1. The Affordable Care Act: The Supreme Court's Decision & What Comes Next Peter Marathas Stacy Barrow July 2, 2012

2. The Future of the Affordable Care Act 2 Welcome and Introduction The Supreme Court’s Ruling Anatomy of the Decision Impact on Employers Questions Reminder: July 18, 2012 Webinar Offers More In-Depth Coverage of Recent Regulatory and Legislative Developments

3. The Future of the Affordable Care Act 3 The Big Picture The Act was largely upheld (Medicaid expansion provisions unconstitutional) All coverage mandates remain Employers must continue implementation

4. The Future of the Affordable Care Act 4 Anatomy of the Decision ConstitutionalUnconstitutional Individual Mandate (Tax and Spend) Roberts, Ginsburg, Breyer, Sotomayor, Kagan Scalia, Alito, Thomas, Kennedy Individual Mandate (Commerce Clause) Ginsburg, Sotomayor, Breyer, Kagan Roberts, Scalia, Alito, Thomas, Kennedy Medicaid Expansion Provisions Ginsburg, SotomayorRoberts, Breyer, Kagan, Scalia, Alito, Thomas, Kennedy

5. The Future of the Affordable Care Act 5 Individual Mandate – Rulings Constitutional within the Taxing and Spending powers Unconstitutional under the Commerce Clause Both holdings were 5-4, with Roberts as the swing vote

6. The Future of the Affordable Care Act 6 Individual Mandate – Constitutional Provisions at Issue Article I, Section 8, cl. 1: Congress has the power to “lay and collect Taxes.” ­ “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.” Article 1, Section 8, cl. 3: Congress has the power to “regulate Commerce.” ­ “To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.”

7. The Future of the Affordable Care Act 7 Individual Mandate – Within Power to Tax and Spend The Individual Mandate is a Constitutional “tax” ­ A Paradox(?)—Anti-injunction Act, not a tax “The most straightforward reading of the mandate is that it commands individuals to purchase insurance.” ­ Taxing to encourage vs. discourage behavior ­ Taxing activity vs. inactivity “[E]very reasonable construction must be resorted to, in order to save a statute from unconstitutionality.”

8. The Future of the Affordable Care Act 8 Individual Mandate – Within Power to Tax and Spend The Tax Conundrum: ­ Publicly Obama Administration denied it’s a tax ­ In court, the Administration argued it’s a tax ­ Court believes it is common to encourage behavior through taxing—generally true, but accurate as applied here? ­ No other federal court agreed with this position Despite Plain Language of the Act, Chief Justice interpreted it as a tax because: ­ It is paid into the treasury ­ Does not apply to non-taxpayers ­ The collection requirements are found in the Code ­ Produces some revenue for the Government

9. The Future of the Affordable Care Act 9 Individual Mandate – Minority View Would Hold Exceeds Power to Tax and Spend Scalia, Thomas, Alito, Kennedy: Penalty, not tax "[A] tax is an enforced contribution to provide for the support of government; a penalty... is an exaction imposed by statute as punishment for an unlawful act." ­ Cannot rewrite the Act -- it's a mandate with a penalty, not a tax. ­ A penalty for constitutional purposes that is also a tax for constitutional purposes. ­ "it is a blatant violation of the constitutional structure when the States have no choice" but "to function as administrators of federal programs" ­ “we have never held—never—that a penalty imposed for violation of the law was so trivial as to be in effect a tax.” Not severable: these parts of the Act are central to its design and operation, and all the Act’s other provisions would not have been enacted without them.

10. The Future of the Affordable Care Act 10 Individual Mandate – Exceeds Power to Regulate Commerce "The Federal Government does not have the power to order people to buy health insurance” “The power to regulate commerce presupposes the existence of commercial activity to be regulated” The Individual Mandate “compels individuals to become active in commerce by purchasing a product” Congress cannot regulate an individual’s failure to engage in a commercial activity, no more than it can regulate “mere breathing in and out”

11. The Future of the Affordable Care Act 11 Individual Mandate – Minority View Would Uphold Under Commerce Clause Justices Ginsburg, Sotomayor, Breyer, Kagan: Majority applied wrong test “Rational basis” that uninsured substantially affect interstate commerce: ­ Uninsured annually consume billions of dollars of health-care products and services ­ Uninsured cross state lines for health care, drive up prices, impose costs on others Mandate bears “reasonable connection” to protecting health-care market from disruption by uninsured

12. The Future of the Affordable Care Act 12 Individual Mandate – Minority View Would Uphold Under Commerce Clause Even applying the Majority’s test: ­ There is a sufficient connection between the uninsured and their activity in the market ­ “Everyone will, at some point, consume health-care products and services.” ­ “No one knows when an emergency will occur, yet emergencies involving the uninsured arise daily.” ­ Justice Ginsburg questions the “broccoli horrible.”

13. The Future of the Affordable Care Act 13 Individual Mandate – Implications? Are We Done With Litigation? ­ As applied challenges—what type of tax is this and is it assailable? ­ Procedurally invalid as a “tax”? ­ First Amendment Challenges & Other issues? ­ Employee Claims Under the Act. ­ Workforce Realignment ­ Retiree-Only Plans ­ Retiree Medical Exit Strategy ­ IROs ­ Claims to Mandated Benefits ­ Whistleblower Actions ­ And, of course, while a door has been shut on the Commerce Clause, a door has been opened on the Taxing Clause.

14. The Future of the Affordable Care Act 14 The Politics Chief Justice Roberts: The November election will become a referendum on the Act “…we possess neither the expertise nor the prerogative to make policy judgments. Those decisions are entrusted to our Nation’s elected leaders, who can be thrown out of office if the people disagree with them. It is not our job to protect the people from the consequences of their political choices.”

15. The Future of the Affordable Care Act 15 Impact on Employers/Plan Sponsors Medicaid Expansion Requirements: ­ States must cover all individuals under age 65 with income below 133% of the poverty line ­ “Essential benefits” must be provided to all Medicaid recipients Failure to comply = loss of all federal funds Court struck down as Unconstitutional: putting a gun to the head of the states This may have an impact on employers

16. The Future of the Affordable Care Act 16 Impact on Employers/Plan Sponsors Medicaid decision may increase exposure to penalty under "pay-or-play" mandate In states that do not expand Medicaid eligibility, broader range of employees may be eligible for a federal premium subsidy for exchange coverage ­ For example, an employee at 120% FPL may be subsidy- eligible in a state that does not expand its Medicaid eligibility if the employer fails to provide coverage that meets certain quality and affordability standards

17. The Future of the Affordable Care Act 17 Impact on Employers/Plan Sponsors Some Major Concerns for Employers ­ While the legality of the legislation is resolved, much uncertainty still exists ­ Considerable delegation to Federal Regulators under the Act ­ Increased regulatory activity by the states ­ Potential legal challenges to the Act ­ Unknown cost increases in 2014 ­ Strategic Thinking is Required Now

18. The Future of the Affordable Care Act 18 Impact on Employers/Plan Sponsors Other Considerations? ­ DOL, IRS and HHS audits will increase ­ Already seeing audits of grandfathered status by DOL under the Act ­ DOL efforts focus on increasing employer compliance rather than assessing penalties in early years ­ Participant lawsuits may follow as participants seek to enforce benefit mandates

19. The Future of the Affordable Care Act 19 Impact on Employers/Plan Sponsors– Upcoming Mandates in 2013: Reminders Form W-2 reporting requirement (for the 2012 tax year) $2,500 limit on employee contributions to health FSAs (for plan years beginning in 2013) Summary of Benefits and Coverage requirements (for open enrollment periods starting on or after September 23, 2012) Requirement for employers to notify employees of the availability of health insurance exchanges (March 2013) 0.9% Medicare payroll tax increase in 2013 on high income individuals

20. The Future of the Affordable Care Act 20 Impact on Employers/Plan Sponsors– Upcoming Mandates in 2014: Reminders The “pay-or-play” mandate Employer certification to HHS regarding whether its group health plan provides “minimum essential coverage” Increase in permitted wellness incentives from 20% to 30% For large employers (200+ employees), automatic enrollment of new employees in a group health plan (effective date unknown) 90 day limit on waiting periods Coverage under non-grandfathered plans for certain approved clinical trials

21. The Future of the Affordable Care Act 21 Impact on Employers/Plan Sponsors– Upcoming Mandates in 2014: Reminders Complete prohibition on annual dollar limits Guaranteed availability and renewability of insured group health plans Prohibition on preexisting condition exclusions ­ The last two will be the perfect storm Employers should consider broad strategic approaches ­ Is Self-Insuring An Option?

22. The Future of the Affordable Care Act 22 Questions?

23. The information provided in this slide presentation is not, is not intended to be, and shall not be construed to be, either the provision of legal advice or an offer to provide legal services, nor does it necessarily reflect the opinions of the firm, our lawyers or our clients. No client-lawyer relationship between you and the firm is or may be created by your access to or use of this presentation or any information contained on them. Rather, the content is intended as a general overview of the subject matter covered. Proskauer Rose LLP (Proskauer) is not obligated to provide updates on the information presented herein. Those viewing this presentation are encouraged to seek direct counsel on legal questions. © Proskauer Rose LLP. All Rights Reserved. The Affordable Care Act: The Supreme Court's Decision & What Comes Next Peter Marathas pmarathas@ proskauer.com Stacy Barrow sbarrow@proskauer.com The Future of the Affordable Care Act July 2, 2012