Understanding the Lawsuit That Could Overturn the ACA

Texas v. U.S.: 18 GOP Attorneys General Challenging the ACA

Headlines about healthcare reform and the Affordable Care Act (ACA) have been ever-present for the last decade, and the details sometimes get lost in the noise. But since early 2018, a lawsuit that threatens to overturn the ACA has been making its way through the court system. A trial court judge has ruled that the law should be overturned, and an appeals court panel agreed, although the details are still being sorted out and the case will eventually need to be heard by the Supreme Court before anything is finalized. For the time being, nothing has changed. But although the ACA weathered all of the Congressional efforts to repeal it in 2017, it could still be overturned judicially. How did all of this come about? Let's take a look.

People demonstrating in front of the Supreme Court

Mark Wilson / Getty Images

The ACA includes a requirement that nearly all Americans maintain minimum essential coverage. To be clear, that requirement still exists, but there's no longer a penalty for non-compliance. In late 2017, the Tax Cuts and Jobs Act was signed into law, and one of its provisions was to eliminate the tax penalty for being without health coverage. The tax penalty continued to apply in 2018, but it was reset to $0 as of 2019 (there are some states that have established their own insurance requirements and collect penalties from non-compliant residents via state tax returns, but there is no longer a federal penalty).

Soon after the Tax Cuts and Jobs Act was enacted, 20 Republican-led states filed a lawsuit, arguing that without the tax imposed by the IRS for non-compliance, the ACA's requirement that people maintain health coverage (commonly referred to as the individual mandate) was unconstitutional. And they also asserted that the individual mandate could not be severed from the rest of the ACA, and that the entire law should thus be overturned.

Confused? This all goes back to the ACA case that went to the Supreme Court back in 2012. In National Federation of Independent Business v. Sebelius, the Supreme Court ruled that the ACA's individual mandate is constitutional specifically because it's within the power of Congress to levy taxes. In other words, the fact that the IRS would assess a tax when a person went without health coverage made the ACA's individual mandate constitutional.

Now fast-forward to early 2018. The individual mandate still had a tax penalty for non-compliance, but it was scheduled to be reset to $0 after the end of 2018. So the 20 Republican-led states that brought the Texas v. U.S. lawsuit based their argument on the fact that without a tax for non-compliance, the individual mandate is not constitutional. And although the Supreme Court had never ruled on whether the individual mandate was severable from the rest of the ACA (whether the rest of the ACA could be allowed to remain in place without the individual mandate), the Texas v. U.S. plaintiffs argued that the individual mandate is not severable and that the entire law should be overturned. This was the position of the four dissenting Supreme Court justices in the 2012 ruling, but since the majority opinion National Federation of Independent Business v. Sebelius was that the individual mandate was constitutional, the Court never issued an opinion on whether the individual mandate was severable.

Two States Withdrew From the Lawsuit, 18 Remain

Wisconsin and Maine had Republican governors in 2018, but Democrats won the gubernatorial elections in both states that year. Soon after taking office in 2019, the new governors of Wisconsin and Maine withdrew their states from the case, so they are no longer plaintiffs. The 18 remaining plaintiff states are: Texas, Alabama, Arkansas, Arizona, Florida, Georgia, Indiana, Kansas, Louisiana, Mississippi, Missouri, Nebraska, North Dakota, South Carolina, South Dakota, Tennessee, Utah, and West Virginia.

A Federal Judge Agreed With the Plaintiff States in Late 2018

In December 2018, just as the open enrollment period for 2019 individual market coverage was drawing to a close, Texas Federal District Court Judge Reed O'Connor issued a ruling in which he agreed with the plaintiffs that the entire ACA should be overturned. O'Connor's final judgment, issued later that month, is clear. He believes the individual mandate is unconstitutional and that it cannot be overturned without overturning the entire ACA (i.e., that it's not severable).

But O'Connor also issued a stay, ensuring that the ACA would remain in effect while the decision was appealed, so nothing changed about the ACA as we headed into 2019 (except that the individual mandate penalty no longer applied to people who were uninsured in 2019).

The Appeal

Sixteen Democratic-led states and the District of Columbia immediately appealed the case to the Fifth Circuit: California, Connecticut, the District of Columbia, Delaware, Hawaii, Illinois, Kentucky, Massachusetts, New Jersey, New York, North Carolina, Oregon, Rhode Island, Vermont, Virginia, Washington, and Minnesota.

The Department of Justice (DOJ) also appealed, although the DOJ's appeal wasn't as straightforward. Normally, the DOJ argues to uphold federal law in its entirety if it's challenged in court. But in Texas v. U.S., the Trump administration had agreed with the plaintiff states that the individual mandate is unconstitutional. But they had argued that only the individual mandate and protections for people with pre-existing conditions (including guaranteed-issue requirements and community rating requirements) should be overturned, while the rest of the ACA should be allowed to remain in place. The plaintiff states, in contrast, argued that the entire ACA should be overturned, and Judge O'Connor agreed with them. So the DOJ joined in the appeal because they didn't agree that the entire ACA should be overturned.

In February 2019, the US House of Representatives (which had a new Democratic majority) joined in the appeal. They were joined by four additional states: Iowa, Michigan, Colorado, and Nevada.

So there are now 21 states defending the ACA, and 18 that are fighting to overturn it. There are also two self-employed Texas residents, Neill Hurley and John Nantz, who are plaintiffs in the case, working to overturn the ACA. They joined the lawsuit on the premise that the ACA's individual mandate forces them to purchase health insurance that they would otherwise not purchase, although the lawsuit was filed specifically due to the fact that the tax penalty for non-compliance with the individual mandate was being eliminated after the end of 2018. Nevertheless, Judge O'Connor ruled that Hurley and Nantz did have standing in the case.

Trump Administration DOJ Changes Position During Appeals Process

Under the Trump administration, the Department of Justice has had an evolving position on Texas v. U.S.. As noted above, the DOJ initially agreed with the plaintiff states that the individual mandate is unconstitutional without the tax penalty for non-compliance, but argued that only the individual mandate and pre-existing condition protections should be overturned, while the rest of the ACA should be upheld. And the DOJ initially appealed Judge O'Connor's ruling, since he had ruled that the entire ACA should be overturned.

But during the appeals process, the DOJ shifted its position to agree with the plaintiff states that the entire ACA should be overturned. However, the DOJ also started to take a more nuanced approach during the appeals process, asking that ACA provisions only be overturned if they would otherwise harm the plaintiffs in the case. And the DOJ also argued that the ACA should only be overturned in the plaintiff states, as opposed to nationwide.

Appeals Court Agrees With Lower Court But Sends Case Back for Further Review

The oral arguments in the appeal were held in July 2019, and the decision was anxiously awaited throughout the fall. The panel of judges from the Fifth Circuit issued their ruling in December 2019, just a few days after the end of the open enrollment period for 2020 health coverage, and just over a year after Judge O'Connor had first ruled that the ACA should be overturned.

But their ruling essentially amounted to a delay. The appeals court judges agreed with O'Connor's ruling that the individual mandate is unconstitutional. But rather than issuing a ruling on the rest of the law, the Fifth Circuit judges sent the case back to the lower court for a further review of which specific portions of the ACA ought to be overturned. The lower court had ruled a year earlier that the individual mandate was inseverable and the entire law should thus be overturned, but the Fifth Circuit ruling instructed the lower court to "employ a finer-toothed comb on remand and conduct a more searching inquiry into which provisions of the ACA Congress intended to be inseverable from the individual mandate."

The delay is significant in terms of when the case gets heard by the Supreme Court, and how it will affect health insurance premiums and plan availability for 2021, particularly in the individual market. Health insurers have to file rates and plans in the spring or early summer, for coverage that will take effect the following January. And the uncertainty caused by the Fifth Circuit's ruling could result in higher premiums and/or fewer plans available, as insurers tend to shy away from uncertainty or price it into their premiums.

In January 2020, a group of 20 states (led by California) and the District of Columbia asked the Supreme Court to take up the case during the 2020 term, without waiting for the case to make its way back through the lower court. The U.S. House of Representatives also issued a similar request. The Democratic-led states and the House of Representatives were seeking certainty in the case, wanting a ruling from the Supreme Court during the summer of 2020, so that it would come before the 2020 elections and before health insurance premiums and plans for 2021 were finalized.

Within a few weeks, the Supreme Court rejected those requests to expedite the case. But there is still a possibility that the case could be considered by the Supreme Court during the 2020 term. The case is likely to linger in the court system for a while, with the trial court reviewing the case and then sending it back to the Fifth Circuit before it eventually makes its way to the Supreme Court.

Note that the case is being referred to as California v. Texas at the Supreme Court level, but it's the same lawsuit that has been referred to in the lower courts as Texas v. Azar. The SCOTUS Blog has links to the various filings related to the case insofar as the Supreme Court is involved in it.

What Happens Next?

In the meantime, nothing has changed. The ACA remains the law of the land, albeit without the tax penalty for non-compliance with the individual mandate. And some of the ACA's taxes—the Cadillac tax, the medical device tax, and the health insurance provider tax—were also repealed as part of a federal tax bill that was enacted in late 2019.

In early 2020, insurers are designing plans and determining premiums for health plans that will be offered in 2021 in the individual and group markets. The uncertainty created by the pending lawsuit could impact insurer participation and/or the prices they project for 2021. In 2017, when Republicans in Congress were focused on repealing the ACA, substantial premium increases were approved for individual market plans that were to be available for 2018, and a significant portion of the increase was due to the uncertainty surrounding the future of the ACA.

And several states are scrambling to codify various aspects of the ACA into state law, as a backstop in case the ACA is ultimately overturned. This includes some of the plaintiff states: Louisiana, Arizona, and West Virginia are examples of states that are actively involved in working to overturn the ACA via Texas v. U.S., but are also in varying stages of working to implement state laws that incorporate some of the ACA's consumer protections (Louisiana's law was enacted in 2019; Arizona and West Virginia are considering legislation to this effect in 2020).

There are also numerous Democratic-led states that have codified various ACA provisions into state law, including guaranteed-issue requirements, community rating, age-based rating rules, bans on gender rating, essential health benefits requirements, and more.

But funding will be a significant obstacle for states to overcome if the ACA is overturned. In 2019, the federal government spent nearly $55 billion on premium tax credits for 8.9 million people who were enrolled in individual/family coverage through the ACA-created exchanges. And the federal government also spent nearly $56 billion in fiscal year 2017 to cover the cost of Medicaid expansion in the states that have accepted it. The federal government pays most of the cost of Medicaid expansion—90% in 2020 and future years—but there are still 19 states that have not accepted federal funding to expand Medicaid, resulting in a coverage gap for their poorest residents. As of 2019, an analysis by the Urban Institute indicated that combined total federal spending for Medicaid expansion and premium subsidies in the exchange stood at $135 billion. Some additional states had expanded Medicaid between 2017 and 2019, pushing federal spending for Medicaid expansion higher than it had been in 2017.

All of that federal money would dry up if the ACA were to be overturned. And most states would find it difficult or impossible to replace that level of funding on their own. So although states might have laws in place to require things like guaranteed-issue and coverage for essential health benefits, it's unlikely that coverage would be as affordable as it is today (i.e., free in most states for people who qualify for Medicaid, and heavily subsidized for most middle-class people who buy their own health insurance).

Nearly 19 million people have gained health coverage as a result of the ACA, and many of them would not be able to maintain coverage without the ACA in place. The ACA's consumer protections also go well beyond Medicaid expansion and individual market coverage—they affect nearly everyone in America in one way or another. All of this is up in the air for the time being as Texas v. U.S. / California v. Texas makes its way through the legal system. But for the time being, nothing has changed (other than the aforementioned elimination of the tax penalty for non-compliance with the individual mandate and repeal of a few ACA taxes).

The ACA remains in effect, with the majority of Americans covered under ACA-compliant health plans in 2020, including individual and group coverage. And insurers are actively preparing for the 2021 plan year, with plan designs based on the assumption that the ACA will remain in place.

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