In one of the most anticipated opinions of its term and perhaps in over half a century, the United States Supreme Court today resolved constitutional challenges to two provisions of the Patient Protection and Affordable Care Act (the "ACA"): First, a surprising 5-to-4 majority of the Court, which included Chief Justice John Roberts, upheld the individual mandate, which requires individuals to purchase "minimum essential" health insurance coverage or pay a tax penalty. Then, by a 7-2 majority, the Court rejected the Medicaid expansion provision. Under that provision, the federal government would have withheld all Medicaid funds from any state which elected not to expand its Medicaid roles to cover all those with incomes less than 133% of the poverty level (National Federation of Independent Business, et al. v. Sebelius (opinion here) [enhanced version available to lexis.com subscribers].
Writing for the majority (consisting of the Chief Justice and Justices Ginsburg, Breyer, Sotomayor, and Kagan), Chief Justice Roberts held that the lynchpin of the ACA, the requirement that most Americans purchase minimum health insurance could not be enforced as a "mandate" but the "shared responsibility payment" required of those who elect not to purchase health insurance will be assessed and paid to the Internal Revenue Service ("IRS") in the same manner as a tax, although it is labeled in the act as a penalty. The Court also held that the Medicaid expansion was unconstitutional.
The Statutory Penalty Is Not A "Tax" For The Purpose of the Anti-Injunction Act
The Court initially determined that for purposes of the Anti-Injunction Act, the individual mandate was a penalty and not a tax. Generally, under that act, those subject to a tax must pay it first and then seek to recover the tax paid, before seeking to enjoin imposition of the tax. (26 U.S.C. § 7421(a).) Thus, one challenge to the ACA was that if the mandate is a "tax," the Court could not consider the ACA until 2014, when the mandate would first be assessed and when a plaintiff would pay it.
Because the ACA called the shared responsibility payment a "penalty," rather than a "tax," the Anti-Injunction Act does not apply. The Court noted that the ACA described many other exactions as "taxes," and cited to the rule that where Congress uses certain language in one part of a statute and different language in another, it is presumed that Congress intended a different meaning. Because the "shared responsibility payment" is called a "penalty," it was not considered a "tax" for purposes of the Anti-Injunction Act.
Amicus curiae argued that because the penalty will be assessed and collected in the same manner as a tax, the Anti-Injunction Act applies. The Court agreed with the Government, however, that the directive to the Secretary of the Treasury that it use the same "methodology and procedures" to collect the penalty does not make it a tax.
However, the Court considers the "penalty" to be a "tax" when determining Congress's power to impose it.
The Commerce Clause Does Not Save the "Mandate"
In the lower courts and among legal scholars and pundits, a focal point of the debate was whether the reach of the Commerce Clause (U.S. Const., art. I, § 8, cl. 3) could support Congress' enactment of the individual mandate. The Court held that the mandate does not pass constitutional muster under the Commerce Clause.
One of the evils the ACA was intended to address was the cost-shifting of uninsured care to those with insurance. The Government argued that Congress had the right to impose an individual mandate because that cost-shifting has a "substantial and deleterious effect on interstate commerce." The Court held that the Commerce Clause gave Congress the power to regulate commerce, but not to compel it. The power to regulate commerce presupposes the existence of commercial activity to be regulated. The individual mandate does not regulate commercial activity, but, instead, requires individuals to become active in commerce by purchasing a product, on the ground that the failure to do so affects interstate commerce. The Court noted that the Government's logic would justify a mandatory purchase to solve almost any problem - including requiring consumers to buy vegetables under the guise of mandating better nutrition.
The Court rejected the Government's argument that because everyone will likely need medical care at some point in their lives, they will engage in health care transactions, and can be "regulated in advance." The Court held that the Commerce Clause is not a general license to dictate the manner in which products needed in the future will be purchased.
As pithily stated in the opinion, "the individual mandate forces individuals into commerce precisely because they elected to refrain from commercial activity. Such a law cannot be sustained under" the Commerce Clause.
The Court then rejected the Government's argument that the Necessary and Proper Clause permitted the survival of the individual mandate. Although the Court is "very deferential" to Congress's determination that a regulation is "necessary," "acts of usurpation" "deserve to be treated as such." The Commerce Clause cannot be stretched to require people to purchase insurance, even though the mandate is an integral part of the ACA.
The Penalty Is a "Tax" to Save the Constitutionality of the Individual Mandate Under the Taxing Clause
While rejecting the individual mandate's constitutionality under the Commerce Clause, the Court nevertheless upheld it under the Taxing Clause (U.S. Const., art. I, § 8, cl. 1). Although the Court held that the "shared responsibility payment" was not a tax but a penalty for purposes of the Anti-Injunction Act, as discussed above, the Court determined that the mandate could be upheld as within Congress's enumerated power to "lay and collect taxes." Going without insurance is "just another thing the Government taxes. . . ."
Congress's choice of how to label a payment to the IRS is controlling for purposes of the Anti-Injunction Act, but the label does not control the substance of whether that payment falls under Congress's power to tax.
Because "every reasonable construction must be resorted to, in order to save a statute from unconstitutionality," the substantive nature of the mandate is such that under the Taxing Clause the penalty must be treated as a tax, and therefore, the mandate is constitutional under the Taxing Clause.
The Medicaid Expansion is Unconstitutional
Before the ACA, states received significant funding from the federal government for Medicaid funding. States had much flexibility in determining who qualified for Medicaid. The ACA would have required that all states dramatically expand those eligible for Medicaid. While most states do not now provide Medicaid benefits to childless adults, the ACA would have required states to cover all individuals under the age of 65 with incomes up to 133% of the federal poverty level - and provide a new mandated "essential health benefits" package. Initially, as conceived in the ACA, the federal government would pay 100% of the cost of coverage through 2016, and that percentage would have gradually decreased to 90%. (In a footnote, the Court noted the obvious: States could not safely assume that the federal government would maintain this level of funding.) States that would have chosen not to meet the expanded ACA requirements would have risked losing all federal Medicaid funding, not just the funding for the expanded coverage. In other words, a state's failure to participate in the ACA's expanded Medicaid program would have had an in terrorem effect.
The Court found, however, that the ACA's requirement of such expanded Medicaid coverage, under penalty of losing all Medicaid funding for failure to do so, changed the very nature of Medicaid. Initially, Medicaid was designed to cover four particular categories of the needy: the disabled, the blind, the elderly and needy families with dependent children. This provision of the ACA would have transformed Medicaid into a program to meet the health care needs of the entire nonelderly poor population.
While Congress could offer funds under the ACA to permit states to expand Medicaid coverage if they wanted to do so, Congress could not penalize states by taking away all Medicaid funding for electing not to provide the expanded benefits contemplated by the ACA. The Court held that this portion of the ACA was improperly coercive. Instead of being "relatively mild encouragement," it "is a gun to the head." Thus, it was unconstitutional under the Spending Clause (U.S. Const., art. I, § 8, cl. 1).
The Court did not strike as unconstitutional, and therefore inferentially upheld, the ACA's provisions on the employer-responsibility assessment, although four dissenting justices (Justices Scalia, Kennedy, Thomas, and Alito) would have ruled otherwise. "The employer-responsibility assessment provides an incentive for employers with at least 50 employees to provide their employees with health insurance options that meet minimum criteria." Under these provisions (26 U.S.C. § 4980H), such an employer is not required to provide its employees with an insurance option, but rather requires the employer to make a payment to the federal government if the employer does not provide for insurance and if a qualified employee buys insurance on an insurance exchange.
The Court's opinion left the ACA's employer-responsibility assessment intact.
Absence of Severability Provision in ACA
Despite the lack of a severability provision, the Court found that Congress would have wanted to preserve as much of the ACA as possible. Thus, the remainder of the ACA did not fail in light of the unconstitutionality of the Medicaid expansion provision. The four dissenters would have invalidated the entire ACA on the ground that the act's major provisions are invalid. The majority, however, struck only the Medicaid expansion provision, applying the fundamental principle that courts should uphold the constitutionality of acts of Congress wherever possible. "The other provisions of the Affordable Care Act are not affected."
Elise Klein and Joseph Hegedus are partners at Lewis Brisbois Bisgaard & Smith LLP in Los Angeles.
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