A federal district court in Fort Worth, Texas struck down the entire Affordable Care Act (ACA) last Friday in a ruling that’s prompting questions about whether its legal reasoning will withstand further scrutiny, and whether the government will continue to enforce provisions of the ACA.
The ACA will become unconstitutional effective January 1, 2019 due to a provision of the Tax Cuts and Jobs Act of 2017 that zeroes out the tax on people who do not buy health insurance, ruled Judge Reed O’Connor of the U.S. District Court for the Northern District of Texas.
The court’s decision will certainly be appealed, and we, along with many other legal observers, believe it is unlikely to be upheld by the federal appeals courts. Moreover, while the ruling declares the ACA unconstitutional, it does not order any officials to stop enforcing the ACA.
Thus, as of today, the ACA remains in force. However, the Trump administration has expressed support for the legal theories adopted by this court, making it necessary to closely monitor the administration’s practical response to this ruling.
The Roots of the Decision
The ruling has its roots in the basic structure of the ACA and in the original legal challenges to the legislation, which were prominently decided by the Supreme Court in 2012 in National Federation of Independent Business v. Sebelius.
The original ACA was structured around three central requirements. The first two were “guaranteed issue,” which requires health plans to cover all applicants, and “community rating,” which requires that rates be set without regard to the insured’s medical history.
These requirements alone, however, risked creating an adverse-selection “death spiral,” where people delay buying health insurance until they are sick. This would eventually cause premiums to rise to unsustainable levels as the pool of insureds became increasingly smaller and sicker.
To avoid that scenario, Congress enacted the ACA’s third central requirement, known as the “individual mandate,” which required nearly all individuals lawfully living in the U.S. to maintain health insurance coverage. People who failed to do so would have to pay an additional tax penalty to the IRS unless they qualified for an exemption.
The First Battles Fought Over ACA
Initially, the battle over the constitutionality of the ACA focused on whether Congress had the power to enact this “individual mandate.” Although Congress enjoys great regulatory power, its power is not unlimited. Congress can only regulate a specific set of subjects listed in the Constitution.
In the first round of ACA litigation, the plaintiffs argued that requiring people to buy health insurance was outside Congress’ powers. In its defense of the ACA, the Obama administration argued that the individual mandate was justified either by the authority Congress has to regulate interstate commerce or by its power to collect taxes.
The Supreme Court rejected the first argument but accepted the second. It held that Congress’ “interstate commerce” power does not allow it to make people buy products they would not otherwise buy. On the other hand, it held that the individual mandate was within Congress’ power to tax. The ACA thus survived those legal challenges and continued in full effect.
There things stood until 2017, when Republicans held the presidency and both houses of Congress. The great majority of Republicans publicly opposed key aspects of the ACA, particularly the individual mandate, which had proved politically unpopular.
So last year Congress zeroed out the individual mandate tax as part of the Tax Cuts and Jobs Act of 2017 (TCJA). The TCJA did not actually repeal any language from the ACA; rather, it amended the individual mandate’s tax provision so that the amount a person would be taxed for not maintaining health insurance is $0.
The Basis for the New Challenge
Dropping the tax for noncompliance to $0 is what makes the individual mandate unconstitutional, Judge O’Connor held last Friday. He reasoned that, since the individual mandate no longer raises any money, it is not justified by Congress’ taxing power.
That by itself would not have been terribly significant, since the TCJA had already eliminated any legal consequences for people who ignored the mandate. But Judge O’Connor went on to conclude that striking down the individual mandate also requires striking down the entire ACA. Because the rest of the ACA does not work or make sense without the individual mandate, Judge O’Connor concluded, the individual mandate was not severable.
It will take time and probably additional litigation to sort out the precise legal consequences of this ruling. It appears likely, however, that Judge O’Connor’s logic would strike down the entire ACA effective January 1, 2019, the date that the individual mandate tax goes to zero pursuant to the TCJA. Before that date, it seems that Judge O’Connor’s ruling will not affect the legal rights and duties created by the ACA.
Is the Legal Reasoning Sound?
Early legal commentary suggests that this decision is incorrect and is not likely to stand on appeal. This assessment is reasonable. Even if there are questions about the constitutionality of the individual mandate if it is no longer a tax, that issue by itself is not of major consequence.
The court’s key conclusion was that the rest of the ACA cannot stand without the individual mandate, and that conclusion is much weaker. Congress itself changed the ACA in the TCJA when it removed any enforcement mechanism for the individual mandate, but it left every other aspect of the ACA intact.
Since Congress chose to make the individual mandate toothless and simultaneously left the remainder of the law in force, it is difficult to argue that the individual mandate was so important that the ACA cannot exist without it.
Furthermore, current market conditions seem to indicate that the individual mandate may not be practically necessary to the ACA’s framework. With the 2019 coverage year about to begin, the individual market has stabilized, rate increases are dramatically lower and insurer participation has increased.
Another reason to question this ruling is that many aspects of the ACA have little practical connection to the individual mandate. Reforms to the individual and small group insurance markets, including protections for consumers and the establishment of the health insurance exchanges, are the pieces of the ACA that garner the most attention.
But the Affordable Care Act was an ambitious 2,000-page law with many other far-reaching impacts. It expanded Medicaid, established value-based reimbursement for Medicare and Medicaid, gradually fills in the “donut hole” in Medicare Part D, and established new requirements on employer-based health insurance. The ACA even established calorie information requirements at restaurants.
To finance these activities, the ACA established a series of subsidies, revenue transfers and industry fees. Certain of these provisions enjoy bipartisan support and many are not directly tied to the individual mandate or the “three-legged stool” on which the ACA’s insurance market reforms rest.
While Judge O’Connor found the ACA to be inseverable from the individual mandate, other judges might disagree, especially as to these unrelated provisions.
What Comes Next?
It will take at least several months for the 5th U.S. Circuit Court of Appeals to review and decide the case, and depending on that outcome, the Supreme Court may also decide to weigh in again.
Judge O’Connor’s decision was only a declaratory judgment: He decided that the ACA is not a valid law, but he did not issue injunctive relief and did not order government officials to stop enforcing it. While he might still issue that kind of relief in the future, it probably would not go into effect until the appeal process is finished.
As a result, there may be little immediate change in the day-to-day administration of the ACA. However, since the Trump administration has expressed agreement with the plaintiffs’ arguments in this case, it is possible that the government will take matters into its own hands and stop enforcing some or all of the ACA even before the appeals are finished.