The Patient Protection and Affordable Care Act Makes Strange Bedfellows — Chief Justice Roberts Casts the Swing Vote Upholding the Individual Mandate

by Marla K. Letellier and Julie Burbank

On June 28, 2012, the United States Supreme Court issued its long awaited and intensely debated decision on the constitutionality of the Patient Protection and Affordable Care Act (the "Affordable Care Act" or "Act"). Given the extensive media coverage, most are likely aware that, with the exception of a portion of the Medicaid expansion provisions, the Court upheld the law. However, due to the convoluted nature of the Court's controlling opinion, it is no small task to figure out what the Court actually said and how it reached its conclusions. What follows is a summary in plain English of the opinion. We will also discuss some of the key implications of the ruling for employers that are trying to figure out what the decision means for the future of their health care plans.

What Did the Supreme Court Decide?

The Short Answer:
In our March 2012 issue we highlighted the following three non-Medicaid issues before the Court:

• Whether the Anti-Injunction Act bars the Court's consideration of the constitutionality of the Act before its full implementation

• Whether the Act's individual mandate requiring all individuals (with limited exceptions) to carry health insurance that qualifies as "minimum essential coverage" is constitutional

• Whether, if the mandate is unconstitutional, the whole Act is unconstitutional

The short answer is that the Court ruled that the Anti-Injunction Act does not prevent the Court from ruling on the constitutionality of the individual mandate, and that the individual mandate is constitutional under Congress's taxation power (but not under the Commerce Clause or the Necessary and Proper Clause). While the four dissenting Justices concluded that the individual mandate was not severable from the rest of the Act (i.e.,that the entire law was unconstitutional because the individual mandate was unconstitutional), the majority did not reach the severability issue because the individual mandate was upheld.

The Long Answer:
While the final result of the case can easily be distilled into a few sentences, it is a much more complicated matter to decipher how the Court reached that result. Even counting the votes of the different Justices on the various issues is challenging. The members of the Court issued four separate opinions totaling 193 pages. Chief Justice Roberts issued the opinion of the Court, but some parts of his opinion are joined by four other Justices, while others are joined by a different group of Justices. On some issues, such as his analysis of why the individual mandate is not a permissible exercise of Congress's power under the Commerce Clause or the Necessary and Proper Clause, the Chief Justice writes only for himself. With respect to the non-Medicaid issues, the votes break down as follows:

• All of the Justices agreed that the individual mandate is not a tax for purposes of the Anti-Injunction Act (although the four dissenting Justices did not join in Chief Justice Roberts's analysis on that point).

• Justices Roberts, Scalia, Thomas, Kennedy and Alito all concluded that the individual mandate was not permissible under the Commerce Clause.

• Justices Roberts, Ginsburg, Breyer, Sotomayor and Kagan concluded that the individual mandate was constitutional under Congress's taxation power.

• Justices Ginsburg, Breyer, Sotomayor and Kagan found that the individual mandate was permissible under the Commerce Clause.

• Finally, Justices Scalia, Thomas, Kennedy and Alito would have struck down the entire law based on the unconstitutionality of the individual mandate.

The Anti-Injunction Act.
The first issue that the Court had to decide was whether the Anti-Injunction Act barred it from considering the constitutionality of the individual mandate before anyone had actually been subject to it. The Anti-Injunction Act was enacted to protect the Federal government's revenue, and generally requires that a plaintiff first pay a tax that has been assessed before challenging it in court. Accordingly, if the individual mandate is a tax for purposes of the Anti-Injunction Act, then the judicial challenge would be premature because no one had yet been assessed and paid the "tax." The Court unanimously concluded that the individual mandate was not a tax under the Anti-Injunction Act. Justice Roberts's discussion of this issue represents the controlling opinion of the Court as it was joined by Justices Ginsburg, Breyer, Sotomayor and Kagan. Chief Justice Roberts reasoned that since the Anti-Injunction Act was itself created by Congress, the controlling issue as to its application is whether Congress, in enacting the Affordable Care Act, intended to have the Anti-Injunction Act apply. Since Congress labeled the required payment under the individual mandate a "penalty" rather than a "tax," there was no intent by Congress to bring the individual mandate within the purview of the Anti-Injunction Act.

The Individual Mandate.
With respect to the constitutionality of the individual mandate, the Justices were sharply divided. Four Justices (Ginsburg, Breyer, Sotomayor and Kagan) concluded that the individual mandate was a permissible use of Congress's power under the Commerce Clause. On the other hand, five Justices (Roberts, Scalia, Thomas, Alito and Kennedy) reached the exact opposite conclusion, which was that the individual mandate represented an unprecedented expansion of the Commerce Clause power because it was an attempt to compel one to engage in commerce, rather than "regulation" of commerce. Chief Justice Roberts acknowledged in his opinion on this issue that the Commerce Clause has an "expansive scope" and that "Congress has employed the commerce power in a wide variety of ways to address the pressing needs of the time." However, for Chief Justice Roberts (and the four dissenting Justices), the individual mandate represented a sharp departure from Congress's previous use of the Commerce Clause, because "Congress has never attempted to rely on that power to compel individuals not engaged in commerce to purchase an unwanted product." These same five Justices also concluded that the individual mandate was not permissible under the Necessary and Proper Clause because the Necessary and Proper Clause does not provide Congress with an independent source of power. Instead it provides Congress with incidental powers that are "necessary and proper" for exercising a specifically enumerated grant of power under the Constitution.

With five votes against the individual mandate on the Commerce Clause and Necessary and Proper Clause issues, this central piece of the Act was in serious peril. So much so that at least two major news outlets initially reported that the individual mandate had been struck down after hearing Chief Justice Roberts read the Commerce Clause portion of his opinion from the bench. Many of those listening jumped to the conclusion that this meant that the individual mandate, and potentially the entire Act, would be struck down. However, the Chief Justice surprised almost all court watchers, legal scholars and pundits by pivoting from this discussion to a finding that the individual mandate was permissible under Congress's taxing authority.

It is counterintuitive, but while Chief Justice Roberts held that the individual mandate was not a tax for purposes of the Anti-Injunction Act, he, along with Justices Ginsburg, Breyer, Sotomayor and Kagan, reached the exact opposite conclusion with respect to whether the mandate is a proper exercise of Congress's power to levy taxes. While the issue of whether a payment is a tax under the Anti-Injunction Act turns on the specific intent of Congress as to whether they intended the payment to fit within the protections of the Anti-Injunction Act, the Court articulated a functional test for determining whether the individual mandate was a permissible use of Congress's taxation power. The constitutional analysis of whether a congressional act is a tax turns on the "practical operation" rather than the "magic words or labels" attached to the payment at issue. Congress cannot avoid the limitations on its powers as outlined in the Constitution by labeling something a tax. Similarly, Congress does not lose the power to levy a valid tax just because it has called something a penalty instead of a tax.

Focusing on the specific characteristics of the "shared responsibility payment," the Court found that it was functionally a tax:

• First of all, the penalty for failing to secure qualifying health coverage is collected solely by the Internal Revenue Service ("IRS"), just as all other taxes are collected. The Act calls for the "shared responsibility payment" to be paid into the Treasury by "taxpayers" when they file their tax returns. The actual statutory requirement to make the payment is found in the Internal Revenue Code, and is enforced by the IRS "in the same manner as taxes."

• Second, according to the Court, "for most Americans the amount due will be far less than the price of insurance," so it does not force those subject to its provisions to purchase insurance. It just levies a tax on those that fail to do so.

• Third, the individual mandate does not include a "scienter requirement," which is to say that there is no requirement that a violation of the mandate to obtain qualifying health coverage be willful before the penalty is imposed.

All these factors led the Court to conclude that the required payment is a tax rather than a penalty for unlawful behavior. The Court notes that the Congressional Budget Office has estimated that approximately four million people are expected to pay the penalty rather than buy qualifying health coverage. "That Congress apparently regards such extensive failure to comply with the mandate as tolerable suggests that Congress did not think it was creating four million outlaws. It suggests instead that the shared responsibility payment merely imposes a tax citizens may lawfully choose to pay in lieu of buying health insurance."

What Does the Supreme Court's Decision Mean for Employers?
Now that the Supreme Court has issued its opinion, we know that the vast majority of the Affordable Care Act stands as initially written and that its implementation will continue. Under the current administration and Congress, there is unlikely to be any significant legislative modifications to the Affordable Care Act in the near future. If the President is not re-elected, and if the Democrats lose control of the Senate, then the Affordable Care Act could conceivably be modified, or even repealed, before the implementation of the individual and employer mandates in 2014. However, employers cannot wait until 2014 to see what happens. Several provisions of the Affordable Care Act have implications for 2012 and 2013, and employers should be addressing these requirements now.

Key Provisions Effective Beginning in 2012
Employers should be programming their payroll systems (or working with their outside payroll vendors) to be ready for the 2012 Form W– 2 reporting requirements. As discussed in our April 2011 and January 2012 issues, the aggregate cost of employer-sponsored health coverage must be reported on the 2012 Form W– 2s that are issued in January 2013.

Employers should also be working with their health plans' third party administrators to prepare the Summary of Benefits and Coverage ("SBC") and Uniform Glossary of Coverage and Medical Terms ("Uniform Glossary"). These are first required to be provided beginning on the first day of the first open enrollment period that begins on or after September 23, 2012. Thus, employers with calendar year plans will need to have the SBCs and Uniform Glossary ready for the fall 2012 open enrollment season. (See our August 2011, February 2012 and April 2012 issues.)

Employers should also be considering which permitted method they will use to calculate the fees imposed on their self-insured plans for the Patient-Centered Outcomes Research Trust Fund ("PCORTF"). The PCORTF fee will be imposed for plan/policy years ending on or after October 1, 2012, and before October 1, 2019, and is first payable by July 31, 2013.

Additionally, Section 2718 of the Affordable Care Act requires health insurance issuers to publically report on major categories of spending of premium dollars and to provide rebates if they do not spend required amounts on reimbursement of clinical services and health care quality improvement activities. Employers should begin considering how any rebates they receive from their insured plans under the medical loss ratio final regulations will be used.

Watch for future Trucker?Huss newsletter articles on the PCORTF fee and the medical loss ratio final regulations.

Key Provisions Effective Beginning in 2013

Salary reduction contributions to health flexible spending accounts are limited to $2,500 (subject to cost of living increases for future years).

Effective beginning March 1, 2013, employers are required to provide written notice at the time of hire that informs employees of the following:

• Of the existence of the insurance exchange and describes the services provided by the exchange and how to contact the exchange

• That the employee may be eligible for a premium tax credit if the employer's share of the total allowed costs of benefits provided under the employer's plan is less than 60%

• That if the employee purchases coverage through the exchange they will lose the employer contribution (if any) to the employer's plan, and that such contribution may be excludable from income

Current employees must receive a notice that contains the above information not later than March 1, 2013.

In addition, at some point between now and 2014, certain employers will be required to automatically enroll full-time employees in health coverage pursuant to Section 18A of the Fair Labor Standards Act. The Affordable Care Act requires employers who have 200 or more full-time employees, and who sponsor at least one health plan, to automatically enroll new full-time employees in health coverage. Employees must be given notice of this automatic enrollment and provided with an opportunity to opt-out. The Affordable Care Act did not specify when the automatic enrollment provision would become effective, however, the tri-agency Affordable Care Act FAQs Part V issued on December 22, 2010, clarify that employers do not need to do this until the Secretary of Labor issues regulations. For this purpose, and for purposes of the employer mandate discussed below, the Affordable Care Act provides that a full-time employee is an employee who is employed "on average at least 30 hours of service per week." For many employers who utilize high numbers of part-time employees, or whose employees' schedules fluctuate, this will require an analysis of their workforce. There are numerous issues to consider regarding who is a full-time employee, and how the 30 hours per week requirement will be measured. The Department of Labor has been considering this situation and we look forward to receiving further guidance on these issues.

Key Provisions Effective Beginning in 2014

In 2014, the insurance exchanges are to be up and running and the employer mandate will become effective. The employer mandate imposes assessments on employers with more than 50 full-time employees that fail to provide such full-time employees with health coverage that qualifies as "minimum essential coverage" and is "affordable" (as defined by the Affordable Care Act). Employers must either provide such coverage (sometimes referred to as "play") or, if they do not provide such coverage, they must pay the assessment/penalty. Many employers have already begun considering their strategies for addressing the employer mandate. This includes whether they will play or pay. Employers who have taken a wait and see approach will need to begin considering these issues now.

Other provisions also take effect in 2014, including but not limited to the following:

• Employers who continue to provide health coverage will not be permitted to have a waiting period of more than 90 days.

• Health plans will no longer be permitted to have annual limits on essential health benefits.

• Health plans will no longer be permitted to impose pre-existing condition exclusions, and there can be no discrimination based on health status, with respect to individuals who are age 19 and older.

• The amount of a reward under a wellness program that conditions the receipt of rewards on meeting certain health standards is increased from no more than 20% to no more than 30% of the cost of coverage.

• Additional reporting requirements will also apply beginning January 1, 2014. Employers that sponsor self-insured health plans will need to report whether they provide their full-time employees with minimum essential coverage on and after January 1, 2014. Applicable large employers will also be required to report additional information about employer provided health care to the government, and to provide related statements to employees. The first information returns reporting this information to the government will be filed in 2015.

Conclusion
Employers have many implementation requirements to comply with in the short-term, and should be considering their strategies for complying with the Affordable Care Act in the long-term. This article does not attempt to address all of the issues that employers need to consider, or details of all of the requirements that employers must comply with. We will be issuing a series of newsletters that will cover the many rules and requirements that impact employers and their health plans in more detail, and will also present webinars on these topics in the coming weeks and months. If you have questions in the meantime, please contact the authors of this article or the Trucker?Huss attorney with whom you normally work.

Copyright © Trucker Huss. All rights reserved. This article is published as an information source for our clients and colleagues.  The article is current as of the date shown above, is general in nature and is not the substitute for legal advice or opinion in a particular case.  In response to new IRS rules of practice, we inform you that any federal tax information contained in this writing cannot be used for the purpose of avoiding tax–related penalties or promoting, marketing or recommending to another party any tax–related matters in this writing.