Chad Mulvany

The U.S. Supreme Court decision is perhaps best seen as the middle act in at least a three-part healthcare reform drama.

At a Glance  

  • A Republican sweep in the November elections could lead to repeal of most of the Affordable Care Act, to be replaced with legislation to achieve limited coverage expansion.
  • A Romney victory and split Congress would likely result in Republicans using their administrative authority to modify or disrupt implementation of the act, with provisions altered or repealed where bipartisan agreement exists.
  • An Obama victory and split Congress would likely result in continued implementation of the act but with a delay to some elements.

The U.S. Supreme Court decision was supposed to bring some clarity on healthcare reform. Unfortunately, the ruling with respect to Medicaid has only muddied the waters for providers in some states. The impact of reform on any given market will largely be decided by three factors: whether states take advantage of the newfound flexibility to expand the Medicaid program, the outcome of November's election, and anticipated deficit reduction efforts.

To navigate this uncertainty-which could extend indefinitely depending on state and federal politics-providers need to focus on building the core capabilities to improve value and developing strategically agile organizations.

The Supreme Court's Ruling

In an unprecedented three days of hearings, the court heard arguments on a number of issues with respect to the Affordable Care Act, including the constitutionality of the individual mandate, the severability of the mandate from the law, the applicability of the Anti-Injunction Act (AIA), and the Medicaid expansion. Below is a brief review of three of these issues and how the court ruled in its June 28 opinion. (The severability of the mandate became a moot issue with the decision to uphold the mandate.)

The individual mandate. The Obama administration pursued two arguments in support of the mandate. The central argument put forth was that the mandate was an allowable exercise of Congress's power under the Commerce Clause of the Constitution. This clause gives Congress broad authority to regulate interstate commerce and foreign trade. The administration argued the mandate was an essential tool to decrease cost shifting from the uninsured to the insured. Therefore, the mandate was necessary to regulate interstate healthcare markets, which are different in kind from other types of economic activity given that at some point, everyone will need health care.

The state plaintiffs argued that the uninsured were not engaged in any type of commercial activity and were, therefore, beyond Congress's ability to regulate under the commerce clause.

The other argument put forth by the administration (which was disputed by the plaintiffs) was that the shared responsibility payment (i.e., the penalty) was in fact a tax.

Chief Justice John Roberts, along with four other judges appointed by Republican presidents, sided with the states in his majority opinion finding the mandate an unconstitutional exercise of the Commerce Clause. The opinion found that although Congress has the ability to regulate commerce, it does not have the authority to create commerce-in this case, by compelling individuals to purchase insurance-to regulate it.

However, Chief Justice Roberts' opinion (supported by four justices appointed by Democratic presidents) also found that the penalty that enforced the mandate was a tax. He reasoned that because the shared responsibility payment looks in many ways like a tax (it doesn't apply to those who do not file tax returns, is assessed and collected in the same manner as a tax, and is estimated to raise $4 billion), it falls under Congress's constitutional authority to raise revenue, which is unquestioned. Therefore, the individual mandate was ultimately upheld.

The AIA. The AIA precludes an individual from suing the federal government to stop a tax from being collected. Under the AIA, individuals have standing to contest a tax only after they've paid it. If the AIA had been found to apply, the case would have had to wait until at least 2015 to be heard. Both the administration and states argued that the AIA did not apply. Justice Roberts' opinion took advantage of semantic differences in the Affordable Care Act to find that, for purposes of the AIA, the "shared responsibility payment" was a penalty. Therefore, the Court was allowed to proceed on the merits of the case.

Medicaid expansion. The Affordable Care Act expanded coverage to everyone up to 133 percent of the federal poverty level who is not currently eligible for Medicaid. To make the expansion palatable for states, it was backed by generous subsidies for the "newly eligible." However, any state that refused to comply risked losing all of its federal matching Medicaid funds. Given that Medicaid consumes a large portion of states' budgets, it is reasonable to ask at what point do grant conditions attached to federal funding become coercive.

The administration argued Congress has always had the authority to attach conditions to federal funding given to the states under the Spending Clause of the Constitution. Bolstering the administration's argument, the Supreme Court has never ruled any such conditions coercive.

States argued that there must be some limit to congressional regulation attached to funding. In this particular case, the federal Medicaid matching funds have become such a large part of states' budgets that threatening to terminate them if states failed to comply with the expansion crossed a line into coercion.

Surprisingly, Chief Justice Roberts' majority opinion (joined by four conservative and two liberal justices) found that although the federal government could offer states additional matching funds, it could not penalize them for not participating in the "new program." Any state's decision to decline to expand Medicaid would have significant implications for individuals included in the newly eligible category and providers.

Implications of Optional Medicaid Expansion

The administration asserted immediately after the ruling that it will be difficult for states not to participate in the expansion. Governors and state legislators considering opting out would face significant pressure from advocates for the uninsured, hospitals, physicians, and managed care companies. Moreover, for the first three years, the federal government will pick up 100 percent of the cost for covering the newly eligible. The states' match increases to only 10 percent of the cost of expansion in 2020, where it is capped.

States are taking a more cautious approach to their newfound flexibility. Although their expenditure is capped at 10 percent, the expansion still represents a significant increase in expense. For example, it is estimated that expanding coverage would cost Mississippi $1.7 billion over 10 years. This level of funding would likely crowd out investments in infrastructure, education, and public safety.

States are also concerned that the federal component of the match for the newly eligible could be reduced in later years, further increasing their cost. This concern is justifiable given states' recent experience and the federal deficit. The increased Medicaid matching funds provided by the American Recovery and Reinvestment Act (ARRA) were coupled with maintenance-of-effort (MOE) requirements regarding eligibility and coverage standards locking states into coverage levels that were set prior to the downturn. The MOE requirements were extended to 2014 as part of the Affordable Care Act without any accompanying funding. From the states' perspective, this extension limited their abilities to balance budgets through the financial crisis.

With the MOE requirements sun-setting in 2014, the ruling gives states the flexibility to return to previous coverage levels. The worst-case scenario for providers is seeing their state not only decline coverage expansion in 2014, but also reduce eligibility below current levels once free of the MOE requirements.

Several states challenging the Affordable Care Act have suggested they will not participate in coverage expansion. For many of these governors, this represents an unassailable strategy. It plays well with their base and serves as an opening negotiating position with CMS to gain flexibility in the form of block grants or other federal Medicaid waivers in exchange for expanding coverage. Based on current coverage levels and each state's governor's political affiliation, the exhibit below shows those states in which declining expansion is a distinct possibility and indicates the relative likelihood that any of these states will decline expansion.

Exhibit 1


Individuals who would have been newly eligible in states that choose not to expand Medicaid would be left with few options. Those with incomes from 100 to 133 percent of the federal poverty level could theoretically purchase insurance within a health insurance exchange. But they are required to spend 2 percent of their income on premiums before subsidies kick in. This requirement probably makes coverage within the exchange cost prohibitive for a family of four with an income of $33,000 per year. They also would be subject to deductibles and copayments, which, even after adjustments mandated under the Affordable Care Act, would be substantial as a percentage of income.

The newly eligible below 100 percent of the federal poverty level are not eligible for subsidies within the exchange and would likely continue to go without coverage.

The Upcoming Elections

The elections in November will have a significant impact on implementation. However, given the fiscal situation and political climate, it is doubtful that Congress could pass a compromise to rectify this situation.

November's upcoming elections are likely to be the most contentious races in recent memory. At the national level, the results will hinge on voters' perception of the general direction of the economy as opposed to healthcare reform. Projecting outcomes at this juncture would be inappropriate. However, there are three likely scenarios, each with significant implications for providers.

Republican sweep. Mitt Romney is elected president, and Republicans retain control of the House and gain a narrow majority in the Senate. Under this scenario, most of the act could be repealed using reconciliation and replaced with a limited coverage expansion based on tax credits, cross-state insurance purchase, and allowance of small groups to pool insurance risk to decrease the cost of coverage.

Republican president, split Congress. Mitt Romney is elected president, Republicans retain control of the House, and Democrats maintain control of the Senate. Under this scenario, the Republicans would use their administrative authority to modify or disrupt implementation of the Affordable Care Act, and on issues where bipartisan agreement exists, provisions of the act would likely be legislatively altered or repealed.

Democratic president, split Congress. President Obama is reelected, Republicans retain control of the House, and Democrats maintain control of the Senate. Under this scenario, implementation of the Affordable Care Act would move forward, but with a likely delay to some elements (such as insurance exchanges).

Under any scenario, it is almost certain that value-based payment mechanisms will be fully implemented. Hospitals also will likely see payments cut-either to fix the sustainable growth rate (SGR) or reduce the deficit-regardless of who is in the White House and Congress.

Exhibit 2


Deficit Reduction

Before passage of the Budget Control Act (BCA) last year, economists estimated that the federal deficit would need to be cut by $4 trillion to $5 trillion over 10 years if the United States were to achieve a sustainable debt-to-GDP ratio. According to HFMA's analysis, using that range as a baseline, if one factors in the BCA reductions, plus offsets to fix SGR and any need for additional stimulus, the next round of deficit reductions will need to realize $2.3 trillion to $3.65 trillion in savings over 10 years to achieve a sustainable debt-to-GDP ratio.a  

Given the level of savings required, additional reductions to hospital Medicare and Medicaid payments are unavoidable. Either in direct cuts or indirectly via beneficiary benefit design, the range will likely be between $150 billion and 240 billion, based on the assumption that 20 percent of deficit reduction savings will come from Medicare and Medicaid, and of that savings, roughly 33 percent will come from hospitals. This level of cuts, when added to the Affordable Care Act and BCA reductions, is on the same scale as the Balanced Budget Act reductions in the late 1990s. Although the timing of these cuts is unclear, Congress is likely to begin serious negotiations after the November elections.

Implications for Providers

Although the Supreme Court's decision on the Medicaid issue adds more uncertainty to a political situation that was already in flux, three things are relatively clear. First, coverage expansion will not meet the initial projections of 32 million estimated by the Congressional Budget Office. The political situation at the state level was always a key driver for coverage expansion, but it is now the main driver. Second, Medicare and Medicaid cuts over the next 10 years will certainly exceed the $200 billion already on the table through the Affordable Care Act and BCA. Finally, purchasers in both the public and private sectors will continue to transition payment systems to reward value instead of volume.

Clearly, providers will need to focus on significantly reducing cost and improving quality to be sustainable in the future. Given the uncertainty in the environment, providers will also need to develop strategically agile organizations. The foundation for an agile organization begins with shortening decision-making time by simplifying organizational structures and empowering front-line staff. Such organizations are also focusing on aligning economic incentives with their physicians and using that alignment to take advantage of opportunities to experiment with value-based payment pilots in both the public and private sectors.

Chad Mulvany is a technical director in HFMA's Washington, D.C., office and a member of HFMA's Virginia Chapter (


a. Additional stimulus could range from a continuation of the social security tax holiday to significant investments in infrastructure.

Publication Date: Wednesday, August 01, 2012

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