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IMA Wellness Blog

Texas Court Declares Affordable Care Act Unconstitutional

by Kris M. Dawley et al.

Ice Miller LLP is an IMA Member

A U.S. District Court in the Northern District of Texas declared the Patient Protection and Affordable Care Act (“ACA”) unconstitutional on Friday, December 14. Judge Reed O’Connor’s 55-page opinion sided with the 19 states, one governor, and two individuals who sought to have the ACA declared unconstitutional in light of Congress’ elimination of the ACA tax on individuals for failing to obtain health insurance. While the ruling does not have immediate impact, it sets up a path for appeals that could once again place the fate of the ACA in front of the U.S. Supreme Court. A copy of the opinion in Texas v. United States of America may be found here.
The NFIB Case. The Texas case is the second bite at the apple for opponents of the ACA, commonly known as “Obamacare.” The first bite came in the case of National Federation of Independent Businesses v. Sebelius (“NFIB”). In a 2012 decision, four Supreme Court Justices and Chief Justice Roberts held that Congress did not have the power under the Commerce Clause —the provision of the U.S. Constitution that grants Congress the power to regulate interstate commerce—to require individuals to purchase health insurance. Without more, this holding would have struck down the so-called “Individual Mandate” of the ACA. However, four other Justices, again with Chief Justice John Roberts joining, found another way to save the Individual Mandate and the ACA. Under the ACA, an individual’s failure to obtain health insurance results in a penalty payable to the Internal Revenue Service. A majority of the Supreme Court determined that this penalty was a tax and upheld the Individual Mandate as a legitimate exercise of Congress’ power to tax. As a result of this ruling, the Individual Mandate—and the ACA—was upheld as constitutional and implementation of the ACA proceeded.
The TCJA. Five years later, Congress passed the Tax Cuts and Jobs Act of 2017 (“TCJA”), the Trump administration’s and the Republican Congress’ signature tax reform legislation. The TCJA reduced the tax penalty for failing to comply with the Individual Mandate to $0. The TCJA did not repeal the Individual Mandate; the obligation to obtain health insurance still exists under the ACA. It did, however, eliminate the penalty on individuals for failing to obtain health insurance.
The Texas v. U.S. Case. Following the passage of the TCJA, the plaintiffs filed suit in Texas v. U.S. The plaintiffs are 19 state attorneys general and one governor. In addition, there are two individual plaintiffs who assert they are harmed by the continuing requirement to purchase health insurance. The plaintiffs argued that, under the Supreme Court’s holding in NFIB and after the TCJA, the Individual Mandate no longer passed constitutional muster, because the Individual Mandate no longer constituted an exercise of Congress’ taxing power. They asserted that since the TCJA eliminated the penalty for failing to purchase health insurance, Congress is no longer exercising its taxing power. Rather, Congress is merely requiring individuals to purchase health insurance—a requirement the Supreme Court held it could not impose under the Commerce Clause in the NFIB case.
In June, 2018, the Trump administration’s Justice Department announced it would not defend all aspects of the lawsuit. Specifically, it stated it agreed the Individual Mandate was no longer constitutional and the ACA’s guaranteed issue and community rating requirements must also fall. In short, the Trump administration’s position would eliminate the Individual Mandate, would allow insurance companies to deny coverage to individuals with pre-existing conditions, and would permit insurance companies to charge higher premiums to individuals based on their medical conditions. The administration asked the court to declare those provisions invalid beginning January 1, 2019. Given the Trump administration’s position, the court granted leave for 16 states and the District of Columbia to intervene as defendants to fully defend the ACA.
On Friday, December 14, 2018, Judge O’Connor issued an opinion that sided with the plaintiffs. First, the court determined the Individual Mandate was no longer constitutional because, by reducing the penalty for failing to purchase health insurance to $0, there was no longer a constitutional justification for the Individual Mandate since Congress was no longer exercising its taxing power. The court also agreed with the Justice Department that since the Individual Mandate was unconstitutional, the guaranteed issue and community rating provisions must also fall. This means insurance companies will be able to deny individuals coverage, and charge them higher premiums, based on their health status.
The court did not stop there. Judge O’Connor went further to invalidate the entire ACA. Analyzing Congressional intent and the various opinions in the NFIB case, Judge O’Connor determined the Individual Mandate is an essential component of the ACA without which the rest of the ACA could not operate as intended. The court noted Congress specifically stated at 42 U.S.C. § 18091(2)(H) that the Individual Mandate “is an essential part of this larger regulation of economic activity, and the absence of the requirement would undercut Federal regulation of the health insurance market.” Judge O’Connor also discussed his view of the interconnectedness of the Individual Mandate and the rest of the ACA:

Upholding the ACA in the absence of the Individual Mandate would change the “effect” of the ACA “as a whole.” . . . For example, the Individual Mandate reduces the financial risk forced upon insurance companies and their customers by the ACA’s major regulations and taxes. . . . If the regulations and taxes were severed from the Individual Mandate, insurance companies would face billions of dollars in ACA-imposed regulatory and tax costs without the benefit of an expanded risk pool and customer base—a choice no Congress made and one contrary to the text. . . . Similarly, the ACA “reduce[d] payments by the Federal Government to hospitals by more than $200 billion over 10 years.” . . . Without the Individual Mandate (or forced Medicaid expansion), hospitals would encounter massive losses due to providing uncompensated care. . . . This would, as Plaintiffs argue, “distort the ACA’s design of ‘shared responsibility.’” . . .
The story is the same with respect to the ACA’s other major provisions, too. The ACA allocates billions of dollars in subsidies to help individuals purchase a government-designed health-insurance product on exchanges established by the States (or the federal government). . . . But if the Individual Mandate falls, and especially if the pre-existing-condition provisions fall, upholding the subsidies and exchanges would transform the ACA into a law that subsidizes the kinds of discriminatory products Congress sought to abolish at, presumably, the re-inflated prices it sought to suppress. . . .
Nor did Congress ever contemplate, never mind intend, a duty on employers . . . to cover the “skyrocketing insurance premium costs” of their employees that would inevitably result from removing “a key component of the ACA.” . . . And the Medicaid-expansion provisions were designed to serve and assist fulfillment of the Individual Mandate and offset reduced hospital reimbursements by aiding “low-income individuals who are simply not able to obtain insurance.” . . .

Because of the essential nature of the Individual Mandate to the ACA, Judge O’Connor determined it was inseverable from the remainder of the ACA. If the Individual Mandate must fall, the court determined, the rest of the ACA must likewise fall.
Going Forward. If Judge O’Connor’s ruling is upheld, it could mean the unwinding of Medicaid expansion, the elimination of the ACA’s employer penalty provisions, the reinstatement of preexisting condition exclusions, and the dismantling of the health care exchanges (a/k/a marketplaces) created under the ACA. It could also mean the elimination of ACA patient protections such as coverage of children on parents’ plans under age 26, preventive care without cost sharing, and prohibitions on annual and lifetime dollar limits on benefits.
For the time being, however, Judge O’ Connor’s ruling does not change any of the ACA obligations under ACA on employers or others. The ruling does not have immediate effect, and it will undoubtedly be appealed, likely to the Supreme Court. Specifically, Judge O’Connor’s ruling does not affect the enrollment in the health insurance marketplaces that recently closed, nor does it immediately relieve employers of the obligation to offer health insurance coverage to full-time employees in order to avoid a penalty. Employers, insurance companies, health care providers, and individuals are not immediately relieved of the obligation to comply with the ACA as a result of the District Court’s opinion.


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