On December 18, 2019, only a few hours before the end of the 2020 open enrollment season for coverage on the Affordable Care Act’s (ACA) federal Marketplace or state Exchanges, the U.S. Court of Appeals for the Fifth Circuit ruled that the law’s individual mandate penalty is unconstitutional. However, the court did not invalidate other provisions of the law. Instead, it ordered a lower court judge to reconsider whether any of the law can survive the invalidation of the mandate. See Texas, et. al, v. United States, No. 19-10011 (5th Cir. Dec. 18, 2019).

Plan sponsors are not required to take any action at this time. The case will likely continue to work its way through the courts for some time. Although the appellate court sent the case back to the lower court for a more searching inquiry into which provisions of the law survive the invalidation of the mandate, the ruling on the mandate may be appealed to the U.S. Supreme Court before that happens.

Background on the litigation

This case centers on a challenge to the constitutionality of law’s individual shared responsibility penalty for failure to purchase health coverage (i.e., the individual mandate). While the U.S. Supreme Court previously upheld the constitutionality of this mandate in the Affordable Care Act, this lawsuit presented a fresh challenge to the law.

In 2012, the U.S. Supreme Court (in an opinion by Chief Justice Roberts, joined by Justices Ginsburg, Breyer, Sotomayor and Kagan) held that the individual mandate was constitutional because Congress has the power to tax individuals who do not purchase health insurance. NFIB v. Sebelius, 567 U.S. 519 (2012).

Congress subsequently passed the Tax Cuts and Jobs Act in December 2017, reducing to zero the penalty for violating the requirement to obtain health insurance coverage, effective January 1, 2019.

This new round of litigation started in February 2018 when two individuals and 20 Republican Attorneys General sued to declare the individual mandate unconstitutional. Their core argument was that once Congress “zeroed” out the penalty, the individual mandate could no longer survive as a “tax” and thus was not supported by Congress’s power to tax individuals who do not purchase health insurance. They further argued that the rest of the law could not be separated from the individual mandate and so the entire law had to be declared invalid.

Because the Trump Administration agreed with the plaintiffs that the individual mandate was unconstitutional, the defense of the law (both before the district court and during the subsequent appeal) was mounted primarily by Democratic Attorneys General from California and many other states.

Judge Reed O’Connor of the U.S. District Court for the Northern District of Texas agreed with the plaintiffs in a decision handed down in December 2018, invalidating the entire Affordable Care Act. Texas v. United States and California, 340 F. Supp. 3d 579 (N.D. Tex. 2018).

The district court’s sweeping decision was put on hold during the appeal to the Fifth Circuit.

The Fifth Circuit’s decision

In a 2–1 decision (two judges in the majority, one dissenting), the three-judge panel of the Fifth Court concluded that the individual mandate, with its tax penalty of zero, was a “command” to have health coverage that could no longer be justified as an exercise of Congressional taxing power.

Having decided that the individual mandate is unconstitutional, the court turned to whether, or how much of, the rest of the law is “severable” from this constitutional defect and so could survive the invalidation of the mandate. The court faulted the lower court for failing to do the “necessary legwork of parsing through the over 900 pages of the post-2017 ACA, explaining how particular segments are inextricably linked to the individual mandate.” The court directed the lower court to take a fine-tooth comb and conduct a more searching inquiry into this question. The court concluded:

It may still be that none of the ACA is severable from the individual mandate, even after this inquiry is concluded. It may be that all of the ACA is severable from the individual mandate. It may also be that some of the ACA is severable from the individual mandate, and some is not. But it is no small thing for unelected, life-tenured judges to declare duly enacted legislation passed by the elected representatives of the American people unconstitutional. The rule of law demands a careful, precise explanation of whether the provisions of the ACA are affected by the unconstitutionality of the individual mandate as it exists today.

The dissenting judge would not have gone as far as the other two judges. She concluded that the plaintiffs did not have the legal right to bring the lawsuit in the first place. If she had to reach the merits of the case, she would conclude that the mandate is constitutional, though unenforceable, and completely severable from the rest of the Affordable Care Act.

Implications of the Fifth Circuit’s ruling

The latest decision does not have any immediate implications for plan sponsors. Only the individual mandate was declared unconstitutional, and the portion of the lower court’s decision invalidating the rest of the Affordable Care Act has been vacated. In a Twitter comment on the decision, Centers for Medicare & Medicaid Services Administrator Seema Verma stated, “The recent federal court decision is still moving through the courts, and there is no disruption or impact to your current coverage or coverage in a 2020 plan.”

While the decision has no immediate impact, it will likely continue to be debated. The parties could appeal the decision to the U.S. Supreme Court. California Attorney General Xavier Becerra, who led the coalition of Democratic Attorneys General, has said that his state will move swiftly to appeal the decision. Alternatively, if the decision is returned to the district court, the judge there would take a “fine-toothed comb” to determine the validity of each of the Affordable Care Act’s thousands of provisions.

The uncertainty generated by the original lawsuit is resolved slightly, in that plan sponsors know that the entire Affordable Care Act will not be overturned. However, challenges to the ACA mean that the health care system continues to be unsettled, particularly with respect to the stability of the individual insurance market. It is unlikely that the provisions most important to plan sponsors — such as elimination of preexisting condition exclusions, coverage of adult children to age 26 and coverage of preventive services — would be sufficiently related to the individual mandate to be threatened. Nevertheless, the continuing attacks on the ACA mean that plan sponsors have to be vigilant in assessing the health care environment and its impact on their health plan costs.