What was the constitutional reasoning that the Supreme Court used to uphold the Affordable Care Act?

Full case name: National Federation of Independent Business, et al. v. Sebelius, Secretary of Health and Human Services, et al. (2012)

The Supreme Court case which upheld the constitutionality of the Patient Protection and Affordable Care Act of 2010 by finding the individual mandate validly imposed through Congress’ taxing power and the Medicaid expansion legal by judicially prohibiting the Secretary from withdrawing existing Medicaid funds from states that refuse compliance with the ACA. (Read the opinion here.)

This case involved the judicial review of the Patient Protection and Affordable Care Act of 2010 (“ACA” or the “Act”), one of Congress’ seminal pieces of legislation produced under the Obama presidency. Twenty-six states, several individuals, and the National Federation of Independent Business brought suit against the Secretary of Health and Human Services (“Secretary”), Kathleen Sebelius, in the Eleventh Circuit. The primary challenges concerned the individual mandate, which imposed a ‘penalty’ or ‘tax’ on certain individuals who failed to obtain health insurance through their employer, the government, or a private company, and the expansion of Medicaid to specified individuals below the poverty line. Federal funding to states’ Medicaid programs was conditioned on acceptance of the Act’s terms.

Chief Justice Roberts wrote the majority opinion, to which Justices Breyer, Ginsburg, Sotomayor, and Kagan joined. The Court opened its opinion with an exposition on constitutional theory, noting that un-enumerated federally exercised powers, and yet not in violation of the Constitution or Bill of Rights, nonetheless must be struck down. The founding documents of the United States curb centralized power by restricting the federal government to only affirmatively authorized powers. Non-enumerated powers, known generally as “police power,” remain with the states.

The Court first addressed the argument advanced by the Fourth Circuit in their refusal to determine the merits of the constitutionality of the ACA. The Court noted that “[t]he Anti-Injunction Act provides that ‘no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.’” Accordingly, taxes may only be judicially challenged after payment, with prevailing litigation affording a refund. Chief Justice Roberts described the function of the individual mandate as a “penalty” collected in the same manner as tax penalties by the IRS. Individuals who do not obtain health insurance must make a “shared responsibility payment” which is calculated based on annual household income and rates of available insurance premiums. This payment contains a formula for determining both a floor and a cap. The IRS is prohibited from using some of its usual enforcement mechanisms in context of the ACA, like criminal prosecutions and levies.

The Court concluded that the shared responsibility payment is labeled within the ACA as a penalty, not a tax, and that Congress’ use of the label ‘tax’ to describe other functions of the ACA’s provisions evinces Congress’ understanding that the shared responsibility payment would be treated differently from a tax for purposes of the Anti-Injunction Act.

The Court next turned to the merits of the primary challenge to the ACA—the individual mandate. The two theories advanced for the constitutionality of this provision include the Commerce Clause and Congress’ power to tax. The Government, on behalf of the ACA, first argued that the healthcare system creates a shifting market with regards to costs for medical services. For example, if a person is treated in a hospital and cannot pay the full amount due, the hospital will pass on those costs to insurers through higher rates, who in turn absorb those costs by charging policyholders with higher premiums. The Government contended that the ACA addresses this issue by including more healthy people in the health insurance pool, whose premiums will likely be higher than their healthcare costs, and by requiring the individual mandate to prevent those who would otherwise go without insurance from passing on their costs to others.

The Court ultimately dismissed the Commerce Clause argument, noting that despite the expansive power the Court has historically granted to Congress under this clause to regulate interstate commerce and the activities associated therewith, the central point has always been that there was an ‘activity.’ The Court found that the individual mandate does not target existing commercial activity, but rather compels individuals to become involved in one. For Congress to be able to regulate individuals for doing nothing oversteps the bounds of its Constitutional grant of authority it possesses under the Commerce Clause. The Court applied similarly reasoning to the Government’s argument that the Necessary and Proper Clause imbues the individual mandate with constitutionality. Rather, the Court held that based on its precedent, the individual mandate is simply too broad in scope to be deemed proper to the aims of the ACA, especially when there is no Commerce Clause to support the means by which a ‘necessary and proper’ legislative power is exercised.

The Court lastly turned to the taxing power argument, which it found satisfactory to uphold the legality of the individual mandate. The Court held that the shared responsibility payment holds many similar characteristics to a traditional tax—it is paid with an individual’s tax returns, assessed and collected by the IRS, and results in revenue for the Government. In responding to its earlier conclusion that the shared responsibility is a penalty for purposes of the Anti-Injunction Act, the Court nonetheless decided that such a determination does not control whether this payment is within Congress’ authorization to tax. In conclusion, the shared responsibility is deemed a tax because the amount due will be much less than the price of insurance, the characteristics of the payment bear resemblance to a tax, the government already taxes to induce certain conduct (e.g., cigarette tax to encourage cessation), and the payment does not connote unlawful behavior by the payor—in fact, such payment may be a calculated decision depending on their respective costs. Therefore, Congress validly exercised its taxing power.

The second main challenge to the ACA regarded its Medicaid expansion. Medicaid provides funding to states to assist vulnerable populations in attaining healthcare. In order to receive that funding, certain federal guidelines must be complied with. Since Medicaid’s enactment in 1965, this part of a state’s budget has come to constitute over 10 percent in most states’ revenue totals. As part of the ACA, if a state does not expand coverage to include the newly covered individuals, then that state might lose not only funding from the federal government for those requirements, but the entirety of its federal Medicaid funds.

The states argued that such a program “violates the basic principle that the ‘Federal Government may not compel the States to enact or administer a federal regulatory program.’” The Court ran through various precedents in explaining that while the Government may exercise its spending power to influence states, it may not exercise that power to directly govern them in accordance with federal aims that run contrary to a state’s desires. Such a system would disrupt the balance of federalism inherent within the Constitution. The Court held that the terms that accompany the expansion of Medicaid within the ACA amounts to coercion, leaving states with virtually no choice but to comply or risk losing approximately 10% of a given state’s annual revenue. The Court concluded that this alteration to Medicaid is not a shift in degree, but kind, and practically amounts to the creation of a new program that states have no viable choice but to accept should they wish to continue to provide pre-ACA Medicaid services. The Court cured this Constitutional violation through the severability clause by holding that the Secretary may withhold those funds that would go towards the Medicaid expansion identified in the ACA should a state not comply, but may not withhold existing funds.

In a concurring opinion by Justice Ginsburg, she writes that not only does she join the Court’s majority opinion with respect to the taxing power issue, but would also uphold the individual mandate under the Commerce Clause. Additionally, she would hold that the Spending Clause authorizes the Medicaid expansion as written in the ACA.

In the dissent joined by Justices Scalia, Kennedy, Thomas, and Alito, the Court would hold that Congress does not possess power under the Commerce Clause, taxing power, or Spending Clause to compel individuals and states to engage in the kind of sweeping behavior the ACA mandates.

The Supreme Court issued its much-anticipated opinion in California v. Texas regarding the constitutionality of the Affordable Care Act (ACA), rejecting the third major challenge to the law. The Supreme Court held in a 7–2 opinion that the states and individuals that brought the lawsuit challenging the ACA’s individual mandate do not have standing to challenge the law. The Supreme Court did not reach the merits of the challenge, but the decision ends the case. The Supreme Court’s decision came as the Biden administration seeks to strengthen and build on the ACA. As part of his Build Back Better Agenda, President Biden has proposed expanding the ACA’s premium tax credits for marketplace health insurance coverage and endorsed proposals to offer a public health insurance option and lower the Medicare eligibility age. This client alert provides an overview of these developments and what to expect next.

BACKGROUND

As described in our Triage podcast episode here, the Supreme Court heard oral arguments in California v. Texas last year regarding the constitutionality of the ACA. At issue was whether the ACA’s individual mandate to maintain health insurance was beyond Congress’ powers given that it no longer raises tax revenues and, if so, whether other parts of the law would need to be struck down along with the mandate. In 2012, the Supreme Court upheld the mandate as a constitutional exercise of Congress’ taxing powers, reasoning, in part, that the mandate could be read as an option to maintain health insurance or pay a tax because the penalty for not complying produced revenue for the government and had other attributes of a tax.1

However, in 2017, Congress set the penalty for failing to comply at zero dollars after attempts to repeal and replace the ACA.2 Shortly thereafter, Texas and over a dozen states, as well as two individuals, brought a lawsuit in federal district court arguing that the individual mandate is unconstitutional because it can no longer be justified under Congress’ taxing power after the penalty for failing to comply with the mandate was set at zero dollars. More importantly, they argued that the individual mandate is essential and inseverable from the rest of the ACA, requiring the entire law to be struck down along with it.

In 2018, the U.S. District Court for the Northern District of Texas agreed with the plaintiffs, holding that the 2017 amendments to the law setting the amount for failing to comply to zero dollars rendered the individual mandate unconstitutional.3 As described in our client alert here, in 2019, the U.S. Court of Appeals for the Fifth Circuit affirmed the district court’s decision that the individual mandate is unconstitutional, but it vacated the district court’s ruling that required striking down the rest of the ACA.4 As a result, the Supreme Court was reviewing not only whether the individual mandate is unconstitutional, but also whether it is inseverable from other parts of the ACA, which would require them to also be struck down.

SUPREME COURT’S DECISION

Justice Stephen Breyer delivered the opinion of the Supreme Court and was joined by all but two conservative justices, Samuel Alito and Neil Gorsuch. The Supreme Court held that the states and individuals that brought the lawsuit do not have standing to challenge the law.5 In order to have standing, a plaintiff must allege “personal injury” that is “fairly traceable” to the alleged unlawful conduct.6 The Supreme Court held that neither the state nor individual plaintiffs had shown that the injury they will suffer or have suffered is “fairly traceable” to the allegedly unlawful conduct of which they were complaining.7

The individuals pointed to harm in the form of past and future payments. However, with the penalty for failing to comply zeroed out, the Supreme Court noted that the Internal Revenue Service can no longer seek a penalty from those who fail to comply, holding that “because of this, there is no possible government action that is causally connected to the plaintiffs’ injury—the costs of purchasing health insurance.”8 The Supreme Court noted that their cases have consistently spoken of the need to assert an injury that is the result of a statute’s actual or threatened enforcement, whether in the present or in the future, adding that unenforceable statutory language alone is not sufficient to establish standing.9

The states pointed to increased use and cost of state medical insurance programs and administrative and related compliance expenses. However, the Supreme Court held that they had failed to show how these were traceable to the challenged provision rather than other provisions of the ACA.10 With respect to increased use and cost of state medical insurance programs, the Supreme Court held that the states had not shown that the mandate, without any prospect of penalty, will injure them by leading more individuals to enroll in these programs.11 Similarly, with regard to increased administrative and related expenses, the Supreme Court held that they were the product of other provisions that were not being challenged.12

WHAT TO EXPECT NEXT

The Supreme Court’s decision comes as the Biden administration seeks to protect and build on the ACA. In February, the administration sent a letter to the Supreme Court to communicate its position that the individual mandate is constitutional and that, even if it was found to be unconstitutional, it is severable from the rest of the ACA, which would allow the rest of the law to stand.13 Acknowledging that the prior administration had taken a different position, the current administration stated that it had reconsidered the government’s position and that the United States no longer adheres to the former position.14

President Biden said in a statement that the Supreme Court’s decision “affirms that the Affordable Care Act is stronger than ever,” adding that he looks forward to “working with the Congress to build on this law so that the American people will continue to have access to quality and affordable health care.”15 During his presidential campaign, and in the months since he took office, President Biden has vowed to protect and build on the ACA. The American Rescue Plan Act, President Biden’s COVID-19 relief package enacted earlier this year, temporarily expanded the scope and eligibility of the ACA’s tax credits for marketplace health care coverage.16 As part of the American Families Plan, the human infrastructure component of his Build Back Better Agenda, President Biden is proposing to make permanent the expansion of the ACA tax credits under the American Rescue Plan Act.17

The American Families Plan also provided that President Biden has a:

plan to build on the Affordable Care Act and lower prescription drug costs for everyone by letting Medicare negotiate prices, reducing health insurance premiums and deductibles for those who buy coverage on their own, creating a public option and the option for people to enroll in Medicare at age 60, and closing the Medicaid coverage gap.18

President Biden elaborated on his health policy priorities as part of his Fiscal Year 2022 Budget Request, which supports policies and programs to lower the cost of prescription drugs; improve Medicare, Medicaid, and the ACA; and create a public option that would be available through the ACA marketplace.19

Given the Supreme Court’s decision, the immediate focus likely will continue to be on making permanent the expanded ACA tax credits and reversing course on policies advanced by the prior administration that are perceived to undermine the ACA. However, Congress is actively considering legislative proposals on drug pricing reform, the public option, and Medicare eligibility age and benefits. These proposals will continue to be debated as Congress and the Biden administration look to strengthen and build upon the ACA.

Footnotes 

1 See Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519, 563-564 (2012).

2 See Tax Cuts and Jobs Act, Pub. L. No. 115-97, § 11081, 131 Stat. 2054, 2092 (2017).

3 See Texas v. United States, 340 F. Supp. 3d 579 (N.D. Tex. 2018).

4 See Texas v. United States, 945 F.3d 355 (5th Cir. 2019).

5 See California v. Texas, 593 U.S. __ (2021).

6 See DaimlerChrysler Corp. v. Cuno, 547 U. S. 332, 342 (2006).

7 See California, slip op. at 5.

8 Id.

9 Id. at 2.

10 Id. at 14.

11 Id. at 15.

12 Id. at 16.

13 See, Dep’t of Just., California v. Texas, No. 19-840 & Texas v. California, No. 19-1019, Letter to the Honorable Scott S. Harris, Clerk, Supreme Court of the United States (Feb. 10, 2021).

14 Id.

15 See White House, Statement by President Joe Biden on the U.S. Supreme Court Decision Upholding the Affordable Care Act (June 17, 2021).

16 See H.R. 1319, American Rescue Plan Act of 2021 (117th Congress 2021–2022); Pub. L. No. 117-2.

17 See White House, Fact Sheet: The American Families Plan, Statements and Releases (Apr. 28, 2021).

18 See White House, Off. of Mgmt. & Budget, Budget of the U.S. Government: FY 2022 at 23–24 (2021).

19 Id.

Copyright 2022 K & L GatesNational Law Review, Volume XI, Number 169