by Christoper E. Condeluci, Principal and sole shareholder of CC Law & Policy PLLC in Washington, D.C.
- I have purposefully avoided writing about this legal challenge, due in large part to the fact that I view this latest legal challenge as Republican “political messaging.” Also, I do not think this challenge will be successful. And for these 2 reasons, I did not want to spend time spinning our wheels on something that I believed (1) had little substance and (2) had no legs.
- Analysis: BUT, as you now know, this latest legal challenge is dominating the headlines, due in large part to the fact that the DOJ has publicly stated that it will NOT serve as the “defendant” in this case. Instead, the DOJ announced that it agrees that the ACA should be found unconstitutional, at least the individual mandate penalty tax and also (1) the prohibition against denying people coverage with pre-existing conditions and (2) the prohibition against developing premiums based on health status. This issue is also dominating the headlines because the DOJ’s recent announcement is being characterized as “a gift to Democrats” (at least when it comes to the Democrats’ own “political messaging”). So why do I think this legal challenge will – in the end – fail? As you may recall, when the individual mandate’s constitutionality was first challenged, Justice Roberts cast the deciding vote to uphold the mandate – and the ACA – because Justice Roberts viewed the individual mandate penalty as a “TAX.” And, Justice Roberts stated that Congress has the exclusive “power to tax,” which meant that the enactment of the individual mandate penalty tax was a lawful act of Congress, and therefore, the individual mandate – and the ACA – was constitutional. Justice Roberts’ ruling was a surprise to most, even ACA supporters. While I did not cheer or jeer the decision, personally, there was some vindication in Justice Roberts’ finding that the individual mandate was a “TAX.” What I mean is this: Back during the ACA debate (in 2009), the Democrats did something very smart. They called the individual mandate penalty tax a “FEE.” Why? Because – for “political messaging” purposes – calling the individual mandate a “FEE” instead of a “TAX” softened this new requirement that every American would now be compelled to obtain health coverage. Based on my experience, the media latched on to this “political messaging” hook-line-and-sinker. The result: The media spread the news far-and-wide that the individual mandate was NOT some ugly “TAX” on people, but rather it was a kinder, gentler “FEE.” In my own personal effort to get the media – and the American public – to understand that the individual mandate penalty was no “FEE,” but rather it was a “TAX,” I wrote a speech for Sen. Grassley (who was the senior most Republican on the Finance Committee, and therefore, my boss). Sen. Grassley gave the speech on the Senate floor in Dec. 2009, where he emphatically stated that the individual mandate penalty is a “TAX” because – and I quote – “[The ACA] amends the TAX CODE by adding a new excise tax, payable by those Americans who do not purchase government-approved health insurance” (see page 23 and 24 of the attached speech from Dec. 2009). In the end, the Democrats’ “political messaging” carried-the-day – and Sen. Grassley’s speech fell-on-deaf-ears – and the rest-is-history (i.e., the individual mandate was enacted into law). Why am I spending so much time giving you the history of the individual mandate penalty tax? Because the core argument advanced by the challengers in this case is that the individual mandate is unconstitutional because the penalty tax is NO LONGER generating revenue for the government. This argument is built on Justice Roberts’ initial finding that because the individual mandate penalty “generates revenue for the government,” the mandate has the characteristics of a “TAX,” and therefore, is constitutional (because Congress has “the power to tax”). In essence, the challengers are reverse-engineering Justice Roberts’ ruling to argue that the individual mandate should be struck down now that the penalty tax is $0. BUT, even though Republicans “zeroed” out the penalty tax through Tax Reform, the individual mandate section of the Tax Code was never technically repealed (i.e., the individual mandate requirements remain on the books (see Code section 5000A)). Which means, a future Congress (and future President) can amend the Tax Code – just like Republicans did in Tax Reform – but this time, Congress can “dial” back up the penalty tax amount from $0 to a substantial dollar amount (or simply $695 or 2.5% of income, which is the current levels for the penalty tax). Why is this important? Because I believe the Supreme Court will find that a future Congress (and a future President) still has the opportunity to make the individual mandate penalty tax a revenue-generating tax yet again. And based on this, I could see the Supreme Court finding that the individual mandate remains constitutional because the penalty tax simply lies dormant unless and until a future Congress (and future President) officially amends the law to make the penalty tax generate revenue.
- Soooo, the DOJ is asserting that the individual mandate penalty tax is unconstitutional because it was “zeroed” out. Importantly, the DOJ is also contending that if the penalty tax goes away, so should (1) the requirement that people cannot be denied coverage because they have a pre-existing condition and (2) the requirement that insurance carriers cannot develop premiums based on health status.
- Analysis: ACA supporters, along with Democratic Congressional and Gubernatorial candidates, are seizing on the fact that the DOJ – and by extension the President – are now suggesting that the pre-existing condition protection should go away. From a political perspective, this is the right move for Democratic candidates because in my opinion, arguing that the President – and by extension, all Republicans running for elected office – want to eliminate the pre-existing condition protection is a political “winner.” As we have learned during last year’s “repeal and replace” exercise, messing with the ACA’s pre-existing condition protection is politically perilous, and Democrats have successfully used the threat of this protection going away to generate support for their causes (and away from Republican causes like “repeal and replace”). However, arguing that the President – and all Republicans – want to get rid of the ACA’s pre-existing condition protection borders on intellectually dishonest. Why? Because in the unlikely event the Supreme Court rules that the individual mandate and the pre-existing protection must go away, I believe a majority of Republicans – including the President – would move to enact legislation reinstating the pre-existing condition protection in some form. So – at least in my opinion – it is NOT as if Republicans and the President want to get rid of the pre-existing protection forever (although, again, that is not how it is being characterized by Democrats, and I don’t fault the Democrats for characterizing it this way for their own “political messaging” purposes). The other reason why this claim borders on intellectually dishonest is because the Trump DOJ is merely recycling the legal argument that the Obama DOJ raised in 2012. What I mean is this: When the individual mandate’s constitutionality was first called into question, the Obama DOJ argued that the individual mandate was indeed constitutional, but the Obama DOJ also suggested that in event the Court found the mandate was unconstitutional, then the entire ACA should remain in place, and only (1) the prohibition against denying people coverage with pre-existing conditions and (2) the prohibition against developing premiums based on health status should go away. The Obama DOJ justified their argument by explaining that the individual mandate and the above consumer protections worked hand-in-hand, and if one of the requirements were to fall away, that would render the other requirements inoperable. In other words, the Obama DOJ said that if the individual mandate goes away, most of the ACA should NOT fall because the mandate was NOT inextricably linked to the rest of the law (i.e., the mandate was “severable” from the rest of the ACA). BUT, because the pre-existing condition and no under-writing based on health status protections were so inter-twined with the mandate, that these provisions were “inseverable,” meaning if one of the requirements fell, all three had to fall. Fast-forward to today, where the Trump DOJ is saying that the individual mandate should go away. The Trump DOJ is then saying – like the Obama DOJ said – if the individual mandate goes away, so should the pre-existing condition and no under-writing based on health status protections. Why? Because again, the Trump DOJ agrees with the Obama DOJ that these requirements are so inter-twined that they are “inseverable” (and the Trump DOJ also agrees with the Obama DOJ that mandate is “severable” from the rest of the ACA, which would leave most of the ACA in place if the penalty tax is ever found unconstitutional). Whew…now that we got that off our chest, let’s move on to more relevant issues.
Individual Market Update
- A couple of months back, concerns were raised over whether HHS would somehow bar insurance carriers from adding the unfunded cost-sharing liabilities to the premiums of “silver” Exchange plans (i.e., “silver loading”) for the 2019 plan year. I did not write much about this issue because I was pretty certain that HHS would NOT bar “silver loading” for 2019.
- Analysis: My assumption was not based on any knowledge of internal discussions about the “silver loading” practice, and whether – for policy reasons – HHS Leadership would continue to green-light “silver loading.” Instead, my assumption was based on the fact that I do NOT believe HHS has the authority to “directly” prohibit insurance carriers from “silver loading.” Why? Because States and their Insurance Commissioners are the only ones that can tell their insurance carriers what rules they have to play by when it comes to developing premium rates. Yes, there are some Federal guidelines when it comes to developing premium rates (e.g., the ACA’s “adjusted community premium rating” rules where carriers can only vary premiums by age, tobacco, and geography). But, no Federal law – including the ACA – allows HHS to dictate whether insurance carriers can or cannot increase plan premiums because of liabilities born by the insurance carriers. For example, a carrier always “passes-through” the taxes that the insurer is required pay on to the consumer in the form of higher premiums. The ACA’s excise tax on insurance carriers is a case in point (AHIP recently reminded us that this excise tax – which is “passed-through” – increases premiums by 3%). Again, HHS cannot tell carriers NOT to “pass-through” this excise tax. Now, maybe HHS could somehow “indirectly” bar “silver loading,” through, for example, refusing to count the premium revenue for purposes of determining a carrier’s MLR for the year. Or, for purposes of the “risk adjustment” formula (which would impact the carrier’s “risk adjustment” payments or charges). But, as Secretary Azar recently said – when hinting at why HHS will NOT be prohibiting “silver loading” for 2019 – making any changes to existing rules to somehow limit or eliminate the practice of “silver loading” would require regulatory changes that would have to be made through the normal rule-making process of proposed regs, public comments, and then final regs (which takes a long time). As a result, we will NOT see any changes for 2019. BTW, I do not see any changes being made for 2020 either. But – in my opinion – HHS will want to wait and see how the 2019 “open enrollment” period goes first, which means we won’t know anything until early 2019. Stay tuned.
- A couple of weeks back, I explained how Iowa (IA) was able to allow its Farm Bureau to sell non-ACA-compliant plans to farmer members, and even to non-farmers who paid a fee to become a member (see my attached update). In short, States have the exclusive authority to regulate their own insurance markets. Based on this authority, States can enact laws that would treat certain products as something other than “insurance,” while also regulating this product any which way the State sees fit. That is what IA did with its “Farm Bureau plan.” The State added to its own Insurance Code a new provision that exempted the Farm Bureau itself – along with the plans sold by the Farm Bureau – from IA’s insurance regulations. This effectively means that the IA Farm Bureau plan is NOT “health insurance” for purposes of Federal laws – like the ACA – because the Farm Bureau is NOT treated as a “health insurance issuer” licensed in the State.
- Analysis: North Carolina (NC) may try to do the same thing, but with some important differences. Like IA, the NC Assembly may add a new section to NC’s Insurance Code, which would exempt health plans sold by certain entities – along with the entities themselves – from NC’s insurance regulations. This would mean that those “qualifying entities” would be able to sell non-ACA-compliant plans because the plans would NOT be considered “health insurance” because the plans would NOT be sold by a “health insurance issuer” licensed in NC. Unlike IA, however, the “entities” that may be permitted to sell these health plans are NOT limited to NC’s Farm Bureau. To put things into perspective here, IA’s change to its Insurance Code limited the “entities” that could sell non-ACA-compliant plans to the State’s Farm Bureau (through specific statutory language that was added to the Insurance Code). BUT, in the case of NC, the “entities” that may sell non-ACA-compliant health plans would include any non-profit organization that has been in existence for 25 continuous years, provides its members with representation on its governing board, and provides membership opportunities in all 100 counties in the State. I am not a student of the demographics of all of the non-profit organizations currently operating in NC. BUT, I would argue that there are a bunch of non-profit organizations – in addition to the NC Farm Bureau – that would be considered a “qualified entity” under the legislation that NC Assembly may consider. That would mean that a whole bunch of organizations – like maybe the Association for CPAs, or Tax Lawyers, or Dentists, or Realtors, or Manufacturers – could sell non-ACA-compliant plans, not just NC’s Farm Bureau. We will have to wait and see whether the NC Assembly approves this measure. It would certainly be noteworthy due to the fact that more entities than just the Farm Bureau could sell non-ACA-compliant plans, which ACA opponents would like to see. But, ACA supporters will certainly come out in full-force against this change in the law. Stay tuned.
Association Health Plan Update
State Regulation of Association Health Plans (AHPs) – Fully-Insured “Large Group” AHPs (no news story)
- Despite the Department of Labor (DOL) more-or-less being on lock-down when it comes to “talking” about the proposed association health plan (AHP) regulations, it was recently reported that a number of State-based Exchanges and the National Academy for State Health Policy (NASHP) met with the DOL to discuss the forthcoming regulations. Their main concern: State regulation of AHPs, and whether States will retain the authority to regulate these arrangements. I know this area of the law is confusing, BUT – at least in my opinion – the policy experts at NASHP and the leaders of the State-based Exchanges should know that they have little to worry about when it comes to States maintaining their exclusive authority to regulate AHPs. Let me explain why:
- Analysis: Let’s start with a “fully-insured” AHP. As we all know, if an AHP is fully-insured, it means that the AHP is contracting with an insurance carrier, where the carrier is under-writing the health risks of the members of the AHPs. As we also all know, States have the authority to regulate the insurance carriers operating in their State. And, we know that States do indeed regulate the carriers operating in their State through a whole host of insurance regulations (e.g., rules governing the carrier’s reserves, risk-based capital requirements, licensing requirements, reporting requirements, etc.). The proposed AHP regulations do NOTHING to impact how a State can regulate its own insurance carriers. That is because the Federal government cannot dictate how States can regulate their carriers. State policy experts should already know this. Sticking with fully-insured AHPs, it is true that an AHP formed in accordance with the forthcoming DOL regulations will be considered an “ERISA-covered” plan. And because ERISA is now added to the equation, it seems as if everyone thinks AHPs can now run rough-shod in each State the AHP offers coverage. NOT TRUE. While ERISA is able to preempt certain State laws that apply to the AHP “plan,” ERISA CANNOT preempt State laws that regulate the AHP “insurance contract” that is under-written by an insurance carrier. An example of a State law that regulates the “insurance contract” is a “benefit mandate” law. Because this benefit mandate law regulates the “insurance contract,” ERISA CANNOT and WILL NOT preempt this State regulation. It is important to note that a fully-insured AHP that is considered a “large group” plan is subject to benefit mandates (e.g., coverage for mental illness and substance abuse disorders, in some States, coverage for autism services and child immunizations, and in other States coverage for mammograms and maternity-related services). Other examples of State laws that regulate the “insurance contract” include specific “premium rating” rules. Unlike the “small group” and “individual” markets, the premium rating rules applicable to a fully-insured large group plan allow the insurance carrier under-writing the coverage to develop premium rates based on the “health claims experience” of the entire group of plan participants. The ACA’s “adjusted community premium rating” rules do NOT apply. BUT, because a State has the ability to enact a State law that regulates the “insurance contract” – and because laws that include specific “premium rating” rules are considered laws that regulate the “insurance contract” – a State can enact any “premium rating” requirement that it wants and apply this “premium rating” requirement to fully-insured AHPs (without concern of ERISA preemption). ERISA also specifically allows a State to regulate the reserve and contribution levels for a fully-insured AHP. This means that a State has the authority to enact reserve and contribution requirements that differ from the requirements that may apply to single-employer fully-insured ERISA plans. The bottom-line is that States have A LOT of power when it comes to regulating fully-insured AHPs. And – at least in my opinion – all of this State regulation should calm ALL of the critics of AHPs who are concerned about a State’s ability to regulate these arrangements. To me, there is NO grey area. Actually, the people with concerns should be the proponents of AHPs. That’s because States can regulate fully-insured AHPs in a manner that is inconsistent with the policy goal of the DOL’s AHP regs, which should be disconcerting to every organization looking at the DOL’s AHP regs as an opportunity to provide affordable health coverage to their members.
State Regulation of Association Health Plans (AHPs) – Self-Insured AHPs (no news story)
- If NASHP and the State-based Exchange leaders have any area to gripe about, one can argue it is in the area of self-insured AHPs. That’s because most of the insolvencies we have seen in the past involve self-insured plans. Sometimes it has been due to mis-management or even fraudulent activity. But in other cases, it has simply been due to a deteriorating risk pool, which is no different from what we see in the fully-insured setting (e.g., where insurance carriers take on too much bad risk, and they end up going insolvent (remember the ACA CO-OPs)). Having said that though – today – there a hundreds if not thousands of self-insured AHPs that are offering affordable and quality coverage to millions of employees and their dependents, while also maintaining a stable, sustainable risk pool. This is an example that self-insured AHPs can work, and they can work well.
- Analysis: But what perplexes me is this: I continually hear critics of AHPs say that States will NOT be able to regulate self-insured AHPs. But the reality is this: States can regulate self-insured AHPs to a greater degree than States can regulate fully-insured AHPs. SAY WHAAAAAATTTT! Yes, it is true. How? ERISA explicitly gives States the exclusive authority to impose ANY State insurance regulation on self-insured AHPs. For example, States can enact a law that prohibits a self-insured AHP from operating within the State. California has such a law in place. And, going forward, ANY State can enact a similar law if it wanted to. The pending AHP regulations do NOTHING to stop this from happening. States can also impose specific “coverage” and “premium rating” requirements on self-insured AHPs. Many States have already enacted these types of laws. For example, in some States, a self-insured AHP must cover some or all of the benefits a small group market plan must cover. Same is true of the premium rating requirements (i.e., self-insured AHPs must adhere to the same premium rating rules a small group plan must follow). And going forward, ANY State can enact ANY “coverage” and/or “premium rating” requirement it may want and impose these requirements on a self-insured AHP. Again, that’s because ERISA has NO preemption powers over the State insurance regulations imposed on self-insured AHPs. States can also impose specific licensing, registration, certification, reporting, and solvency requirements on self-insured AHPs (and most if not all States already do). Soooo, based on the fact that States have free-reign over how they can regulate self-insured AHPs, I do NOT understand why these State policy experts are so concerned. They should NOT be at this stage of the game. Actually, the proponents of AHPs are the ones who should be most concerned. Why? Because States can obliterate self-insured AHPs if they want to. Alternatively, States can treat self-insured AHPs like small group market plans. Which is all counter to the policy goal of the DOL’s AHP regs (which is to provide more flexibility – not less – when it comes to allowing employers and independent contractors to band together to form an AHP). Which brings me to my last point: One area of concern among these State policy experts that is legitimate is if the DOL were to ever develop a “class exemption,” which would exempt self-insured AHPs from the “non-solvency” requirements of a State MEWA law. I believe these State policy experts have a reason to be concerned because if such a “class exemption” were ever developed, much of the State regulation of self-insured AHPs that I discussed above may NOT apply to those self-insured AHPs that met all of the specific requirements set forth in the “class exemption.” But, I would submit this: If and when we ever get to a point where the DOL undertakes the development of a “class exemption,” I for one want these State policy experts to have a seat-at-the-table – along with the proponents of self-insured AHPs – to make sure the DOL develops a “class exemption” that balances the need for regulation of self-insured AHPs (including applicable solvency requirements) with flexibility that would allow self-insured AHPs to offer coverage in multiple States, subject to uniform regulatory requirements. In my opinion, we will NOT see the DOL committing to the development of a “class exemption” once the final AHP regulations are released. So, we will just have to wait and see if there will be an AHP 2.0 exercise. I for one am ready, willing, and able to engage in such an exercise (to examine whether a “class exemption” is the right – or wrong – policy, and to fix parts of the final AHPs regs that are identified as being too inflexible).