The U.S. Supreme Court on June 30, 2014, ruled 5-4 that a closely held, for-profit corporation can qualify for an exemption from the U.S. Department of Health and Human Services (HHS) requirements mandating contraceptive coverage for employees. The exemption is only available if the mandate imposes a substantial burden on the corporation’s ability to “conduct business in accordance with their religious beliefs.” (Burwell v. Hobby Lobby Stores, Inc., 2014 BL 180313, U.S., No. 13-354, 6/30/14.)

Background 

The case represents another milestone in the continuing battle over the scope of the Affordable Care Act (ACA). Under the ACA, preventive care and screenings for women generally must be covered by health plans without “any cost sharing requirements” (such as co-payments, co-insurance or deductibles). As authorized by Congress, the Health Resources and Services Administration, an agency of the HHS, issued guidelines developed by the Institute of Medicine on the types of preventive care and screenings that must be covered, including a mandate requiring nonexempt health plans to cover (without cost sharing) all FDA-approved “contraceptive methods, sterilization procedures, and patient education and counseling.” In addition to providing a religious employer exemption for churches and similar organizations, HHS has also established a self-certifying exemption for certain religious nonprofit organizations with religious objections to use, to avoid directly providing coverage for some or all contraceptive services.

Decision 

Each closely held corporation that participated in the case (Hobby Lobby Stores, Inc. was one of three) argued that under the Religious Freedom Restoration Act of 1993 (RFRA), as amended by the Religious Land Use and Institutionalized Persons Act of 2000, its business should be exempt from providing coverage for those contraceptive methods it found objectionable on religious grounds. The RFRA provides that “Government shall not substantially burden a person’s exercise of religion even if the burden results from a rule of general applicability.” If there is a substantial burden, then RFRA entitles the person to an exemption from the rule unless the government can show that the burden “is in furtherance of a compelling governmental interest” and “is the least restrictive means of furthering that compelling governmental interest.”

The Court essentially held that the contraceptive mandate constituted a substantial burden on each corporation’s exercise of religion. When explaining the rationale for treating a closely held, for-profit corporation as a “person” under RFRA, the majority opinion pointed to HHS’s concession that a nonprofit corporation can be a “person” under RFRA, stating that the concession “effectively dispatches any argument that the term ‘person’ as used in RFRA does not reach the closely held corporations involved in these cases.” The majority opinion acknowledged that “numerous practical restraints would likely prevent” a publicly traded corporation from asserting RFRA rights and that it has “no occasion in these cases to consider RFRA’s applicability to such companies.” Instead, it narrowly applied its ruling to closely held corporations.

After establishing that a closely held corporation should be afforded protection under RFRA, the Court, in applying the RFRA standards, assumed that HHS had a compelling governmental interest in providing cost-free access to the contraceptives at issue, but found that the contraceptive mandate violated RFRA. It reasoned that the regulations providing for the mandate are not the least restrictive means of furthering such compelling interest. In support of its rationale, the Court pointed to the system HHS has put in place to accommodate religious nonprofit corporations with religious objections (certain “eligible organizations”), under which such corporations are permitted to opt out of directly providing contraceptive coverage. The majority opinion specifically did not address whether this accommodation complies with RFRA for purposes of all religious claims. However, Justice Kennedy’s concurrence suggests that the HHS accommodation might be acceptable. Under the applicable regulations, the group health insurance issuer is required to bear the cost of the accommodation and must not impose any cost-sharing requirements on the eligible organization, its insurance plan or its plan participants or beneficiaries. As noted in the majority opinion, HHS has determined that the issuer’s obligation is cost neutral. The accommodation regulations suggest that issuers have multiple options to achieve this cost neutrality, including (1) treating the cost for these services as an administrative cost to be spread across the issuer’s entire risk pool or (2) setting the premium for the eligible organization’s large group policy as if no payments for contraceptive services had been provided (in other words, pursuant to the actual terms of the group policy). Under the accommodation for self-insured arrangements, the third-party administrator must “provide or arrange” payments for contraceptive services (without imposing any cost-sharing requirements on the eligible organization, its plan or its plan participants or beneficiaries). An accommodation for a self-insured plan is intended to be financed through a federally-facilitated Exchange user fee adjustment.

 So What Does This Mean?

The decision represents a significant boundary regarding the scope of the ACA. However, the parameters of the decision may only be relevant (for now) to those “closely held” for-profit corporations with religious objections to contraceptive coverage. The case only involves three family-owned businesses that use the corporate form. Nonetheless, the Court repeatedly uses the term “closely-held corporation” as opposed to “family-owned” or “family-operated” corporations, and left unanswered what is meant by “closely held corporation.” It remains to be seen whether companies will simply borrow the IRS definition of “closely held corporations,” specifically, a corporation that has more than 50 percent of the value of its outstanding stock owned (directly or indirectly) by five or fewer individuals at any time during the last half of the tax year (excluding any personal-service corporations), or view the “closely-held” rule in terms of ownership, control and operation.