The ACA and the Supreme Court: What’s Next for States and the Federal Government?

On June 28, 2012, the Supreme Court of the United States largely upheld landmark health reform legislation known as the Patient Protection and Affordable Care Act of 2010 (ACA). By ushering in significant changes to the regulation of private health insurance and Medicaid as well as creating new incentives in Medicare and funding for public health programs, the ACA has the potential to transform the accessibility, adequacy, and affordability of health coverage and health care in the United States.

Yet, because many of the ACA’s comprehensive reforms do not go into effect until 2014, states and the federal government have much to do to prepare for the significant regulatory changes to come. Here, I discuss the potential implications of the Supreme Court’s ruling on state and federal efforts to implement the ACA.

What Did the Supreme Court Rule?

With the exception of one provision, five justices—Roberts, Breyer, Ginsburg, Sotomayor, and Kagan—held that the entire ACA was constitutional. Writing for the majority, Chief Justice John Roberts held that the law’s most controversial provision, the individual mandate, was constitutional under Congress’ authority to tax and spend.

In upholding the mandate as a tax, Chief Justice Roberts concluded that 1) the Anti-Injunction Act did not bar the Supreme Court from considering the constitutionality of the mandate; 2) the mandate could not be sustained under Congress’ power to regulate interstate commerce; and 3) the mandate could not be upheld pursuant to Congress’ authority to enact laws that are “necessary and proper” to its exercise of congressional authority.

Although a majority of justices rejected the Obama administration’s primary argument that the mandate was constitutional under the Commerce Clause, Chief Justice Roberts noted the long-standing principle that the Court must construe federal statutes to be constitutional if such an interpretation is reasonable. In this case, he noted that requiring “certain individuals [to] pay a financial penalty for not obtaining health insurance may reasonably be characterized as a tax” and is within Congress’ authority even if “the most straightforward reading of the mandate” suggests otherwise. For additional analysis on the Court’s opinion and the mandate, see Tim Jost’s analysis.

Reaching an unexpected conclusion, seven justices—Roberts, Breyer, Kagan, Kennedy, Scalia, Alito, and Thomas—struck down the ACA’s requirement that allowed HHS to condition the availability of existing federal funding for Medicaid on whether a state chooses to expand its Medicaid program in 2014. Medicaid expansion under the ACA is expected to cover 16 million people by covering all individuals with an income under 133 percent of the federal poverty level. The costs of covering this population will be fully funded by the federal government through 2016 and permanently funded at 90 percent by federal funds thereafter.

Viewing the Medicaid expansion as a “new program,” Chief Justice Roberts wrote that “Congress is not free to … penalize States that choose not to participate in that new program by taking away their existing Medicaid funding.” Because 42 U.S.C. § 1396c allows the Secretary of the U.S. Department of Health and Human Services (HHS) to withhold all Medicaid payments to the states, both for “existing” Medicaid and “new” Medicaid, this provision is unconstitutional “when applied to withdraw existing Medicaid funds from States that decline to comply with the expansion.” While the decision could render the ACA’s Medicaid expansion to now be optional for states, some legal scholars, such as Sara Rosenbaum and Tim Westmoreland, argue that a more nuanced understanding of the decision is needed and that the Supreme Court’s analysis may have left additional enforcement options open to HHS to encourage states to expand their Medicaid programs.

What Actions Have States Already Taken to Implement the ACA?

State leaders have taken a range of approaches to the implementation of the ACA – some have embraced health reform while others, even in the wake of the Court’s decision, continue to argue for its repeal. However, regardless of the public stance of their elected leaders, many state officials have taken a pragmatic approach to implementing the ACA and have done, perhaps, more work than conventional wisdom suggests. Here, we review state efforts to implement the ACA in three key areas: private market reforms, exchanges, and Medicaid.

Private Market Reforms. Although many of the Affordable Care Act’s private market reforms were not scheduled to take effect until 2014, a number of the law’s consumer protections—together known as the “early market reforms”—went into effect in 2010. These popular provisions include the extension of dependent coverage up to age 26, the prohibition on lifetime limits on essential health benefits, and the requirement that insurers offer certain preventive services without cost-sharing, among others. In an analysis for the Commonwealth Fund, we found that the vast majority of states and the District of Columbia took new action to require or promote compliance with these protections. Indeed, 49 states and the District of Columbia have passed new legislation, issued a new regulation, issued new sub-regulatory guidance, or are actively reviewing insurer policy forms for compliance with these protections (see where your state falls).

In addition to these early market reforms, many states have amended or passed new laws in response to the ACA’s new requirements for enhanced rate review as well as internal and external appeals processes. States have also amended their medical loss ratio standards, and a handful have begun implementing the ACA’s broader 2014 market reforms. These states include the District of Columbia, Maine, Maryland, New York, and Rhode Island which have, for example, banned exclusions for preexisting conditions, adopted the ACA’s new rating requirements, or prohibited insurers from using gender to set rates, among other 2014 reforms.

Exchanges. Under the ACA, each state is required to establish a new health insurance exchange where individuals and small businesses can purchase health insurance. States can choose to run their own exchange, a “state-based exchange,” or the federal government will do so on their behalf through a “federally-facilitated exchange.” HHS recently allowed states to opt to establish a “state partnership exchange” which would be administered by the federal government with the state retaining responsibility for critical plan management functions, consumer assistance, or both. At least one state, Arkansas, has publicly announced that it will pursue this partnership option with HHS and, following the Supreme Court’s decision, other states are expected to follow.

States have been mixed in their efforts to establish state-based exchanges. Sara Collins and Tracy Garber of the Commonwealth Fund report that 11 states and the District of Columbia already passed exchange legislation while a number of other states considered exchange legislation or have governors pursuing or considering alternatives to establishing exchanges through, for example, an executive order. Governors in both Rhode Island and New York already signed such executive orders and, following the Supreme Court’s ruling, other states, such as Kentucky, may choose to do the same.

Although not all states have obtained the legal authority to establish an exchange, the majority of states have been active in exchange planning and development using federal funding. HHS has authorized the use of federal funds for state exchange planning and, to date, 49 states and the District of Columbia received exchange planning grants states while 34 states and the District of Columbia also received level one establishment funds to develop and operationalize a state-based exchange. Two states, Rhode Island and Washington, have already received level two establishment funds to operationalize their exchanges.

Medicaid. Many states have already begun preparations for Medicaid expansion under the ACA. An analysis by the Kaiser Commission on Medicaid and the Uninsured shows that, as of May 2012, 48 states and the District of Columbia had taken steps forward with at least one of the five options studied. According to the analysis, most states have submitted or approved plans to upgrade Medicaid eligibility systems and to test integrated care models for dual eligible beneficiaries. These steps were taken in 28 states (and the District of Columbia) and 26 states, respectively. In addition, 8 states chose to expand their Medicaid programs to cover adults up to 133 percent of the federal poverty level ahead of 2014 under a new state plan option made available under the ACA. Other options included amending the state’s Medicaid program to provide health homes for individuals with chronic conditions and to test the effectiveness of providing incentives to Medicaid beneficiaries who participate in prevention programs.

Implementing the ACA: What’s Next for States?

States will quickly face a number of critical policy decisions as they implement the ACA. Although many of the ACA’s provisions do not go into effect until 2014, states must make many decisions ahead of that time to be ready for the significant changes ushered in by the law. For example, a state must identify its essential health benefits benchmark plan in the fall of 2012 and, if the state chooses to do so, submit an application to operate a state-based exchange by November 16, 2012. And, for states that want to enforce the ACA’s private market reforms to avoid having the federal government do so, the state will likely need to enact legislative or regulatory changes to the state’s insurance code. Because these changes should be in effect prior to January 1, 2014, state legislatures will need to be active in implementing the ACA during the 2013 legislative session which, for many states, begins in January.

With all of the debate and controversy surrounding the ACA, these decisions, among many others, are not likely to come easily but states must move forward quickly with implementation to comply with federal law.

Implementing the ACA: What’s Next for HHS?

The federal government will also face important decisions as it continues to issue regulations and guidance implementing this landmark piece of legislation. For example, HHS is expected to quickly publish regulations on, at a minimum, the 2014 market reforms, the essential health benefits package, and quality requirements for health insurers. These regulations will undoubtedly elicit many comments from interested parties which the agency will respond to before finalizing its regulations. In addition, HHS is expected to release additional details on the requirements for establishing a state partnership exchange versus a federally facilitated exchange and how states can use exchange funding. Beyond the need for regulatory guidance, HHS has a number of its own statutory obligations to fulfill, such as designing a methodology for risk adjustment and establishing a federal data hub to verify eligibility information when individuals and small businesses use the exchanges.

In addition to meeting their own deadlines, HHS—and the Departments of Labor and Treasury, where necessary—must work quickly to help ensure that states are able to meet their statutory deadlines in implementing the market reforms, establishing an exchange, and expanding the Medicaid program.

By October 1, 2013, millions of people will begin exercising their right to access affordable, quality insurance coverage—many for the very first time.  While the eyes of many in the media will be focused on the drama of the November election, over the next 18 months, federal and state officials, health plans, providers, and consumer advocates will need to stay focused on meeting critical implementation goals on very tight timeframes, so that the promise of the ACA’s reforms can be realized.

This entry originally appeared on the O'Neill Institute for National and Global Health Law blog on July 2, 2012.

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