Virginia Decision May Yield Similar Rulings

By Linda Koco, Contributing Editor
InsuranceNewsNet

Dec. 15, 2010 -- Monday’s Virginia federal court ruling on a challenge to the Affordable Care Act (ACA) may affect future challenges to the health reform law, according to experts who are analyzing the decision.

The ruling is the first to declare unconstitutional the mandated coverage provision in ACA.

Two earlier rulings on challenges to ACA—in Michigan and Virginia—have upheld the law. But now that the courts have a decision finding the mandate in the law unconstitutional, “that opens the door for judges to use the ruling in other cases involving the ACA,” says Bilyana Savic, president of Insurance Insights, a Bath, Ohio, health insurance consulting firm.

The first two decisions did not change things because they supported the law, Savic explains. “But this ruling provides a precedent for other challenges. It will give those challenges more credibility.”

Health care groups have not yet commented on the 42-page decision. Both National Association of Health Underwriters (NAHU) and America's Health Insurance Plans (AHIP) say they are still reviewing it.

However, AHIP’s Press Secretary Robert Zirkelbach did point out in an email that “throughout the health care reform debate, there was broad agreement that enacting guarantee issue and community rating would cause significant disruption and skyrocketing costs unless all Americans have coverage."

The ACA provision challenged in Virginia — Section 1501 of the ACA, also called the Minimum Essential Coverage Provision — requires most U.S. citizens to buy a minimum amount of health insurance. If they don’t, they will be subject to a penalty. The penalties would be in the $600 to $700 range for an average American, and would start showing up in 2014 tax returns.

U.S. District Judge Henry E. Hudson ruled the provision unconstitutional in an opinion handed down in Richmond, Va. He said the court will “sever” the provision and its directly dependent provisions from the ACA.

Virginia Attorney General Kenneth T. Cuccinelli II had filed the suit on the behalf of the Commonwealth of Virginia, against Kathleen Sebelius, Secretary of the Department of Health and Human Services. Cuccinelli contended the mandate provision is unconstitutional because it exceeds the power of the Commerce Clause and the General Welfare Clause under the U.S. Constitution.

A key part of the decision hinged on whether the ACA’s fine for noncompliance with the mandate is a penalty or a tax. The Commonwealth had argued it is a penalty, not a tax to raise revenues for the general welfare, while the federal government had argued it is a tax.

The judge affirmed the Commonwealth’s position, saying the court is “unpersuaded” that the noncompliance fine “is a bona fide revenue raising measure enacted under the taxing power of Congress.”

In a footnote, Judge Hudson pointed out that “if allowed to stand as a tax, the Minimum Essential Coverage Provision would be the only tax in U.S. history to be levied directly on individuals for their failure to affirmatively engage in activity mandated by the government not specifically delineated in the Constitution.”

At its core, the judge wrote, “the dispute is not simply about regulating the business of insurance—or crafting a scheme of universal health insurance coverage—it’s about an individual’s right to choose to participate.”

Noting that the case has significant public policy implications, he predicted that “the final word will undoubtedly reside with a higher court.”

Later this week, oral arguments are scheduled to begin on another ACA challenge. This is a closely watched case in the Florida district court. Brought by officials in 20 states, it opposes not only the ACA’s individual mandate provision but also the ACA’s expansion of Medicaid to more people.

Savic says an immediate impact of the Virginia decision is that it will likely increase confusion among consumers.

“People are already confused about the ACA but when they see headlines saying a court declares part of the law as unconstitutional, they will latch onto the word ‘unconstitutional’ and attach meaning to that. This may cause more people to question the validity of the law and it may create more skepticism.”

Savic believes community education programs could help set the record straight, but she says it is not yet clear about who should or will offer such program.

Concerning the issue of having a mandate, the Virginia court did acknowledge the government’s argument that, “without full market participation, the financial foundation supporting the health care system will fail, in effect causing the entire health care regime to ‘implode.’ Unless everyone is required by law to purchase health insurance, or pay a penalty, the revenue base will be insufficient to underwrite the costs of insuring individual presently considered as high risk or uninsurable.”

AHIP’s Zirkelbach provided InsuranceNewsNet with a report that touches on the same point. AHIP had commissioned Milliman to study the impact of guarantee issue (GI) and community rating (CR) laws when there is no accompanying mandate for people to buy health coverage.

Published in 2007, the report examined the effects GI and CR in eight states: Kentucky, Maine, Massachusetts, New Hampshire, New Jersey, New York, Vermont and Washington.

Milliman found that GI effectively “encourages” people to wait until they have health problems before buying insurance, and that CR has a similar effect.

Milliman also found that the individual health insurance markets in the eight states “deteriorated” following GI and CR implementation, and that with some carriers stopped selling individual health insurance, thereby reducing competition.

Other Milliman findings: insurance premiums rose, individual insurance enrollment declined, and the number of uninsured did not increase significantly in those states.

Two of the eight states (Kentucky and New Hampshire) had terminated their GI and CR laws before report was published, and another state (Washington) had “significantly weakened” its GI and CR provisions, Milliman says.

Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at linda.koco@innfeedback.com.