Supreme Court Sets Stage For Further Regulatory Action On Affordable Care Act

The Supreme Court's decision in Nat'l Federation of Independent Business v. Sebelius, 56 U.S. __ (2012), upholding most of the Patient Protection and Affordable Care Act (the "ACA") raises more questions than it answers, as the focus now will shift to how the ACA's major provisions will be implemented, especially in the states.

In a 5-4 opinion, the Court upheld the ACA's mandate requiring individuals to maintain "minimum essential" health insurance coverage or pay a penalty to the Internal Revenue Service. To reach this holding, the Court construed the mandate as a tax within Congress's constitutional taxing authority.

At the same time, the Court struck down a provision of the ACA under which the states would have been required to accept a major and costly expansion of Medicaid or risk losing all funding for existing Medicaid programs. Under the ruling, the states may accept the Medicaid expansion but will not be penalized if they elect not to do so. All other provisions of the ACA are left in place.

The Court's decision means that all of the ACA's insurance reforms remain valid and enforceable, including guaranteed issue and community rating of insurance and the establishment of insurance exchanges, all of which will become effective in 2014. Also surviving are the ACA's revenue-generating provisions relating to health insurers and insurance plans, including the limit on deductibility of executive compensation, the annual policy fee, the "Cadillac plan" excise tax and the provision under which health insurers collectively will pay the federal government a large annual assessment, starting at $8 billion in 2014 and growing to $14.3 billion by 2018.

The Supreme Court's decision will increase the pressure on states to take action to implement all or parts of the ACA. States, in particular, will need to closely examine the ACA's provisions regarding exchanges, insurance market reforms and Medicaid expansion to determine what action, if any, the state should take in reaction to the Court's ruling.

As a result of the ruling, it is clear that exchanges will play a significant role in the future distribution of health insurance. The ACA, and the Department of Health and Human Services' (the "HHS") regulation implementing the ACA, envisions three potential forms of Exchanges: 1) a state-created and run Exchange ("state-based exchange"); 2) a federally-created, but state-managed exchange ("partnership exchange"); or 3) a federally-created and run...