On June 28, 2012, the Supreme Court of the United States issued its opinion in the case of National Federation of Independent Business v. Sebelius, which involved constitutional challenges to certain provisions of the federal health reform law, the Patient Protection and Affordable Care Act, Pub. L. No. 111-148 (the ACA). The Court upheld the controversial “individual mandate” as constitutional under Congress’s tax power and permitted the ACA’s Medicaid expansion to continue, but only on a voluntary basis by the states.
This article provides analysis of the Court’s decision along with a discussion of the political and policy ramifications it could have on implementation of the ACA going forward.
The Anti-Injunction Act Does Not Bar a Decision
Question before the Court: Does the Supreme Court have the authority to consider the constitutionality of the individual mandate, given that the penalties for noncompliance do not take effect and would not have been paid until 2015? The Anti-Injunction Act (AIA) provides that the taxpayer must pay the tax before being able to challenge it. Although no party made the argument, the Court appointed special counsel — an Amicus Curiae — to argue that the penalty is a tax. If the Court determines that the penalty is a tax, the AIA may prohibit the Court from ruling on the constitutionality of the individual mandate until 2015 or later. So is the penalty a tax?
Decision: The Court held that the AIA did not bar a decision because — for purposes of the AIA only — the penalty for failing to obtain health insurance under the individual mandate is not a tax.
The Court-appointed Amicus argued that, although Congress did not label the penalty a tax, it functioned as such — it was collected by the IRS, and was subject to minimum income provisions — and so should be treated as a tax for purposes of the AIA. Chief Justice Roberts, writing the only portion of the opinion in which all the justices joined, disagreed, stating that the AIA and ACA “are creatures of Congress’s own creation. How they relate to each other is up to Congress, and the best evidence of Congress’s intent is the statutory text.” Opinion of Roberts, C.J. at 13.
In other words, when analyzing the individual mandate under the rules of the congressionally created AIA, it is more important that Congress referred to it as a “penalty” instead of a “tax,” even though it effectively functions as a tax. The Court noted that this analysis works the other way around, and that in previous decisions it had applied the AIA to a statutorily described “tax” on child labor even though it functioned as a criminal penalty.
The Amicus also argued that various sections of the Internal Revenue Code requiring “penalties” to be collected in the same manner as taxes showed that penalties such as the individual mandate should fall under the AIA. However, the Court found that “[i]n light of the Code’s consistent distinction between the terms ‘tax’ and ‘assessable penalty,’ we must accept the Government’s interpretation.” Opinion of Roberts, C.J. at 15.
Policy Perspective:
The Court’s ruling on this question does not cause a change in policy or implementation.
The Individual Mandate is Constitutional as a Tax
Question before the Court: Can the federal government, through its authority to regulate commerce under the Constitution, require Americans to obtain health insurance by January 1, 2014, or pay a penalty? Under the individual mandate, individuals who fail to maintain coverage would be subject to penalties to be collected in conjunction with annual tax filings.
Decision: The Court upheld the individual mandate, not under the Commerce Clause or the Necessary and Proper Clause, but as a valid exercise of Congress’s enumerated power to collect taxes under the Taxing and Spending Clause.
Commerce Clause
The Court held that the individual mandate could not be sustained as a valid exercise of Congress’s authority under the Commerce Clause because a necessary precursor of that authority is some existing activity that affects interstate commerce. The Court reasoned that the individual mandate does not regulate an existing activity; rather, it compels individuals to become involved in an activity and that “[C]onstruing the Commerce Clause to permit Congress to regulate individuals precisely because they are doing nothing would open a new and potentially vast domain to congressional authority.” Opinion of Roberts, C.J. at 13. The Chief Justice rejected arguments that the uninsured as a class are active in the market for healthcare, that their future involvement in the market makes them subject to regulation or that health insurance is a unique product as a basis for permitting congressional authority to impose the individual mandate.
Justice Ginsburg, joined by Justices Sotomayor, Breyer and Kagan, dissented from the majority opinion on the Commerce Clause, stating that “Congress had a rational basis for concluding that the uninsured, as a class, substantially affect interstate commerce” and referred to the Chief Justice’s opinion on the Commerce Clause as “a novel constraint on Congress’s commerce power.” Opinion of Ginsburg, J. at 18.
Necessary and Proper Clause
The Court also dismissed arguments that the individual mandate could be sustained as a valid exercise of the Necessary and Proper Clause. In response to arguments that the individual mandate was necessary and proper because it is integral to the guaranteed-issue and community-rating provisions of the ACA, the Court concluded that Congress could not “create the necessary predicate to the exercise of an enumerated power … and reach beyond the natural limit of its authority and draw within its regulatory scope those who would otherwise be outside of it.” Opinion of Roberts, C.J. at 29-30.
The Court reasoned that, while the individual mandate may be “necessary” to the guaranteed-issue and community-rating provisions, it is not “proper” because the necessity is based upon the guaranteed-issue and community-rating provisions themselves. Stated differently, there is no existing enumerated power of which the individual mandate is a derivative of (e.g., the Commerce Clause), which is a threshold requirement in the Court’s previous decisions pertaining to the Necessary and Proper Clause.
Justice Ginsburg, joined by Justices Sotomayor, Breyer and Kagan, further dissented from the Chief Justice’s decision by challenging the focus on the word “proper” in the holding on the Necessary and Proper Clause and stated that the Chief Justice’s “argument is short on substance” and lacks “case law support for the holding.” Opinion of Ginsburg, J. at 33-34.
Taxing and Spending Clause
Even though the Court did not uphold the constitutionality of the individual mandate under the Commerce Clause or Necessary and Proper Clause, it construed the statute as a tax, ultimately concluding that the individual mandate was a valid exercise of the Taxing and Spending Clause. The Court reasoned that, under established case law regarding deference to Congress, it has a duty to adopt any reasonable interpretation of the law that saves the law from being found unconstitutional.
Since its interpretation as a regulation could not be upheld under the Commerce Clause or Necessary and Proper Clause, the Court evaluated whether interpretation of the individual mandate as a tax is a “reasonable” or “fairly possible” one. Opinion of Roberts, C.J. at 33. Granting deference to Congress, the Court determined that the individual mandate could be interpreted to be a tax for many reasons, including that the penalty amount is paid to the Treasury when taxpayers pay their tax returns, is determined based on factors similar to those used in determining taxes, is enforced by the Internal Revenue Service and produces revenue for the government. Having established that the individual mandate could be interpreted as a tax, it then determined that the tax was properly within Congress’s authority under the Constitution.
The Court recognized that the individual mandate is described as a “penalty” in the ACA and that this label is fatal for purposes of applying the AIA because interpretation under the AIA required deference to Congress’s choice of language, but reasoned that use of the word “penalty” as opposed to “tax” is not determinative of whether the payment is a valid exercise of Congress’s authority to tax in a constitutional analysis. In making this point, the Court relied on previous cases that stand for the proposition that, for purposes of determining the constitutionality of Congress’s authority to tax, it is a matter of function over form and held that, in function, the individual mandate is a tax.
In their dissenting opinion, Justices Scalia, Kennedy, Thomas and Alito rejected the approach taken by the Chief Justice to save the individual mandate through an alternative interpretation of the law, instead preferring to simply conclude that Congress exceeded its authority under the Commerce Clause by enacting the individual mandate and stopping there. The dissent faults the Administration for failing to frame the individual mandate as a tax, regards a tax and a penalty as being mutually exclusive of one another and states that the Court “cannot rewrite the statute to be what it is not.” Opinion of Scalia at 17-18.
Policy Perspective:
The Court’s ruling does not cause a change in policy or implementation.
Some states chose to wait until the Court ruled on the individual mandate before acting on establishing state exchanges. To date, 14 states and the District of Columbia have authorized the creation of exchanges. Thirty-three states have taken only initial steps or not acted at all. Three states have said they will not create an exchange. The ACA requires the federal government to run the exchange if state officials are unwilling or unable to do so. The U.S. Department of the Health and Human Services (HHS) has also created a hybrid form in which they would partner with the state to run exchanges.
However, upholding the individual mandate does not erase practical issues that have been raised about the individual mandate. Section 1501 of the ACA requires all Americans, with a narrow exemption for religious conscience, to purchase and maintain a qualifying level of health insurance coverage, or be subject to a penalty.
Under the law, the penalty for not having coverage is phased in. When the penalty starts in 2014, the penalty will be $95 or 1 percent of an individual’s income, whichever is greater. By 2016, when fully implemented, it will cost either $695 or 2.5 percent of income. Some health economists have argued that the penalties for not having insurance are so low, particularly in the first two years, that some people may opt to pay the penalty and forgo insurance. If that should happen, some are concerned that the individual mandate will not bring in enough health people to keep premiums stable. Chief Justice Roberts said from the bench in describing how the penalty was a tax that “[i]t is indeed likely that many [more] Americans will choose to pay the IRS than buy insurance.”
For example, when fully implemented, a family making $55,125 a year or 250 percent of the federal poverty line — would face a penalty of $1,378 if the family did not have health insurance (2.5 percent of income). However, insurance premiums could be more than that even when taking into account tax credits in the ACA.
Medicaid Expansion not Stricken from Law, but Made Voluntary
Question before the Court: Are the conditions placed upon states for additional Medicaid dollars to cover more Americans coercive? The ACA expands Medicaid eligibility to legal residents earning less than 133 percent of the federal poverty level.
Decision:
In its previous decisions, the Court has never invalidated a law as coercive under the Spending Clause. Here, the Court held that allowing the Secretary to withhold all Medicaid funds from states that fail to implement the proposed expansion crossed the line from encouragement to coercion, but did not go so far as to strike the provision in its entirety. Instead, the Court limited the unconstitutional application of that provision, so that states could, but would not be required to, pursue the proposed expansion. The Court made the distinction that for states deciding not to elect the Medicaid expansion, the Secretary can withhold only those funds designated to pay for the expansion, leaving funds designated for other portions of the states’ Medicaid programs intact.
The Court held that the funds threatened to be withheld are so large that no state could sustain the financial impact of a decision to refuse the Medicaid expansion required by the ACA. In South Dakota v. Dole, the Court held that it was permissible for Congress to condition the receipt of 5 percent of South Dakota’s federal highway funds — less than half of 1 percent of the state’s total budget at the time — on the state’s raising its drinking age from 18 to 21. In contrast, federal Medicaid funds often account for more than 10 percent of the states’ overall budgets. According to the Court, to threaten the loss of such a large portion of the states’ funding “is economic dragooning that leaves the States with no real option but to acquiesce in the Medicaid expansion.” Opinion of Roberts, C.J. at 51-52.
Justice Ginsberg, joined by Justice Sotomayor, argued that the expansion under the ACA was similar to other expansions of the Medicaid program over the years. However, the majority agreed with the states that the expansion was in reality a new program and that Congress was attempting to force the states to accept this new program or risk loss of funding for the existing Medicaid program. The Court noted that the expansion was, unlike previous expansions, “a shift in kind, not merely degree.” Opinion of Roberts, C.J. at 53. Instead of being a program designed to meet the healthcare needs of specific populations — the disabled, the blind, the elderly and needy families with dependent children — the expansion seeks to expand coverage to everyone at certain income levels as an element of a comprehensive national plan to provide universal health insurance coverage. By conditioning funding for the existing program on changing the focus of the program, Congress exceeded its powers under the Spending Clause.
In the dissenting opinion, Justices Kennedy, Scalia, Thomas and Alito argued that the withholding provision should be struck entirely. However, the majority held that the invalidation of one application of the withholding provision does not affect the continued application of the withholding provision to the existing Medicaid program, nor the Secretary’s ability to withdraw funds provided under the ACA if a state chooses to not participate in the expansion. In response to the dissent’s argument that the majority was rewriting the law, the Court notes that it is invalidating only an unconstitutional application of a provision, rather than the provision itself.
Policy Perspective:
The Court’s ruling not only impacts who might be covered by the Medicaid expansion provisions, but also how this population may or may not interact with state exchanges.
Under the ACA, Medicaid eligibility is changed. The ACA establishes a new national floor of Medicaid coverage at 133 percent of the federal poverty level (FPL) with a standard 5 percent “income disregard” that effectively raises the limit to 138 percent of FPL. For the first three years, the federal government would fund the entire cost, and over time the federal portion would drop to 90 percent. The Medicaid expansion was designed to cover approximately 17 million people.
Due at least in part to understandable concerns that the federal government would shift more costs to them for this population, 26 states challenged the constitutionality of the Medicaid expansion. It is anticipated that many, if not most, of those states will choose to not expand their Medicaid programs. In addition, the Court’s ruling may make it more likely that some states will also wait to make a decision until the elections have taken place in November.
While the ruling allows states the option to not expand their Medicaid programs, it does not negate or make optional other Medicaid provisions that are independent of the expansion provisions. Those provisions include increased Medicaid reimbursement for primary care physicians, changes in drug coverage, drug rebates, a variety of demonstration projects, reductions in Disproportionate Share Hospital (DSH) payments as coverage increases, quality measures, and encouragement of home- and community-based care.
Some have argued that the federal funding for this expansion is “too rich” for states not to expand their Medicaid programs. However, others have argued that even with the initial federal funding, states would be responsible for costs and these costs would be too great for some states to shoulder. Because of the impact of the provisions that are independent of the expansion, the political dynamic may be impacted by who would shoulder this cost in the provider community. At the very least, states will have to calculate the amount of federal assistance available for this vulnerable, and sometimes high-cost, population through federal funding at a higher match rate than other portions of Medicaid versus the amount that same population would receive in affordability credits through the exchange. They must also do this with the understanding that the Secretary of HHS has the final say in approving their state exchange. Under the exchanges, premiums are capped at 2 percent of income for those individuals whose incomes are up to 133 percent of the FPL. Adding more individuals to the exchange would raise the overall cost of providing subsidies.
Several policy issues need to be addressed. First, do states need to affirmatively opt in or opt out of the expansion? If once the state expands its Medicaid program, can it reverse the decision later or fold those individuals into the state exchanges when federal funding declines? HHS will have to issue guidance to address these issues. In addition, what is the financial impact on the overall cost of the decision on the ACA? The Congressional Budget Office (CBO) announced it would re-estimate the law’s cost. Another cost-related question is whether or not the individuals who would have been covered by Medicaid will seek insurance through the state exchanges and how the overall cost of subsidies would be impacted. The uncertainty of Medicaid coverage or coverage through the exchanges for these individuals means there could be fewer covered people in the system than providers anticipated.