In National Federation of Independent Business v. Sebelius, the Supreme Court decided its first ACA case. While potentially affecting the entire ACA, the case focused on two particular provisions: the individual mandate and the Medicaid expansion. This Fact Sheet summarizes the case, focusing on the holding that the Medicaid expansion is coercive on the states.
The Patient Protection and Affordable Care Act (ACA) is designed to accomplish comprehensive, market-based health reform. The law seeks to increase the number of insured Americans by requiring those who can afford to do so to purchase health insurance or to pay a penalty (called the ?individual mandate?). It provides for tax subsidies to enable individual to purchase policies. The ACA prohibits health insurers from discriminating on the basis of pre-existing condition or from imposing life-time limits on coverage. In addition, the law expands Medicaid coverage to individuals with incomes below roughly 133% of the federal poverty level. The ACA also includes numerous provisions designed to improve the public?s health.
Since it was signed into law in March 2010, the ACA has been subjected to relentless litigation, with over two dozen federal court cases filed so far.2 In National Federation of Independent Business v. Sebelius, Nos. 11-393, 11-398, 11-400, 2012 WL 2427810 (June 28, 2012) (NFIB), the Supreme Court decided its first ACA case.3 While potentially affecting the entire ACA, the case focused on two particular provisions: the individual mandate and the Medicaid expansion. This Fact Sheet summarizes the case, focusing on the holding that the Medicaid expansion is coercive on the states.
Overview of the caseThe Court heard NFIB on appeal from the Eleventh Circuit Court of Appeals. As noted by the Court, there was a split among the federal circuits regarding the constitutionality of the individual mandate provision. Both the Sixth and D.C. Circuits had upheld the mandate as a valid exercise of Congress?s authority under the Commerce Clause. See Thomas More Law Ctr. v. Obama, 651 F.3d 529 (6th Cir.2011), pet. for cert. denied, _. S.Ct. _, 2012 WL 2470097 (June 29, 2012); Seven Sky v. Holder, 661 F.3d 1 (D.C. Cir. 2011), pet. for cert denied, _. S.Ct. _, 2012 WL 2470101 (June 29, 2012). However, the Eleventh Circuit ruled the provision was not authorized by the Constitution?s Commerce or Taxing Clauses. See Florida v. Sebelius, 648 F.3d 1235 (11th Cir. 2011).
Over a three-day period from March 26-28, 2012, the Court heard six hours of arguments in the case?a modern day record for the Supreme Court. Over 140 amicus (friend of the court) briefs were submitted to the Court?an all-time record. The Court considered four questions:
As explained below, the Court?s decision in NFIB is surprising not only for its legal reasoning but also because of how the Justices voted.
Holding #1: The Anti-Injunction Act does not bar review of the individual mandate issue.As expected, the Court held that the Anti-Injunction Act (AIA) did not prevent it from determining the constitutionality of the individual mandate. This holding is the only unanimous decision in the case. NFIB, 2012 WL at 2427810, at *5.
The AIA prohibits litigation to enjoin the collection of taxes, thus generally allowing taxes only to be challenged by persons who have paid the tax and then sued for a refund. The question was whether the ?shared responsibility payment? that individuals must pay for ignoring the individual mandate is a tax within the meaning of the AIA. If a tax, then the AIA would bar a challenge because the penalty provision does not become effective until 2014. Id. at *12.
The Court engaged in a straightforward reading of the ACA to find no AIA bar. According to Chief Justice Roberts, Congress ? chose to describe the ?[s]hared responsibility payment? imposed on those who forgo health insurance not as a ?tax,? but as a ?penalty.? ? Congress?s decision to label this exaction a ?penalty? rather than a ?tax? is significant because the Affordable Care Act describes many other exactions it creates as ?taxes.? 2012 WL 2427810, at *12. Relying on the statutory maxim that Congress is presumed to act intentionally when using certain language in one part of a statute and different language in another, the Court concluded that Congress did not intend the penalty to be a tax within the meaning of the AIA.
Holding #2: The individual mandate is a valid exercise of Congress?s taxing power.The parties argued over whether the individual mandate was a valid exercise of congressional authority under the Constitution?s Commerce Clause, Necessary and Proper Clause and/or Taxing Clause. Pre-decisional interest focused almost exclusively on the Commerce Clause. Indeed, at oral argument, the taxing argument was a secondary alternative for the federal government, representing only 217 lines in the voluminous transcript. In a surprise, however, the Court held that the individual mandate is a valid exercise of Congress?s power to tax.4 This holding could and, perhaps should, have ended the matter; however, a majority of the Court found Congress lacked authority to enact the individual mandate pursuant to the Commerce Clause. Id. at *20.
Legislating pursuant to the taxing power: In a part of the opinion joined by Justices Ginsburg, Breyer, Sotomayor, and Kagan, Chief Justice Roberts held the mandate is a valid exercise of Congress?s power to ?lay and collect Taxes.? U.S. Const. Art. 1, § 8, cl. 1. They reached this conclusion despite the fact that the financial consequence imposed on an individual who does not purchase health insurance was labeled as a ?penalty? in the ACA.
The Court decided the issue by concluding that the payment operates as a tax: It is paid to the Treasury when taxpayers file their tax returns; it does not apply to individuals who do not pay federal income taxes; it is determined by familiar factors such as number of dependents, taxable income and joint filing status; it is found in the Internal Revenue Code and enforced by the IRS; and it produces some revenue (expected to be about $4 billion per year by 2017). 2012 WL at 2427810, at *24. The Court reasoned, as well, that the payment was not meant to be punitive, and the requirement to pay did not rest the intent not to purchase insurance:
In distinguishing penalties from taxes, [the] Court has explained that ?if the concept of penalty means anything, it means punishment for an unlawful act or omission.? While the individual mandate clearly aims to induce the purchase of health insurance, it need not be read to declare that failing to do so is unlawful. Neither the Act nor any other law attaches negative legal consequences to not buying health insurance beyond requiring a payment to the IRS. Id. at *26 (internal citations omitted). The majority was not troubled by the fact that the individual mandate is intended to affect individual conduct, not just to raise revenue, noting that the use of taxes seeking to affect conduct is nothing new. For example, the substantial taxes imposed on the purchase of cigarettes are intended not just to raise money but also to encourage people to stop smoking. Id. at *25.
Thus, the Chief Justice concluded the mandate could stand under Congress?s Taxing power. He warned, however, that ?Congress?s authority under the taxing power is limited to requiring an individual to pay money into the Federal Treasury, no more.? Id. at *30.
Legislating pursuant to the Commerce Clause and the Necessary and Proper Clause: As noted, given that the Court upheld the constitutionality of the mandate, it did not need to say more.5 Nevertheless, by a vote of 5-4, the Court stated the individual mandate was not valid under the Commerce Clause and could not be sustained under the Necessary and Proper Clause.
The Commerce Clause gives Congress the power to ?regulate Commerce?among the several States.? U.S. Const. Art. I, § 8, cl. 3. Over the last 80 years, these words have been expansively interpreted to allow Congress to regulate not just interstate commerce itself, but individual activities that, in the aggregate, ?substantially affect? interstate commerce. 2012 WL 2427810, at *15. In NFIB, however, the Court discussed a significant boundary on congressional authority. According to the Chief Justice, as expansive as cases construing the commerce clause power have been, they uniformly describe the power as reaching ?activity.? Id. at *16. This contrasts, he said, with the individual mandate, which is an attempt to regulate ?inactivity,? i.e., the refusal to purchase health insurance.
The individual mandate ? does not regulate existing commercial activity. It instead compels individuals to become active in commerce by purchasing a product, on the ground that their failure to do so affects interstate commerce. Construing 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. Id. at *16 (emphasis in original). The Chief Justice also found that the individual mandate amounts to an attempt to exercise ?police power,? which is exclusively vested in the States. Id. at *20. Returning to the familiar broccoli example, he posited that a decision allowing the mandate under the Commerce Clause would allow for legislation ?ordering everyone to buy vegetables? to address the problem of unhealthy diets resulting in widespread obesity and increased health care costs. Id. at *17. ?This is not the country the Framers of our Constitution envisioned,? he said. Id. at *18. Because the individual mandate was an effort to regulate inactivity, it could not stand pursuant to the Commerce Clause. Id. at *20.
From here, the majority easily concluded that the Necessary and Proper Clause did not apply. The Government argued that the individual mandate was a Necessary and Proper component of reforming the market for health care through insurance reforms such as guaranteed issue and community rating. Id. at *21. The Court found application of the Necessary and Proper Clause to be limited to laws that ?involve exercises of authority derivative of, and in service to, a granted power.? Id. The mandate could not be upheld as a necessary and proper component of insurance reform because the Commerce Clause did not authorize the mandate. Id. at *22.
Notably, the dissenting justices, Kennedy, Scalia, Alito, and Thomas, would have found the mandate unconstitutional and ruled that the entire ACA was invalid. Id. at *72- 105.
It remains to be seen whether the Court?s discussion of the Commerce Clause will lead to a significant limitation of Congress?s power under the Commerce Clause or whether, in light of the unique characteristics of the health care market and individual mandate, it will be interpreted narrowly.
Holding #3. The Medicaid expansion is unduly coercive on the States, and the remedy for the coercion is to preclude the Federal government from terminating existing federal funding to a State that does not implement.
The Spending Clause of the Constitution, Art. I, § 8, cl.1, empowers Congress to tax and spend to provide for the general welfare. Over the years, Congress has used the authority to address national issues by offering federal funds to states in return for their agreement to abide by the standards set by the federal government as a condition of receiving the funding. For the first time ever, a federal court has found Congress?s exercise of Spending Clause authority to be unduly coercive. The Supreme Court?s actions, both in agreeing to consider the question and finding a constitutional bar, are unprecedented. It is also surprising that seven of the Justices agreed that the expansion is unduly coercive, with only Justices Ginsburg and Sotomayor dissenting. Of equal interest is how the Chief Justice, joined by Justices Breyer and Kagan, crafted a remedy for the violation that gained the support of Justices Ginsburg and Sotomayor to form a
5-4 4 majority.By a 7-2 margin, the Court accepted the argument from 26 State officials that they were being unduly coerced into accepting the ACA?s requirement to expand Medicaid to individuals with incomes below roughly 133% of the federal poverty level. The ACA inserted the expansion provision into the existing Medicaid statute, which includes a long-standing provision authorizing the Secretary of Health and Human Services (HHS) to terminate all federal funding to a state that does not comply with a mandatory federal requirement. Thus, the state officials argued, if they did not implement the expansion, they would lose all federal funds and, thus, as a practical matter, they had no choice but to participate.
Accepting this argument at face value without evidence of actual coercion, Justice Roberts? opinion rests on three premises. First, according to the Chief Justice, the Medicaid expansion ?accomplishes a shift in kind not merely degree. The original program was designed to cover medical services for four particular categories of the needy: the disabled, the blind, the elderly, and needy families with dependent children.? 2012 WL 2427810, at *35. Previous Medicaid amendments and expansions, such as those in the 1980s and 90s, concerned only these populations. By contrast, the ACA Medicaid expansion mandated inclusion of an entirely new group, an action that Chief Justice Roberts decided ?transformed? Medicaid from a program serving designated population groups to ?a program to meet the health care needs of the entire nonelderly population with income below 133 percent of the federal poverty level.? Id. He concluded that the ACA expansion made Medicaid ?no longer a program to care for the neediest among us, but rather an element of a comprehensive national plan to provide universal health insurance coverage.? Id.
Second, the Chief Justice found that States were being treated unfairly because they had inadequate notice that the new expansion program would be a part of the Medicaid deal. Id. at *36. Previous Supreme Court cases (that did not address coercion) have noted that Spending Clause programs are similar to contracts. Thus, Congress must establish clear notice of Spending Clause requirements so that States will know what they are getting themselves into if they decide to participate. According to Roberts, when States first decided to participate in Medicaid, they did not foresee a requirement to include everyone below a certain percentage of poverty.
Finally, likening the situation to ?a gun to the head,? Justice Roberts found that Congress was forcing the States to accept the unanticipated new program by threatening them with the loss of all federal funding for the old one. Id. at *34. ?The threatened loss of over 10% of a State?s overall budget ? is economic dragooning that leaves the states no real option but to acquiesce in the Medicaid expansion.? Id.
The next question facing the Court was what to do about the Medicaid expansion. Since its enactment, Medicaid has included a provision that allows the Secretary of HHS to deny all or part of a non-compliant State?s federal Medicaid funding, 42 U.S.C. § 1396c. Although the provision has never been used to terminate the entirely of a State?s funding, the Chief Justice turned to it, and a 5-member majority agreed to Chief Justice Roberts? deft conclusion: The constitutional violation is ?fully remedy[ed]? by prohibiting the Secretary of HHS from terminating existing federal Medicaid funding of a State that does not implement the expansion. Id. at *37. This is a carefully crafted holding is meant to be narrow:
Nothing in our opinion precludes Congress from offering funds under the Affordable Care Act to expand the availability of health care, and requiring that States accepting such funds comply with the conditions on their use. What Congress is not free to do is to penalize States that choose not to participate in that new program by taking away their existing Medicaid funding.
Id. Thus, the decision remedies the undue coercion by curbing the power of the federal government to enforce the Medicaid expansion but maintains the ACA and the Medicaid Act in all other respects.