cost ofcoverage in the individual market will skyrocket. The coverage will be required to becommunity rated (albeit with some ability to vary costs based on geography and age),guaranteed issue and with the preexisting condition exclusion. If everyone is not part of theinsurance pool and paying into the pool, those requirements will force insurers to raise ratesbecause the risks will be borne across a smaller group and, more importantly, a group thatknows it needs the coverage. After all, why would a young healthy person voluntarily pay forexpensive premiums when he knows he can get coverage any time he needs or wants it andwill not be penalized for waiting or for already having a need? Most rational people wouldjust wait until they are going to use the insurance to buy it if there is no mandate and penaltyto enforce the mandate. This occurred in Massachusetts. Since the healthy people will notbe subsidizing the rest of the population, the costs for those who are in the pool will rise. As costs continue to go up, fewer people will voluntarily participate forcing the rates to gohigher still. Against that backdrop, it is not clear what actions the Secretary of HHS mighttake, or what level of success they would have to review and challenge substantial rateincreases.

The resulting death spiral will ultimately cause the exchanges to fail. In that case, employer-provided coverage (which has the benefit of including everyone in the pool from the outset)will become even MORE valuable to employees, as that will be the only place they will beable to find affordable coverage. In addition, employers will likely find it hard to off-loadthat coverage because there will still be no alternative in the individual market. Some ofthe expenses of coverage will likely still make the coverage more expensive than otherwise(because the annual and lifetime dollar limit caps will still be prohibited, and the otherprovisions that expand eligibility and coverage will still be mandated). However, comparedto the individual market the costs should be significantly more affordable for employees,even if shared to the maximum extent possible under the affordability requirement.Therefore, while costs will likely rise, group coverage will continue to be sought byemployees and provided by employers as a competitive requirement (in addition to the factthat the pay or play requirement would continue to exist with its penalties).

WHAT WILL HAPPEN IF THE INSURANCE REFORMS AREALSO OVERTURNED BUT NOT THE REST OF PPACA?

This question is a little more difficult to answer. Presumably the “pay or play” mandate andthe affordability requirements will still be part of PPACA in this case. That means that theemployers will still have some pressure to provide coverage at an affordable cost or pay a

penalty. Many of the same questions that they have been asking themselves with respect tomoving forward with PPACA would still apply. However, there may be more reasons foremployers to pay the penalty and let employees purchase coverage through the exchanges,because, without the insurance reforms, insurers will be able to properly price theirproducts. That could lead to lower overall premiums in the exchanges. Nevertheless,without the individual mandate and the expansion of the insurance pool, the premiums inthe individual market would still likely be more expensive than the employer group market.So, while it is an open question and the individual market would likely be somewhat moreappealing in this scenario, the employer group market would likely still be the best optionfor most employees.

WHAT WILL HAPPEN IF THE ENTIRE ACT IS INVALIDATED?

Unfortunately, even if PPACA is completely overturned, it is not as though employers canjust ignore the whole thing and assume we can return to the status quo ante. Many of theprovisions of PPACA have already taken effect – for instance the adult child coveragerequiring children up to 26 to be offered coverage and the elimination of lifetime and annualdollar limits on plans. Therefore, employers will have to make some determinationsregarding the various requirements or provisions that are already in place:

n Will they eliminate coverage for adult children? Will that result in COBRA for thosewhose coverage is eliminated, or will employers offer a substitute continuation coveragepackage for them?

n Will employers re-impose dollar limits? What about for those people who exceededthem recently? Will the limits be imposed retroactively?

n Will employers re-impose preexisting condition exclusions for pre-19 year oldenrollees? How will that be implemented?

n Will employers who obtained a reimbursement under the Early Retiree ReimbursementProgram be forced to repay those amounts? What if they already distributed the fundsto the covered retirees?

n Will employers reinstate the over-the-counter drug reimbursements from FSAs? Will they eliminate the $2,500 cap (albeit that will no longer be effective before 2013plan years).

n Will non-grandfathered plans eliminate the additional layer of external appeals?n Will they otherwise re-impose the managed care limits (such as what provider can

be a primary care physician and certain out-of-network limits) that were eliminatedunder PPACA?

Some of these questions will need to be answered by the regulators (like what happens to theERRP funds). While we wait for the outcome, Willis is involved with industry groups thatare teeing up those questions to the various agencies in anticipation of the ruling.

CONCLUSION

The Supreme Court decision is unlikely to be the end of the story with respect to PPACA. AsYogi Berra is reputed to have said, “It ain’t over ‘til it’s over!” Employers should be ready fora decision to be published at the end of this month. All should be ready to shift into high gearin terms of planning. As noted above, the PPACA planning is already underway – makingplan sponsor decisions, legislative and regulatory repairs and – design changes difficult toimplement. Regardless of the decision, you should anticipate the regulators will roll out newrequirements, and that Congress (regardless of the results of the 2012 elections) willpromulgate more changes via new legislation. We’ve only just begun.

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Auburn, ME207 783 2211

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Boston, MA617 437 6900

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Shelton, CT203 924 2994

NORTHEAST

Buffalo, NY716 856 1100

Cranford, NJ908 931 3005

Florham Park, NJ973 410 4622

Morristown, NJ973 829 6374973 829 6465

New York, NY212 915 8802

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Radnor, PA610 254 7289

Wilmington, DE302 397 0171

ATLANTIC

Baltimore, MD410 584 7528

Bethesda, MD301 581 4261

Knoxville, TN865 588 8101

Memphis, TN901 248 3103

Nashville, TN615 872 3716

Norfolk, VA757 628 2303

Reston, VA703 435 7078

Richmond, VA804 527 2343

Rockville, MD301 692 3025

SOUTHEAST

Atlanta, GA404 224 5000

Birmingham, AL205 871 3300

Charlotte, NC704 344 4856

Gainesville, FL352 378 2511

Greenville, SC704 344 4856

Jacksonville, FL904 355 4600

Marietta, GA770 425 6700

Miami, FL305 421 6208

Mobile, AL251 544 0212

Orlando, FL407 562 2493

Raleigh, NC704 344 4856

Savannah, GA912 239 9047

Tallahassee, FL850 385 3636

Tampa, FL813 490 6808813 289 7996

Vero Beach, FL772 469 2842

MIDWEST

Appleton, WI800 236 3311

Chicago, IL312 288 7700312 348 7700

Cleveland, OH216 861 9100

Columbus, OH614 326 4722

Detroit, MI248 539 6600

U.S. HUMAN CAPITAL PRACTICE OFFICE LOCATIONS

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KEY CONTACTS

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Grand Rapids, MI616 957 2020

Milwaukee, WI414 203 5248414 259 8837

Minneapolis, MN763 302 7131 763 302 7209

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SOUTH CENTRAL

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Austin, TX512 651 1660

Dallas, TX972 715 2194972 715 6272

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Houston, TX713 625 1017713 625 1082

McAllen, TX956 682 9423

Mills, WY307 266 6568

New Orleans, LA504 581 6151

Oklahoma City, OK405 232 0651

Overland Park, KS913 339 0800

San Antonio, TX210 979 7470

Wichita, KS316 263 3211

WESTERN

Fresno, CA559 256 6212

Irvine, CA949 885 1200

Las Vegas, NV602 787 6235602 787 6078

Los Angeles, CA213 607 6300

Novato, CA415 493 5210

Phoenix, AZ602 787 6235602 787 6078

Portland, OR503 274 6224

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San Diego, CA858 678 2000858 678 2132

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The information contained in this publication isnot intended to represent legal or tax advice andhas been prepared solely for educational purposes. You may wish to consult your attorneyor tax adviser regarding issues raised in this publication.

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