Overturned in the Northern District of Texas, the ACA Heads to the 5th Circuit, and Perhaps to SCOTUS

Print Friendly, PDF & Email


Richard Evans / Scott Hinds

203.901.1631 /.1632

revans@ / shinds@ssrllc.com


December 17, 2018

Overturned in the Northern District of Texas, the ACA Heads to the 5th Circuit, and Perhaps to SCOTUS

  • Judge Reed O’Connor on Friday issued a ruling that finds the ACA’s individual mandate unconstitutional, and by finding that the mandate cannot be severed from the ACA, ruled that the entire Act is unconstitutional
  • The ruling inevitably will be appealed in the Fifth Circuit, which since 2008 has affirmed decisions (or rejected appeals) in 84.9 percent of Texas Northern District civil cases involving the federal government, vacated decisions in 9.7 percent of instances, and partially affirmed / partially vacated in 5.3 percent of instances. Not including its Chief Judge (Democratic appointee), 18 of the Circuit’s 25 judges are Republican appointees
  • The core argument is that because SCOTUS found Congress’ power to pass the individual mandate rests only on its power to tax, the 2017 Congress’ decision to zero the penalty for not obeying the mandate means the mandate is no longer a tax, thus making the mandate unconstitutional. Crucial to O’Connor’s decision is that he found the mandate to not be severable from the balance of the Act. However because the 2017 Congress which chose to zero the penalty simultaneously chose not to modify other parts of the Act, the argument is being made that by linking the mandate to the balance of the ACA, O’Connor is using judicial power to take actions the legislative branch chose not to take, in violation of constitutional requirements for separation of powers
  • If O’Connor’s decision is overturned in its entirety, there’s obviously no impact on the healthcare system. If the decision is upheld in part and vacated in part, this could mean either that the mandate is unconstitutional but entirely severable from the Act (again no impact on healthcare); or, that the mandate is unconstitutional but only partially severable from the Act. In the latter case, the mandate might reasonably be linked to pre-existing condition and community ratings provisions, which could fall with the mandate. In such an instance, without Congressional action the individual insurance market would suffer considerably; however given the popularity of these provisions, it’s likely Congress would act to re-establish these provisions
  • Thus only if the decision is upheld in its entirety is it likely to have major healthcare effects, by way of eliminating the entire ACA, including its many popular provisions (pre-existing condition protections, Part D donut-hole fill-in, the Medicaid expansion, subsidies for exchange-based insurance purchases, and children’s right to remain on parents plans to age 26, to name just a few)
  • Given the popularity of the ACA (53 percent of adults now favor, as compared to 40 percent who oppose), not to mention many of its key provisions, a final decision vacating the ACA would force Congress to re-legislate healthcare reform from a clean sheet, a process whose outcome is impossible to predict
  • O’Connor’s decision likely will be appealed to the Fifth Circuit in Spring of 2019, and if upheld, appealed to SCOTUS in the term beginning October 2019. A SCOTUS ruling for that term traditionally would be handed down by June / July 2020 – just months before the 2020 general election

Federal Judge Reed O’Connor of the Northern District of Texas on Friday issued a ruling[1] that declares the Affordable Care Act to be unconstitutional. Because the Friday ruling is silent on several questions raised in the litigation, further rulings may be required from O’Connor before the case can be appealed. The inevitable appeal will be heard by the Fifth Circuit court in New Orleans, and this could happen as early as Spring of 2019. If the Fifth Circuit upholds O’Connor’s ruling this almost certainly would be appealed to the Supreme Court, most likely during the session beginning in October of 2019, with a ruling at some point (presumably by late June / early July) in 2020 – the year of the next general election

In NFIB[2], the Supreme Court found the ACA’s individual mandate to be a constitutional use of power only on the basis of Congress’ right to tax. Plaintiffs in the present case argue that because Congress eliminated the dollar penalty (i.e., the tax) associated with the individual mandate, a tax no longer applies to the mandate, thus making the mandate unconstitutional. And plaintiffs argue that the individual mandate is not severable from the rest of the ACA, making the entire ACA unconstitutional. In essence, O’Connor agreed with the plaintiffs on both counts

Reactions to the ruling generally are falling along partisan lines, though a number of conservatives have spoken out against O’Connor’s decision, presumably because of concerns about what the ruling means for constitutional separation of powers. In finding that the individual mandate is not severable from the ACA, O’Connor relied heavily on text from the 2010 Congress that passed the Act, and on SCOTUS opinions from NFIB. O’Connor gives less weight to the 2017 Congress which chose to zero out the penalty for the individual mandate, but at the same time chose not to modify or repeal other parts of the Act. By linking the individual mandate to ACA provisions that the 2017 Congress chose to leave intact, O’Connor is causing the judiciary to modify legislation in a manner that Congress specifically chose not to, thus violating constitutional separation of judicial and legislative powers, or so the argument goes[3]

Questions likely to be raised on appeal include the core questions of whether the mandate is constitutional, and if not, whether the mandate is severable from the rest of the ACA. In addition, there remains the threshold question of whether or not the plaintiffs have standing. Generally speaking, to establish standing plaintiffs must show that they are harmed by the defendant’s action(s) in a manner that would be addressed by a favorable court decision. Plaintiffs (select states) in this case argue that their citizens are harmed by the individual mandate, even though their constituents are free (since the repeal of the penalty associated with the mandate) to ignore the mandate without any legal or financial consequence. Purely from a lay perspective, it’s easy to see how plaintiffs’ standing might be called into question

Potential outcomes on appeal are that the decision is either upheld or overturned in its entirety; or upheld in part and overturned in part. In the latter instance, this would mean finding that the mandate is unconstitutional, but that it is severable from most of if not all of the balance of the ACA, thus allowing the Act to stand. A partial decision could find the mandate unconstitutional but severable from the entire Act; or, unconstitutional and linked to the pre-existing conditions and community ratings provisions, but severable from the balance of the Act

A decision to overturn the decision in its entirety, or a decision finding the mandate unconstitutional but entirely severable, would have few if any practical consequences for how healthcare works. A decision that the mandate is unconstitutional and linked only to the pre-existing conditions and community ratings provisions would – unless Congress acted to restore these provisions — meaningfully disrupt the markets for individually purchased insurance, placing coverage out of reach for persons who currently are sick, or who become sick. The potential loss of these provisions was highly politicized in the midterms to Republicans’ great disadvantage, and it is our sense that Congress would act to defend pre-existing conditions and community ratings provisions if the appellate courts found the mandate unconstitutional, and linked it only to these provisions, but not the rest of the ACA. A decision to uphold Judge O’Connor’s decision in its entirety and eliminate the ACA would have these individual market effects and of course many more, e.g. the Medicaid expansion would be eliminated, the ‘donut-hole’ in Medicare Part D drug coverage would return, and children could no longer remain on parents’ plans until age 26, just to name a few

Since Congress seems reasonably likely to restore pre-existing condition and community rating provisions if these are lost in a partial decision, the only outcome that clearly would have major healthcare impacts is a decision to uphold Judge O’Connor’s ruling in its entirety. Because the sweep of the ACA is so incredibly broad, and because so many of the ACA’s provisions are so popular, Congress would effectively be forced to focus on healthcare reform from a more or less clean-sheet perspective – and the outcome of such an effort is anyone’s guess. From an ideological perspective, an opportunity to re-legislate healthcare reform from a clean-sheet is a Republican victory; however in practical terms, Republicans may or may not be in power beginning in 2021, and even if they are, they might understandably prefer to spend their political capital on any number of issues, other than being forced to tackle healthcare reform

To get a general sense of how appeals of Texas’ Northern District decisions have gone in the past, we examined all appeals of civil cases involving the U.S. government since 2008. The Fifth Circuit appellate court has either affirmed Texas Northern District decisions or dismissed appeals in 84.9 percent of such cases, as compared to 82.3 percent of all district decisions reviewed by the Fifth Circuit, and 83.7 percent of all district decisions reviewed by any Circuit. The Fifth Circuit overturned 9.7 percent of Texas Northern District decisions and affirmed in part / vacated in part 5.3 percent of decisions. Comparable figures for Fifth Circuit review of district decisions are 12.1 percent and 5.6 percent; and, comparable figures for all Circuits’ review of federal district decisions are 12.0 percent / 4.3 percent (Exhibit 1). Notably, not counting the Fifth Circuit’s Chief Judge (Carl Stewart) who is a Democratic (Clinton) appointee, 18 of the Circuit’s 25 judges are Republican appointees

Politically, it’s as though Republicans have chosen to saw the branch they’re sitting on. At the latest poll, the ACA was supported by 53 percent of American adults and opposed by just 40 percent (Exhibit 2). Individual provisions of the ACA – particularly those listed above — are even more popular than the ACA as a whole (e.g. see opinions on pre-existing conditions in Exhibit 3). Making healthcare an electoral issue generally doesn’t work for Republicans, simply because voters – particularly independent ‘swing’ voters – tend to trust Democrats on healthcare issues far more then they trust Republicans. But this case is very likely to make healthcare a 2020 electoral issue, since a SCOTUS ruling, if the case gets that far, would likely fall on the eve of the general election



©2018, SSR, LLC, 225 High Ridge Rd, 2nd Floor, Stamford, CT 06905. All rights reserved. The information contained in this report has been obtained from sources believed to be reliable, and its accuracy and completeness is not guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein. The views and other information provided are subject to change without notice. This report is issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is not construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. In the past 12 months, through a wholly-owned subsidiary SSR Health LLC has provided paid advisory services to BioPharmX (BPMX), Bristol-Myers Squibb (BMY), Celgene (CELG), Gilead Sciences (GILD), GlaxoSmithKline (GSK), Johnson & Johnson (JNJ), Merck (MRK), Pfizer Inc (PFE), Sanofi (SNY) on both securities-related and non-securities-related topics. One or more of SSR Health’s analysts owns long positions in the following stocks: ADMA, AERI, ALNY, ALXN, ARDX, BMY, CRSP, CSSPF, DPLO, EDIT, HRTX, IMMU, ITCI, LXRX, MDCO, NTLA, REPH, RHHBY, SAGE, SGMO, SRPT, STML, VRTX

  1. https://www.star-telegram.com/latest-news/article223146480.ece/BINARY/ACA%20ruling%20(1).pdf#storylink=readmore_inline 
  2. National Federation of Independent Businesses v. Sebelius 
  3. See Nicholas Bagley, here: https://www.washingtonpost.com/opinions/2018/12/15/latest-aca-ruling-is-raw-judicial-activism-impossible-defend/?noredirect=on&utm_term=.9bf55d78f0e4 . See also Jonathan Adler and Abbe Gluck, here: https://www.nytimes.com/2018/12/15/opinion/obamacare-ruling-unconstitutional-affordable-care-act.html 
Print Friendly, PDF & Email