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U.S. Supreme Court Hears Oral Arguments For Constitutional Challenge of Affordable Care Act – Day Three (Severability and Medicaid Expansion Issues)

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March 29, 2012

The U.S. Supreme Court’s three days of oral arguments in Department of Health and Human Services v. Florida (and two companion cases), which challenges the constitutionality of the Affordable Care Act, concluded on Wednesday. As outlined in our prior alerts (Day One, Day Two) this week, the last day of hearings was dedicated to two separate issues. First, the Court considered whether the remainder of the Act can stand if the “individual mandate” is struck down by the Court (in other words, whether the individual mandate is “severable” from the remainder of the Act).  Second, the Court considered whether Congress’s expansion of Medicaid coverage under the Act is permissible. 

The severability issue in particular is a key issue for employers, who have already spent the past two years on compliance obligations under the Act and will continue to have substantial compliance obligations in the future if the Act survives.  While the individual mandate is a key part of the Act, there are a number of other mandates contained in the Act that affect employers, group health plans, and the insurance market in general.  Paul Clement – counsel for the 26 states and various business groups that are challenging the Act – noted that Congress itself found the individual mandate to be the “heart” of the Act and essential to the economic viability of the Act’s remaining provisions affecting the insurance market.

Various provisions of the Act are arguably dependent on the individual mandate – for example, the operation and success of the State health insurance exchanges; the guaranteed issue requirement (under which insurers must permit every employer and individual who applies in the individual and group market to enroll); and the community rating requirement (which prevents insurers from varying premiums within a geographic area based on gender, health status, or other factors).  These mandates under the Act will be effective in 2014.  Based on the argument that these mandates are “closely related” to the individual mandate, Clement surmised that Congress would not have passed the “hollow shell” of the Act that would remain if the individual mandate was struck down by the Court.  

In opposition, the Deputy Solicitor General argued that the Court should exercise judicial restraint, and that if the individual mandate was struck down the Court should leave Congress with the task to fix the law. Justice Kennedy, typically a crucial swing-vote, opined that this request would actually be the opposite of judicial restraint, stating, “We would be exercising the judicial power…to impose a risk on insurance companies that Congress had never intended.”  Justice Ginsburg appropriately remarked that the Court’s task is to determine whether it must do a “wrecking operation” or a “salvage job” for the Act.  The Court was decidedly split on which option it would prefer.  As Justice Kagan noted, “half a loaf is better than no loaf” (indicating further that the remainder of the Act can still “do something” of value even if it isn’t everything that Congress envisioned).  On the other hand, Justice Scalia stated, “if you take the heart out of the statute, the statute’s gone.” 

As noted above, the Court is also considering the Act’s expansion of Medicaid coverage.  The Act expands Medicaid eligibility by requiring coverage for individuals with household incomes up to 133 percent of the federal poverty level. For states that meet the new conditions for Medicaid participation, the federal government will pay 100 percent of the cost of coverage of newly eligible individuals starting in 2014, and this will gradually decrease to 90 percent in 2020.  The states have opposed this expansion, arguing that Congress exceeded its powers under the Spending Clause of the Constitution and violated basic principles of federalism by essentially compelling states to accept the new conditions (i.e., by threatening to withhold all federal funding for Medicaid from the states that do not comply with the new conditions).  During the afternoon session of oral arguments on Wednesday, Clement argued against the Medicaid expansion.  While Medicaid is a voluntary program for the states, Clement noted that it is practically impossible for states to turn down the funding offered by the federal government and forego the Medicaid program.  The Justices appeared to be skeptical of these arguments in general. 

At least until the Court’s decision this June, the Affordable Care Act and all of the hundreds of pages of regulations and other guidance issued pursuant to the Act remain law.  It is possible that all of the Act, or at least those provisions affecting employer group health plans, will be upheld by the Court.  Therefore, the present task for employers remains.  We urge clients to continue their review of compliance obligations under the Act.  We will provide immediate notice this summer as soon as the Court issues its final decision. 

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