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No more waiting on the sidelines. It's time to get ready to implement upcoming provisions of the Affordable Care Act and assess the financial fallout.
Jeff Mamorsky, CFO.com | US
July 6, 2012
Now that the Affordable Care Act (ACA) has survived its constitutional challenge, companies will markedly ramp up the implementation of its provisions in the coming months.
Significant regulations will continue to be issued, including those related to employers' "pay or play" decision (i.e., whether to offer employees insurance meeting "minimum essential coverage" or pay a penalty to the government), the methodology for determining who is a "full-time employee," the operations of the state-run health-insurance exchanges provided for in the law, automatic enrollment in health plans, and more.
Implementing the ACA also means new direct and indirect fees and assessments for employer plans. For example, two well-known ones are the pay or play penalty, which applies to employers with 50 or more full-time-employee equivalents (slated to take effect in 2014), and the 40% excise tax on employers for sponsoring "high-cost" coverage, or so-called Cadillac plans (slated to take effect in 2018).
But there is also a transitional reinsurance assessment fee paid by a third-party administrator (for self-insured plans) or the insurer (for insured plans) (2014–2016), a new fee imposed on health insurers' insured business (2014), and new fees on medical-device manufacturers and prescription-drug makers (2013). The combination of these direct and indirect fees could have a more substantial impact on employer costs than is generally understood.
Had the Supreme Court decided otherwise, companies might not have been subject to some or all of those provisions and fees. We wrote in this space last November that it was difficult to predict how the court would decide the case, which primarily challenged the constitutionality of the "individual mandate" provision of the ACA. And indeed, few did predict the basis on which the court would ultimately decide, 5-4, to uphold the mandate.
The individual mandate requires most Americans to maintain "minimum essential" health-insurance coverage or make a "shared responsibility" payment to the federal government. The ACA provides that the payment will be made to the Internal Revenue Service along with an individual's taxes, and "shall be assessed and collected in the same manner" as tax penalties.
Those facts turned out to be keys to the court decision. At issue before the court was whether the individual mandate was a legitimate exercise of Congress's authority under either the Constitution's Commerce Clause or Taxing Clause, but most observers believed the decision would be based on whether the mandate violated the former.
The court held that the individual mandate was not a valid exercise of Congress's authority under the Commerce Clause, reasoning that the failure to engage in economic activity (the purchase of health insurance) is not subject to regulation under that clause. The court said the individual mandate does not regulate existing commercial activity, but rather compels individuals to become active in commerce by purchasing a product, on the ground that their failure to do so affects interstate commerce. In this regard, the court emphasized that "construing the Commerce Clause to permit Congress to regulate individuals precisely because they are doing nothing would open a new and potentially vast domain to congressional authority."
However, Chief Justice John Roberts, writing for the majority, said that although the Commerce Clause does not support the individual mandate, "that is not the end of the matter." He then turned to the federal government's second argument: that the mandate may be upheld as within Congress's power to "lay and collect taxes." In this regard, the government asked the court to read the mandate not as ordering individuals to buy insurance, but rather as imposing a tax on those who do not. Roberts agreed, saying that the only consequence for an individual who does not maintain health insurance is the additional payment to the IRS. Under that theory, he said, the mandate is not a legal command to buy insurance: "Rather, it makes going without insurance just another thing the Government taxes, like buying gasoline or earning income. And if the mandate is in effect just a tax hike on certain taxpayers who do not have health insurance, it may be within Congress's constitutional power to tax."
Citing Supreme Court precedent on this issue, the chief justice said the question is not whether that is the most natural interpretation of the mandate, but only whether it is a "fairly possible" one, and that "every reasonable construction must be resorted to, in order to save a statute from unconstitutionality."
Although the ACA describes an individual's "shared responsibility" for not having health insurance as a "penalty," not a "tax," Roberts concluded that "the shared responsibility payment may for constitutional purposes be considered a tax." He noted that for most Americans the amount due will be far less than the price of insurance, and, by statute, it can never be more.
For example, said Roberts, a congressional report indicates that in 2016, individuals making $35,000 a year are expected to owe the IRS about $60 for any month in which they do not have health insurance, someone with an annual income of $100,000 would likely owe about $200, and the price of a qualifying insurance policy is projected to be about $400 per month. Accordingly, said the chief justice, it may often be a reasonable financial decision to make the payment rather than purchase insurance, unlike a "prohibitory" financial punishment that is characteristic of a "penalty." Also, the payment is collected solely by the IRS through the normal means of taxation, and the IRS is not allowed to use those means most suggestive of a punitive sanction, such as criminal prosecution.
In distinguishing penalties from taxes, said the chief justice, the court has explained that if the concept of penalty means anything, it means punishment for an unlawful act or omission. "While the individual mandate clearly aims to induce the purchase of health insurance, it need not be read to declare that failing to do so is unlawful. Neither the Act nor any other law attaches negative legal consequences to not buying health insurance, beyond requiring a payment to the IRS. . . . [I]f someone chooses to pay rather than obtain health insurance, they have fully complied with the law."
Jeff Mamorsky is co-chair of the global benefits practice at law firm Greenberg Traurig.