HCP Alert: Health Care Reform Bill 6.12


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HCP Alert: Health Care Reform Bill 6.12

  1. 1. HUMAN CAPITAL PRACTICEALERT:HEALTH CARE REFORM BILLJune 2012 www.willis.comWAITING FOR THE SUPREME COURT DECISION— WHAT WILL IT DO?The Supreme Court heard oral arguments in March on several Constitutional issuesregarding the Patient Protection and Affordable Care Act (PPACA) and is expected to issueits opinion this month. We think that the timing is right to discuss the potential decision,what the outcome might be and the possible fallout as the expected release date approaches.BACKGROUNDThe Supreme Court will consider several issues that federal courts have ruled on in the twoyears since the passage of PPACA, including:n Does the individual mandate exceed Congressional authority to regulate interstate commerce, or is it an essential part of a broader regulatory scheme?n Can Congress forge national solutions to national problems despite individual origins?n Are insurance reforms, such as guaranteed issue and the prohibition of any preexisting condition exclusion, Constitutional?n Is the penalty (as labeled in PPACA) for not complying with the individual mandate a tax (with broad Congressional authority to levy such taxes) or a penalty (which is far more limited under the Constitution)?n If the individual mandate is overturned, what part of the rest of PPACA, if any, must also be invalidated, or must the entire Act be overturned as well?n Do any individuals or employers even have the right to challenge the law?n Is the case ripe for review since no one has yet been forced to pay a penalty?The Court asked that the advocates discuss four topics:n Is the issue reviewable at this point?n Is the individual mandate an appropriate exercise of the Commerce Clause of the Constitution?n If the individual mandate is unconstitutional, how much, if any, of the rest of PPACA can remain (i.e., is the one unconstitutional provision “severable” from the rest of the Act)?n Is the Medicaid expansion an unconstitutional burden on the states? (Since this is of less concern to employers we will not examine those arguments here.)IS PPACA RIPE FOR REVIEW?The Court seemed to have little concern regarding this question. The proponents of PPACAhad argued that under the Anti-Injunction Act, any tax levied by Congress would have to beassessed before the validity of the tax could be challenged. PPACA’s requirement thateveryone have health insurance coverage would be enforced by the collection of the penalty.The proponent appointed by the Court to advance this argument asserted that the penaltyshould be deemed a tax since it is to be assessed and collected by the IRS. He argued furtherthat because the penalty was in fact a tax (despite being called a penalty by Congress), the
  2. 2. terms of the Anti-Injunction Act applied – (http://www.lifehealthpro. com/2010/06/30/consultants-meaning that it could not be challenged before individuals-game-mass-health-insurance). Manyit was actually assessed. The Justices all commentators have pointed out that we all can see that forseemed skeptical that something specifically insurance to work in other markets, such as auto and housing, welabeled a penalty was really a tax just because can’t wait until after the event to pay premiums.it was collected by the IRS. In lower courtdecisions, justices had pointed out that PPACA proponents say that health insurance is different fromCongress knew how to designate something as those other markets because we know that we are all going to needa tax. In fact, PPACA itself includes many new health care at some point. Therefore, PPACA includes thetaxes. The Solicitor General (arguing on behalf individual mandate that requires all individuals to have coverageof the federal government) agreed that the or pay a penalty. The opponents of PPACA immediately objected tocase was not premature because the penalty such a penalty as a violation of the U.S. Constitution because,was not really a tax (although that would instead of regulating commerce, it forces people to enterundermine its core argument, as Justice Alito commerce. The proponents’ view is that since everyone willimplied in his questions). eventually get sick or injured, and since no one can be refused treatment (because of federal law), the individual mandate isBecause of the Court’s skepticism, many simply regulating the means to finance care (via insurance) asobservers think it unlikely that the Court opposed to forcing participation in commerce. They point to thewould choose not to rule on the other Commerce Clause (which permits Congress to regulate commercesubstantive issues based on this distinction. between the states and to enact laws necessary and proper to carry out its enumerated powers) as enabling Congress to pass lawsIS THE INDIVIDUAL MANDATE necessary to fulfill its health care financing requirement.CONSTITUTIONAL? The opponents’ view is that the Constitution was designed to limit Congress’s powers to those specifically enumerated in theThe underpinning of PPACA is contained in Constitution, with the remaining powers left to the states or tothe so-called “individual mandate” portion of the people. For example, the so-called “police powers” permitthe shared responsibility provisions of Massachusetts to include a health coverage mandate in itsPPACA. The proponents of PPACA realized legislation without challenge under the federal Constitution.that the insurance reforms designed to make Since there is no provision in the Constitution that permitscoverage more affordable for those that did Congress to force people to buy a private product, opponentsnot have it (community rating requirements, argue that the mandate is unconstitutional.the prohibition of preexisting conditionexclusions and the guaranteed issue During oral arguments, the Justices evinced some skepticism ofrequirement) could not function financially the idea that forcing people to purchase insurance (and a specifiedunless everyone in the U.S. was in the pool minimum level) or pay a penalty would be permitted under theand paying premiums (or at least having their Constitution.employer or the government payingpremiums on their behalf ). That makes sense Justice Kennedy asked if it is possible to create commerce inof course. If it is possible to get the same order to regulate it. Since it is presumed that Justice Kennedy iscoverage as everyone else can get any time the swing vote, there is some indication that he might be skepticalwith no preexisting condition exclusion, there that the mandate is a Constitutional regulation of commerceis little incentive to actually pay a premium versus an unconstitutional overreach. The conservative Justicesfor the coverage before it is needed. In fact, pretty much piled on with that reasoning and kept asking thesimilar reforms in Massachusetts did lead to Solicitor General (arguing in favor of the mandate) that ifhigher premiums even with a mandate Congress can force people to purchase insurance, what can’t(http://www.patriotledger.com/topstorie Congress do? That is, they were searching, and asking thes/x1852604642/Massachusetts- Solicitor General to delineate the “limiting principal” that showsindividual-health-premiums-highest- the outer limits of Congressional power. While Justices Ginsburgin-Nation). Those higher costs have led to and Breyer (two of the Justices in the liberal wing of the Court)some people gaming the system and buying seemed to be helping the Solicitor General to make his arguments,coverage when it is needed and dropping it even Justice Sotomayor asked the Solicitor General to clarify whylater (presumably due to the high cost) Congress does not have unlimited power if it can force people to buy insurance. 2 Willis North America • 06/12
  3. 3. Those questions and the admittedly weak responses from the Solicitor General led manyto believe that the individual mandate will not survive the Supreme Court review. Thepotential for the individual mandate to be found unconstitutional was buttressed by oralargument the next day – where more liberal Justices seemed to make arguments thatwould allow the rest of the Act to stand even if the individual mandate is overturned. Thatcould be an indication that in the discussions the Court had prior to oral arguments theywere already leaning toward overturning the mandate.IF THE INDIVIDUAL MANDATE IS UNCONSTITUTIONAL,MUST THE REST OF PPACA BE OVERTURNED, OR CANSOME OF PPACA BE RETAINED (AND IF SO, HOW MUCH)?As mentioned above, the individual mandate is one of the essential pillars supporting theentire health reform scheme. If it strikes down the individual mandate asunconstitutional, the Supreme Court must decide whether the rest of the law must alsofall. The district court that originally ruled that the entire Act had to be overturned if theindividual mandate was unconstitutional noted that, unlike most laws, the PPACAlegislation was intentionally drafted without a severability clause and found that theindividual mandate was not severable – declaring the entire PPACA unconstitutional. TheEleventh Circuit Court of Appeals ruled differently – that the provisions were severable,and that is where the Supreme Court finds the question now.Supreme Court precedent states that an unconstitutional provision may be severed fromother Constitutional parts of a statute unless it is “evident that [Congress] would not haveenacted those provisions which are within its power independently” of theunconstitutional provision. Other lower court decisions also noted the ambiguitysurrounding Congressional intent – but split on this issue – some decided the individualmandate was severable; others concluded all must “rise and fall” with the individualpurchase requirement.PPACA proponents argued that provisions may only be invalidated on non-severabilitygrounds if Congress clearly would not have enacted the provisions in the absence of theindividual mandate. PPACA opponents argued that the entire PPACA should beinvalidated, if the individual mandate is found unconstitutional, because the remainder ofPPACA could not be implemented in a manner consistent with Congress’ originallegislative intent without the mandate.The Justices clearly differed on the question of severability of the various provisions ofthe Act. Those questions were directed at the federal government’s position that if theindividual mandate is overturned, many other PPACA provisions should be preserved.Opponents took the position that the entire Act is so closely integrated and financiallydependent on the individual mandate that if the individual mandate is overturned, thenthe rest of the Act must necessarily be overturned as well.Case law can be cited for the proposition that if a single provision of an act isunconstitutional, the entire act is unconstitutional and must be overturned (unlessCongress specifically provided otherwise in the act itself ). However, there is alsoprecedent for the Court to say that, if there are provisions of an act that can stand alonewithout regard to the unconstitutional provisions, then those provisions should be upheldwhile the unconstitutional provisions are severed from the remainder of the act. Thosepositions were discussed by the attorneys and the Justices weighed in frequently,challenging the various positions. 3 Willis North America • 06/12
  4. 4. Tellingly perhaps, the Justices on the liberal number of amicus (friend of the court) briefs that argued thewing of the Court asked several questions employer mandate should be invalidated if the individualwhich seemed to be directed at complete mandate is invalidated, judicial restraint would argue againstseverability, or at limiting severability to overturning the other mandates or the entire bill.those provisions directly linked to theindividual mandate (guaranteed issue,community rating and elimination of HOW WILL THE COURT RULE?preexisting condition exclusions). Justice It is pure conjecture of course (and perhaps colored by our ownSotomayor asked if it were not possible for the biases), but it appears from the line of questioning that theentire rest of the Act to stand. Justice Justices are skeptical of the individual mandate and will likelySotomayor asserted that yes, the costs would overturn that provision. That prediction is also based on Justicelikely go up, but there is some dispute about Kennedy’s history of being skeptical of government power vis-a-just how much, and isn’t it really a legislative vis the individual. He has historically found governmentalact (therefore, something for Congress to fix) overreach in the criminal area especially, and he retains thatrather than something that can be done by skepticism of federal power generally. If he rules consistentlyjudicial fiat? The Congress could fix the with that outlook, the individual mandate will be overturned.deficient part or start all over per itsprerogative. If the individual mandate is overturned, it follows from the Justices’ questions that they will likely overturn the insuranceJustice Scalia then made the point that it was mandates as well. It seems unlikely they would overturn theunlikely that Congress would have intended entire Act. We would be left then with many employer mandatesfor the entire bill to be struck down just but no individual mandate.because one feature was invalid, even if thatintent was not specifically included in the As to the other questions, it appears that the Court islegislation. Justice Kagan and Justice comfortable with a ruling at this time that rejects the argumentGinsburg also made points that many that the penalty is really a tax. Similarly, the Court seemsprovisions of the law could be operational comfortable with the Medicaid expansion mandate despite thewithout the individual mandate and that it states’ objection.would be the more conservative approach tobe selective in the ruling rather thanoverturning the entire Act. Chief Justice WHAT WILL EMPLOYERS BE REQUIRED ORRoberts and Justice Kennedy also weighed in PERMITTED TO DO IN RESPONSE?asking for the standard that could be used tosever parts of the bill and not others. These scenarios are offered to lay some groundwork for planning under the various options. All are premised on CongressionalFinally, Justice Scalia asked if it would not be inaction following the Court’s ruling; although mostcruel and unusual punishment for the commentators feel that whatever the Court does, there will be someJustices or their clerks to be forced to read the Congressional response or at least an attempted response. Howentire bill to make a determination provision that all plays out politically will depend on the fall elections and,by provision. either way, the ruling will likely be a talking point for both sides through election day and beyond.Making any predictions about the Court’sruling on severability based on the questionsis difficult. However, it appears that since the WHAT IF THE ENTIRE ACT IS UPHELD?Administration argued for the invalidation of In this scenario, the hypotheticals are largely the same as thosethe insurance reforms in other forums if the employers have been dealing with for the last two years. Whatindividual mandate were invalidated and all will our costs be? How much of those can be shared withthe Justices seemed to agree that they were employees (and still stay under the affordability cap of 9.5% oftied directly to the individual mandate (even taxable income)? Who is a full-time versus a part-timeif not necessary) – if the individual mandate is employee? Can I afford to offer coverage to all my employees?overturned, it is likely the rest of the What will the penalty actually be if I offer no coverage orinsurance reforms would also be overturned. unaffordable coverage? Will I have to continue to offer benefitsWith respect to the rest of the bill, including for competitive reasons regardless of the costs – how will thatthe employer mandates, however, despite a 4 Willis North America • 06/12
  5. 5. affect other aspects of my total rewards package? Will it make sense for employees to havecoverage at work, or is it acceptable for them to go without coverage and seek it on theexchanges? Will the exchanges be available January 1, 2014 as promised? Will coverage onthe exchanges actually be an option for employees? Those and other questions have beenoccupying employer planning since before passage of PPACA. If the Act is completelyupheld, even with the political firestorm that will likely ensue from the Republican side,most employers will likely find it prudent to step up that planning once there is someadditional certainty after the Court’s decision. Some may be ready to update their healthcoverage strategy and start making incremental changes at this time – before the manymandates and requirements take effect as scheduled, January 1, 2014.WHAT IF ONLY THE INDIVIDUAL MANDATE IS OVERTURNEDAND THE REST OF THE ACT IS LEFT INTACT, INCLUDINGTHE INSURANCE REFORMS?What will happen if only the individual mandate is overturned? By all estimates, the cost ofcoverage in the individual market will skyrocket. The coverage will be required to becommunity rated (albeit with some ability to vary costs based on geography and age),guaranteed issue and with the preexisting condition exclusion. If everyone is not part of theinsurance pool and paying into the pool, those requirements will force insurers to raise ratesbecause the risks will be borne across a smaller group and, more importantly, a group thatknows it needs the coverage. After all, why would a young healthy person voluntarily pay forexpensive premiums when he knows he can get coverage any time he needs or wants it andwill not be penalized for waiting or for already having a need? Most rational people wouldjust wait until they are going to use the insurance to buy it if there is no mandate and penaltyto enforce the mandate. This occurred in Massachusetts. Since the healthy people will notbe subsidizing the rest of the population, the costs for those who are in the pool will rise.As costs continue to go up, fewer people will voluntarily participate forcing the rates to gohigher still. Against that backdrop, it is not clear what actions the Secretary of HHS mighttake, or what level of success they would have to review and challenge substantial rateincreases.The resulting death spiral will ultimately cause the exchanges to fail. In that case, employer-provided coverage (which has the benefit of including everyone in the pool from the outset)will become even MORE valuable to employees, as that will be the only place they will beable to find affordable coverage. In addition, employers will likely find it hard to off-loadthat coverage because there will still be no alternative in the individual market. Some ofthe expenses of coverage will likely still make the coverage more expensive than otherwise(because the annual and lifetime dollar limit caps will still be prohibited, and the otherprovisions that expand eligibility and coverage will still be mandated). However, comparedto the individual market the costs should be significantly more affordable for employees,even if shared to the maximum extent possible under the affordability requirement.Therefore, while costs will likely rise, group coverage will continue to be sought byemployees and provided by employers as a competitive requirement (in addition to the factthat the pay or play requirement would continue to exist with its penalties).WHAT WILL HAPPEN IF THE INSURANCE REFORMS AREALSO OVERTURNED BUT NOT THE REST OF PPACA?This question is a little more difficult to answer. Presumably the “pay or play” mandate andthe affordability requirements will still be part of PPACA in this case. That means that theemployers will still have some pressure to provide coverage at an affordable cost or pay a 5 Willis North America • 06/12
  6. 6. penalty. Many of the same questions that they have been asking themselves with respect tomoving forward with PPACA would still apply. However, there may be more reasons foremployers to pay the penalty and let employees purchase coverage through the exchanges,because, without the insurance reforms, insurers will be able to properly price theirproducts. That could lead to lower overall premiums in the exchanges. Nevertheless,without the individual mandate and the expansion of the insurance pool, the premiums inthe individual market would still likely be more expensive than the employer group market.So, while it is an open question and the individual market would likely be somewhat moreappealing in this scenario, the employer group market would likely still be the best optionfor most employees.WHAT WILL HAPPEN IF THE ENTIRE ACT IS INVALIDATED?Unfortunately, even if PPACA is completely overturned, it is not as though employers canjust ignore the whole thing and assume we can return to the status quo ante. Many of theprovisions of PPACA have already taken effect – for instance the adult child coveragerequiring children up to 26 to be offered coverage and the elimination of lifetime and annualdollar limits on plans. Therefore, employers will have to make some determinationsregarding the various requirements or provisions that are already in place:n Will they eliminate coverage for adult children? Will that result in COBRA for those whose coverage is eliminated, or will employers offer a substitute continuation coverage package for them?n Will employers re-impose dollar limits? What about for those people who exceeded them recently? Will the limits be imposed retroactively?n Will employers re-impose preexisting condition exclusions for pre-19 year old enrollees? How will that be implemented?n Will employers who obtained a reimbursement under the Early Retiree Reimbursement Program be forced to repay those amounts? What if they already distributed the funds to the covered retirees?n Will employers reinstate the over-the-counter drug reimbursements from FSAs? Will they eliminate the $2,500 cap (albeit that will no longer be effective before 2013 plan years).n Will non-grandfathered plans eliminate the additional layer of external appeals?n Will they otherwise re-impose the managed care limits (such as what provider can be a primary care physician and certain out-of-network limits) that were eliminated under PPACA?Some of these questions will need to be answered by the regulators (like what happens to theERRP funds). While we wait for the outcome, Willis is involved with industry groups thatare teeing up those questions to the various agencies in anticipation of the ruling.CONCLUSIONThe Supreme Court decision is unlikely to be the end of the story with respect to PPACA. AsYogi Berra is reputed to have said, “It ain’t over ‘til it’s over!” Employers should be ready fora decision to be published at the end of this month. All should be ready to shift into high gearin terms of planning. As noted above, the PPACA planning is already underway – makingplan sponsor decisions, legislative and regulatory repairs and – design changes difficult toimplement. Regardless of the decision, you should anticipate the regulators will roll out newrequirements, and that Congress (regardless of the results of the 2012 elections) willpromulgate more changes via new legislation. We’ve only just begun. 6 Willis North America • 06/12
  7. 7. KEY CONTACTSU.S. HUMAN CAPITAL PRACTICE OFFICE LOCATIONSNEW ENGLAND Wilmington, DE Jacksonville, FL 302 397 0171 904 355 4600Auburn, ME207 783 2211 ATLANTIC Marietta, GA 770 425 6700Bangor, ME Baltimore, MD207 942 4671 410 584 7528 Miami, FL 305 421 6208Boston, MA Bethesda, MD617 437 6900 301 581 4261 Mobile, AL 251 544 0212Burlington, VT Knoxville, TN802 264 9536 865 588 8101 Orlando, FL 407 562 2493Hartford, CT Memphis, TN860 756 7365 901 248 3103 Raleigh, NC 704 344 4856Manchester, NH Nashville, TN603 627 9583 615 872 3716 Savannah, GA 912 239 9047Portland, ME Norfolk, VA207 553 2131 757 628 2303 Tallahassee, FL 850 385 3636Shelton, CT Reston, VA203 924 2994 703 435 7078 Tampa, FL 813 490 6808NORTHEAST Richmond, VA 813 289 7996 804 527 2343Buffalo, NY Vero Beach, FL716 856 1100 Rockville, MD 772 469 2842 301 692 3025Cranford, NJ MIDWEST908 931 3005 SOUTHEAST Appleton, WIFlorham Park, NJ Atlanta, GA 800 236 3311973 410 4622 404 224 5000 Chicago, ILMorristown, NJ Birmingham, AL 312 288 7700973 829 6374 205 871 3300 312 348 7700973 829 6465 Charlotte, NC Cleveland, OHNew York, NY 704 344 4856 216 861 9100212 915 8802 Gainesville, FL Columbus, OHNorwalk, CT 352 378 2511 614 326 4722203 523 0501 Greenville, SC Detroit, MIRadnor, PA 704 344 4856 248 539 6600610 254 7289 Willis 7 Willis North America • 06/12
  8. 8. Grand Rapids, MI San Antonio, TX616 957 2020 210 979 7470Milwaukee, WI Wichita, KS414 203 5248 316 263 3211414 259 8837 WESTERNMinneapolis, MN763 302 7131 Fresno, CA763 302 7209 559 256 6212Moline, IL Irvine, CA309 764 9666 949 885 1200Pittsburgh, PA Las Vegas, NV412 645 8506 602 787 6235 602 787 6078Schaumburg, IL847 517 3469 Los Angeles, CA 213 607 6300SOUTH CENTRAL Novato, CAAmarillo, TX 415 493 5210806 376 4761 Phoenix, AZAustin, TX 602 787 6235512 651 1660 602 787 6078Dallas, TX Portland, OR972 715 2194 503 274 6224972 715 6272 Rancho/Irvine, CADenver, CO 562 435 2259303 765 1564303 773 1373 San Diego, CA 858 678 2000Houston, TX 858 678 2132713 625 1017713 625 1082 San Francisco, CA 415 291 1567McAllen, TX956 682 9423 San Jose, CA 408 436 7000Mills, WY307 266 6568 Seattle, WA 800 456 1415New Orleans, LA504 581 6151 The information contained in this publication isOklahoma City, OK not intended to represent legal or tax advice and has been prepared solely for educational405 232 0651 purposes. You may wish to consult your attorney or tax adviser regarding issues raised in thisOverland Park, KS publication.913 339 0800 Willis 8 Willis North America • 06/12