Breakdown of Supreme Court Affordable Care Act Ruling

The United States Supreme Court, on June 28, 2012, issued its ruling on the pair of cases challenging the constitutionality of the Affordable Care Act (ACA).  The Court’s ruling in National Federation of Independent Business v. Sebelius will undoubtedly have historical implications on the federal government’s use of power under the Commerce and Taxing and Spending Clauses of the United States Constitution.

With regard to the ACA, the Court held the individual mandate a permissible use of the federal government’s taxing authority.  The ACA’s Medicaid expansion, however, was found to exceed the federal government’s constitutional spending authority because it was unduly coercive on the states.  Here we offer our breakdown and analysis of the Court’s opinion.

The Individual Mandate

Section 5000A of the ACA requires that the majority of Americans purchase “minimum essential” health insurance coverage.  If they opt to not purchase the coverage, they must pay a penalty to the IRS together with their taxes.  The government asserted that this requirement that individuals participate in the insurance market was permissible under the Commerce Clause and the Tax and Spending Clause of the Constitution.

The Commerce Clause has been interpreted to grant the federal government expansive powers.  Many of the civil rights laws, for instance, have been found to be a permissible use of federal authority under the Commerce Clause.  See e.g. Heart of Atlanta Motel v. United States.  The government also attempted to rely on the Commerce Clause in enacting legislation such as the Gun-Free School Zones Act of 1990 and the Violence Against Women Act, though both were found to be beyond the scope of Commerce Clause Authority.  See e.g. United States v. Lopez, United States v. Morrison.

In it’s ACA ruling, however, a majority of the Court didn’t agree that the individual mandate was a valid exercise of federal authority under the Commerce Clause.  Chief Justice Roberts together with the four dissenting justices in their joint dissent found it significant that the government was attempting to force individuals into a market rather than merely regulating existing commercial activity.  Therefore, a majority of the current court believes that authority under the Commerce Clause extends only to existing commercial activity; the Commerce Clause does not give the federal government the authority require individuals to take action they have deliberately chosen not undertake.

Although a majority of the Court found the individual mandate impermissible under the Commerce Clause, a majority found that the penalty  associated with not purchasing “minimum essential” health insurance coverage was a permissible use of the government’s authority to levy taxes.  A majority of the Court found it significant that the penalty for not purchasing insurance coverage must be paid by taxpayers to the government when they file their tax returns; application of the penalty is tied to the IRS income threshold for filing tax returns; and the amount of the penalty is based on tax-familiar requirements such as taxable income, number of dependents, and joint filing status.  Regardless of what the federal government wants to call the “penalty,” the Court views it as a tax that is permissible under the Constitution.

An interesting twist is that, while the Court viewed the penalty associated with the individual mandate requirement as a tax in its assessment of whether it was a permissible use of federal authority, the Court did not view the penalty as a tax under its analysis of whether it could even decide the case.  The Anti Injunction Act is a statute that prevents the filing of lawsuits challenging the government’s ability to enact a tax before the tax is actually paid; it is a means to protecting the financial solvency of the government.  If the Anti Injunction Act applied to the “penalty” under the ACA, the Court would have been precluded from hearing the case at this point because no one has paid the penalty yet.

Although the Court found that the individual mandate was a tax, the Court on the other hand found that it was not a tax for purposes of the Anti Injunction Act.  This holding allowed the Court to have it both ways: it could decide the issue of whether the individual mandate was constitutional before anyone was actually required to pay the “penalty” for failing to purchase health insurance coverage.  The Court’s rationale on this point is stated in brief as follows:

It is up to Congress whether to apply the Anti-Injunction Act to any particular statute, so it makes sense to be guided by Congress’s choice of label on that question.  That choice does not, however, control whether an exaction is within Congress’s power to tax.

Because Congress did not call it a tax, the Anti-Injunction Act does not apply.  Although it is up to Congress to call something a tax to invoke the Anti-Injunction Act, it is the Court’s prerogative to determine whether something is a tax in assessing whether it is a constitutional use of federal authority.

Medicaid Expansion

Although the individual mandate passed constitutional muster as a tax, the Medicaid expansion provisions were determined to be unduly coercive on the states and therefore impermissible.  Of some interest is the fact that the Court was not as sharply divided on this point, with seven justices finding it unconstitutional and only two — Ginsburg and Sotomayor — finding it constitutional.

The Medicaid provisions of the ACA dramatically expand the scope of Medicaid, which is funded and administered by the states.  The ACA, in § 1396(a)(10)(i)(VIII), requires that states expand Medicaid coverage beyond specific categories of needy individuals to include all individuals under the age of 65 with incomes below 133% of the federal poverty line.  The expanded Medicaid coverage must all meet the criteria of “essential health benefits” that all other individuals are required to maintain under the individual mandate provision.

Although states can choose not to offer the expanded Medicaid coverage, that choice would result in the withholding of all federal funds under the Medicaid program even as it currently exists.  Not even accounting for the expansion, federal funds to the states under the current Medicaid program are estimated to be approximately $3.3 trillion between 2010 and 2019.  Not complying with the expansion, therefore, puts a significant amount of federal funds at risk.

Offering an expansion of Medicaid coverage will increase costs to already cash-strapped states, however.  The ACA provides that the federal government will pay 100% of the costs for the expansion through 2016, with federal subsidies gradually decreasing to a minimum of 90%.

Under the Constitution’s Spending Clause, the federal government has the authority to provide federal funds to the states and, in return, require that states take certain action that the federal government could not ordinarily require.  A prime example of this power of the purse is the federal government’s grant of highway funds to states in exchange for states enacting laws prohibiting the consumption of alcohol under age 21; states that choose not to enact those laws lose 5% of their highway dollars.

Although the federal government is permitted to apply this financial pressure, it is not permitted to enact a scheme that effectively compels states to comply with a federal program.  Chief Justice Roberts wrote as follows regarding political accountability and potential insulation of federal officials who develop a scheme that states must enact:

Spending Clause programs do not pose this danger [of insulating political accountability] when a State has a legitimate choice whether to accept the federal conditions in exchange for federal funds.  In such a situation, state officials can fairly be held politically accountable for choosing to accept or refuse the federal offer.  But when the State has no choice, the Federal Government can achieve its objectives without accountability….

(emphasis added.)

The Court held that the Medicaid expansion scheme under the ACA went beyond overseeing the use of newly available federal funds to coercing the states in adopting the expansion.  Roberts characterized the scheme as follows:

Instead of simply refusing to grant the new funds to States that will not accept the new conditions, Congress has also threatened the withhold those States’ existing Medicaid funds.  The States claim that this threat serves no purpose other than to force unwilling States to sign up for the dramatic expansion in health care coverage effected by the Act.

Given the nature of the threat and the programs at issue here, we must agree.

***

In this case, the financial “inducement” Congress has chosen is much more than “relatively mild encouragement” — it is a gun to the head.

The bottom-line on the Court’s decision on the Medicaid expansion is that the federal government can still offer the program and require that states that accept the federal reimbursement for the program comply with conditions imposed by the federal government.  What the federal government cannot do, however, is penalize states that choose not to participate in the expansion by taking away current levels of Medicaid funding.

So what are the real-world implications of this decision on health care providers?  We’ll save that for future posts.  In the meantime, check out our ACA Timeline.