Sunday, June 15, 2014

Hobby Lobby Part XV -- “There’s No Employer Mandate” Update: The Justices’ engagement at oral argument, and an important new Standard & Poor’s report

Marty Lederman

In a series of posts preceding the oral argument in Hobby Lobby (see especially Posts III and IX, as well as posts III-A and III-B, in my compendium) I explained that the litigation had proceeded, in the lower courts and in most of the briefs, on the basis of a fundamental misconception.  The plaintiffs in Hobby Lobby and Conestoga Wood argue that federal law requires them to act contrary to their religious obligations by offering employee health insurance plans that include contraception coverage.  This legal requirement, the argument goes, puts the plaintiffs to an “unconscionable choice” between violating the law and violating their religious obligations.   

But there is no such legal obligation:  The so-called “employer mandate” does not exist.  To be sure, if employers choose to offer their employees a health insurance plan, that plan must include many required features, including coverage of persons with pre-existing conditions, coverage for dependents up through age 26, and cost-free coverage of such services as immunizations, colo-rectal cancer screening . . . and women's health services, including access to 18 contraceptive methods.  But employers are legally entitled to decline to offer such an employee plan at all.  If they do so, federal law (26 U.S.C. 4980H(a)) imposes a tax on employers such as Hobby Lobby, Martel, and Conestoga Wood (just short of $2000 per employee) to help defray the cost to the government of subsidizing their employees’ purchase of insurance on an exchange.  But there is no penalty, because there is no legal duty.  Moreover, if employers do choose not to provide such a plan, the direct effect would be a cost savings to the employer, even after accounting for the tax assessment.  (More on that below.) 

This post is an update on the “there’s no employer mandate” argument, focusing on the its treatment during the Hobby Lobby oral argument in March, and on an important new report from Standard & Poor’s that sheds further light on the viability of the employers’ choice. 

At the oral argument, Hobby Lobby’s counsel, Paul Clement, pressed the central argument in the plaintiffs’ briefs:  “You have a government law that specifically says you must do something that violates your religion.” 

Justice Sotomayor questioned whether that was an accurate description of the law:
“Isn’t there another choice nobody talks about,” she asked, “which is paying the tax, which is . . . a lot less than the cost [to the employer] of health insurance”?  Justice Kagan sounded the same theme:  "There is a choice here. . . .  You can do this thing, or if this thing violates your religion you can do another thing.”  And Chief Justice Roberts appeared to agree that the Section 4980H(a) assessment is a tax assessed for a lawful choice, not a penalty for a violation of legal duty.  Indeed, and most importantly, not a single Justice expressed any disagreement with this crucial point

It therefore appears likely that the Supreme Court, unlike virtually every court of appeals, will identify the threshold RFRA question correctly.  That question is not, as Hobby Lobby and the lower courts would have it, whether a legal obligation to violate one’s religion imposes a substantial burden on religious exercise—since there is no such obligation here.  Instead, the initial question on the merits is whether, notwithstanding the absence of any such legal duty, the state nevertheless imposes “substantial pressure on an adherent to modify his behavior and to violate his beliefs," Thomas v. Review Board, 450 U.S. at 718 (emphasis added).  (I discuss this “substantial pressure” standard further here and here.)

Paul Clement offered three basic responses to this line of argument. 

1.  Rejecting the premise 

At first, Clement appeared to reject the Justices’s view that the assessment is a tax and that there is no legal duty to offer health insurance with contraception coverage.  The Thomas “substantial pressure” analysis, he explained, is relevant “if you don't have a direct government . . . mandate that somebody do something that violates their religion.”  But the assessment here, he argued, is “like the five-dollar penalty enforcing the prohibition in Yoder.”  Clement here was invoking the argument found at pages 36-37 of his brief that a fine imposed for adherence to one’s religious beliefs, no matter how small, “is as direct and obvious a burden [on religious exercise] as one could imagine.”  In Yoder, for example, the Court found a “severe” and “inescapable” burden where a law “affirmatively compel[led]” Amish parents to send their children to high school, and were fined five dollars for not doing so.

The basic point Clement made in the brief and at argument is correct:  If a law imposes a duty to do something one’s religion forbids, it imposes a cognizable burden on religious exercise, no matter how minimal the penalty.  But that is because a citizen will naturally feel obliged to comply with such a legal duty, no matter the sanction.  What placed a burden on the Amish parents in Yoder, for instance, was not the measly five-dollar fine they were assessed, but the fact that Wisconsin imposed upon them a legal duty—the violation of which was punishable by imprisonment (see footnote 2 of Yoder)—to send their children to high school.

The fundamental problem with invoking this argument in Hobby Lobby, however—as I discussed in this post and as the Justices appeared to confirm at oral argument—is that the Section 4980H(a) assessment here is not a “penalty” for violation of a legal duty.  What the Chief Justice explained in the landmark Health-Care Cases (a/k/a NFIB v. Sebelius) with respect to the so-called “individual mandate” provision of the ACA is even more obviously true here:  “Neither the Act nor any other law attaches negative legal consequences to not [doing what the plaintiffs wish to avoid], beyond requiring a payment to the IRS,” so that if an employer “chooses to pay rather than [provide] health insurance, they have fully complied with the law.”  132 S. Ct. at 2597.

2. A religious obligation to provide an employer-based employee health insurance plan? 

When this point about Hobby Lobby’s legal choice arose at oral argument, the Chief Justice interjected to suggest that perhaps the fact of a choice would not matter here, if the other legal option (i.e., dropping the employee insurance plan) would also require Hobby Lobby’s directors, the Greens, to violate their religious obligations:  “I thought that part of the religious commitment of the owners,” he said, “was to provide health care for its employees.”  (The Chief Justice presumably was referring to the Greens; but they are the corporate directors of Hobby Lobby, not its owners.)

Paul Clement responded “that is true, Mr. Chief Justice,” but Justice Kagan was skeptical:  "Mr. Clement, you're not saying, are you, that their religious beliefs mandate them to provide health care? . . . .  They seem like very good employers.  And I'm sure they want to be good employers.  But again, that's a different thing than saying that their religious beliefs mandate them to provide health insurance.”

Justice Kagan’s skepticism was warranted.  It’s hard to imagine that the Greens would actually assert, with a straight face, that they have a religious obligation to ensure that Hobby Lobby’s employees are offered employer-sponsored health insurance.  As I wrote back in December:  “I would be surprised . . . if the plaintiffs argue that their religions actually requite them to guarantee their employees subsidized health insurance (a relatively recent workplace practice), let alone that their religions require that such insurance be subsidized by the employer directly rather than by the government (using employer funds, in part).  To be sure, the allegations in the complaints suggest that the plaintiffs’ religions encourage them to make sure their employees are well-cared-for.  But that is entirely consistent with what would happen if the employers were to [drop their employee plans and] make § 4980H(a) payments.”

Elsewhere in the oral argument, Paul Clement put the point differently:  The Greens, he said, “believe it’s important to provide [the] employees with qualified health care.”  That is a much more plausible claim.  For one thing, making sure they have health care is not a religious obligation, it’s a religiously motivated belief.  Moreover, that belief is not that the employees must receive health insurance from their employer, in particular, but instead merely that the employer should guarantee that they are provided “qualified health care.”  That objective would be fully satisfied if Hobby Lobby dropped its plan and its employees obtained a “qualified” plan on an exchange.

Therefore, if the Greens chose the alternative option the law affords them, they would not be violating any religious injunction.

3.  Federal law places substantial pressure on Hobby Lobby to keep its plan.

Perhaps because neither of those first two responses to the “there’s no employer mandate” point is especially compelling, Clement’s principal response was to argue that even if there is no legal duty to provide contraception coverage, federal law does, in fact, substantially pressure Hobby Lobby to retain its employee plan—including the required contraception coverage—rather than to drop its plan.  (As I noted above, even where it does not impose a legal duty, the law can substantially burden a person’s exercise of religion if it imposes “substantial pressure on an adherent to modify his behavior and to violate his beliefs," Thomas v. Review Board, 450 U.S. at 718 (emphasis added).)

Clement first stressed that the Section 4980H(a) assessment is no small thing—in Hobby Lobby’s case, for instance, it would amount to approximately $26 million per year.  True enough; but as Justice Kagan noted, that tax would not be financially burdensome when viewed in light of the employer’s cost savings if it were to drop coverage:  The $26 million tax assessment would be “less than what Hobby Lobby is paying for the coverage [to its employees].”  Justice Sotomayor offered the details:  “I thought the average price of providing insurance for a single person is $4,000, and it's $12,000 for a family”—numbers substantially higher than the Section 4980H(a) tax.  (Moreover, she added, the tax is assessed “to help the government provide subsidies to people on the exchange that don't have employer insurance[, which is] exactly what your client wants, to get the government to supply the contraceptives . . . .")

Clement then added (and Justice Scalia concurred) that Hobby Lobby would feel compelled to raise employee wages if it dropped its employee insurance plan.  This is probably true as to at least some employees—namely, any high-income employees on Hobby Lobby’s workforce—because access to the Hobby Lobby health insurance plan presumably was a benefit offered to them in the first place in lieu of higher wages, and they will have to spend more to purchase a plan on the exchanges than they currently spend on plan premiums.  (It’s much less likely that lower-income employees—probably the vast majority of Hobby Lobby’s workforce—would demand increases in salary, since their purchases of a plan on the exchanges will be heavily subsidized by the government, and thus they may realize a cost savings if Hobby Lobby discontinues its plan.)

Justice Kagan and Justice Kennedy suggested that even if that were the case, it still would not mean that federal law imposed substantial pressure on Hobby Lobby to retain its plan:
JUSTICE KAGAN:  Well, let's say that that's right.  Let's say that they have to increase the wages a little bit.  I mean, still we are talking about pretty equivalent numbers.  Maybe it's a little bit less; maybe it's a little bit more.  But this is not the kind of thing that's going to drive a person out of business.  It's not prohibitive.  It's like the thing that we talked about in Braunfeld where we said, you know, maybe if the store can't stay open seven days a week, it makes a little bit less money.  “But so be it,” is what we said.

JUSTICE KENNEDY:  Assume hypothetically that it's a wash—that the employer would be in about the same position if he paid the penalty and the . . . employee went out and got the insurance and that the employee's wages were raised slightly . . . and that it's a wash so far as the employer [is] concerned . . . .  Then what would your case be?
Paul Clement responded to Justice Kennedy that “there would still be a substantial burden on their [religious] exercise” in such a case . . . but he did not explain why that would be so.  As I’ve discussed in several posts, the Hobby Lobby complaint does not offer any factual allegations that would support such a conclusion, and it’s by no means obvious that it is correct.  Of course, some employers will conclude, for an array of complex and firm-specific reasons, that it remains in their interests to offer a health-insurance plan to their employees.  As I have explained, however, even in those cases, it is at best uncertain whether federal law as a whole would impose substantial pressure upon them to do so.  Any pressure that some employers will feel to retain plans including such coverage will result from an array of variables and considerations, including not only their employees' preferences (which will be influenced in part by the longstanding federal tax exclusion for employer premium payments and which will vary among employees based on their family incomes), but also the elasticity of the relevant labor market; the relative degree of the employer's own cautiousness and risk tolerance; the nature and income levels of its workforce; the viability and desirability of the insurance exchanges over time; the costs of administering the employer's insurance plan; the employer executives’ preferences for retaining their own benefits under that plan; its competitors’ practices; and more.

In other words, whether federal law substantially pressures any particular employer to offer an employee health insurance plan will depend upon a complex set of variables that will differ from employer to employer and from year to year. 

At oral argument, Paul Clement stated that he would “love to have the opportunity to show” how the option of dropping their plans would be a “huge burden” on his clients because it would affect “their ability to attract workers, and . . . in fact would cost them much more out of pocket.”

In other words, Clement was asking for an opportunity for a trial, or a hearing, on the question of whether federal law would substantially pressure Hobby Lobby and Mardel to retain their health plans, notwithstanding their religious objections.  There are at least two problems, however, with this suggestion: 

First, it means that the Court should reverse the judgment below, which was decided at the pleadings stage (indeed, on a motion for preliminary injunction).  The burden is on the Hobby Lobby plaintiffs to demonstrate a substantial burden on their religious exercise.  If their ability to do so depends upon evidence they would adduce—and that might be tested and controverted—at a hearing, then they should not prevail at the pleadings stage.  Indeed, if any party should prevail at the pleadings stage it should be the government, since Hobby Lobby and Mardel have not alleged any specific facts that would, if proved, be sufficient to demonstrate such a substantial burden under the demanding Iqbal/Trombley standards.  

Second, and perhaps most importantly, it would be exceedingly difficult for Hobby Lobby to actually show that the government has imposed substantial pressure upon it not to discontinue its employee plan.  For one thing, Hobby Lobby would likely be able to absorb any costs quite readily:  It has annual sales of $3.3 billion, and the Greens are multi-billionaires.  (If Adele Sherbert had been worth $4.9 billion, would the Court have found that South Carolina's denial of unemployment compensation substantially burdened her exercise of religion?)  

Moreover, dropping the plan might well save the company money.  After all, as Justice Kagan noted at oral argument, “there are employers all over the United States that are doing this voluntarily because they think that it’s less [costly].”

Indeed, just five weeks after oral argument, Standard and Poor’s Capital IQ Global Markets Intelligence group issued a report suggesting that employers are likely to start rapidly shifting away from provision of employee health insurance—so rapidly, in fact, that by 2020, it is possible only ten percent of employees would remain covered by employer plans.  “Once a few notable companies start to depart from their traditional approach to health care benefits,” the S&P report predicts, “it's likely that a substantial number of firms could quickly follow suit.  The result would be a dramatic departure from the legacy employer/employee payroll deduction benefit provision relationship.”  Why will companies make such a fundamental shift?  Because it will result in extraordinary cost savings to them, if the report’s predictions are accurate.

What about the Section 4980H(a) tax assessment?  “[E]ven when adjusted for health care inflation,” the report concludes, it “will not be enough to incentivize companies to continue offering health care benefits to their employees, facing the reality of rising insurance costs.”

I don’t mean to suggest that the report conclusively settles the matter.  Its authors appropriately acknowledge that their modeling is necessarily speculative and dependent upon numerous hard-to-predict variables that may affect the long-term health costs for individuals, employees, employers, and the federal government, including the future role of health savings accounts; potential shifts of more people into Medicaid; and the impact on the economy, especially consumer spending, if individuals face higher deductibles and increased out-of-pocket expenses.

What’s undeniable, however, is that in light of the S&P report it is by no means certain that Hobby Lobby and Mardel would be able to demonstrate that dropping their health plans would, in the words of their brief, “hobble their employee recruitment and retention efforts,” let alone that such a move would put them at a considerable competitive disadvantage vis-à-vis their competitors.


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