Supreme Court Rules on Affordable Care Act: Initial Insights and Implications

28 June 2012 Publication
Authors: Diane Ung C. Frederick Geilfuss II Maria E. Gonzalez Knavel Samuel F. Hoffman Thomas R. Hrdlick Leigh C. Riley

Legal News Alert: Health Care

On June 28, 2012, the U.S. Supreme Court issued a landmark ruling on the constitutionality of key provisions of the Patient Protection and Affordable Care Act (ACA). In a 5-4 decision, the Court ruled the individual mandate is constitutional. While the ruling upheld the provisions of the ACA and allows implementation of the law to go forward, the Court limited the federal government's ability to require states to implement the Medicaid expansion. Below, we briefly describe some of the key implications of the decision.

Medicaid Expansion

One fundamental element of the Affordable Care Act is the expansion of Medicaid from a program that covers only specified categories of needy individuals to coverage for all individuals with incomes below 133 percent of the federal poverty level. (For an individual, 133 percent of the federal poverty level is currently about $14,856 annually.) The statutory amendments implementing this expansion were structured so that if a state refused to implement the mandatory expansion, the Secretary of Health and Human Services could use her existing enforcement authority to withhold part or all of that state’s Medicaid funding. The Court’s narrow holding was that the use of that enforcement authority (42 U.S.C. § 1396c) to withhold existing Medicaid funds based on a state’s failure to implement the ACA’s Medicaid expansion is unconstitutional. The Court did not invalidate any provision of the ACA, but instead limited the federal government’s ability to enforce the specific Medicaid expansion requirements in those states that are unwilling to undertake the dramatic Medicaid eligibility expansion that would have been mandated by the ACA.

A majority of the Court agreed that the federal government cannot penalize a state that refuses to implement the Medicaid expansion by taking away the state’s existing Medicaid funding. At their option, states are free to implement the expansion, and if they do so, they must comply with the requirements of the ACA. The federal government retains its power to withhold federal Medicaid funding if a state that implements the expansion fails to comply with federal law in doing so. The narrow holding of the Court does not affect the federal government’s power to withhold federal Medicaid dollars based on a state’s failure to comply with other Medicaid requirements.

Chief Justice Roberts’ opinion, in which two other justices joined, concluded that the purpose of the threatened loss of all Medicaid funding was to force unwilling states to sign up for the dramatic expansion of their Medicaid programs. The opinion provides that while Congress can impose financial inducements to ensure that states implement Medicaid consistent with federal policies, it cannot force a state to adopt a federal regulatory system as its own. The Court was unwilling to draw a clear line between appropriate financial inducements and financial coercion that exceeds Congress’ constitutional power to spend funds for the general welfare. However, the Justices limited the impact of their opinion by characterizing the ACA’s Medicaid expansion as such a dramatic change that it constitutes a new program separate from the existing Medicaid program. They concluded that Congress cannot force states to implement the new program by threatening the loss of funding under the existing Medicaid program.

It is unknown whether any states will elect not to implement the Medicaid expansion as a result of the Court’s decision. States that have taken affirmative steps to expand Medicaid coverage pursuant to the ACA are unaffected by the decision. In those states that opt out, the providers (in particular public providers) may continue to incur high costs for uncompensated care furnished to the low-income, uninsured population.

Impact of the Decision on Providers

The Supreme Court’s ruling has no direct impact on the delivery system and payment system reforms enacted under the ACA. Notwithstanding the constitutional limits on the ability of the federal government to withhold existing Medicaid funding if a state does not implement the Medicaid expansion, this constraint does not apply to the other Medicaid program payment provisions, such as the primary care rate increases and the disproportionate share hospital payment reductions.

The ACA also added weapons to the government's fight on health care fraud and abuse. Among other payment changes, the ACA weakened the public disclosure defense to a False Claims Act action; overruled the Hanlester scienter requirement for a violation of the Anti-Kickback Statute; created an express duty to report overpayments by certain time limits; required mandatory compliance programs for all providers; authorized CMS to institute a Stark self-disclosure protocol and to accept lower repayment settlements; required manufacturers of drug, device, biological, and medical supplies to report payments made to physicians and teaching hospitals (Physician Sunshine Law); and expanded Recovery Audit Contractor audits to Medicaid. CMS has implemented some of these provisions and the health care industry has spent significant time and resources to achieve compliance. The Court’s decision does not impact the implementation of these provisions.

Additionally, the Court's decision left unaffected the provisions of the ACA that relate to accountable care organizations (ACOs) and the many demonstration projects and pilot programs funded through the ACA and the Center for Medicare and Medicaid Innovation that it created. Specifically, the Medicare Shared Savings Program was unaffected.

Many had expressed the belief that even if the ACA had been completely invalidated, the drivers that underlie care transformation and the changes in reimbursement systems, as reflected in ACOs, medical home models, and other demonstration projects, would not slow the momentum for developing new structures and arrangements. The Supreme Court decision upholding the ACA makes that prognosis even more certain.

Impact of the Decision on Insurers

The Supreme Court's decision ruled that the most controversial element of the ACA, the individual mandate, was a valid exercise of Congress' power to impose taxes. As a result of this decision, most individuals will be required to obtain health insurance coverage or pay a penalty beginning in 2014 as planned. While the penalties for failure to obtain health insurance will likely be much lower than the cost of the typical insurance premium, the insurance mandate is expected to increase the number of individuals who obtain health insurance coverage.

Because the Supreme Court upheld the individual mandate, it did not reach the question of whether the related insurance provisions included in the ACA also must be invalidated. As a result, the related insurance provisions in the ACA will continue to be implemented. The health insurance industry must continue to comply with the various market reforms currently in place (medical loss ratio requirements, coverage for dependents until age 26, and so forth), and continue to prepare for those reforms that are set to go into effect in 2014 (complete prohibition of pre-existing condition requirements, implementation of community-based rating requirements, and so forth). Looking ahead, it will be interesting to see how the insurance industry adapts to these market reforms, both in terms of product innovation and investor relations. In addition, for insurers that operate in the Medicaid managed care market, today’s decision upholding the Medicaid expansion (although making participation optional for the states) will likely be viewed positively, as it should result in an increase in the number of participants in such plans.

Implications for Health Insurance Exchanges

Now that the Supreme Court has upheld the ACA entirely, the law’s provision on health insurance exchanges will go into effect as anticipated. Accordingly, the ACA provides that a state’s plan to operate an exchange must be approved by HHS no later than January 1, 2013. However, the implementing regulations allow for conditional approval if the state is advanced in its preparation but cannot demonstrate complete readiness by January 1, 2013. Because a number of states had suspended their implementation efforts pending the outcome of the Supreme Court case, it remains to be seen how many states will actually meet these deadlines and how many will require the federal government to step in and run their exchanges.

Implications for Employers

The Supreme Court's decision leaves all ACA employer requirements intact. So, for now, it’s business as usual. Group health plan sponsors will need to continue to get ready to issue Summaries of Benefits and Coverage during the next open enrollment period, reduce the limit on medical flexible spending account contributions to $2,500 for plan years starting in 2013, decide whether the existence of the health insurance exchanges starting in 2014 will or will not impact how the employer provides health care to its employees and retirees, and otherwise continue complying with the ACA.

Medical Device/ Pharmaceutical Industry Implications

The Supreme Court’s decision leaves intact all of the ACA provisions related to medical devices and pharmaceuticals, including authorization for the FDA to create an abbreviated licensure path for biosimilars, and imposition of a 2.3 percent excise tax on the sale of most medical devices. The medical device excise tax has been consistently opposed by the medical device industry and may face renewed political opposition in the wake of the Court’s decision.

Conclusion

In sum, the Court did not invalidate the remainder of the ACA based on the narrow constitutional defect relating to the implementation of the Medicaid expansion. However, the ACA was a series of complex statutory amendments that were interrelated in many respects. Other provisions did not take into account the possibility that one or more states could decline to implement the Medicaid expansion. If any state decides to reject the available federal Medicaid dollars, the number of uninsured in that state will likely remain high. As the Court noted, where state officials have a legitimate choice whether to accept federal funding, those officials can be held politically accountable for choosing to accept or refuse the offered funding. The Court’s decision will likely create a defining political issue at both the state and federal levels, particularly in light of the November elections.

The decision and dissenting opinions can be found here:
http://www.supremecourt.gov/opinions/11pdf/11-393c3a2.pdf 

Authors

Diane Ung
Health Care Industry Team
Los Angeles, California
213.972.4669
diane.ung@foley.com

C. Frederick Geilfuss II
Health Care Industry Team
Milwaukee, Wisconsin
414.297.5650
fgeilfuss@foley.com

Maria E. Gonzalez Knavel
Health Care and Life Sciences Industry Teams
Milwaukee, Wisconsin
414.297.5649
mgonzalezknavel@foley.com

Samuel F. Hoffman
Health Care Industry Team
San Diego, California
619.685.6414
shoffman@foley.com

Thomas R. Hrdlick
Insurance & Reinsurance and Health Care Industry Teams
Milwaukee, Wisconsin
414.297.5812
thrdlick@foley.com

Leigh C. Riley
Insurance & Reinsurance Industry Team
Milwaukee, Wisconsin
414.297.5846
lriley@foley.com

Benjamin P. Sykes
Insurance & Reinsurance and Health Care Industry Teams
Milwaukee, Wisconsin
414.319.7333
bsykes@foley.com

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