These States Maximize Your Business & Entrepreneurial Opportunity in a Post-COVID World of Social Unrest

American businesses teeter on the precipice of an onslaught of COVID-19 related lawsuits. The return-to-work decision is a difficult one in every aspect. But the question of employer liability for employees or customers who claim to have contracted the virus in the workplace is about to make things considerably more precarious.

Freedom loving people have always focused on taxation, regulatory burden, state debt and an unencumbered Second Amendment when analyzing whether it is time to move their business or just take their talent to a more appreciative state. The exodus from high tax, legislatively stifling states to states offering more liberty accelerated in recent years as documented regularly by ZeroHedge:

• 3 Simple Charts That Help Explain Why 9,000 Businesses Have Left California In Just 7 Years
• It's Time To Go: Over Half Of All California Voters "Have Considered Leaving The State"
• Leaving Illinois: "Does Anybody Care About People Like Us?"
• Over-Taxed: The Middle Class Is Being Wiped Out, NJ Residents Flee In Droves

Historically, I used the below metric to show clients, family and friends which locations are likely to present them with the best business, employment and homeownership opportunities.

Sources:

1) Freedom in the 50 States, Cato Institute,2018
2) Ranking the States by Fiscal Condition 2018 Edition, Mercatus Center
3) 2020 State Business Tax Climate Index, Tax Foundation 
4) Kiplinger's Most Tax Friendly States in the U.S., 2019

This then results in these final rankings: 

2020, however, requires the addition of a few more considerations as we now see the potential for crippling business lawsuits due to the coronavirus and widespread social unrest.

Overview of the Employer Liability Rules in Play

In general, workers injured in the workplace will receive compensation and benefits under the applicable state’s workers’ compensation laws. Benefits are provided irrespective of fault and are generally the exclusive remedy for workplace injuries, illnesses, or fatalities. Nearly all workers in the United States are covered by workers’ compensation.

The system is sometimes referred to as a grand bargain between employers and workers. It developed early in the 20th century in response to dissatisfaction with the tort system as a method of compensating workers for workplace injuries, illnesses, or deaths. Under this grand bargain, workers receive guaranteed, no-fault benefits for injuries, illnesses, and deaths, but forfeit their rights to sue their employers absent some form of willful, extremely reckless or grossly negligent employer behavior. Employers receive protection from lawsuits but must provide benefits regardless of fault.

COVID-19 now has states, employers and the federal government scrambling to come to grips with how the resulting illnesses and deaths will impact employer tort liability and workers’ compensation laws. Beyond the worker impact of COVID-19, businesses must further consider tort suits brought by customers and venders who claim that the business failed to act as a reasonably prudent business in the same or similar circumstances and that failure resulted in a COVID-19 infection. This legal upheaval is no small matter, no matter how it is approached. As stated by The Hill:

One U.S. law firm suggested coronavirus litigation could be “the new asbestos,” referring to a wave of personal injury litigation in the 1970s and '80s related to the carcinogenic material that was once commonly used in building construction.

“If you just let it all go now, it would be a disaster,” said David Rivkin, a partner at Baker Hostetler, who supports Congress granting businesses temporary immunity. “It would be a tsunami of lawsuits. Hundreds have already been filed.”

Therefore, as we review the list of states presenting entrepreneurs and businesses with the best opportunity to thrive, it makes sense to take an early look at how states plan to handle business liability for COVID-19 as well as the states most (and least) likely to have destructive riots and looting.   

States Seeking to Shield Business from Onerous Lawsuits  

“Bless this immunity.” - Tool, Fear Inoculum

From The Hill:

Many states have granted some form of liability immunity to health care workers and facilities. Utah and North Carolina have gone the furthest, passing laws that offer the strongest immunities yet for a range of industries as stay-at-home orders and business closures are eased.

In Utah, Gov. Gary Herbert (R) signed legislation earlier this month that makes all businesses and individuals immune from litigation based on others’ exposure to coronavirus on their property, with exceptions for things like willful misconduct. Oklahoma lawmakers have sent similar legislation to its governor.

North Carolina’s law is narrower than Utah’s and applies to “essential businesses” as defined in the state’s emergency declaration, but still offers more protection than other states.

At least six states — Alabama, Illinois, Louisiana, Ohio, South Carolina and Wyoming — have introduced legislation that would also shield more than just health care workers and facilities, according to the National Conference of State Legislatures (NCSL).

Alabama Governor Kay Ivey signed a proclamation that provides liability protections for businesses, healthcare providers, and other covered entities during the COVID-19 pandemic. I provides that businesses are not liable for a person’s death, injury, or property damage that results from an act or omission related to COVID-19, in any way, unless clear and convincing evidence otherwise proves that the harm was caused by the entity’s wanton, reckless, willful, or intentional misconduct.

The proclamation also creates a standard of care, which requires entities to reasonably attempt to comply with applicable public health guidance in response to COVID-19; and protects businesses from liability for damages from mental anguish, emotional distress, or for punitive damages.

States Making Things Worse for Employers

“Enumerate

All that I'm to do

Calculating steps away from you” – Tool, Fear Inoculum

As David Lindsay and Erinn Rigney wrote at the National Law Review:

Perhaps the most significant pronouncement was by California Governor Gavin Newsom, who issued an executive order on 6 May 2020 that establishes a rebuttable presumption in workers’ compensation claims, presuming that covered workers who are diagnosed with COVID-19 contracted the illness at work, without the employee having to provide any further proof. Although this presumption is rebuttable—meaning that an employer can provide evidence to refute the presumption, it is likely to be a high burden for employers to meet, especially given the wide variety of ways COVID-19 can be transmitted. Further, California extended the presumption to any worker who reported to work outside of the home at the direction of their employer and received a positive test or physician diagnosis, a far broader category of workers than most other states. Therefore, in California, most eligible workers’ claims relating to on-the-job COVID-19 exposure likely will be covered by workers’ compensation.  

Riots Destroying Your Investment

On the good news front, auto, homeowners, and business insurance policies generally include coverage for property losses caused by riots and civil commotions. Standard business property insurance policies provide coverage for the structure of the building as well as the contents inside. Furthermore, Business Interruption (BI) coverage generally does reimburse losses when a covered peril forces a business to temporarily close its doors and pays employees, venders, rent and electric bills.

Nevertheless, this coverage is far from an inoculum against the perils of social unrest. Sixty percent of businesses with less than 100 employees do not even have (BI) coverage. For those that do, the lost income is calculated on a 12-month, look-back assessment of a business’ income prior to the date of loss. This means a business that has been shut or operating at a limited capacity due to COVID-19 will receive a reduced payout for any business income claims due to the recent rioting and looting.

Furthermore, no business owner wants to deal with the cleanup, claim process and resultant escalation in premiums after the fallout of such social unrest. So, as we consider the freest and most economically viable states for relocation, it makes sense to also factor in that state’s proclivity for social unrest and rioting. The below map was created at 11:30 AM PST on May 31, 2020 in the midst of the protests and social unrest resulting from the horrific alleged murder of George Floyd at the hands of former Minneapolis police officer Derek Chauvin. As of the time of this post, Derek Chauvin has been charged with 2nd degree murder in Minnesota.

Interactive US Map of Active Protests and Riots as of 11:30 AM PST on May 31, 2020.

As you can see from this map, some of the freest and most desirable states for business and employment also happen to be some of the least likely places that a business will confront rioters and looting. Montana, Idaho, Wyoming and the Dakotas form a 5-state zone remarkably free from social unrest and property damage.

Best States in 2020-2021 

Before 2020, businesses and entrepreneurs were leaving deep blue states for greener pastures in less encumbered jurisdictions. The pandemic, social unrest and devastating economic collapse coupled with the fact that so many more people are learning they can effectively do their job remotely through video-conferencing platforms will only accelerate this trend. Additionally, some states now seek to encourage the reopening of business by shielding employers from an onslaught of lawsuits due to complains that employees and customers could have contracted COVID-19 in the workplace. Conversely states like California seek to pin that responsibility on employers by creating a presumption that an employee’s sickness resulted from the workplace.

Utah, North Carolina, Wyoming and Alabama’s bold leadership in this regard elevate those states status for consideration in the new, post-pandemic workplace. In Utah and Oklahoma’s cases, you could argue that it might move them up into the top 10. While Alabama and North Carolina’s efforts are good for business, they are not enough to overcome those states’ weaker performance in other economic indices.

Choice of jurisdiction matters. As we move through ever-increasing tumultuous times, that choice becomes that much more important. California, New York, New Jersey and Illinois have co-opted individual liberties, saddled their people with an unsustainable debt, regularly punish the job creators and entrepreneurs while also being the most likely states to encounter social unrest. Meanwhile, South Dakota, Wyoming, Idaho, New Hampshire and Tennessee reward hard work, creativity and honor constitutional freedoms. Keep that in mind as you vote with the location your homes and businesses.

How King v. Burwell Can be Read to Restrict Administrative and Executive Powers, While Increasing the Role of the Courts

Below is a portion of a longer Client Advisory from Alston & Bird.  It makes a couple of fascinating points about the Supreme Court's decision in King.  Namely:

1. The way it was decided precludes a future administration from undoing it in the regulatory process with a new interpretation of whether "State" means "State" or if it means "State or federal."  And, 
2. In the long run, it can lead to a decrease in the power of federal bureaucracies as the Court refused to grant significant deference to a bureaucracy on a matter that was as pivotal and weighty as the subsidy question.  

From Alston & Bird:

For administrative law, there are notable implications of the decision because the majority opinion does not follow the ordinary Chevron rules for interpreting ambiguous provisions in a statute. Ordinarily, when a court construes an ambiguous statutory provision under Chevron, the court would defer to the interpretation adopted by the federal agency that administers the statute (here the IRS) as long as that interpretation is reasonable—even if the court does not believe the agency’s interpretation to be the best interpretation of the statute. As noted in the Court’s opinion, the basis for deference is the theory that by enacting an ambiguous provision, Congress delegated responsibility to the pertinent agency to fill in the gaps in the statute. A corollary to that delegation (and deference) is that the agency could change its regulatory interpretation of the statute as long as the agency’s new interpretation is a reasonable or plausible interpretation of the statute. 

Here, the Supreme Court construes ambiguous statutory language directly, in lieu of deferring to the IRS’s interpretation. The Court acknowledges that this is a departure from the ordinary rules of interpretation but is necessary, given that King is an “extraordinary case.” The Court reasons that the availability of tax credit subsidies (to make health insurance affordable) is so central to the statutory scheme that Congress would not have intended to delegate responsibility to the IRS to decide the question. Although the Court’s approach is unusual, it ends up with the same result as if the Court had applied Chevron deference: upholding the IRS Rule implementing the tax credit subsidies. While the Court’s interpretive approach does not lead to a different outcome than would likely have obtained under a Chevron step 2 analysis of the IRS Rule, both its approach and its conclusion that Congress would not have delegated authority to the IRS to fill the gaps in the statutory provision by rulemaking could have implications on a future administration’s ability to change the IRS Rule: If the Congress did not delegate authority to the IRS to interpret IRC § 36B, a future administration cannot amend the IRS Rule to limit premium subsidies to insurance policies purchased through state-established Exchanges. 

The Court’s message is clear: Courts need not always defer to the pertinent agency when construing ambiguous statutes. Although this is a victory for the current Administration, the majority’s decision in King v. Burwell could be seen as reducing the power of the Executive Branch in interpreting and implementing statutory schemes—and increasing that of the Judicial Branch in the situations where a court chooses not to apply Chevron deference but to independently interpret an ambiguous statutory provision for itself.

   The added emphasis is mine.

Obama Administration's Unilateral Decision to Delay PPACA Provisions and Spend Unappropriated Money Comes Under Legal Fire

The Obama administration is about to face another big legal headache in defending PPACA.

The unprecedented suit challenges the administration's decision to delay the ACA's employer mandate and to use Treasury funds that were not appropriated by Congress to pay for $175 billion in subsidies for low-income exchange plan members to help them with out-of-pocket costs. ... 

Without those subsidies, which are in addition to the law's premium subsidies, many exchange enrollees likely would not be able to afford health care because of high deductibles and coinsurance. Exchange plans still would be required by the ACA to reduce cost sharing, but doing so would not be financially viable for the insurers, potentially disrupting the exchange market. 

The new legal challenge comes as everyone tensely awaits the Supreme Court's decision in King v. Burwell, expected in late June, which could eliminate premium subsidies in up to 37 states that are using the federal insurance exchange. The new case creates the possibility that even if the high court upholds the premium subsidies, the cost-sharing subsidies for people in silver-tier plans with incomes up to 250% of the federal poverty level still could be in peril. ...

   Source: Business Insurance.
 

Paying Down the U.S. Debt is Now Basically an Impossibility | Mathematical Model & Options

This is part of a sobering post and video from Zero Hedge: 

A mathematical model ... shows that, even with absurd assumptions (7%+ GDP growth for years at a time, low interest rates, etc.), it is simply not feasible for the US government to ‘grow’ its way out [of the current debt].  

Default has become the only option. And that could mean a number of things.

• They could default on their creditors (other governments like China who loaned money to the US government). But this would spark a global financial and banking crisis. 

• They could default on the Federal Reserve, which owns trillions of dollars of US debt. But this would create an epic currency crisis for the US dollar.

• They could also default on their obligations to their citizens—primarily to future beneficiaries of Social Security (who collectively own trillions of dollars of US debt).

• Or they could choose to default on their obligations to every human being alive who holds US dollars… and engineer rampant inflation.

None of these is a good option. And simply put, the US government has reached a point of no return. ...

  

  

Simple Rules for Voting with Audio from Armstrong and Getty

I'm veering a smidgen off topic for some election day fun this afternoon.  When I was a kid I could recall going on hunting and fishing trips with my Dad and uncle.  I knew something was not right about me because I often enjoyed the political discourse as much as the outdoor adventure.  And while that may pass as acceptable in adulthood, it certainly was not normal for a 9 year old.  I decided to distill some of Uncle Don and Dad's lessons into four simple rules with the help of Armstrong and Getty - Rule 3 is bedrock A & G doctrine.

Jack and Joe had some fun today pontificating the prudence of these principles early in the 7 AM hour of Today's Armstrong and Getty Show.  Here is that audio:

For a trio of outstanding columns from Megan McArdle, the Coyote Blog, and Mike "Mish" Shedlock dealing with the same concepts check out the following:

• Many Propositions that seem outwardly liberty-enhancing are actually Trojan Horses that do the opposite. (Coyote Blog.) 

• Forget the claim, "it's for the children". Politicians do whatever they want with the money once the tax hikes pass.  (Mike "Mish" Shedlock.) 

• Unsure?  Don't vote. Apathy “is a good sign that the country does not need your ill-informed, half-hearted opinion." (Megan McArdle at Bloomberg.) 

 

California's Unfunded Liabilities for Current & Future Pensions Exploded from $6.3 Billion in 2003 to $198.2 Billion in 2013

This morning on the Armstrong and Getty Show, Jack and Joe discussed a topic we touched upon here on Saturday.  California's public pension promises are totally out of control and will bankrupt the state quickly if municipalities are not able to renegotiate those fanciful promises in bankruptcy proceedings.  Joe also expounds on my theory that if we Californians are going to need a federal bailout (and we will) we had better hurry up and get to it because if Illinois beats us to the punch, I doubt the nation will have the stomach for a second state-handout. 

Here is the audio from today's Armstrong and Getty show at the top of the 7 AM hour.  Set forth below you can find nearly all of another excellent column from Dan Walters in the Sacramento Bee on the topic as well as an excerpt from Ed Mendel over at Calpensions.org. 

This is from Dan Walters of the Sacramento Bee:

State Controller John Chiang dropped a political bomb the other day, although he was so quiet about it, one could say it was a stealth bomb. 

Chiang added public pension systems to his already large fiscal database. One chart reveals that their “unfunded liabilities” – the gap between assets and liabilities for current and future pensions – exploded from $6.3 billion in 2003 to $198.2 billion in 2013. 

Moreover, that startling number assumes that pension systems will see asset earnings of about 7.5 percent a year – a number that some are beginning to see as unattainable. 

Los Angeles’ city pension system dropped its assumed earnings, called the “discount rate,” last week. The board of California’s second largest pension system, covering teachers, was told last month by a panel of experts that its 7.5 percent assumption is likely to be under 7 percent for the next decade. 

If a 7.5 percent discount rate, which is also used by the giant California Public Employees’ Retirement System and many local systems, is too high, the current $198.2 billion debt in Chiang’s report is, in reality, much higher. 

The debt rose as pension funds’ earnings plummeted during the recession and new benefits kicked in, despite dramatic increases in mandatory contributions.
State and local governments’ contributions nearly tripled between 2003 and 2013, from $6.43 billion a year to $17.5 billion, while those of employees nearly doubled, from $5.2 billion to $9.1 billion. 

The unfunded liability problem hits cities the hardest because of their high payrolls. Many have seen their retirement tabs quadruple, such as the 2003-13 increase from $98 million a year to $375 million for Los Angeles’ city police and fire pensions. 

Three California cities have declared bankruptcy in recent years, in large measure due to pension debts, and the judge in Stockton’s case declared those debts may be reduced in bankruptcy, although he didn’t compel Stockton to do so.  [More on this below from Ed Mendel.] ... 

Chiang’s new numbers should not be surprising. 

Fifteen years ago, in a spasm of abject irresponsibility, then-Gov. Gray Davis and the Legislature pumped up pension benefits for state employees on blithe, unsupported assurances from a union-friendly CalPERS board that high investment earnings, not taxpayers, would cover the cost. And many local governments blindly followed suit. 

Davis was rewarding unions that helped him get elected in 1998. Now the piper must be paid, and the cost is very steep.  

And regarding just how difficult it is for bankrupt cities to actually cut pension promises, this is from Ed Mendel at Calpensions.com:

... To cut pensions, said the judge, the city would have to reject its contract with CalPERS and “more importantly” its contract with employees. Pensions are part of total pay, and while in bankruptcy Stockton negotiated contracts with unions. 

Klein said employees agreed to pay cuts during the negotiations with the understanding that pensions would not be cut. He said all of the concessions were “made on the direct income side not the pension side.” 

So to cut pensions, the city would have to reject a collective bargaining agreement. A U.S. Supreme Court decision (Bildisco 1984) set a higher standard for rejecting a collective bargaining agreement. 

The judge said Congress responded by setting a higher standard than Bildisco for rejecting a collective bargaining agreement in business bankruptcies (Chapter 11), which so far is not applicable to municipal bankruptcies. 

He said rejecting a “garden variety” contract is a low-level hurdle, rejecting a collective bargaining agreement under Bildisco is a higher hurdle, and rejecting a bargaining agreement in a business bankruptcy is an even higher hurdle. 

“So it would be no simple task to go back and redo the pensions,” said Klein. In the case of Stockton, the package of pay concessions would have to be reopened, which “as a practical matter would be difficult to do.”... 

    

Tim the Lawyer and Joe Discuss the Absurdity of PPACA's Individual Mandate Exempt-A-Palooza on the Armstrong & Getty Show

Tim "The Lawyer" Sandefur visited the bowels deep within Armstrong and Getty's radio compound for a fantastic discussion of victory for freedom and property rights in Levin v. San Francisco.  In that case, the Pacific Legal Foundation challenged and overturned San Francisco’s “Relocation Assistance Payment Ordinance."  That oppressive and unconstitutional taking required rental property owners to pay their tenants oppressive sums of money before the owners could regain personal use of their property — money the tenants could have used for any private purpose they wish.

Joe and Tim also touched upon a recurring theme on this blog and Armstrong and Getty (most recently covered here) about the total evisceration of Obamacare's Individual Mandate via 22 exemptions.  Which, as Joe puts it, enables a "half bright chimp" to remove himself from the clutches of Obamacare.  Provided, as Tim illuminations from another of his recent cases, that chimp can sort out the byzantine, bureaucratic mess of paperwork required to receive a governmental blessing of Obamacare exculpation.

Here is a segment of their time together.

You can hear all three hours of Tim on the Armstrong & Getty Show here:

• 7 o'clock hour
• 8 o'clock hour
• 9 o'clock hour

  

The History and Danger of Administrative Law

This is from Professor Philip Hamburger of Columbia Law School. It is an excerpt from a speech he gave on May 6, 2014 at Hillsdale College.  I highly recommend the entire speech, which can be read here.

... Those who forget history, it is often said, are doomed to repeat it. And this is what has happened in the United States with the rise of administrative law—or, more accurately, administrative power.

Administrative law is commonly defended as a new sort of power, a product of the 19th and the 20th centuries that developed to deal with the problems of modern society in all its complexity. From this perspective, the Framers of the Constitution could not have anticipated it and the Constitution could not have barred it. What I will suggest, in contrast, is that administrative power is actually very old. It revives what used to be called prerogative or absolute power, and it is thus something that the Constitution centrally prohibited.

But first, what exactly do I mean by administrative law or administrative power? Put simply, administrative acts are binding or constraining edicts that come, not through law, but through other mechanisms or pathways. For example, when an executive agency issues a rule constraining Americans—barring an activity that results in pollution, for instance, or restricting how citizens can use their land—it is an attempt to exercise binding legislative power not through an act of Congress, but through an administrative edict. Similarly, when an executive agency adjudicates a violation of one of these edicts—in order to impose a fine or some other penalty—it is an attempt to exercise binding judicial power not through a judicial act, but again through an administrative act.

In a way we can think of administrative law as a form of off-road driving. The Constitution offers two avenues of binding power—acts of Congress and acts of the courts. Administrative acts by executive agencies are a way of driving off-road, exercising power through other pathways. For those in the driver’s seat, this can be quite exhilarating. For the rest of us, it’s a little unnerving. ...

   

What Might James Madison Say About the "Patient Protection and Affordable Care Act"?

• There have been 38 changes to this law via administrative action, executive order or what I'll refer to as "amendment to prosecutorial discretion."  

• Statute itself is over 2,400 pages.

• If the regulations implementing the statute hold to the same ratio as Medicare’s regulations-to-statue ratio, that will mean PPACA’s regulations will exceed 140,000 when they are all done.

• It will cost over $1.5 Trillion when fully implemented - CBO revised estimate, March 2014. Price at passage was $0.9T. 

• In 1965, government experts projected that in 1990, on an inflation-adjusted basis, Medicare would cost $12 billion. In reality, Medicare cost $107 billion in 1990.

• 2013's edition of the Federal Register passed the 80,000 page mark.  An average weekday represents another 330+ pages of new federal rules, orders and hearings. 

• HCR creates 20 new federal fees and taxes. (Tanning salons, FSA max’s, robust plans, premium tax, insurer risk corridor tax, Medicare increase, investment income increase, Rx tax, device tax, etc.)

• Analysis by the Joint Economic Committee and the House Ways & Means Committee estimates up to 16,500 new IRS personnel will be needed to collect, examine and audit new tax information mandated on families and small businesses in HCR. 

• The Law will greatly increase the federal government’s role in healthcare by expanding Medicaid by 33% and involving HHS in the design, sale and regulation of health insurance products. 

• For nearly one-third of calls into the Medicaid/Medicare hotline reporting waste, fraud and abuse, government workers take over 4 months to begin investigation.

• President Obama called Medicaid a broken system in 2009.  

• 31 million nonelderly residents of the United States are likely to remain without health insurance in 2024, roughly one out of every nine such residents. 

• This means that we will go from 45 million uninsured to 31 million for a net reduction of 14 million.  

• There are 314 million people in America. This equates to a 4.5% reduction.

PPACA Supporter & Law Prof: Delays Set Troubling Precedent - Worrisome Policy

This is from a self described ardent supporter of PPACA, University of Michigan Law Professor Nicholas Bagley writing at the New England Journal of Medicine: 

... The U.S. Constitution imposes a duty on the President, as head of the executive branch, to “take Care that the Laws be faithfully executed.” The President may decline to enforce a law, but ignoring it altogether would violate his constitutional duty. 

At what point does a decision not to enforce the law ripen into a decision to dispense with it? The answer is not always clear. Take, for example, the delay of the ACA's insurance rules for people who want to keep their current, nonconforming plans. Viewed one way, the delay just postpones enforcing the ACA's rules against relatively few existing health plans, even as those rules take effect for the large majority of plans, including plans sold on the insurance exchanges. From another perspective, the delay flouts provisions of the ACA that had become politically inconvenient. No crisp line separates routine nonenforcement from blatant disregard. 

For several reasons, however, the recent delays of ACA provisions appear to exceed the scope of the executive's traditional enforcement discretion. To begin with, the delays are not “discretionary judgment[s] concerning the allocation of enforcement resources” that, per Heckler, are at the core of the executive branch's power to decline to enforce laws. Instead, they reflect the administration's policy-based anxiety over the pace at which the ACA was supposed to go into effect. The mandate delays, for example, were designed to “give employers more time to comply with the new rules.” Similarly, the postponement of the insurance requirements aims to honor the President's promise that “if you like your health care plan, you can keep it.” ...

It's Only a Matter of Time Before Employee Groups or Insurers Sue to Enforce PPACA as Written - Not as "Butchered"

An argument that Congressman Tom McClintock first made to me in November and that I think has gained even greater credibility over the last few months is that the Administrative magic-wand-waiving and unilateral, extra-constitutional delays to PPACA are irrelevant.  The congressman's point is simple enough: regulations and executive proclamations are inferior to statutory language.  And since PPACA was passed by congress and signed by the President, any purported changes made by IRS, HHS, DOL, or the President himself are extraneous and without actual authority.  This is true even when His Most Excellent Majesty commands that your health plan be de-un-grandfathered, as Mark Steyn so eloquently put it.  

Congressman McClintock is absolutely correct.  But I suffered a bout of cranial constipation as I struggled with the practical limitations of this rationale.  Since the executive branch has decided not to enforce aspects of the law as written, the only remaining way to compel compliance would be in a court of law.  And before a suit can proceed, we would need a plaintiff (or group of plaintiffs) with actual and tangible harm.  With every passing delay, amendment, and change that likelihood increases.  It is still not a slam-dunk, but I think there will be a real class of plaintiffs out there before too long.  

Section 105(h) of the Internal Revenue Code has been in effect for decades with respect to self-funded insurance plans.  It was passed to ensure that employers do not discriminate in favor of their highly compensated employees in the provision of health benefits.  PPACA looped 105(h) in and made it applicable to fully-insured plans once ACA Grandfathered Status was lost.  

This is going to create a huge mess for many health plans as many currently do discriminate in favor of their highly compensated employees.  Before March 23, 2010 we called this a "compensation-strategy."  Now it has been demonized as an unethical assault on all that is good and decent.  Because of the havoc 105(h) will cause in insured plans, the federal government has decided not to enforce it until it can write regulations presumably neutering the dictates of 105(h) much like it has done with the affordability tests in PPACA.  (On affordability, administrators wrote regulations allowing an employer to charge up to 100 percent of the premium for an employee's dependents, angering some of the most ardent supporters of the President's law). 

One area in which I can imagine banding together a group of sympathetic plaintiffs would be in response to an employer's violation of 105(h) as the statute is written.  Imagine a group of employees who have to pay 30 percent or more of the cost of their health plans while the highly compensated, executive-class pays nothing or some nominal percentage of premium.  Such an arrangement was common prior to PPACA's passage and is still quite prevalent.  PPACA's stated penalty for such a violation is $100 per person per day for all persons harmed by the employer's transgression.  In this case that would most likely be all employees that are not in the top 25% of wage earners at an employer.  If you had a 1,000 employee company that would be a fine of $75,000 per day.  

And then I read the below and began to ponder various scenarios that may allow for a group of employees or even insurers to sue to enforce the employer mandate as it is written: not as federal regulators have butchered it.  In any event, I think we are in for some rather interesting lawsuits in the upcoming months as our legal system tries to sort through the practical mess created by an executive branch attempting to legislate as it goes along. 

This is from law professor, Jonathan Alder writing at the WaPo's Volokh Conspiracy:

... Congress expressly provided that the mandate was to take effect this year. Further, if the mandate penalty is a tax — as the administration currently maintains in various PPACA-related cases pending in federal court — then the employer mandate delay constitutes more than deferring payments or declining to seek penalties. Rather it constitutes a unilateral decision by the executive branch to waive an accrued tax liability. 

The legal justification for the employer mandate delay offered by the Treasury Department has been exceedingly weak. Perhaps this is because the Treasury Department never considered whether it had legal authority to delay the employer mandate until after it made the decision to delay it. The Examiner reports:

Treasury Assistant Secretary for Tax Policy Mark Mazur, who announced the employer mandate delay in a blog post, told the House Oversight and Government Reform Committee that he didn’t remember anyone considering the legal basis for the delay. 

“Did anyone in the Department of the Treasury inquire into the legal authority for the delays?” Mazur was asked.

“I don’t recall anything along those lines, no,” he replied. He gave a similar answer when asked about the IRS and the Executive Office of the President.

This has led some to speculate that the order for the delay came from the White House, where political considerations would have trumped legal constraints. This is eminently plausible given some of the White House’s other announcements seeking to alter PPACA implementation in unauthorized ways. 

This would hardly be the only instance in which the Treasury Department implemented the PPACA without adequately considering the relevant legal constraints. A recent report issued by the House Ways & Means and Oversight and Government Reform Committees suggests there was little consideration of the Administration’s legal authority to authorize tax credits in federal exchanges before the decision was made and the rule was drafted. 

The PPACA was bad enough as drafted, but what we’re getting is something else entirely. 

Just this morning, I learned that another inherent conflict in PPACA might settle itself rather quickly.  The statute itself requires no newly sold small group (sub-50 employees in California) or individual plan to have a deductible of more than $2,000.  The problem is that many groups do and driving deductibles below $2,000 will price some employer plans out of reach.  Exchanges like we have in California are openly selling plans to individuals with deductibles well over $2,000.

What is going on?  Federal regulators have issued guidance that they will grant significant leeway to the states in crafting and approving plans so long as those plans meet the 60% actuarial value threshold.  Incidentally, according to government calculators, you can have a deductible in excess of $6,000 and meet that standard if other benefits are crafted accordingly.  How much do you think employees are going to like $6,000 deductibles?  Prepare your riot gear for those open enrollment meetings.

So once again, we have a situation where the statute and the regulators are diametrically opposed.  When employers ask me what to do, I explain the situation and the risks.  Do you comply with the statute as written or with the law as butchered?  (To be fair most of the butchering to which I refer has been from regulators understanding the horrific unworkability of massive chunks of PPACA and their effort to try and make it somewhat palatable.)  But it is a juicy steak on a garbage can lid.  No amount of grilling and seasoning will make it more appealing.

During a hilarious episode in season 8 of The Cosby Show,
Bill Cosby introduced us to the "steak on a garbage can lid" image.  

Alas, the deductible problem may go away quickly.  Just today we learned from our contacts in D.C. that language repealing PPACA’s deductible cap for small employers is being included in the Medicare provider payment fix patch legislation that has been negotiated by both parties and will be voted on by Congress over the course of the next week or so. [Update here.]

Nevertheless, I expect to see more creative law suits in this vein, much like the Halbig v. Sebelius case which was heard yesterday in the D.C. Appellate Circuit.  For more on that case hit our Oklahoma vs. Obamacare label in the nav panel to the right.

Presidential Speeches Don't Change the Law: Administration is Starting to Make Desperate Moves to Try and Salvage PPACA

Clearly a Desperate Situation:

This is an outstanding synopsis from Veronique de Rugy writing at National Review:

I’ve been trying to understand the legality of the president’s administrative “fix.” One thing that’s clear: While President Obama gave a speech saying that his administration will permit insurers to renew plans that don’t comply with Obamacare’s requirements, it was just a speech. It didn’t change the law. That means that insurance companies who sell plans that are still illegal under the law could be sued in courts and won’t get any legal protection.

Over at the Volokh Conspiracy, Jonathan Adler, a law professor at Case Western University, explains:

Does this make the renewal of non-compliant policies legal? No. The legal requirement remains on the books so the relevant health insurance plans remain illegal under federal law. The President’s decision does not change relevant state laws either. So insurers will still need to obtain approval from state insurance commissioners. This typically requires submitting rates and plan specifications for approval. This can take some time, and is disruptive because most insurance companies have already set their offerings for the next year. It’s no wonder that some insurance commissioners have already indicated they have no plans to approve non-compliant plans.

Yet even if state commissioners approve the plans, they will still be illegal under federal law. Given this fact, why would any insurance company agree to renew such a plan? It’s nice that regulators may forbear enforcing the relevant regulatory requirements, but this is not the only source of potential legal jeopardy. So, for instance, what happens when there’s a legal dispute under one of these policies? Say, for instance, an insurance company denies payment for something that is not covered under the policy but that would have been covered under the PPACA and the insured sues? Would an insurance company really want to have to defend this decision in court? After all, this would place the insurance company in the position of seeking judicial enforcement of an illegal insurance policy. If there’s an answer to this, I haven’t seen it. It’s almost as if the Administration has not thought this through. As Sarah Kliff reports, this supposed “fix” creates a “big mess.”

A lawyer friend of mine I consulted sent me the following explanation:

Here are the two operative phrases from the CMS letter yesterday:

Plans “will not be considered to be out of compliance with the market reforms.” CMS is just saying they will not consider them out of compliance. However, THEY WILL BE OUT OF COMPLIANCE. And none of the market reforms themselves are changed by the President’s speech or the CMS letter. 

“State agencies responsible for enforcing the specified market reforms are encouraged to adopt the same transitional policy with respect to this coverage.” Wonderful, a suggestion from CMS to state agencies, who are the ones who actually have to allow insurance plans to be sold. Again, only a suggestion, no legal effect.

So here you go: Insurance companies that will agree to continue the old policies will do it at their own risk. In other words, in the name of political expediency, the administration threw the insurance companies under the bus (where they they at least have the company of the millions of Americans who lost their plans because of Obamacare’s requirements). As expected, they’re very upset by this development. ...

In addition, it is unlikely to work. Michael Cannon has a good post on this point:

Set aside the president’s disregard for the U.S. Constitution, the separation of powers, and the rule of law generally. Here’s how his fix alters – where it leaves – his once-categorical “if you like your health plan, you can keep your health plan” promise:

• If your insurer hasn’t already cancelled your plan prior to October 1, 2013, and
• If you had coverage in effect on October 1, 2013, and
• If your insurer wants to invest in re-issuing your already-cancelled plan for just one more year, and
• If your state’s insurance commissioner wants to let your insurer re-issue that plan, and
• If your insurer and your commissioner can get your old plan re-approved by January 1, and
• If your insurer informs you how lousy your old plan was and how awesome ObamaCare plans are, even though they may charge you more for less coverage, and
• If your insurance commissioner does not mind approving products that are clearly illegal under federal law, and
• If you and your insurer don’t mind engaging in an economic transaction that is clearly illegal under federal law, and
• If you trust me when I promise not to prosecute any of you for your clear violations of federal law,
• Then you can keep your plan, for one more year. 

Does that seem like a fix? It certainly doesn’t seem likely to work.

What a mess.  

The surprising ages of the Founding Fathers on July 4, 1776

For the Journal of the American Revolution, Todd Andrlik compiled a list of the ages of the key participants in the Revolutionary War as of July 4, 1776. Many of them were surprisingly young:

Marquis de Lafayette, 18
James Monroe, 18
Gilbert Stuart, 20
Aaron Burr, 20
Alexander Hamilton, 21
Betsy Ross, 24
James Madison, 25

This is kind of blowing my mind...because of the compression of history, I'd always assumed all these people were around the same age. But in thinking about it, all startups need young people...Hamilton, Lafayette, and Burr were perhaps the Gates, Jobs, and Zuckerberg of the War. Some more ages, just for reference:

Thomas Jefferson, 33
John Adams, 40
Paul Revere, 41
George Washington, 44
Samuel Adams, 53

The oldest prominent participant in the Revolution, by a wide margin, was Benjamin Franklin, who was 70 years old on July 4, 1776. Franklin was a full two generations removed from the likes of Madison and Hamilton. ...

Via: Kottke.org.  

The Most Hotly Debated Issue in the Forming of the U.S. Constitution

Contrary to popular belief it was not slavery.  Although slavery was probably the second most debated issue in our framers' drafting.  Before the Convention delegates moved on to sectional North vs. South debates in the summer of 1787, they had to figure out a way to balance power between large and small states.

The small states, Connecticut, New York, New Jersey, Delaware, and Maryland wanted each state to have an equal say in the soon to be created congress as had been the case from the end of the Revolutionary war for eleven years.  While Massachusetts, Pennsylvania, Virginia, North Carolina, South Carolina and Georgia insisted on representation proportional to population.

Roger Sherman of Connecticut suggested a middle ground between the large and small states.  On Monday June 11, 1787, he proposed:

that the proportion of suffrage in the first branch should be according to the respective numbers of free inhabitants; and that in the second branch or Senate, each state should have one vote and no more.... As the state would remain possessed of certain individual rights, each state ought to be able to protect itself; otherwise a few large states will rule the rest....

Sherman's proposal differed only slightly from what would later be called the Connecticut Compromise and result in our current congressional makeup.

Source: Richard Beeman's "Plain Honest Men." Random House 2010 paperback edition pages 150 & 156.

Had George Washington Not Been at the Constitutional Convention in 1787 We Might Have Had a Presidency by Committee

The General's presence might have been the only thing keeping our country from going in a radically different direction.   This is from Plain Honest Men by Richard Beeman, p. 128 in the 2010 Random House paperback edition:

Washington was not the only one whose support of a new constitution would be essential to its success, but he was the only man in the room who could be assured of unanimous support in the role of a unitary executive.  [Edmund] Randolph's remarks about the dangers of "executive tyranny" [to which our framers were acutely sensitive after living under British rule for so long] may well have been more vehement had Washington not been present, and indeed it is likely that the debates over the character of the American presidency that whole summer were influenced by the presence of America's first citizen. Washington's very reluctance to assume power combined with his unique qualifications as the only man in America who could shape the office of the presidency such that it would prevent others using it to subvert liberty were crucial factors in guiding the thinking of virtually everyone in the convention.  Had Washington been absent, it is entirely possible that the framers of the Constitution would have created a multiple executive.   

Madison and Jefferson on the Traditionalist View of the U.S. Constitution Versus the 'Living Breathing' Constitution

The very first debate about the "living" nature of our constitution versus interpretation from a traditional standpoint began immediately after its drafting between fellow Virginians and friends, Thomas Jefferson and James Madison.

Madison was probably the single most influential person in the crafting of our constitution.  He was the first to arrive in Philadelphia, worked to set up alliances before the convention began, took the most robust notes of the four months of of proceedings and continued to argue his federalist (stronger central government) vision after the fact in the Federalist Papers.   

Jefferson spent that summer in Europe and did not attend the proceedings but stayed in communication with Madison and others via mail as best he could.   

The below summary appears on pages 421 and 422 of Plain Honest Men by Richard Beeman in the 2010 Random House paperback edition.  (More on this book in the prior post).  

America's 'Two Most Distinguished Citizens' (Washington and Franklin) Meet Days Before They Join 53 Others in Writing our Constitution

I just finished reading Plain Honest Men by Professor Richard Beeman.  The below text appears on pages 35 and 36 in the 2010 Random House paperback edition.  It is a fantastic read that I highly recommend.

Beeman's work brilliantly catalogues the drafting of the U.S. Constitution from May to September of 1787.  It is the most authoritative, readable and vivid account of the debates, political posturing, and motivations behind the creation of a radical new form of government.

Below is a brief depiction of what happened when General Washington got to town and rushed off to meet with Dr. Franklin.  It was May 13, 1787, eleven years after the American Revolution.  55 delegates gathered in Philadelphia, America's largest city at the time, to draft the framework for a new government.  The Articles of Confederation and the Continental Congress  which had governed our country since the Revolution proved to be deeply flawed with no executive, no judiciary and requiring unanimous consent of the 13 states to get anything of substance accomplished.

Executive Nullification: Why Obama Won't Allow Congress To Legalize His Changes To PPACA

This is from John Graham writing at Forbes:

So, instead of taking opportunities to put Republican legislators on the spot, the President chose the risky course of potentially illegal executive action. The reason can only be that this approach allows him to line-item veto parts of Obamacare without subjecting the changes to CBO scoring that would require “pay fors”. Although the OPM’s decision on staffers’ health benefits is unlikely to have a significant  impact on the costs of Obamacare (maybe $40 million or so a year, according to my back-of-the envelope estimate), the same cannot be said of decisions like the one-year delay of the employer mandate.... 

If Congress had amended Obamacare to delay the employer mandate, it would have had to find $13 billion of savings from subsidies to health insurers channeled through exchanges, expansion of Medicaid dependency, or other pockets of Obamacare spending. This, of course, would have been intolerable to President Obama. Expect more executive nullification of politically inconvenient parts of Obamacare during the rest of 2013 and 2014. 

Supreme Court Upholds Mandate as a Tax - Medicaid Restrictions Detailed

Overview

With the release of the Supreme Court ruling today you are likely to see a flurry of emails and updates on PPACA. The Court upheld the Sections of the law related to employers entirely. We are committed to providing accurate and timely information to our clients. We believe today’s ruling is merely the end of the beginning of the debate on the future of healthcare. Given the significant nature of the ruling we want to take some time to review and discuss internally what we believe are the best strategies going forward.

We will have a position paper out within the next day or two. Additionally we will have a comprehensive webinar to review the key elements of the law along with a calendar of compliance dates. No employer can afford to wait any longer before beginning the work of total compliance.

We fundamentally still think employers are likely to bear the majority of future costs associated with healthcare increases. The governments budgets are stretched to a breaking point and cost will be shifted to the private sector. Benefits remain a competitive business priority in today’s business climate.

We continue to emphasize that employers who proactively help their employees stay healthy and manage known conditions, have medical cost increases which are about half of their peers who do nothing. We will continue to bring new services and support you in these areas.

Ruling

Today's ruling is approximately 200 pages and it will take us some time to read, synthesize and digest.  (Ruling linked here). 

In short, the Supreme Court upheld the health care law in a splintered, complex opinion.  The justices said that the individual mandate -- the requirement that most Americans buy health insurance or pay a fine -- is constitutional as a tax.  In 2014, the penalty will be; 

• $285 per family or 1% of income, whichever is greater;
• by 2016, it goes up to $2,085 per family or 2.5% of income, whichever is greater. 

Chief Justice John Roberts provided the key vote to preserve the landmark health care law, which figures to be a major issue in the upcoming Presidential election.

The government had argued that Congress had the authority to pass the individual mandate as part of its power to regulate interstate commerce; the court disagreed with that analysis, but preserved the mandate because the fine amounts to a tax that is within Congress' constitutional powers. 

Justice Anthony M. Kennedy, the usual swing vote, spoke for the conservative dissenters and said the entire law should have been struck down.

Medicaid Issue

The ruling was not a total victory for the Obama administration.

Roberts said the law's required expansion of Medicaid violates states' rights.  In essence PPACA expanded a citizen's right to Medicaid if that person made up to 133% of the federal poverty limit (as opposed to 100% prior to the law).  The law further stated that if states did not take on this extra burden, all federal Medicaid assitance could be fully extracted from that state.  This appears to be a significant issue and we will be addressing it further in the upcoming weeks. 

"The states are given no choice in this case. They must either accept a basic change in the nature of Medicaid or risk losing all Medicaid funding," he wrote.

He said the federal government cannot require the states to follow this part of the law. States that want to take extra federal money may do so, he said, but they cannot be threatened with the loss of all federal funds if they refuse to expand the program as required by Washington.

Market Response

Since the decision issued, stocks have been dropping sharply.

The Dow Jones industrial average, which was down about 100 points before the court ruled, was down 133 points at 12,494 shortly before noon EST Thursday.

Stocks of major insurance companies fell sharply as analysts sorted through the ruling. Hospital chains rose.

Bank stocks were the biggest losers in the market. JPMorgan fell 4 percent after the New York Times reported that its loss from a complex trade could swell to $9 billion.

The Standard & Poor's 500 index fell 14 points to 1,318 and the Nasdaq composite index was off 40 points at 2,834.