United States: Texas Federal Court Declares The Entire ACA Unconstitutional: Now What?

Summary

In a dramatic decision in the case of Texas v. US1, Judge Reed O'Connor, sitting in the US District Court for the Northern District of Texas, declared on December 14, 2018, that the entire Affordable Care Act (ACA) is unconstitutional. The decision is based on the argument that the ACA's individual mandate to obtain health insurance will no longer be a valid use of Congress' taxing power, starting on January 1, 2019, when a statute lowers the tax penalty for noncompliance with the mandate to zero. While an appeal will certainly follow, it is unclear how quickly. In the meantime, the US Department of Health and Human Services (HHS) has stated that it will continue to implement and administer all aspects of the ACA, noting the that decision does not require the agency to change any ACA programs or its administration of the law.

In this alert, we address key aspects of the decision, its immediate effects, the longer-term outlook for appeal and the industry, and the likely political repercussions.

What was the decision in this case?

Judge O'Connor ruled that, since the individual mandate for health insurance is unconstitutional, the entire ACA is unconstitutional. The lawsuit was brought by multiple Republican state attorneys general, led by Texas, representing several individuals who claimed to be harmed by the mandate. California, leading a different group of Democratic state attorneys general, joined the lawsuit as intervenor-defendants. The Trump administration decided not to defend the existing law. 

This ruling only resolves one of several counts in the case. Furthermore, it is only a declaratory judgment, as discussed below. Nevertheless, the opinion states that, starting on January 1, 2019, the individual mandate for health insurance will be unconstitutional, and so will the rest of the ACA.

Does the decision have any immediate impact? 

There are no clear or immediate effects; while declaring the ACA unconstitutional, the court did not enjoin its implementation. In addition, HHS has indicated it will continue implementing and administering all parts of the law. However, starting on January 1, the Trump administration would, technically, be free to stop administering any aspect of the ACA. This would be legally and politically risky, should there be a pending appeal.

What will happen next?

Anything could happen, starting January 1. For now, the government is free to keep implementing the ACA, because Judge O'Connor issued a declaratory judgment, but not an injunction. That being said, this was a ruling only on one of several counts in the lawsuit. The judge has ordered the parties to submit a proposed schedule for the remaining claims by January 4. Therefore, we cannot rule out an injunction in a future ruling in the case.

California Attorney General Xavier Becerra has announced his intent to appeal. Appeal would likely occur after the final resolution of the case, and would go to the Fifth Circuit Court of Appeals. Most likely, in due time, any decision by the Fifth Circuit would be further appealed to the US Supreme Court. 

The legal effect on the health care industry is still uncertain, even though the resulting uncertainty is roiling the health care community. In theory, it is possible that an insurance company could defy the ACA as early as January 1, for example, by selling lower-priced plans to people without pre-existing conditions. If someone challenged that action, the company could defend it on the basis of this ruling—unless, in the meantime, it is reversed on appeal. It seems unlikely that an insurer would invest resources in such a product while the future is so uncertain, but if the ruling is upheld, we may expect to see such products re-enter the market in future years.

What is the "severability" issue? 

The question is whether the individual mandate can be separated from the rest of the ACA. If it is not severable, then none of the ACA is valid law. 

In prior challenges to the ACA, the federal government had argued that the individual mandate was an important part of the overall plan in the ACA. Congress intervened and, effective January 1, 2018, reduced to zero the amount of the tax penalty for noncompliance with the individual mandate. In effect, Congress eliminated the individual mandate. 

Several legal scholars argue that Congress, by removing the individual mandate while leaving the rest of the ACA intact, displayed a clear intent to have the individual mandate be severable from the rest of the ACA. This stands in contrast to the recent ruling. 

The recent opinion characterizes the individual mandate as the "ACA keystone," not a severable provision. The opinion also notes that, in the first challenge to the ACA, the court had upheld the individual mandate as a valid exercise of Congress' power to tax. Now that the "tax" will be zero, as of January 1, the opinion explains that the mandate remains, but will no longer be enforced, and therefore, it cannot be justified as an exercise of Congress' taxing power. Coupled with the conclusion that the mandate is not severable, the result is that the entire law is unconstitutional. 

What is the possible timeline for the case?

The district court will likely rule on the rest of the case in 2019, as the parties have been ordered to submit a proposed schedule to resolve the remaining claims by January 4. As noted above, California's attorney general has already stated an intent to appeal. There is some speculation about whether an appeal would be viable before the rest of the case is resolved, or whether the ruling might not be appealable at all as a declaratory judgment. (Attorney General Becerra has asked Judge O'Connor to allow the ruling to be appealed.) The case will most likely be appealed to the Fifth Circuit, and subsequently, to the Supreme Court. This will be a long process, and the case is not likely to be resolved in 2019. 

What is the likelihood that the decision will be upheld by higher courts, particularly the Supreme Court?

The outcome is ultimately uncertain. Many legal scholars and commentators expressed skepticism about the legal theory of the case, and the decision is surprising to some. Judge O'Connor is known as a conservative judge, having previously issued a nationwide injunction against an Obama administration rule regarding gender-identity discrimination in health care. Similarly, the Fifth Circuit is known as a conservative circuit, and has several new judges appointed during the Trump administration. Therefore, despite criticism of the opinion's reasoning, the possibility for an equally surprising result on appeal cannot be dismissed.

What will this mean politically, especially for the new Congress?

House and Senate Democratic leadership were quick to respond to the court's ruling. Both Senate Minority Leader Chuck Schumer and the likely incoming House Speaker, Nancy Pelosi, criticized the decision and pledged congressional action.

Shortly after the ruling, Representative Pelosi said, "When House Democrats take the gavel, the House of Representatives will move swiftly to formally intervene in the appeals process to uphold the life-saving protections for people with pre-existing conditions and reject Republicans' effort to destroy the Affordable Care Act." We can expect the new Democratic majority in the House of Representatives to join supporters of the ACA in their appeal efforts. The House's intervention would almost certainly be considered and passed by the Democratic majority in the opening weeks of the 116th Congress. However, such intervention in the case would not be as definitive an action as passing a law or amendment, such as one eliminating the mandate altogether, or reinstating it in a very low amount, either of which could negate the ruling. In the Senate, Democrats will lament the court's decision and may offer legislative remedies, but will likely be stymied by Majority Leader Mitch McConnell on any substantive response.

In practice, given the divided nature of the Congress in 2019, their actions may be more "messaging" than legislation. Democrats in both chambers will lay the confusion and uncertainty around the ACA going forward squarely at the feet of Republicans, touting this as the latest example of the GOP's efforts to deny health care to those with pre-existing conditions. Although the GOP had hoped to turn the debate to drug pricing, this ruling has, for now, put the spotlight back on health insurance and the ACA.

Footnote

1 Texas v. U.S., 4:18-cv-00167-O (N.D. Texas Dec. 14, 2018)

About Dentons

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

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