As discussed in the July 19 article “Mandate Mayhem,” several pending lawsuits present challenges to The Patient Protection and Affordable Care Act (the Act), variously referred to as health-care reform and ObamaCare. Recently, two federal circuit courts ruled on the constitutionality of the Act, further guaranteeing a showdown in the Supreme Court within the next year. In the meantime, companies should be conservative about implementing some of the longer-term provisions of the Act.
On January 31, 2011, U.S. District Court Judge Roger Vinson declared the Act unconstitutional in an action brought by 26 states, on the grounds that the individual mandate to purchase insurance exceeded Congress’s authority to regulate interstate commerce. The judge further ruled that the individual mandate was not severable; therefore, the entire law was ruled invalid. The Obama Administration, however, declared that implementation of the Act would continue as scheduled.
On August 12, the 11th Circuit Court of Appeals affirmed Judge Vinson’s decision in part, agreeing that the mandate was unconstitutional. But the appeals court held that the individual mandate could be severed, allowing the rest of the Act to remain.
The first case rejecting the Act’s constitutionality was decided by U.S. District Court Judge Henry Hudson, who sided with Virginia’s attorney general by maintaining that no precedent existed for congressional power to regulate a person’s decision not to purchase a product.
On September 8, a panel from the 4th Circuit Court of Appeals unanimously ruled that Virginia did not have the authority to challenge the law. The state attorney general said he planned to appeal the decision. Note that the court did not rule on the merits of the challenge to the Act’s constitutionality, but rather threw out the case at this present stage, since it is not ripe for challenge.
As noted in our prior article, a final ruling on the constitutionality of the Act will most likely be decided by the Supreme Court after winding through the circuit courts. It will take the high court some time to resolve the outstanding issues. As we cannot accurately predict how the court will ultimately rule, CFOs should encourage their companies to begin preparing to implement the Act’s provisions. Indeed, even if the Supreme Court rules the mandate to be unconstitutional, that does not guarantee that the entire Act will be overturned.
In particular, if the Supreme Court upholds the Act’s constitutionality while severing the individual mandate, the Act will remain on the books, with its various other provisions being implemented on schedule. That will lead to very costly unintended consequences. The Act bases much of its fiscal maneuvering on the assumption that the individual mandate will require everyone to pay into the health-insurance system, spreading the risk. Without the individual mandate, individuals could wait until they became sick or injured before purchasing a health-insurance policy. Since the Act also prohibits exclusion for preexisting conditions, individuals and families would have little incentive to purchase expensive health-care plans before they were absolutely necessary.
Waiting until the health expenses are incurred or imminent before purchasing health insurance would almost definitely result in a domino effect of skyrocketing health-care costs that would consume the federal government’s already prohibitive bloated budget. Congress would be required to scale back the Act in some manner, raise taxes in some form to pay for the Act’s provisions, or possibly even face another downgrade in our nation’s credit rating.
Therefore, we suggest to CFOs that their companies should not be overzealous in adopting the Act’s far-reaching measures. Provisions that are already effective should be implemented, but provisions that will become effective in the future should not be adopted yet.
For instance, effective as of 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). In addition, effective as of January 1, 2014, there will be a $2,500 limit on tax-free contributions to FSAs, which allow for payment of certain health costs with pretax dollars.
We would suggest that these changes should not be fully implemented until the effective date of the provision or when the constitutionality of the Act is clarified, whichever is earlier.
Thus, while the constitutionally of the individual mandate and the possibility of severability if the mandate is thrown out are debated in court, it is important for CFOs and their human-resources personnel to become familiar with the Act. Provisions that are to be implemented in upcoming months need to be discussed and addressed with your health benefit advisers, while changes with deadlines that are still a few years away from becoming requirements should be discussed but not fully implemented. We will keep you posted on future developments in this area.
Jeff Mamorsky is co-chair of the global benefits practice at law firm Greenberg Traurig. He extends his appreciation to his associate Ira Reifer in the preparation of this article.