Supreme Court Health Reform Ruling Debrief

Where to Go from Here?Barbara J. Zabawa, Attorney, Whyte Hirschboeck Dudek S.C.

July 12, 2012

The Pre-Decision Hype• March 19, 2012: The New Republic reports an ABA survey showing 85%

predicted Court will uphold law.• June 19, 2012: The New York Times reports that 80% of Intrade investors

believed the Court would reject the individual mandate.• June 22, 2012, Uwe E. Reinhart writes in the New York Times that he

would bet the SCOTUS would strike down the individual mandate only.• Mid-June 2012, Richard Mourdock accidently releases videos

“celebrating” the decision, as well as “lamenting” it.• Speaker John Boehner cautioned House Republicans in Mid-June to not

seem too joyous if all or part of the law was struck down.• June 27, 2012, the Capital Times runs a story interviewing two local

observers, a constitutional law scholar and health consumer advocate, who both believe that Court will find the individual mandate unconstitutional.

• Barbara J. Zabawa predicts during numerous discussions that the easiest decisions will be to strike it all or uphold it all and that the severability issue is too messy.

The Pre-Decision Hype

• Lessons learned:– Don’t follow the crowd– Don’t bet money on Supreme Court

decisions– SCOTUS is very good at keeping secrets

Quick Survey

The Decision

• NFIB v. Sebelius, 567 U.S. ____ (2012)• Issued on June 28, 2012• 5-4 decision upholding the

“individual mandate” to purchase insurance under the federal government’s taxing power.– C.J. Roberts, joined by J. Ginsburg, J.

Breyer, J. Sotomayor and J. Kagan.

The Decision

• Anti-Injunction Act– The majority decides the AIA does not

apply because Congress chose to describe the “shared responsibility payment” for those who do not purchase health insurance as a “penalty,” not a tax.• Labels matter• Because AIA is a creature of Congress,

Congress can describe a payment as a penalty even though treated as a tax.

The Decision

• Commerce Clause argument does not win the day for the government.– C.J. Roberts and Justices Kennedy,

Scalia, Thomas and Alito found the individual mandate to be an invalid exercise of Congress’ power under the Commerce Clause, Art. I, s. 8, cl. 3.

The Decision

• According to C.J. Roberts, the individual mandate does not regulate an existing commercial activity, but seeks to compel those not already engaged in commerce to purchase a product (i.e., health insurance).

The Decision

• “People, for reasons of their own, often fail to do things that would be good for them or good for society. Those failures – joined with similar failures of others – can readily have a substantial effect on interstate commerce. Under the Government’s logic, that authorizes Congress to use its commerce power to compel citizens to act as the Government would have them act.” C.J. Roberts, at 23.

The Decision

• Individual mandate could not be sustained under “Necessary and Proper Clause.” – Even if individual mandate is necessary to

ACA’s insurance reforms, such an expansion of federal power is not a “proper” means for making those reforms effective. C.J. Roberts, at 30.

– The Necessary and Proper Clause does not license the exercise of any “great substantive and independent powers beyond those specifically enumerated.” Id. at 28.

The Decision

• The Government’s “alternative” argument wins the day:– The majority finds that despite the

importance of labeling something as a “penalty” for purposes of the AIA, such a label is not important for purposes of determining whether the payment is a legitimate exercise of Congress’ taxing power.

The Decision

• Citing to cases like New York v. United States, 505 U.S. at 171 (1992), the majority finds precedent that exactions not labeled as taxes were authorized under Congress’ power to tax.– “Every reasonable construction must be

resorted to, in order to save a statute from unconstitutionality.” C.J. Roberts, at 32.

The Decision

• The exaction in the ACA requires those without health insurance to pay an amount to the IRS through the normal taxation process.

• This “functional approach” justifies treating the mandate as a tax.– The “tax” is not a penalty in that the

amount due to the IRS will be far less than the price of insurance, and by statute, it can never be more. C.J. Roberts, at 35.

The Decision

• Moreover, the Chief Justice points out that the mandate contains no scienter requirement and the IRS is not allowed to use those means most suggestive of a punitive sanction, such as criminal prosecution.

The Decision

• The Chief Justice states that many taxes seek to influence conduct.– Tax incentives exist to encourage

purchasing a home or pursuing an education.

– The ACA’s individual mandate “tax” encourages the purchase of health insurance.• However, the Chief Justice notes that the CBO

estimates 4 Million/year will choose to pay the IRS rather than buy insurance.

The Decision

• Limits Federal Authority on Medicaid Expansion.– C.J. Roberts, joined by Justices Breyer

and Kagan, concluded that the ACA’s Medicaid expansion violates the Constitution by threatening states with the loss of their existing Medicaid funding if they decline to comply with the expansion.

The Decision

• Justices Ginsberg and Sotomayor concurred in the judgment by C.J. Roberts.– Disagreed that the withholding of

Medicaid funds in their entirety would violate the Spending Clause.

– Agreed that the offending provision should be severed and the ACA should be allowed to stand.

The Decision

• C.J. Roberts held that the federal government could meet constitutional standards by precluding DHHS from withdrawing all existing Medicaid funds if a state chooses not to participate in the Medicaid expansion program.– Roberts concluded that finding the

withdrawal of Medicaid funds unconstitutional does not affect the rest of the ACA.

Impact on Employers

• Based on the Supreme Court ruling, employers should move forward on implementing and preparing for the various ACA provisions.

Impact on Employers

• Next steps– Prepare for reporting employer provided

health coverage in form W-2;• Are you aggregating group health plan

valuation data for this reporting requirement?

– Finalize Summary of Benefits and Coverage material for inclusion in the 2013 Open Enrollment package.

Impact on Employers

– Reflect the 2013 plan year $2500 cap on salary deferral contributions into healthcare spending accounts in 2013 Open Enrollment material, payroll processes, and administration systems.

– Prepare to receive, and properly distribute or apply any MLR rebates associated with 2011 insured health coverage.

Impact on Employers

– Understand and begin to determine the patient-centered outcomes trust fund fees due in July 2013.

– Determine whether you are eligible for the Small Business Health Care Tax Credit.

Impact on Employers

–Mind the forthcoming changes to the nondiscrimination rules.

– Conduct a “Health Reform Analysis” with regard to the benefit plans you offer currently.• Do you provide a “Cadillac Plan?”• Does your plan provide minimum value and

is it “affordable” for purposes of the premium tax credit available in 2014?

Impact on Employers

• The Health Reform Analysis will help determine the likelihood of whether you will owe a “shared responsibility payment.”– Applies to employers with 50 or more FTEs

(defined as 30+ hours/week) and who:• Do not offer health care coverage or• Fail to offer coverage that meets minimum value

and affordability requirements, and• Have an employee that receives a premium tax

credit in a Health Insurance Exchange.

Impact on Employers

• Amount of penalty:– For employers who do not offer any

coverage:• $2,000 annually times the number of FTEs

minus 30.

– For employers who do offer coverage that fails to meet the requirements:• $3,000 annually for each FTE receiving a tax

credit, up to a maximum of $2,000 times the number of FTEs minus 30.

Impact on Employers

• Health Reform Analysis should help determine your role in continuing to offer current level of coverage.– Other considerations:• Recruitment value of health insurance• Ability to pair health plan coverage with

employee wellness initiatives• Employee/Community expectations• Tax exemption of benefits vs. wages

Impact on Employers

Examples of Impact (from kff.org)

• About This Company• Highland College is a small college, but an important source of jobs in the community. The college

offers comprehensive health coverage as a way to attract and retain talented employees.•  See How Health Reform Affects Highland College• Highland College will likely continue offering coverage to employees and their dependents. The college

will not have to alter the coverage, except to provide dependent coverage up to age 26. If, however, the college alters the benefits or cost-sharing requirements of the plan in such a way that it loses its grandfathered status, the plan would have to provide some additional benefits, such as providing coverage for certain preventive services with no cost-sharing.

• Because Highland College employs more than 250 employees, it will be required to automatically enroll employees into the employer plan if they do not opt out of coverage.

• If, in 2018, the value of the coverage offered by the college exceeds the threshold of $10,200 for single coverage and $27,500 for family coverage, the plan will be considered a high-cost plan and the college will be charged a tax of 40% on the amount by which the premiums exceed the thresholds. Highland College may pass this tax on to its employees who would pay higher premiums or it may choose to reduce the cost of the plan to avoid the tax.

• As long as the college continues to offer coverage, it will not be assessed any penalties, unless the employee share of the premium exceeds 9.5% of income for any employee and that employee chooses to purchase coverage in the state exchange and receives a premium subsidy. In that event, Highland College would be required to pay the lesser of $3,000 per employee receiving a subsidy or $2,000 per full-time employee, excluding the first 30 employees.

• Should Highland College decide to stop offering coverage to its employees, and any employees receive federal subsidies for purchasing coverage in the state exchange, the college would be assessed a penalty of $2,000 per full-time employee excluding the first 30 employees ($1,940,000).

Examples of Impact (from kff.org)

• About This Company• Fresh Food Market is a local market specializing in locally produced foods. It

recently opened and is trying to establish a client base to sustain its operations. It currently employs 16 full-time workers and although it would like to provide them with health insurance, it cannot afford to do so until it is more established. The owner and several employees have coverage through spouses or parents, but about half are uninsured.

•  See How Health Reform Affects Fresh Food Market• The health reform law exempts Fresh Food Market and other small employers

with fewer than 50 employees from any penalties related to not providing health insurance. Its uninsured employees may be eligible for Medicaid or for subsidies to help them purchase coverage in the state Exchange.

• If Fresh Food Market believes it can begin offering coverage, it would likely be eligible to receive a tax credit for two years of up to about 20% of the costs of providing health coverage to its employees as long as it chooses to purchase coverage for its employees through the Small Business Health Options Program (SHOP) Exchange and it pays at least 50% of the total premium. The full tax credit of 50% of employer premium costs is available to small employers with 10 or fewer employees and average annual wages of less than $25,000.

Examples of Impact (from kff.org)

• About This Company• Real Clean Janitorial Services employs 60 full-time employees to clean offices in the

local area. Real Clean does not currently offer insurance to its employees. Some of its employees obtain coverage through a spouse but most are uninsured.

•  See How Health Reform Affects Real Clean Janitorial Services• Although the health reform law does not require employers with 50 or more

employees to provide health insurance coverage, those that don’t will face a penalty if any employee receives a subsidy to purchase coverage in the state exchange. Since many of Real Clean’s employees are both low-income and uninsured, it is likely that at least one will choose to purchase coverage in the exchange and receive a subsidy. In that case, Real Clean will be assessed a fee of $2,000 per full-time employee, excluding the first 30 employees from the assessment, or $60,000. Even if Real Clean does not offer coverage, its uninsured employees will have new coverage options. Those with incomes below 138% of the poverty level will be eligible for Medicaid while employees with incomes above that level will be able obtain coverage through the state exchange and may be eligible for premium and cost-sharing subsidies.

• If Real Clean chooses to provide coverage in lieu of paying the penalty, the coverage may have to meet new standards around benefits and cost-sharing. Real Clean may have the option of purchasing the coverage through the Small Business Health Options Program (SHOP) Exchange.

Examples of Impact (from kff.org)• About This Company• Kate and Nate, both family physicians, formed the Pate Medical Group about ten years ago. They have a

thriving practice and currently employ eight full-time workers. The Pate Medical Group provides health insurance to their employees and tries to keep the employee costs low. However, when their plan renewed this year, the premium increased nearly 20%, in part because one of their employees was recently diagnosed with cancer and is undergoing expensive treatment. The practice can afford the additional costs; however, they will have to hold off hiring another part-time medical assistant.

•  See How Health Reform Affects The Pate Medical Group• Under health reform, the Pate Medical Group will likely continue offering the current coverage to its

employees and dependents. As long as the medical group does not reduce benefits or significantly increase employee cost sharing, the plan will be grandfathered and can remain as it is, with the exception of having to offer dependent coverage up to age 26. If Kate and Nate decide to make changes to the coverage, the changes would have to comply with new standards that include offering a comprehensive set of benefits, offering coverage for certain preventive services with no cost-sharing, limiting deductibles to $2,000 for individuals and $4,000 for families and limiting employee out-of-pocket costs to the current limits for health savings accounts ($5,950 for individuals and $11,900 for family in 2011).

• If the Pate Medical Group wanted to offer a greater choice of plans to its employees, it could purchase coverage through the state-based Small Business Health Options Program (SHOP) Exchange. The premiums in the SHOP Exchange may or may not be cheaper.

• New premium rating rules in the Exchange and in the small group market prohibiting insurers from basing premium rates on the health status of employees may help lower premium increases in the future related to having a sick employee.

• Although Kate and Nate are not considering dropping health insurance coverage for their employees, if they did decide to drop coverage, they would not be assessed a fee because they employ fewer than 50 employees.

Examples of Impact (kff.org)• About This Company• ACME Manufacturing makes auto parts. Although it has shrunk in size over the years, it still

employs 150 full-time employees. The company provides health insurance to its employees and their dependents. The coverage is fairly comprehensive, although in response to recent premium hikes, the company adopted a $2,000,000 lifetime limit on coverage and has increased slightly the plan deductible requiring employees to pay more out-of-pocket for the coverage. It also began imposing a three-month waiting period for coverage for new employees.

• See How Health Reform Affects ACME Manufacturing• ACME will likely continue offering coverage to its employees. The coverage will not change

much though the company will have to get rid of the lifetime limit on coverage and it will need to offer dependent coverage up to age 26. It will be allowed to retain the waiting period, but it cannot exceed 90 days. If ACME continues to raise deductible levels and these increases exceed specified thresholds, the plan will have to meet new limits on out-of-pocket spending and will be required to cover certain preventive services with no cost-sharing.

• As long as the company continues to offer coverage, it will not be assessed any penalties, unless the employee share of the premium exceeds 9.5% of income for any employee and that employee chooses to purchase coverage in the state exchange and receives a premium subsidy. In that event, ACME would be required to pay the lesser of $3,000 per employee receiving a subsidy or $2,000 per full-time employee, excluding the first 30 employees.

• If ACME stops offering coverage and any of its employees receive federal subsidies in the state exchange, it would be assessed a penalty of $2,000 per full-time employee, excluding the first 30 employees from the assessment ($240,000).

Questions?

• For more information, contact:Barbara J. Zabawa, Health Care Team

Lead at: Whyte Hirschboeck Dudek, S.C.33 East Main Street, Suite 300Madison, WI 53703-4655Phone: 608-234-6075Email: bzabawa@whdlaw.com