A First-Hand Report On The Arguments Relating To The Affordable Care Act

Tuesday, April 24, 2012 - 09:28

The Editor interviews Howard Shapiro, Partner and co-head of Proskauer’s ERISA Litigation Group, and James Napoli, Senior Counsel and a leader of Proskauer’s Health Care Reform Task Force. (Mr. Napoli attended the recent Supreme Court arguments on the Affordable Care Act’s constitutionality and is Counsel of Record for the amicus brief filed on behalf of the American Benefits Council.)

Editor: Please describe your backgrounds and how the Proskauer Health Care Reform Task Force and ERISA Litigation Group have evolved in recent years.

Shapiro: My career in ERISA law has spanned 30 years. I am known nationally for defending class action claims and other claims brought against companies, fiduciaries, plans and those people and entities that provide services to plans. These cases involve huge sums because they are generally class action cases alleging that someone or some entity did something wrong involving plan assets, judgments about plan assets, communications to participants about their rights under plan documents and questions as to how these very complicated pension plans are administered. In the health care arena, Proskauer has long had a significant practice defending claims brought under ERISA for health-related benefits and in assisting companies with establishing and maintaining their health plans. The ERISA Litigation Group is comprised of about 20 lawyers, housed in our various offices, who do nothing but ERISA litigation 24/7/365.

Napoli: I have been practicing in the employee benefits area for nearly 17 years. My practice consists of both legal consulting and litigation in the employee benefits space. Our Health Care Reform Task Force is comprised of more than a dozen lawyers from our Employee Benefits, ERISA Litigation, Health Care and Labor practices. We partner with clients and help them deploy effective legally-compliant strategies to implement health care reform in a manner consistent with client business strategies. Task Force members are prolific writers, having authored dozens of client alerts, articles and papers on health care reform and its impact on employers and providers alike. We have also authored a book on health care reform that was a Top 10 best seller for 2011 within the employee benefits space according to the International Foundation of Employee Benefit Plans.

Editor: The Affordable Health Care Act was argued over three days before the Supreme Court. What were the principal issues that dominated each day?

Napoli: There were three key issues: Day One arguments focused on application of the Anti-Injunction Act (AIA). Generally, the AIA prohibits a party from challenging a federal tax prior to that tax being levied and collected. The key issue before the Court being whether the penalty under the individual mandate is in fact a “tax” for purposes of the AIA. (In this instance, the penalty under the individual mandate would not be levied until the year 2014 with collection action in 2015); Day Two dealt with the constitutionality of the individual mandate; and Day Three focused on the severability argument, i.e., whether without a severability clause in the bill, if the individual mandate were declared unconstitutional, would the entire Act fail?

Editor: Why were outside counsel rather than the Solicitor General or the attorneys for the respondents brought in to argue the first part of the case?

Napoli: The Court appointed amici to argue points that were not being raised by the primary litigants with respect to the Anti-Injunction Act and severability. Specifically, the Court was interested in having the position that the AIA precluded the Court from reaching the merits of the case briefed and argued by the amici. Likewise, the Court was interested in the arguments supporting the position that the individual mandate is completely severable from the remainder of the Act, meaning that only the individual mandate need be struck if found unconstitutional. On the first issue, both the respondents and the government agreed that the Anti-Injunction Act did not apply, taking the position that the penalty under the individual mandate is just that -- a penalty for purposes of the Anti-Injunction Act. (The government took a different position for purposes of the constitutional argument later in the case.) The takeaway after the Day 1 arguments was that the Anti-Injunction Act would not preclude the Court from ruling on the merits of the Case. Justice Ginsburg appeared to champion that position by asking questions that highlighted the nature of the penalty under the Act as being just that, a penalty and not a tax.

Editor: What is the exact wording of the individual mandate, the provision that has evoked so much controversy? What are the terms of the Shared Responsibility Payment provision?

Napoli: It amounts to one sentence: “An applicable individual shall for each month beginning after 2013 ensure that the individual and any dependent of the individual who is an applicable individual is covered under minimum essential coverage for such month.” For purposes of the individual mandate an applicable individual is everybody other than certain individuals who are subject to a religious exemption, conscientious objectors for example, illegal aliens or other non-U.S. residents and individuals who are incarcerated.

The Shared Responsibility Payment provision includes the mandate that each applicable individual has to obtain minimum essential coverage. There are various ways to get there, two of the more common examples are: (1) by purchasing insurance through the state exchanges and (2) by purchasing insurance or otherwise obtaining coverage through an employer provided plan, which is the employer mandate side of the equation. The employer mandate is the counterpart of the employee (or individual) mandate. Employers must provide access to minimum essential coverage for employees or face a penalty. An employer who has a plan in place today must make sure that the plan is affordable as defined by the Act in order to meet the employer mandate. In our brief that we filed with the Court on behalf of the American Benefits Council we took the position that, if the individual mandate is severed from the Act, the employer mandate must be severed as well since the function of the employer mandate is to support the individual mandate. Simply put, in the absence of the individual mandate the employer mandate loses its purpose.

Editor: What were the guaranteed issue and community rating provisions that the Federal Government argued must fall if the individual mandate doesn’t survive?

Napoli: Guaranteed issue generally means that an individual cannot be denied coverage on the grounds of having preexisting conditions. The community rating rule has to do with reducing costs by spreading costs of coverage among all members of the community, who have different actuarial ratings. It was argued that these two provisions are the “crown jewels” of the Act, and that the individual mandate is necessary to effectuate the provisions. That is, the argument goes that without the individual mandate, unhealthy people will dominate the system because healthy individuals will sit on the sidelines as many do today. This would cause costs to skyrocket. Simply stated, healthy lives must be in the same pool as unhealthy lives in order for the guaranteed issue and community rating provisions of the Act to work.

Editor: Please describe the arguments put forth by the respondents (26 states and others) in arguing that the Commerce Clause does not allow the government to create commerce – it can only regulate commerce.

Napoli: The Affordable Care Act is not reform but rather health insurance reform. Justice Kennedy broke it down very well by stating there are really two markets at play – the individual health insurance market and the health care market. The respondents would argue that these two distinct markets do not overlap. Visualize a Venn diagram where there are two circles that do not intersect or overlap. The first is a circle representing the health care market treated as a separate and distinct market from the other circle representing the individual health insurance market. The individual is outside of the health insurance market, and Congress is attempting to regulate the individual on the grounds that all US citizens will one day participate in the health care market. The respondents would point out that just because an individual is inside the health care market, does not necessarily mean that the individual is inside the health insurance market. As such, Congress is pushing people into a market in an effort to regulate the actions of those individuals. 

Using another Venn diagram for the government’s case, there would be a large circle representing health care with another smaller circle, the individual health insurance market, tucked within the health care circle. The Federal Government contends that, because all individuals are going to be in the health care market at some point and the health insurance market resides within the health care market (or otherwise has a direct impact on the health care market), it’s appropriate for Congress to regulate the health insurance market in a way that would require everybody to purchase insurance..

Editor: What was the Eleventh Circuit’s decision on this point?

Napoli: The Eleventh Circuit held that the individual mandate was unconstitutional, but that it was entirely severable from the remainder of the Act. The Eleventh Circuit viewed the issue in the way that the respondents were viewing the issue, i.e., that Congress was creating commerce or otherwise forcing individuals into commerce who were not already there. If the federal government could do that, then the government would have limitless power, an issue raised many times during the oral arguments before the Supreme Court on that second day. Once the Court holds that Congress has the ability to regulate a particular market under the Commerce Clause, its powers are generally only limited by the political process.  

Editor: Describe today’s analogy to the 1942 case of Wickard v. Filburn, a case invoked in the several briefs.

Napoli: In Wickard Congress was regulating the wheat market’s price structure as part of the general commodities markets. An individual farmer was growing wheat for his own consumption, and because he was not going to sell the wheat, he took the position that there would be no impact on the market. The Court was not persuaded. Congress was regulating the wheat market, and the fact that the farmer was not purchasing wheat as a result of growing his own wheat had an impact on the market according to the Court’s decision. In contrast, persons not buying insurance are not like the farmer growing wheat in that they are not in the insurance market at all, where, arguably, the farmer was in the wheat market.

Shapiro: The distinction being that the farmer is doing something active, placing himself in the economic market that Congress sought to regulate whereas here Congress is forcing individuals to take economic action and only when Congress forces them to take economic action are they then within the marketplace Congress seeks to regulate.

Napoli: And that’s why it’s so important then to look at the key issue expressed by Justice Kennedy: how do you view the markets – as one market within the other or as two separate markets?

Editor: What were the positions of the government and the respondents on the severability issue? What sentiments did the justices express? Are all parts of the law dependent on upholding the individual mandate clause?

Napoli: Unlike the Day 2 constitutional argument where the justices appeared to be drawing ideological lines, there seemed to be no consensus as to the severability issue, i.e., whether by severing the individual mandate and its related issues the rest of the legislation could stand. In fact, Justice Scalia seemed to express the sense of the Court in stating that there was no clear-cut test set forth in prior precedent – whether to look to statutory construction on the part of Congress or to consider a functionality test, i.e., would the Act function as Congress had intended absent the individual mandate. (Our conclusion in researching the brief for the American Benefits Council was in line with Justice Scalia’s sentiment.) The question for the Court became not only whether the individual mandate provision of the Act was completely severable, but what test should apply? The respondents claimed that the individual mandate was at the core of the Act and that without it the Act was a mere shell, meaning the entire Act should fall absent the individual mandate. The Federal Government took the position that the individual market reforms were tied directly to the individual mandate such that the market reforms could not exist in the absence of the individual mandate. We took the position in our brief that in addition to the individual market reforms, the employer mandate should be struck if the individual mandate were found unconstitutional.

Editor: If the Court decides to strike the entire Act or only a part, what happens to the programs already in effect or grants that have already been paid or promised?

Napoli: In answering that question, there is an important distinction to be drawn between the striking of the individual mandate versus the other provisions of the Act; namely, the individual mandate would be struck on constitutional grounds, whereas the other provisions would not be struck as being unconstitutional but, rather, because they could not function properly in the absence of the individual mandate or on some other judicially derived grounds.. For example, the early retirement reinsurance program would be struck not because it is unconstitutional but because it will not really function properly absent the individual mandate. Therefore, one could take the position that while the program may not continue, there would not have to be any unraveling or paying back of amounts received under that program. Congress could always pass something to extend that particular program. The answer is not exactly clear that these programs would necessarily have to be unwound and returned to the status quo prior to enactment of the Act.

Editor: What advice are you giving to clients in terms of planning their programs? Are most of them already in compliance with the parts of the law that apply currently?

Napoli: We are telling our clients that the Affordable Care Act continues to be the law of the land. In fact, the Department of Labor is beginning to audit some Affordable Care Act issues such as the mandated extension of coverage to adult children up to age 26, the elimination of lifetime and annual limits for certain benefits. What employers should be doing is thinking about how they would respond to the various rulings that could be handed down in the case. For example, if the entire Act is struck, would the employer seek to amend its plan to eliminate the various mandated coverages? If so, there are steps that must be taken in order to avoid problems under ERISA. Likewise, employers should be revisiting their 2014 implementation plans. For example, there are some employers who are looking at the state exchanges as a soft landing area for their retirees as the employer exits sponsorship of retiree medical benefits. However, employers have to consider that the state exchanges may not be there if the Act is struck in its entirety.

Shapiro: We are looking at an environment where employers are unsure yet of what their options are, thus producing greater overhead because of greater uncertainty and the need for planning for multiple legislative outcomes. This is unfortunate in an economy that is still trying to recapture its dynamism.


Please email the interviewees at howshapiro@proskauer.com or jnapoli@proskauer.com with questions about this interview.