On Friday, December 14, Judge Reed O’Connor of the Federal District Court in the Northern District of Texas issued a declaratory judgment holding the shared responsibility provision (also referred to as the “Individual Mandate”), and with it, the entire Affordable Care Act (“ACA”), to be unconstitutional. The case is Texas v. United States and California (Civil Action No. 4:18-cv-00167) (previous HL Pulse discussion here). Judge O’Connor did not issue an injunction and the ACA remains in place.
The decision was notable not only for its breadth, but also for its timing, released on the eve of the final day of open enrollment for the 2019 plan year. HHS and CMS Administrator Seema Verma quickly notified the public that the decision did not affect 2019 open enrollment.
This decision comes on the heels of midterm elections where healthcare was the top issue for voters. The incoming Democratic majority in the U.S. House of Representatives has promised to make health care a top issue in the 116th Congress. Judge O’Connor’s ruling will keep healthcare and the ACA at the forefront of American politics as the 116th Congress begins and attention turns to the 2020 election, injects additional uncertainty into the healthcare market, and leaves the future of the ACA again in doubt.
This case is likely to be stayed while it is appealed to the Fifth Circuit Court of Appeals and will likely reach the Supreme Court.
President Obama signed the ACA into law on March 23, 2010. Later that same day thirteen states filed a lawsuit against the Obama administration, alleging that the requirement under section 5000A of the Internal Revenue Code that applicable individuals maintain minimum essential coverage (the Individual Mandate) or make a shared responsibility payment (the penalty) was unconstitutional. The Government argued that Congress had the authority to impose the Individual Mandate under the Constitution’s Commerce Clause, the Necessary and Proper Clause, or the power to lay and collect taxes. The case reached the Supreme Court and on June 28, 2012, the Court upheld the constitutionality of the ACA, with a 5-4 majority holding that the individual mandate and the penalty provisions could be read together as a tax provision. NFIB v. Sebelius, 567 U.S. 519. The Court also held that states could not be penalized for failing to implement the ACA’s requirement to expand Medicaid to non-elderly adults with household income up to 138 percent of the federal poverty level.
The Tax Cuts and Jobs Act (Pub. L. No. 115-97), signed into law by President Trump on December 22, 2017, eliminated the penalty associated with failing to maintain minimum essential coverage under the ACA’s Individual Mandate beginning January 1, 2019. At the same time, Congress left in place the Individual Mandate and the rest of the ACA. On February 26, 2018, a group of twenty states, led by Texas Attorney General Ken Paxton, filed a lawsuit against the Trump administration seeking to have the ACA declared unconstitutional. The states alleged that the elimination of the individual mandate penalty in the Tax Cuts and Jobs Act without a corresponding elimination of the Individual Mandate, rendered the entire ACA unconstitutional. Two individual plaintiffs, Neill Hurley and John Nantz, joined the lawsuit and alleged that even without the tax penalty they would continue to purchase health insurance because the Individual Mandate remained in place.
In May, Judge O’Connor granted a Motion to Intervene filed by seventeen Democratic attorney generals from sixteen states and the District of Columbia. The states argued that intervention was proper because the federal government may not adequately represent their interests, specifically regarding the severability of the shared responsibility provision from the rest of the ACA.
On June 7, 2018, the U.S. Department of Justice (DOJ) unexpectedly announced that it would no longer defend the constitutionality of section 5000A of the ACA, the Individual Mandate. (HL Pulse discussion here). While sharing the view of the states and individual plaintiffs that the Individual Mandate is unconstitutional, DOJ took the more limited position that the mandate is inseverable from only the guaranteed issue and community rating requirements (which protect individuals with pre-existing conditions). Therefore, the rest of the ACA is severable and should remain in place. DOJ announced its policy change in a three-page letter to Congress and a brief in response to the plaintiffs’ motion for a preliminary injunction.
This left the intervening states to defend the constitutionality of the ACA.
Judge O’Connor’s Opinion
Oral arguments were held on September 5 and on Friday evening, December 14, Judge O’Connor declared that without the tax penalty, the Individual Mandate is rendered unconstitutional. He also held that because the Individual Mandate is “essential” to the ACA and inseverable from the rest of the law, the entire ACA is unconstitutional. Judge O’Connor issued a declaratory judgment and did not enjoin the law, meaning that it remains in place.
At the beginning of his opinion, Judge O’Connor offered a summation of the basis for his decision:
Resolution of these claims rests at the intersection of the ACA, the Supreme Court’s decision in NFIB, and the TCJA. In NFIB, the Supreme Court held the Individual Mandate was unconstitutional under the Interstate Commerce Clause but could fairly be read as an exercise of Congress’s Tax Power because it triggered a tax. The TCJA eliminated that tax. The Supreme Court’s reasoning in NFIB—buttressed by other binding precedent and plain text—thus compels the conclusion that the Individual Mandate may no longer be upheld under the Tax Power. And because the Individual Mandate continues to mandate the purchase of health insurance, it remains unsustainable under the Interstate Commerce Clause—as the Supreme Court already held.
Judge O’Connor’s analysis begins by examining the standing of the two individual plaintiffs. The plaintiffs alleged a harm resulting from having to comply with the individual mandate to purchase minimum essential coverage, despite effective January 1, 2019 there will no longer be a financial penalty. The intervening states (and the American Medical Association and other physician groups in an amicus brief) argued that the plaintiffs lacked a cognizable injury because it was their voluntary choice to purchase minimum essential coverage. The ACA always offered applicable individuals a choice in section 5000A of the Internal Revenue Code (section 1501 of the ACA): maintain minimum essential coverage, make a shared responsibility payment, or obtain an exemption. In NFIB, Justice Roberts concluded that the ACA does not require an individual to purchase health insurance:
Neither the Affordable Care Act nor any other law attaches negative legal consequences to not buying health insurance, beyond requiring a payment to the IRS. And Congress’s choice of language—stating that individuals “shall” obtain insurance or pay a “penalty”—does not require reading § 5000A as punishing unlawful conduct. It may also be read as imposing a tax on those who go without insurance.
Without the penalty in place beginning January 1, 2019, there is no negative consequence to an individual failing to maintain minimum essential coverage. However, Judge O’Connor disagreed, and found that the obligation to maintain minimum essential coverage remains a regulatory burden on the plaintiffs and therefore they suffer a cognizable injury. He did not address whether the plaintiff states have standing.
Judge O’Connor then turned to the constitutionality of the individual mandate. He found “that both the plain text of the ACA and Supreme Court precedent dictate that the Individual Mandate is now unconstitutional under” either Congress’s Tax Power or the Interstate Commerce Clause of the Constitution.
Examining the Tax Power, Judge O’Connor begins by noting that the requirement to maintain minimum essential coverage and the tax penalty are separate provisions under section 5000A. In NFIB, the Court had viewed the Individual Mandate as a tax because of its trigger to impose a tax when an individual fails to maintain minimum essential coverage. Judge O’Connor pointed to the lack of an exaction after December 31, 2018 following the implementation of the Tax Cuts and Jobs Act, which sets the tax penalty to $0, and concluded that without it, the individual mandate provision is unconstitutional. He stated that “[t]he saving construction in NFIB was available only because § 5000A(a) triggered a tax.” Because the mandate no longer “triggers a tax”, the saving construction no longer exists and the Tax Power no longer supports the individual mandate.
Judge O’Connor then turned to whether the individual mandate may be upheld under the Interstate Commerce Clause of the Constitution. The intervening states had argued that following the elimination of the tax penalty, the ACA no longer compels the purchase of minimum essential coverage. Therefore, it may be upheld under the Interstate Commerce Clause. Judge O’Connor rejected this argument, noting that the individual mandate remains a part of the ACA and applicable to the plaintiffs, who feel obligated to comply with the law. He stated that “the fact that many individuals will no longer feel bound by the Individual Mandate does not change either that some individuals will feel so bound.”
Congress only eliminated the shared responsibility payment and left the requirement to maintain minimum essential coverage in place. Therefore, Judge O’Connor concluded that the individual mandate “now serves as a standalone command that continues to be unconstitutional under the Interstate Commerce Clause.”
Finally, Judge O’Connor addressed whether the individual mandate is severable from the remainder of the ACA or whether the entire law is unconstitutional. In the most controversial part of his decision, Judge O’Connor declared the entire law unconstitutional. He found that both the 2010 and 2017 Congresses believed the individual mandate is so “essential” to the ACA, that the law may not stand without it.
The Supreme Court has a strong presumption of severability. Judge O’Connor acknowledged that the Supreme Court has “frequently severed unconstitutional provisions from constitutional ones”. The intervening states and an amicus brief submitted by a bipartisan group of law professors argued that finding the individual mandate inseverable would be improper when “Congress itself has essentially eliminated the provision in question and left the rest of a statute standing.” In short, they argued that by eliminating the individual mandate penalty in the Tax Cut and Jobs Act and leaving the rest of the ACA in place, Congress made clear that the individual mandate is no longer essential to the operation of the ACA.
Judge O’Connor’s analysis focuses heavily on the intent of Congress in 2010, when the ACA was passed and signed into law. In support, the opinion cites to “Congressional findings” regarding the requirement to maintain minimum essential coverage contained in section 1501 of the ACA (42 U.S.C. § 18091). He described that “Congress stated three separate times that the Individual Mandate is essential to the ACA” and “[o]n the unambiguous enacted text alone, the Court finds the Individual Mandate is inseverable from the Act to which it is essential.”
Judge O’Connor pointed to the Supreme Court’s decisions in NFIB and King v. Burwell and their representations that the individual mandate, guaranteed issue, and community rating provisions are interdependent to infer that the provisions are inseverable. He cited heavily to the dissent in NFIB, which believed that the Individual Mandate and Medicaid expansion were so critical to the design of the ACA that the law becomes inoperative without them. The opinion references the earlier concerns about what would happen to the insurance market were the mandate to be eliminated but the remainder of the ACA to remain in place.
The opinion then states that the 2017 Congress “further entrenched” the “unambiguous intent” that the individual mandate could not be severed from the rest of the ACA. Judge O’Connor indicated that searching for the intent of the 2017 Congress related to severability would be a “fool’s errand” because it couldn’t repeal any part of the ACA through the budget reconciliation process used to pass the Tax Cut and Jobs Act. Judge O’Connor pointed to the fact that Congress did not repeal the Congressional findings at 42 U.S.C. § 18091 and “did nothing to repudiate or otherwise supersede the Supreme Court’s NFIB and King opinions detailing the Individual Mandate’s essentiality to the ACA.” The 2017 Congress may have preserved the individual mandate because it is “essential to the ACA.”
In concluding the individual mandate cannot be severed from the remainder of the ACA, Judge O’Connor stated:
In some ways, the question before the Court involves the intent of both the 2010 and 2017 Congresses. The former enacted the ACA. The latter sawed off the last leg it stood on.
Judge O’Connor issued a declaratory judgement and not an injunction. Therefore, the law remains in place. It is anticipated that this case will quickly be appealed to the Fifth Circuit Court of Appeals. The White House issued a statement that included their expectation that this case will end up before the Supreme Court of the U.S.:
“Obamacare has been struck down by a highly respected judge. The judge’s decision vindicates President Trump’s position that Obamacare is unconstitutional. Once again, the President calls on Congress to replace Obamacare and act to protect people with preexisting conditions and provide Americans with quality affordable healthcare. We expect this ruling will be appealed to the Supreme Court. Pending the appeal process, the law remains in place.”
The Democrats in the U.S. House of Representatives are expected to file a Motion to Intervene in this case at the beginning of the 116th Congress. Legal scholars that have focused on the ACA, such as Nicholas Bagley, Jonathan Adler, and Abbe Gluck, were critical of Judge O’Connor’s decision. It is anticipated that after a decision from the Fifth Circuit Court of Appeals, the case will be appealed to the Supreme Court. Justice Roberts concluded his decision in King v. Burwell by stating the following:
Congress passed the Affordable Care Act to improve health insurance markets, not to destroy them. If at all possible, we must interpret the Act in a way that is consistent with the former, and avoids the latter.
The Affordable Care Act implemented protections and programs beyond the regulation of the health insurance market. Thirty-six states and the District of Columbia have expanded their Medicaid programs under the ACA to individuals with household income up to 138% of the federal poverty level. More than 15.3 million individuals have enrolled in Medicaid or CHIP following expansion. For instance, the ACA created the Center for Medicare and Medicaid Innovation (CMMI) that implements models to test innovative payment and service delivery models. CMMI has been used by the Obama and Trump administrations in testing payment and delivery reforms, including bundled payments, accountable care organizations, and the Trump Administration’s plans to lower drug prices. The decision would eliminate the ACA’s popular consumer protections such as the prohibition on annual and lifetime limits, the prohibition on pre-existing condition exclusions, and the ability for parents to keep children on their health insurance until age 26.
Insurers participating in the Exchanges are again expected to be profitable in 2018, more insurers are participating in 2019 despite the effective elimination of the Individual Mandate, and premiums are relatively stable. Nonetheless, close to nine years after the enactment and subsequent implementation of the ACA by insurers, health systems, employers, consumers, and state and local governments, Judge O’Connor’s decision has the potential to be enormously disruptive to the American health care system.
Norton Rose Fulbright attorneys will continue to monitor this case and its implications for healthcare system stakeholders.
 Alabama, Arizona, Arkansas, Florida, Georgia, Indiana, Kansas, Louisiana, Mississippi, Missouri, Nebraska, North Dakota, South Carolina, South Dakota, Tennessee, Texas, Utah, West Virginia, Wisconsin, and Governor Paul LePage of Maine (who leaves office at the end of the year).
 California, Connecticut, Delaware, Hawaii, Illinois, Kentucky, Massachusetts, Minnesota, New Jersey, New York, North Carolina, Oregon, Rhode Island, Vermont, Virginia, and Washington.