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Mandate Mayhem

Court challenges to the health-care reform law, especially its provision requiring everyone to buy health insurance, make for an uncertain future.
Jeff Mamorsky, CFO.com | US
July 19, 2011

The Patient Protection and Affordable Care Act (the "Act") — known as health-care reform or ObamaCare by many proponents and opponents, respectively — is being challenged in the courts. A major issue concerns the constitutionality of the federal mandate that all individuals maintain adequate health-insurance coverage or pay a penalty to the Internal Revenue Service.

The challengers claim that the mandate, which requires individuals to purchase a product, falls outside the federal government's purview to regulate interstate commerce. The Obama Administration insists, conversely, that the Interstate Commerce Clause of the Constitution affords Congress the authority to mandate individual behavior in this instance. Since all or at least most citizens will at some point engage in the commerce of health care, they are subject to the clause, the argument goes.

The opponents of the mandate counter that the law regulates inactivity. Specifically, the law does not require that one engage in health-care commerce at all in order to be subject to the law; rather, all citizens must purchase health insurance or pay a penalty. Essentially, citizens must buy health insurance just for existing, without any nexus to their health-care activity. As such, the mandate exemplifies a law that falls outside of Congress's legislative power.

The Scoreboard
So far, two conservative judges have ruled the individual mandate to be unconstitutional, while two liberal judges have upheld the law.

In January of this year, Judge Roger Vinson, a senior federal judge in Florida, ruled that the Act is unconstitutional. He also rejected the option of severing the individual mandate from the overall Act and therefore declared that the entire law is invalid. However, he allowed the law to stand while the Obama Administration appeals it.

Jeff Mamorsky 7-19-11

However, on June 29, the Sixth Circuit Court of Appeals upheld the reform law, declaring the individual mandate to be constitutional under Congress's right to regulate interstate commerce. The court held that the mandate regulates health care (something most or all citizens purchase and are active in economically). In addressing the issue of legislating inactivity, the court maintained that since most people will use health care regardless of whether they have health insurance, the decision to self-insure (i.e., to decline purchasing health insurance) is in itself an economic activity and therefore falls within Congress's legislative power.

The decision was not unanimous, and the dissenting judge, James Graham, said he believed "the mandate is a novel exercise of Commerce Clause power" and that Congress has never before "required individuals to purchase a good or service."

Now What?
Although the future of "ObamaCare" remains a mystery, the Act is still on the books and is binding. Following is a quick summary of some of its relevant provisions that are or will become effective.

Already Effective:
Dependents (children) will be permitted to remain on their parents' insurance plan until their 26th birthday, even if they no longer live with their parents, are not dependents on a parent's tax return, or are no longer students, as was the case under the prior law.

Companies that provide early retiree benefits for individuals age 55 to 64 are eligible to participate in a temporary program that reduces premium costs. The program reimburses participating plan sponsors for a portion of the costs of providing health coverage to early retirees and their spouses, surviving spouses, and dependents. The program is scheduled to end no later than January 1, 2014.

Flexible spending accounts (FSAs), health reimbursement accounts, and health savings accounts cannot be used to pay for over-the-counter drugs, purchased without a prescription, except insulin. It is a confusing piece of legislation, since it does not result in "patient protection" or "affordable care," the hallmarks of the Act.

Effective January 1, 2012:
Employers must disclose the value of the benefits they provide for each employee's health-insurance coverage on the employee's annual Form W-2 (generally applicable to employers for calendar year 2012, to be reported in January 2013). This provision is also fraught with controversy, since the IRS could use the information to police and collect penalties from individuals and employers who do not comply with the mandate to buy health insurance.

Effective January 1, 2013:
Income from self-employment and wages of single individuals in excess of $200,000 annually will be subject to an additional tax of 0.9%. The threshold amount is $250,000 for a married couple filing jointly or $125,000 for a married person filing separately. An additional tax of 3.8% will apply to the lesser of net investment income or the amount by which adjusted gross income exceeds $200,000 ($250,000 for a married couple filing jointly; $125,000 for a married person filing separately).


Effective January 1, 2014:
There will be an annual penalty of $95 or up to 1% of income, whichever is greater, for individuals who do not secure insurance. It will rise to $695 or 2.5% of income by 2016. Families have a limit of $2,085.

In general, there will be a $2,000-per-employee tax penalty on employers with more than 50 employees that do not offer health insurance to their full-time workers. Arguably, this is the most controversial provision in the Act. Because of this penalty, many businesses will be strongly encouraged to hire part-time employees instead of keeping full-time employees on their payroll. Alternatively, many businesses will attempt to classify employees as independent contractors to evade the Act's obligation to provide health insurance for full-time employees.

Employed individuals who spend more than 9.5% of their income on health-insurance premiums will be permitted to purchase subsidized private insurance through health exchanges. If an employer provides an employer-sponsored plan but the individual earns less than 400% of the Federal Poverty level and could qualify for a government subsidy, the employee is entitled to obtain a "free choice voucher" from the employer that is of equivalent value to the employer's offering. It can be spent in the exchange to buy a subsidized policy of the employee's own choosing.

There will be a $2,500 limit on tax-free contributions to FSAs, which allow for payment of health costs.

What's Next?
The future of health-care delivery in this country will most likely become clearer during the next year. The general election will determine whether Republicans will win a majority in Congress. The GOP has repeatedly maintained that if it has the votes, it will repeal the Act, as the House of Representatives recently did.

However, if President Obama is reelected, repeal will face a challenge from the executive branch: the President has consistently stated that he will veto any bill to repeal the Act. Therefore, a Republican supermajority (enough to override a veto) would be required to keep the repeal movement alive. Obviously, the Act faces almost certain repeal if the GOP sweeps the board and wins the presidency and the Congress.

The Act also faces challenges on the state level. Before Judge Vinson declared the Act unconstitutional in the suit in Florida, 26 states joined in it. And several state legislators are trying at the state level to nullify some or all of the Act's provisions. Thus, even if the Act and its provisions survive at the federal level, they may not in some states.

Although the Sixth Circuit has ruled that the Act is constitutional, the battle in the courts is far from over. The cases are most likely headed for the Supreme Court, possibly as early as the fall of 2012. That should bring clarity, or even finality, to the ongoing conflict. Of course, even a Supreme Court decision may be overridden by congressional action. On this front, the outcome is ultimately in the hands of the voters.

Jeff Mamorsky is co-chair of the global benefits practice at law firm Greenberg Traurig.




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