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Takeaway: Probability lower court will be overturned above 50% but we are not as confident as most due to the range of possibilities

 Déjà vu All Over Again |  ACA Constitutionality Hearing in New Orleans on Tuesday: A Preview - 2019.07.08 ACA Constitutionality Preview

 On Tuesday, July 9, in New Orleans, a three judge panel will hear an appeal by a group of State Attorney Generals and the U.S. House of Representatives of a lower court decision that, after effective repeal of the individual mandate, the Affordable Care Act was unconstitutional.

The appeal focuses on three separate questions for the Fifth Circuit to consider.

  1. Did the plaintiffs have standing to challenge the constitutionality of the ACA?
  2. Is the individual mandate constitutional now that the penalty has been effectively repealed by Congress?
  3. If reducing the individual mandate penalty to zero makes the law unconstitutional, is that provision severable from the rest of the law?

Additionally, the court asked the parties to address the question of standing by intervenor states and the U.S. House of Representatives.

Potential Outcomes

The constitutional and severability issues will trigger intense discussion before the panel.  Like most areas of constitutional law, the guidance provided by past Supreme Court precedents defy consistent and concrete interpretation.  The three judges can select from a range of outcomes without being unreasonable. 

The somewhat conservative predisposition of the panel (two Republican appointees – including a Trump appointee -- and one Democrat) suggests the base case supports affirmance of the district court’s decision.  But there is substantial room for disagreement and further appeal to the Supreme Court, given the magnitude of this case, seems likely regardless of outcome in the Fifth Circuit.

Oral arguments should provide useful insights on the disposition of the core issues in the case and whether particular judges appear to be struggling to reach a certain end point, but the questions on plaintiff standing are significant.  Although there is a logical basis to reject the district court’s severability analysis, we believe a conservative view could lead to affirmance of Judge O’Connor’s District Court decision to strike down the entire Act as non-severable. 

We note that four Supreme Court justices (the four dissenters) reached a similar conclusion in 2012 Obamacare case, the decision that upheld the individual mandate as a valid exercise of congressional taxing power.  If four Justices were willing to reject severability of the individual mandate and take down the entire law, a similar ruling from the relatively conservative Fifth Circuit would not come as a shock.

Standing. The plaintiffs in the original case are two individuals, Neill Hurley and John Nantz plus the states of Texas, Alabama, Arizona, Florida, Georgia, Indiana, Kansas, Louisiana, Mississippi, Missouri, Nebraska, North Dakota, South Carolina, South Dakota, Tennessee, Utah, West Virginia and Arkansas.

The original defendants were the United States, Department of Health and Human Services and the Internal Revenue Service. However, the Trump administration has declined to defend the law in total and as a result the states of California, Connecticut, Delaware, Hawaii, Illinois, Kentucky, Massachusetts, New Jersey, New York, North Carolina, Oregon, Rhode Island, Vermont, Virginia, Washington, Minnesota and the District of Columbia Intervened. Also intervening to defend the law is the U.S. House of Representatives.

The lower court did not address whether the states challenging the ACA had standing, but it has emerged as one of the primary issues in the appeal. The red states argue they have standing because the ACA has significantly upended their insurance markets causing disruption of their health care systems, costing employers money and increasing regulatory burdens. The individual plaintiffs contend that, although the individual penalty has been reduced to zero, they are law abiding citizens and as such are being forced to engage in a commercial activity – the purchase of insurance – they do not wish to do.

The House argues that the ACA does not force the purchase of insurance.  Instead it now provides two equally acceptable options – purchase insurance or forgo insurance without any tax or cost obligation.  Because there is a cost-free option to forgo insurance, an individual’s decision to buy an ACA-compatible policy is a matter of choice and any asserted injury is therefore self-inflicted.  Self-inflicted injuries, the House contends, cannot be the basis for constitutional standing.

The intervening states argue that they would be harmed if the law is voided as they relied on it to expand Medicaid and establish individual insurance markets including online exchanges. The House of Representatives makes a similar argument and attempts to stand in the shoes of the federal government which has declined to defend the law.

The standing arguments are focused on the individual plaintiffs who, with no mandate penalty, may not have suffered legal harm. Also subject to scrutiny is the House of Representative’s standing. In requesting more information from all parties on the standing issue last week, the court cited a Supreme Court decision from last month where the court found the Virginia House of Delegates lacked standing.

It would seem, though, that the states’ standing is much less controversial as the ACA was constructed and implemented in so many ways as a joint project requiring federal and state cooperation.

Constitutionality without Individual Mandate. The meat of the dispute centers on whether the ACA is constitutional now that Congress has reduced the individual mandate penalty to zero. As you may recall, the Supreme Court determined that the ACA was constitutional as part of the federal government’s power to tax but not constitutional under its power to regulate commerce.

With the reduction of the “shared responsibility” payment to zero, i.e., a tax of zero imposed for not purchasing health insurance, the law no longer flows from congressional taxing power, or so the argument goes.  ACA proponents argue the essential tax structure of the payment remains and is simply set a zero rate for now but could raise future revenue.

Severability. The final major issue is if, having found the individual mandate unconstitutional, the provision can be separated from the rest of the law. The lower court said no. The individual mandate and its penalty are so integral to the function of major components of the law that they whole thing needed to go.

The appellee states argue the opposite. They say that if Congress wanted to eliminate the entire law, they would have done so when they lowered the individual mandate penalty to zero or at several other opportunities during 2017.

Severability is perhaps the most vexing of the three issues. On the one hand it does appear Congress intended only to end the individual mandate but courts generally avoid trying to act like Congress and decide what stays and what goes.

What we are watching:

Questions on standing. To find the appellee states and the House without standing may render the whole exercise in New Orleans moot. In short, the case had no business being before the Fifth Circuit in the first place. That conclusion may leave the lower court decision intact and the law unconstitutional.

On the other hand, if the court determines the lower court wrongly concluded the original plaintiffs – the states and the individuals lacked standing, the lower court decision could be vacated and the law would remain intact.

A decision based on standing that finds the law unconstitutional or vacates a lower court decision, would likely be appealed to SCOTUS. However, there isn’t much to the standing argument that look appealing to the Supreme Court in our mind, so the chances of success seem low.

Questions on Severability. How comfortable the court appears to be divining which parts of the law should remain and which ones should go may offer clues as to how they may decide the severability issue. It is a complicated law with an interdependency between the individual mandate, community rating and guaranteed issue that are tough to unravel.

Paul Glenchur and I will be in New Orleans for the hearing on Tuesday and will provide a recap on Wednesday morning, earlier if events warrant.

In the meantime, call with questions.

Emily Evans
Managing Director – Health Policy



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Paul Glenchur
Senior Analyst, Telecommunications/Cable