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Takeaway: The individual mandate is probably toast, but the Trump Administration likely fails to take down the entire law.

Editor's Note: Below is a complimentary research note written yesterday by Legal Policy Analyst analyst Paul Glenchur. To access our Legal Catalyst research please email sales@hedgeye.com.

Obamacare Should Survive Supreme Court Surgery - 11 11 2020 1 50 11 PM

The Supreme Court heard arguments today in a challenge brought by Republican state Attorneys General and the Trump Justice Department to the constitutionality of the Affordable Care Act's individual mandate. 

When the case is decided, perhaps late in the first quarter of next year, we expect the Court will affirm an appellate court ruling striking down the individual mandate to obtain health insurance. 

We anticipate that a majority of the Justices will consider the individual mandate generally severable from the rest of the Act, allowing lower courts to determine whether other portions of the law should be invalidated as inextricably dependent on the viability of the individual mandate.  The case has intensified political fights over future coverage for preexisting conditions and community rating for insurance pricing.

The case emanates from the 2017 Trump tax cut legislation that eliminated financial penalties for failure to obtain insurance.  Because the tax law eliminated the enforcement mechanism for compliance with the individual mandate, the State of Texas and other plaintiffs in their personal capacity resurrected constitutional challenges to the individual mandate.  Because the Supreme Court, in 2012, upheld the mandate as a legitimate exercise of congressional taxing power (buy insurance or pay the tax), the plaintiffs argued that eliminating the penalty -- and its capacity to raise revenue -- strips away its tax character and undermines its constitutionality.

The Fifth Circuit Court of Appeals in New Orleans agreed with the plaintiffs, concluding the individual mandate is now unconstitutional.  The Supreme Court previously held that the individual mandate cannot be sustained under congressional commerce clause cause power. 

Accordingly, without classification as a tax, the mandate is vulnerable to judicial invalidation.

The Mandate's Constitutionality  

There was some sympathy on the Court for the argument that the taxing power still applies.  The rate today may be zero but future revenue could be raised if a new penalty is enacted.  Justice Sonia Sotomayor seemed the most open-minded to the theory, but our sense is that the argument will fall short of five votes, a majority concluding the unenforceable mandate raises no revenue and cannot qualify as a "tax."

The State of California and the House of Representatives contend that absence of a penalty makes the mandate something less than a true mandate.  Yes, the statute still orders individuals to purchase insurance, but with congressional elimination of the penalty, the mandate has been downgraded to a mere suggestion.  If congress, in effect, no longer imposes an enforceable mandate, the provision can survive as simply an inoperable provision of the law, they contend.

We suspect the conservatives on the Court won't buy it.  It's entirely possible that some individuals will feel compelled to follow legislative mandates even if there is no financial consequence for failing to do so.  That's probably enough for a Court majority to view the mandate as a congressionally enacted requirement lacking an acceptable constitutional foundation.

Severability

This is the core issue in the case because it implicates politically desirable provisions like coverage for preexisting health conditions.  The Justice Department argued the entire law should be invalidated because the individual mandate is an essential pillar that supports the rest of the ACA.  They point to a "finding" expressed in the ACA that defines the individual mandate as essential to the operation of the Act.  "The requirement [to buy health insurance] is essential to creating effective health insurance markets in which improved health insurance products that are guaranteed issue and do not exclude coverage of pre-existing conditions can be sold."

Generally, absent a clear provision recognizing a challenged statute as inseverable from the rest of a legislative enactment, courts presume congress would prefer severance of invalidated provisions, leaving the rest of a law intact.  Based on today's arguments, we think Chief Justice Roberts and Justice Brett Kavanaugh, two members of the Court's more conservative contingent, will lean against a ruling that would take down the entire law.  For the Chief Justice, the language of the congressional finding cited by the Trump DOJ falls short of the kind of clear inseverability language found in other statutes.  For Justice Kavanaugh, the presumption against inseverability likely governs in this case.

The severability issue cannot be taken lightly.  We note that four Justices, in the 2012 Obamacare case, joined in a dissenting opinion that considered the individual mandate unconstitutional and inseverable from the rest of the ACA, justifying a complete obliteration of the law.  In their view, if the individual mandate is removed from the law, too many other provisions could prove unworkable, forcing federal courts to pick and choose what parts of the law survive the loss of the mandate.  The four Justices considered this a legislative task beyond the competence of judges and voted to strike down the entire law.  Two of those four members are still on the Court -- Justices Clarence Thomas and Samuel Alito.  

But we doubt a majority of the Court will take this path.  The Act's defenders argue that Congress, by 2017, determined the law could work without an enforceable individual mandate and thus eliminated the "tax" penalty without concern that other parts of the law would fail.  According to their narrative, Congress cut the tax penalty to zero without repealing any other provisions of the law, reflecting this assumption and confirming an intent to keep the rest of the law intact.

Ultimately, the presumption favoring severability, and the absence of a more explicit and forceful statutory provision to override the presumption, probably win a majority to sever the individual mandate from the rest of the law.  Lower courts, however, could address whether other provisions of the law depend on the mandate and determine inseverability on a more targeted basis.  Advocates for the ACA will argue coverage of preexisting conditions can survive the loss of the individual mandate.

Standing

There was a procedural fight over the standing of individual plaintiffs and the states to challenge the individual mandate, particularly as there is no financial consequence for noncompliance.  The issue is not trivial, but we suspect the Court will allow standing, recognizing that individuals may feel compelled to comply with congressional mandates even without enforcement consequences and such compliance imposes a cost.  In addition, plaintiff states argue the individual mandate imposes administrative paperwork costs and higher Medicaid costs that would be mitigated by striking down the individual mandate.