Takeaway: We expect them to refrain from tossing the whole law; individual market including essential health benefits at risk; Medicaid likely to stay

The Fifth Circuit panel of judges met today to hear oral arguments on Texas v. USA on appeal of a decision by lower court that the Affordable Care Act was unconstitutional. We expect a decision in late 2019 that will affirm in part the lower court’s decisions that the individual mandate is unconstitutional, and the parties have standing and reverse in part the lower court’s decision that the entire law should be voided. Given that outcome the case is likely to be remanded to the lower court to work out what parts of the law should be severed, and which ones should stay. But first the Supreme Court is likely to have its say.

It is the issue of severability that is the most contentious, based on questions from the three-judge panel.

On the one hand, Trump appointee Judge Kurt Engelhardt asked the attorney for the House of Representatives why the judiciary keeps getting tasked with “performing taxidermy” on Congress’ “big game legislation” and suggesting there was a political solution.

On the other, Judge Jennifer Elrod, indicated a bias toward sending the case back to the district judge to parse out which parts of the law are inseparable from the individual mandate.

The court appeared sympathetic to dissenters in the earlier ACA challenge by the NFIB, the four conservatives that would have invalidated the entire law, reasoning that judges usurp the legislative function when tasked with picking and choosing which statutory provisions should survive a severability analysis.  We suspect a majority of the fifth circuit, however, will ultimately be uncomfortable with affirming the lower court’s decision to strike down the entire 974-page law.

The sole appointee by a Democrat, Judge Carolyn King did not ask any questions.

Constitutional standing was another issue generating some disagreement but to a much lesser extent. The courts must consider whether the appellee states, appellant states, individual plaintiffs and the House of Representatives have standing.  Based on the questioning, the court seems to raise the most eyebrows over the presence of the House of Representatives, at one point asking why the Senate was not there.

If the Fifth Circuit declares the individual mandate unconstitutional and sends the case back to the district court to determine what parts of the ACA can be severed and which parts would remain, provisions likely to join the unconstitutional club are section of the ACA known as Title I. This section includes sections on:

  • Health insurance market reforms such as community rating, age bands, guaranteed issue, etc.
  • Requirements of Qualified Health Plans sold on the ACA exchanges
  • Standards for Essential Health Benefits including certain requirements for preventive services
  • Permanent reinsurance program individual and small group market
  • Employer mandate and penalty
  • Individual mandate and penalty
  • Cost-sharing reductions, premium tax credits to support individual and small group markets

It seems less clear and but probably unlikely that ACA provisions in the rest of the law related to Medicaid expansion, Medicare reimbursement changes, creation of CMMI, among other things will be voided by the district court.

Also unclear is how either court might treat the revenue provisions. Title IX includes the Health Insurance Tax, Cadillac Tax, Medical Device Tax and others that helped offset the cost of federal subsidies supporting the purchase of insurance. There is a case to be made that these revenue provisions supported federal expenditures in Title I and should be eliminated as well.

Eliminating Title I from the ACA is a significant headwind for DVA which depends on commercial reimbursement for its margin. Also at risk are providers of preventive services like EXAS’ colorectal screening test. While there are many state mandates that will still require CRC screening for individual plans, the requirement that ERISA plans provide it and other preventive services would be eliminated.

Most major insurers have little exposure to the individual market. However, CNC is an exception. Because we do not expect the Medicaid expansion to be affected, ANTM, UNH and other large insurers should not be negatively impacted and may feel the tailwind if the HIF is eliminated. Similarly, THC, HCA which have relied more on Medicaid expansion than individual market should also not be negatively impacted.

More analysis to be done on specific ticker impacts which we will publish as soon as possible.

Timing of a decision is critical and important. If the appeals court reaches a decision and publishes an opinion by late fall, the case could be appealed by either party to the Supreme Court and make it on the 2019-2020 docket. A decision would likely land right in the heat of presidential election season and risk making the court a campaign issue for both parties.

If, however, the Fifth Circuit process or delays in the filing of a subsequent Supreme Court appeal push the case well into next year, high court review, assuming review is granted, could be a 2020-2021 event. Given the recent interest in term limits for justices, the typical fight over the Court’s partisan composition, increasing the size of the court and other political ideas in response to the court’s rightward tilt, the question of timing is very important.

All the above said. oral arguments are but one part of the judicial process and many times not an accurate indicator of outcomes. Like everyone else we will have to wait for the final opinion to know for sure.

Call with questions and your own ideas on impacts.

Emily Evans
Managing Director – Health Policy


Paul Glenchur
Senior Analyst
202 600-7150