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Fifth Circuit Affirms ACA Individual Mandate Is Unconstitutional; Severability Question Remains

(Parker Tax Publishing January 2020)

The Fifth Circuit affirmed a district court and held that (1) there remains a live case or controversy between Texas and other states opposed to the Affordable Care Act (ACA) and the United States; (2) Texas and other states opposed to the ACA have standing to challenge the ACA; and (3) the individual mandate is unconstitutional because it can no longer be read as a tax, and there is no other constitutional provision that justifies this exercise of congressional power. However, on the question of how much, if any, of the rest of the ACA beyond the individual mandate is inseverable from the individual mandate, the Fifth Circuit remanded the case to the district court to provide additional analysis of the provisions of the ACA as they currently exist in light of the penalty for not having insurance being reduced to zero in the Tax Cuts and Jobs Act of 2017. State of Texas v. U.S., 2019 PTC 481 (5th Cir. 2019).


On March 23, 2010, President Barack Obama signed the Affordable Care Act (ACA) into law. The ACA sought to increase the number of Americans covered by health insurance and decrease the cost of health care through several key reforms. Some of those reforms implemented new consumer protections, aiming primarily to protect people with preexisting conditions. For example, the law prohibits insurers from refusing to cover preexisting conditions. The "guaranteed-issue requirement" forbids insurers from turning customers away because of their health. The "community-rating requirement" keeps insurers from charging people more because of their preexisting health issues. The law also requires insurers to provide coverage for certain types of care, including women's and children's preventative care.

Other reforms sought to lower the cost of health insurance by using both policy "carrots" and "sticks." On the stick side, the individual mandate - which some challenged - requires individuals to maintain health insurance coverage. If individuals do not maintain this coverage, they must make a payment to the IRS called a "shared responsibility payment." The individual mandate was designed to lower insurance premiums by broadening the insurance pool. The ACA also sought to lower insurance costs for some consumers through policy "carrots," providing tax credits to offset the cost of insurance to those with incomes under 400 percent of the federal poverty line. The ACA also created government-run, taxpayer-funded health insurance marketplaces - known as "Exchanges" - which allow customers "to compare and purchase insurance plans."

The ACA also enlarged the class of people eligible for Medicaid to include childless adults with incomes up to 133 percent of the federal poverty line. The ACA originally required each state to expand its Medicaid program or risk losing all of its federal Medicaid funds. However, the Supreme Court subsequently held that this exceeded Congress' powers under the Spending Clause. But the Court allowed those states that wanted to accept Medicaid expansion funds to do so. As a result, the states that have not participated in the expansion now subsidize, through their general tax dollars, the states that have participated in expansion.

Since the ACA was passed, its opponents have attempted to attack it both through congressional amendment and through litigation. Between 2010 and 2016, Congress considered several bills to repeal, defund, delay, or amend the ACA. Except for a few modest changes, these efforts were closely fought but ultimately failed. In 2017, the shift in presidential administrations reinvigorated opposition to the law, but many of these later legislative efforts failed as well.

The ACA's opponents also took their cause to the courts in a series of lawsuits, some of which reached the Supreme Court. In National Federation of Independent Business v. Sebelius (NFIB), 2012 PTC 167 (S. Ct. 2012), the Court upheld the law's individual mandate. The Court decided that the ACA's individual mandate could be read as a tax on an individual's decision not to purchase insurance, which was a constitutional exercise of Congress' taxing powers under Article I of the U.S. Constitution.

In December 2017, the ACA's opponents achieved some legislative success. As part of the Tax Cuts and Jobs Act (TCJA), Congress set the "shared responsibility payment" amount - the amount a person must pay for failing to comply with the individual mandate - to the "lesser" of "zero percent" of an individual's household income or "$0," effective January 2019.

Two months after the shared responsibility payment was set at zero dollars, two private citizens and 18 states filed a lawsuit against several federal defendants: the United States, the Department of Health and Human Services and its Secretary, Alex Azar, as well as the IRS and its Acting Commissioner, David J. Kautter. The plaintiffs argued that the individual mandate was no longer constitutional because: (1) the Supreme Court's decision in NFIB rested the individual mandate's constitutionality exclusively on reading the provision as a tax; and (2) the 2017 amendment undermined any ability to characterize the individual mandate as a tax because the provision no longer generates revenue, a requirement for a tax. The plaintiffs argued further that, because the individual mandate was essential to and inseverable from the rest of the ACA, the entire ACA must be enjoined. On this theory, the plaintiffs sought declaratory relief that the individual mandate is unconstitutional and the rest of the ACA is inseverable. The plaintiffs also sought an injunction prohibiting the federal defendants from enforcing any provision of the ACA or its regulations.

The federal defendants agreed with the plaintiffs that once the shared responsibility payment was reduced to zero dollars, the individual mandate was no longer constitutional. They also agreed that the individual mandate could not be severed from the ACA's guaranteed-issue and community-rating requirements. Unlike the plaintiffs, however, the federal defendants contended in a Texas district court that those three provisions could be severed from the rest of the Act. Driven by the federal defendants' decision not to fully defend against the lawsuit, 16 states and the District of Columbia intervened to defend the ACA.

The Texas district court agreed with the plaintiffs' arguments on the merits. Specifically, the court held that: (1) the individual plaintiffs had standing because the individual mandate compelled them to purchase insurance; (2) setting the shared responsibility payment to zero rendered the individual mandate unconstitutional; and (3) the unconstitutional provision could not be severed from any other part of the ACA. The district court granted the plaintiffs' claim for declaratory relief. Specifically, the district court's order declared "the Individual Mandate, 26 U.S.C. Sec. 5000A(a), UNCONSTITUTIONAL," and the order further declared that "the remaining provisions of the ACA, Pub L. 111-148, are INSEVERABLE and therefore INVALID." The district court, however, denied the plaintiffs' application for a preliminary injunction. The district court entered partial final judgment as to the grant of summary judgment for declaratory relief, but stayed judgment pending appeal. An appeal to the Fifth Circuit followed.

On appeal, the U.S. House of Representatives intervened to join the intervenor-defendant states in defending the ACA. Also on appeal, the federal defendants changed their litigation position. After contending in the district court that only a few provisions of the ACA were inseverable from the individual mandate, the federal defendants contended in their opening brief for the first time that all of the ACA is inseverable. Moreover, the federal defendants contended for the first time on appeal that - even though the entire ACA is inseverable - the court should not enjoin the enforcement of the entire ACA. The federal defendants argued that the district court's judgment should be affirmed "except insofar as it purports to extend relief to ACA provisions that are unnecessary to remedy plaintiffs' injuries."

The questions before the Fifth Circuit were the following: (1) Is there a live case or controversy before us even though the federal defendants have conceded many aspects of the dispute; and, relatedly, do the intervenor-defendant states and the U.S. House of Representatives have standing to appeal? (2) Do the plaintiffs have standing? (3) If the plaintiffs have standing, is the individual mandate unconstitutional? (4) If it is, how much of the rest of the Act is inseverable from the individual mandate?

Fifth Circuit's Holding

The Fifth Circuit held that there is a live case or controversy because the intervenor-defendant states have standing to appeal and, even if they did not, there remains a live case or controversy between the plaintiffs and the federal defendants. The court found that the plaintiffs have standing to bring this challenge to the ACA and that the individual mandate injures both the individual plaintiffs, by requiring them to buy insurance that they do not want, and the state plaintiffs, by increasing their costs of complying with the reporting requirements that accompany the individual mandate.

The Fifth Circuit also held that the individual mandate is unconstitutional because it can no longer be read as a tax, and there is no other constitutional provision that justifies this exercise of congressional power. Finally, on the severability question, the court remanded this question to the district court to provide additional analysis of the provisions of the ACA as they currently exist.

For a discussion of the penalty taxes for failing to maintain minimum health coverage that existed prior to being eliminated by the TCJA, see Parker Tax ¶190,100.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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