The health insurance industry should be prepared and formulate strategies to respond to the next series of challenges. Health insurance issuers may want to seek guidance from their legal and tax advisors on the impact of the Court's decision on their specific businesses.
Ending months of uncertainty following three days of historic oral arguments, on June 28, 2012, the last day of the 2011–2012 session, the U.S. Supreme Court ruled on the Patient Protection and Affordable Care Act (ACA). The Court upheld the individual mandate, which requires individuals to obtain health insurance or face the imposition of penalties, but invalidated the authority to withhold existing Medicaid funds from states that decline to comply with Medicaid expansion.
This Alert focuses on health insurance issuers and is part of a comprehensive series on the Court's ruling prepared by Duane Morris' Health Law, Insurance/Regulatory and Employment, Labor, Benefits and Immigration Practice Groups.
The Decision on Healthcare Reform
The Court held that the Anti-Injunction Act did not apply in this case because Congress labeled the shared responsibility payment as a "penalty" and not as a "tax." The Court has long held that Congress's use of different terms within a statute is generally presumed to be deliberate.
Chief Justice Roberts, writing for the majority, ruled that the individual mandate is not a valid exercise of Congress's power under the Commerce Clause and the Necessary and Proper Clause of the U.S. Constitution, but is constitutional based on Congress's taxing power. In an interesting nexus with the Anti-Injunction Act holding, the Court found that Congress's labeling of the shared responsibility payment as a "penalty" was fatal to the application of the Anti-Injunction Act, but in answering the constitutional question, the Court followed a functional approach focusing on the substance and application of the payment in determining it was a tax.
In announcing the decision from the bench, Chief Justice Roberts read the following:
"Put simply, Congress may tax and spend. This grant gives the Federal Government considerable influence even in areas where it cannot directly regulate. The Federal Government may enact a tax on an activity that it cannot authorize, forbid or otherwise control."
Seven members of the Court agreed that the Medicaid expansion violates the U.S. Constitution by threatening the states with the loss of their existing Medicaid funding if they decline to comply with the expansion. Because of this finding, a five-member majority invalidated the Secretary of Health and Human Services' authority to withdraw existing Medicaid funding from these states and applied the severability clause in the Medicaid Act to hold that the other provisions of the ACA are not affected. Medicaid funding can account for 10 percent to 17 percent of a state's budget.
Health Insurance Regulation Transformed by the ACA
The health insurance regulatory landscape was forever changed on March 23, 2010, when the ACA was enacted. Two years of insurance market reforms with more to come, dozens of federal regulations and guidance, state legislative and regulatory activities and billions of dollars in federally issued funds have created a formidable health insurance regulatory scheme.
The ACA provides up to $200 billion in appropriations. Out of the $12 billion in federal funds already issued, $4 billion have gone to state and local governments to enact specific reforms, such as:
- establishment of state and federal-based exchanges;
- increased rate review and state regulation;
- cost containment; and
- other market reforms and innovations.
The remaining $8 billion have gone to private enterprises, including tax relief for businesses and reinsurance pools.
Despite the availability of federal funds, federal and state regulators charged with implementing the ACA have fast-approaching deadlines to meet. No longer faced with the uncertainty of the ACA's constitutionality, they now have to address complex issues in an abbreviated time frame with existing resources. The ACA continues to have substantial short- and long-term impacts on health insurance issuers, health providers, healthcare consumers and employers.
Federal and State Regulatory Expansion
The health insurance industry should be prepared and formulate strategies to respond to the next series of challenges. The permanent increase in federal and state regulatory scrutiny of the industry, inevitable market innovation, new health business models and evolving distribution strategies, among many other issues, should be constantly monitored and analyzed in the context of the health insurance issuer's business.
Health insurance issuers should develop strategies to address the current regulatory environment, including:
- heightened health insurance rate review and regulation by the individual states, the U.S. Department of Health and Human Services (HHS) and, in California, a ballot initiative sponsored by a consumer advocate group;
- increased regulatory scrutiny of insurance costs and expenses—
- the ACA Medical Loss Ratio standards and required rebates have been adopted and, in some instances, increased by states. By August 1, 2012, more than $1 billion in rebates will have been issued by insurers to the individual and small group markets under the ACA 80/20 rule;
- cost-containment is the next issue in the healthcare debate. Massachusetts is undertaking the second stage of healthcare reform with both chambers passing cost-containment legislation. The legislation, currently in conference, is projected to save $150 billion over the next 15 years; and
- increased attention to executive compensation issues across the entire insurance industry. In Massachusetts, the Division of Insurance is reviewing executive pay in more than 100 domestic companies and affiliated holding companies.
- health insurance exchange implementation with a deadline of November 16, 2012, for states to inform HHS of each state's plan to either establish a state-run exchange or state-federal partnership exchange or rely on the federal facilitated exchange;
- development of innovative health distribution mechanisms, including Accountable Care Organizations, and nonprofit insurance CO-OPs—with $399 million in federal funding for CO-OPs alone; and
- ACA consumer market reforms, which may be supplemented by state-specific requirements, including guaranteed issue and restricted dollar-amount annual maximums.
What This Means for Health Insurance Issuers in This New Regulatory World
Health insurance issuers may want to seek guidance from their legal and tax advisors on the impact of the Court's decision on their specific businesses. The Court's ruling is not the end of the road with respect to healthcare reform. With the presidential election now just four months away, the issue of healthcare reform will remain front and center through the remainder of 2012 and beyond. Members of Congress have indicated that they will introduce and debate competing bills, including the possibility of outright repeal, over the coming days and weeks in order to respond to the Court's ruling. State and federal health insurance regulators will move forward with the ACA mandates and newly granted authority on the state level. We are continuing to assess the Court's ruling and its impact on the health insurance regulatory landscape nationally and on the state level and will publish updates as developments arise.
For more information on how the Court decision impacts employment, see our Alert titled "What Are the Implications for Employers of the Supreme Court Decision Upholding the Patient Protection and Affordable Care Act?" For more information on how this decision impacts healthcare providers, see our Alert titled "Affordable Care Act Declared Constitutional . . . For the Most Part."
About Duane Morris
Duane Morris insurance regulatory attorneys have carefully followed healthcare reform for the past two years and have the experience to provide guidance and answers on these issues. We have been focused on state and federal insurance regulatory expansion for decades, and we have nationwide experience with major regulatory expansion in all aspects of insurance that we have applied to health insurance legislation and regulation since the enactment of the ACA.
About Duane Morris Institute
We also invite you to join us on Monday, July 9, 2012, for a Duane Morris Institute webinar titled "The U.S. Supreme Court Ruling on PPACA: What’s Next?" for a detailed discussion of the Court's decision and its impact on health insurance issuers.
For Further Information
If you have any questions about this Alert, please contact Alice T. Kane, Elizabeth W. Powers, Max H. Stern, any of the attorneys in our Insurance and Reinsurance Practice Group or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.