Affordable Care Act Withstands Constitutional Scrutiny But Providers Face Uncertain Future
In National Federation of Independent Business v. Sebelius, a divided U.S. Supreme Court upheld the vast bulk of the Patient Protection and Affordable Care Act (“ACA” or the “Act”) against a number of challenges.
The Individual Mandate Upheld as a Permissible Tax
Five Justices (Roberts, Ginsburg, Breyer, Sotomayor, and Kagan) held that the requirement that all individuals obtain health insurance (the “individual mandate”) is constitutional because it falls within Congress’s power to levy taxes. Although Congress labeled as a “penalty” the fee that those who fail to obtain insurance will have to pay to the federal government under the Act, the Court held that the nature of the fee--and not the label chosen by Congress--controlled. And because the fee is collected by the IRS, is expected to raise significant revenue, carries no criminal sanction, and is relatively small, the Court held that it constitutes a true tax and not a penalty.
A different majority of five Justices (Roberts, Scalia, Kennedy, Thomas, and Alito) held that the individual mandate could not have been enacted under the Commerce Clause because the mandate “does not regulate existing commercial activity” and “instead compels individuals to become active in commerce by purchasing a product.” Because of the ruling that the mandate is a constitutional tax, the Commerce Clause ruling had no effect on the outcome. Moreover, because of the unique nature of the ACA’s mandate and the Court’s refusal to overrule any prior Commerce Clause decisions, it is unclear whether this aspect of the decision portends any significant changes in future Commerce Clause jurisprudence.
Medicaid Expansion Curtailed
A majority of the Court did, however, strike down one aspect of the ACA. The Act requires states, as a condition of continuing to receive all Medicaid funding, to provide Medicaid coverage to anyone earning less than 133% of the federal poverty level. Seven Justices (Roberts, Scalia, Kennedy, Thomas, Alito, Breyer, and Kagan) held that enforcement of this requirement would amount to unconstitutional coercion of the states and would exceed Congress’s power under the Spending Clause. In the majority’s view, because states depend so heavily on Medicaid funding, they had no real choice as to whether to expand their Medicaid programs to what the majority viewed as a transformed Medicaid program under the Act. The Court made clear, however, that Congress could properly condition states’ receipt of any additional Medicaid funding on compliance with the Act’s expanded coverage requirements; it simply cannot condition existing funding on compliance. The Court further held that the portion of the ACA it invalidated could be severed from the remainder, so every other part of the ACA is unaffected.
Ultimately, then, the only significant change wrought by the opinion is that states now may choose whether to expand coverage as the ACA requires (with the resulting increase in coverage, costs, and funding from the federal government), or may refuse to do so and forgo only the additional federal funding they would receive if they expanded coverage. Given that the federal government is picking up the tab for the vast majority of the expansion funds for the foreseeable future, and that citizens of all states will pay for the expansion in states that opt-in, there appears to be a compelling economic rationale for states to participate in the expanded program regardless of the Court’s coercion analysis.
The Court’s decision creates a level of certainty which likely will accelerate provider consolidation to address the ACA’s imperatives for efficiency and assumption of global care responsibilities, while ensuring infrastructure capabilities to handle the influx of newly insured patients. Creation and development of accountable care organizations should continue unabated. Increased investment in health information technologies to support more integrated and larger health systems and business structures is expected. For employer sponsored health plans and insurers that sell coverage to those plans, many provisions of the ACA have already taken effect, or are scheduled to take effect within the next few months. For employers that have deferred compliance efforts pending the outcome of the case, the Court's decision should be the signal to ramp up those efforts.
The law’s multiple components affecting the life sciences industry will proceed absent legislative redress. For instance, beginning January 1, 2013, medical device manufacturers will pay an excise tax of 2.3% on sales of FDA approved devices, which is designed to help finance the insurance coverage expansion. In addition, the ACA’s pathway for approval of biosimilars (generic equivalents of highly priced brand name biologics) remains in place, affecting both the aspiring manufacturers of biosimilars as well as large pharmaceutical companies selling brand name biologics. The ACA’s bolstered fraud and abuse remedies and disclosure requirements also remain intact, such as the “Physician Payment Sunshine Act,” which requires drug, medical device, biological, and medical supply manufacturers to track and report payments to physicians and teaching hospitals.
The most immediate question for the provider community is whether individual states will choose to participate in Medicaid expansion. In the event that some states do not participate, however unlikely that may seem, providers will face a checkerboard of coverage for their Medicaid patient populations, and will likely be funding through charity care the resulting “donut hole”-- patients too indigent to afford coverage and not covered by a state expansion, but not earning enough to qualify for insurance subsidies under the ACA. This issue will be particularly acute for tertiary care and border area providers. The Court’s opinion also raises a host of issues not contemplated by the Act, such as whether a state could opt into Medicaid expansion through 2016, where the federal government funds 100% of the expansion costs, and later opt out when state contributions become too expensive. The major “stick” that the federal government has to prevent such action under the Court’s decision is withholding federal expansion funding, but the Court’s opinion and the Act itself do not address whether previously paid expansion funds could be recouped, or if the federal government could successfully argue that once a state opts in, it is “all in” and therefore could be denied all Medicaid federal financial participation if it later opts out of the expansion or any significant aspect of the program.
Finally, if states do opt out of Medicaid expansion, providers treating Medicaid patients may lack a sufficient volume of patients to offset the reductions in federal health program reimbursement levels that the ACA carries in anticipation of increased enrollment. Compounding this issue is the uncertainty of whether Medicaid providers can continue to bring court challenges to block Medicaid payment cuts following the Supreme Court’s recent decision in Douglas v. Independent Living Center of Southern California, Inc., 132 S. Ct. 1204 (2012), and anticipated federal regulations that are expected to make it much more difficult for providers to establish that state Medicaid rate reductions violate federal law. See 76 Fed. Reg. 26342 (May 6, 2011).
© 2012 Perkins Coie LLP