Sizing Up The Legal Threat Facing the Affordable Care Act

Contributors: Brandon Gee - Senior Analyst, Market Access Insights

Publish date: 21 Dec, 2018

Uncertainty continues to prevail in the days since U.S. District Court Judge Reed O’Connor dropped a Friday-evening bombshell Dec. 14 by releasing an opinion ostensibly overturning the Affordable Care Act nationwide. It was a move that surely (and perhaps intentionally, given its proximity to the deadline to enroll in exchange coverage) propelled the case, the judge, and his ruling to the forefront of conversations at that weekend’s holiday parties.

It was not until the following Monday that the federal government cleared up the most pressing question—Is the ACA still in effect?—when the U.S. Department of Health and Human Services said it “will continue administering and enforcing all aspects of the ACA as it had before the court issued its decision,” absent an injunction or final judgment.

In the days since, many commentators have fed into divisiveness by ascribing to one of two views regarding the Affordable Care Act’s long-term future: “It’s doomed!,” or, “Reed is partisan grandstander, and his opinion will be overturned faster than you can say ‘pre-existing condition.’”

As usual, the truth likely lies somewhere in between. The decision certainly is not meaningless, but appears a longshot to be upheld. Reed, who sits in the Northern District of Texas and has a history of siding with Republicans in ideologically charged lawsuits, relied on some bold underlying findings to reach his ultimate conclusion, which judges in the relatively conservative 5th Circuit Court of Appeals, let alone the Supreme Court, will have difficulty swallowing.

First, some history

In addition to expanding health insurance coverage via Medicaid and the creation of health insurance exchanges, the sweeping ACA revolutionized the U.S. healthcare industry through a long list of provisions including those that closed the Medicare drug donut hole, created the Center for Medicare and Medicaid Innovation, required restaurant menu labeling, and allowed children to stay on their parents’ insurance longer.

When the Affordable Care Act went before the Supreme Court in 2012, the court was asked to determine whether the law’s individual mandate to obtain health insurance was constitutional and, if not, whether other provisions of the ACA could stand without it. In a 5-4 decision, the court ruled that the individual mandate was a constitutional use of Congress’s tax powers. Therefore, the court did not need to address whether the mandate could be severed from the rest of the ACA. The five justices who voted in the majority remain on the court, while two dissenters have been replaced.

After their much-ballyhooed, but ultimately failed, efforts to “repeal and replace” Obamacare in 2017, ACA opponents in Congress won a more narrow victory when the tax penalties for not complying with the individual mandate were zeroed out as part of the Tax Cuts and Jobs Act of 2017. As trivial as it seems, the difference between repealing a tax versus reducing it to $0 is quite relevant in this context, precisely because the individual mandate’s severability from the rest of the ACA remains an unsettled question. Congress could have simply repealed the unpopular individual mandate, but that would have put other popular provisions of the ACA (including the ban on insurers declining, or charging more, to cover those with pre-existing conditions) at risk if it ultimately were determined that the ACA must stand in its entirety or not at all.

Zeroing out the penalty instead of repealing the individual mandate was a deliberate decision that, it was believed, shielded the ACA’s more-popular provisions from a ruling like O’Connor’s. In sum, Congress did not have the will to repeal the ACA entirely or the individual mandate specifically. It only had the will to zero out the associated tax penalty.

As noted, there is a legitimate legal question as to whether the individual mandate is severable from the remainder of the ACA. O’Connor’s opinion seizes on this uncertainty, but the judge makes a larger leap in determining that the individual mandate no longer exists in the first place. Getting there required him to disregard the intent of Congress by adopting a legal doctrine holding that if there is no tax penalty for defying the individual mandate, then the mandate does not exist.

Appellate judges, even those inclined to oppose the ACA, are likely to be reluctant to follow Reed down this path because of his ruling’s disregard for the intent of Congress. In addition, the individual mandate is not the only tax that has been set at zero. For some, the long-term capital gains tax is 0 percent, but the tax still exists and you still have to report capital gains on your tax return—just like you still have to report whether you have health insurance on your return.

All that being said, the ACA’s preservation is not guaranteed. The law certainly sits precariously on the unresolved question of whether the individual mandate can be severed from the rest of the law. That’s a very real threat that O’Connor’s ruling at least puts back in play, albeit against tall odds.

As the case navigates the court system over the following months, if not years, expect Democrats, with their new House majority, to hold hearings and pass measures aimed at shoring up the rest of the ACA. Democrats have turned the tide in the debate on healthcare, with recent polls showing that a majority of voters now favor the ACA overall and significant majorities favor its key, non-individual-mandate provisions. All this will put pressure on the Republican-led Senate to join the House in preventing a potential wholesale reversal of the ACA, which could be as simple as adding a standard severability clause to the ACA.

Brandon Gee is a senior analyst at DRG with expertise in Medicare Advantage. 
For additional insights, follow Brandon Gee @BSGeeDRG.

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