Split Supreme Court Upholds PPACA Constitutionality, Limits Medicaid

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By Mary Anne Pazanowski  

In a 5-4 decision, the U.S. Supreme Court June 28 declared constitutional a key provision of the federal health reform law, known as the individual mandate or minimum coverage provision, which requires virtually all U.S. citizens to obtain health care insurance or pay a penalty (NFIB v. Sebelius , U.S., No. 11-393, 6/28/12).

Chief Justice John G. Roberts Jr. cast the deciding vote to uphold the validity of the Patient Protection and Affordable Care Act's controversial provision, set to go into effect in 2014. The ruling, though, rested on somewhat unexpected grounds: Congress's power under the U.S. Constitution's taxing and spending clause.

While the “most straightforward reading” of the mandate is that it commands individuals to buy insurance, it also can be read merely as establishing a condition--lack of health insurance--that triggers a tax, Roberts said.

“Under that theory,” he wrote, “the mandate is not a legal command to buy insurance. Rather it makes going without insurance just another thing the Government taxes, like buying gasoline or earning income. And if the mandate is in effect just a tax hike on certain taxpayers who do not have health insurance, it may be within Congress's constitutional power to tax.”

Justice Ruth Bader Ginsburg, along with Justices Stephen G. Breyer, Sonia M. Sotomayor, and Elena Kagan, joined Roberts in upholding the mandate on tax grounds, but they would have gone further and also found the provision valid under the commerce clause. Opponents had argued that Congress could not use the commerce clause to force individuals to engage in commercial activity by requiring them to purchase a commodity or service.

Justices Anthony M. Kennedy, Antonin Scalia, Clarence Thomas, and Samuel A. Alito Jr. dissented. Writing for the four, Kennedy said Congress exceeded federal power in enacting PPACA when it mandated the purchase of health insurance and threatened states with the loss of Medicaid funds if they refused to expand Medicaid in compliance with the health reform law. The “entire statute is inoperative,” Kennedy wrote for the dissenters.

Medicaid, Anti-Injunction Act.

In the other major holding, the majority of justices left open a few questions about PPACA's Medicaid expansion provision. Roberts, Breyer, and Kagan would have held that the provision violates the Constitution by threatening states with the loss of existing funding if they decline to comply with the expansion. Ginsburg and Sotomayor would have upheld the provision in its entirety.

Taken together, the two opinions appear to hold that the Medicaid provision is constitutional, but only if the threat to the states for noncompliance is limited to loss of new funds provided under PPACA. The administration cannot take away from the states all existing Medicaid funds, the majority of justices said.

The court also held that the tax anti-injunction act (AIA), 26 U.S.C. § 7421(a), did not bar its consideration of the case on the merits. This statute strips courts of jurisdiction to hear pre-enforcement challenges to monetary extractions. Roberts wrote that there was no reason to believe Congress, which characterized the payment due for noncompliance with the mandate as a “penalty,” intended it to be treated as a tax for purposes of the AIA.

Since the majority upheld the individual mandate, it did not reach the question of whether portions of PPACA could be severed and ruled on independently from the rest. The dissenters would have invalidated the entire law.

Initial Reactions: Mixed.

Initial reactions to the decision were mixed. Caroline Fredrickson, president of the American Constitution Society (ACS) in Washington, said in a phone briefing that the tax-based outcome was “far from expected.” But Stuart Gerson, a former acting U.S. attorney general now with Epstein Becker & Green in Washington, told BNA he was not overly surprised.


It “took a lot of courage” for Roberts to break with the conservative majority in this case to avoid a polarized result.  


--Jeffrey Rosen, George Washington University Law School

“Congress has always had broad power under the tax clause,” Gerson said. Attorneys familiar with the case had said all along that the tax argument could lead to the court's upholding the statute, he said.

Gerson also said the opinion shows that the justices “don't go for politics.” Timothy Jost, a health care policy expert and Washington & Lee University Law School professor in Lexington, Va., agreed, saying the court had, “to its great credit, demonstrated that it remains committed to the rule of law.”

Jeffrey Rosen, a professor at the George Washington University Law School and a well-known legal commentator, added that the decision was a “dramatic vindication of [Chief Justice Roberts's] vision of bipartisanship.”

Speaking during the ACS teleconference, Rosen said Roberts made clear from the start of his tenure that he believes it is bad for the court and the country to have politically polarized, 5-4 decisions. It “took a lot of courage” for Roberts to break with the conservative majority in this case to avoid a polarized result, Rosen said.

“The hardest vote must have been his,” Rosen added.

Not everyone was pleased with the result. Ilya Shapiro, a senior fellow in constitutional studies at the Cato Institute in Washington, called the opinion “a baby-splitting decision.” While it was gratifying that the court rejected the commerce clause as a justification for the individual mandate, its reliance on the tax clause in “no way rehabilitates the government's constitutional excess,” Shapiro said in an email to BNA.

“If Congress can slip the Constitution's structural limits by simply 'taxing' anything it doesn't like,” Shapiro wrote, “its power is no more limited that it would be had it done so under the Commerce Clause.”

Case History.

The case stemmed from three separate petitions for review of a decision by the U.S. Court of Appeals for the Eleventh Circuit. In a split opinion, the appeals court held the mandate unconstitutional (157 HCDR, 8/15/11). The commerce clause did not give Congress authority to require individuals to purchase products they did not want, the appeals court said.

The Eleventh Circuit also determined that the individual mandate could not survive as an exercise of Congress's taxing power. Congress repeatedly referred to the mandate as imposing a “penalty,” not a “tax,” for noncompliance. Courts uniformly had held that the penalty could not be considered a tax for constitutional purposes, the Eleventh Circuit observed.

The court also found PPACA's Medicaid expansion provision constitutional. It said Congress has authority under the spending clause to place conditions on outlays of federal funds and that the condition in question was not unduly coercive.

Finally, the court held that the individual mandate, though unconstitutional, could be separated from the remainder of PPACA, thus saving the rest of the law.

The parties challenging the law--26 states, led by Florida--and the National Federation of Independent Business (NFIB)--an advocacy group for small businesses--filed separate petitions arguing against the Eleventh Circuit's severability ruling (189 HCDR, 9/29/11). The states also asked the court to review the Medicaid expansion question (207 HCDR, 10/26/11).

The Obama administration filed its own petition (No. 11-398), requesting the court to review the constitutional issue and determine whether Congress had authority to enact the individual mandate (189 HCDR, 9/29/11).

The high court granted all three petitions (220 HCDR, 11/15/11). It heard oral arguments over three days in late March (58 HCDR, 3/27/12; 59 HCDR, 3/28/12; 60 HCDR, 3/29/12).

The court heard the AIA issue the first day, the constitutional issue the second, and the severability and Medicaid issues on the final day.

Taxing Power Trumps Commerce Clause.

Throughout the history of the case, the briefs had focused on the extent of Congress's power under the commerce clause and whether it could, pursuant to that power, force individuals to acquire health insurance. Roberts concluded that the individual mandate could not be sustained on that ground. That was not the end of the story for the chief justice, however.

Although labeled a “penalty,” the exaction imposed by the individual mandate “looks like a tax in many respects,” Roberts said. From this “functional” perspective, it is a tax, he found. The amount is not prohibitory, it is collected solely by the Internal Revenue Service through normal means of taxation, and it is not a punitive or criminal sanction. The exaction also will raise revenue, though Roberts concedes that is not its main purpose.

Roberts said that high court “precedent demonstrates that Congress had the power to impose an exaction in the [individual mandate] under the taxing power, and that [the mandate] need not be read to do more than impose a tax. That is sufficient to sustain it.”

The penalty otherwise complied with constitutional requirements for taxes, Roberts said. It did not fall within any recognized categories of direct taxes and was not a capitation tax, he said, because it was to be paid only by individuals who lacked health insurance.

Roberts concluded that the financial penalty imposed by the individual mandate on citizens who failed to obtain health insurance “may reasonably be characterized as a tax. Because the Constitution permits such a tax, it is not our role to forbid it, or to pass upon its wisdom or fairness.”

Ginsburg, in her opinion, concurred in Roberts's determination that the individual mandate is a proper exercise of Congress's taxing and spending clause powers. Breyer, Sotomayor, and Kagan concurred.

Justices Reject Commerce Clause Argument.

A majority of the court, however, rejected the government's argument that the individual mandate also could be upheld under the commerce clause.

Writing for himself on this point, Roberts acknowledged that the “path of [the court's] Commerce Clause decisions has not always run smooth.” But, he said, Congress has never before tried to rely on its commerce clause power “to compel individuals not engaged in commerce to purchase an unwanted product.” While “[l]egislative novelty is not necessarily fatal,” Roberts wrote, “sometimes 'the most telling indication of [a] severe constitutional problem … is the lack of historical precedent.'”

A law forcing individuals to participate in an activity cannot be sustained under the commerce clause. --Chief Justice John Roberts

The commerce clause grants Congress the authority to regulate commerce among the states, he said. The power to regulate “presupposes the existence of commercial activity to be regulated.” Precedent also bears this out, Roberts said, as the court's past decisions “uniformly describe the power as reaching 'activity.'”

“The individual mandate, however, does not regulate existing commercial activity,” Roberts said. It instead requires individuals to become active--and thus opens “a new and potentially vast domain to congressional authority.”

Roberts added that Wickard v. Filburn, 317 U.S. 111 (1942), in which the court upheld restrictions on farmers growing wheat for personal consumption, represents the outer limit of Congress's commerce clause authority.

A law forcing individuals to participate in an activity cannot be sustained under the commerce clause, Roberts concluded.

'Newly Minted' Doctrine.

Ginsburg disagreed with Roberts on this point and accused the chief justice of relying “on a newly minted constitutional doctrine” in holding that the commerce clause does not allow Congress to “compe[l] individuals to become active in commerce by purchasing a product.” There is no precedent for such a ruling, Ginsburg said, nor is it supported by the text of the Constitution.

Ginsburg, along with Breyer, Sotomayor, and Kagan, would have held that Congress acted within the confines of its constitutional power in enacting the individual mandate. “Whatever one thinks of the policy decision Congress made” to address the problems raised by uncompensated care and lack of insurance coverage, “it was Congress's prerogative to make it,” she said.

The court owes “strong deference” to Congress's economic and social legislation. So long as Congress had a rational basis for concluding that the uninsured as a class substantially affected interstate commerce, the legislation should be upheld, Ginsburg wrote. The justice found that Congress had a rational basis for the individual mandate.

No Activity, No Regulation.

In responding to Ginsburg, Kennedy's dissent harkened back to Roberts's argument. It is true, he said, that Congress needs only a rational basis for concluding that a regulated activity substantially affects interstate commerce. “But it must be activity affecting commerce that is regulated, and not merely the failure to engage in commerce,” he said.

There are “structural limits” on Congress's power to regulate private conduct, Kennedy said. Whatever those limits are, “they cannot be such as will enable the Federal Government to regulate all private conduct and to compel the States to function as administrators of federal programs,” he wrote.

Addressing Wickard, Kennedy said the decision always has been regarded as on the outskirts of the commerce clause. It is one thing to tell a farmer he can only grow a certain amount of wheat, he said. It would be another thing entirely to penalize a farmer for failing to grow wheat. The latter is not an economic activity, even though it necessarily would affect interstate commerce, Kennedy said. It is the activity that may be regulated, not the failure to engage in commerce, he emphasized.

Kennedy wrote that the dissenters would have stopped here and not gone on to analyze the tax clause argument. He nevertheless went on to refute the majority's decision, saying that the exaction required by the individual mandate clearly was not a tax. It was not labeled as such and, moreover, was a penalty for failing to buy insurance.

“We have never classified as a tax an exaction imposed for violation of the law, and so too, we never have classified as a tax an exaction described in the legislation itself as a penalty,” Kennedy wrote.

Medicaid Provision Limited.

The most unclear aspect of the court's decision involved the constitutionality of PPACA's Medicaid expansion provision.

Roberts, joined by Breyer and Kagan on this point, wrote that there was “no doubt” the provision “dramatically increases state obligations under Medicaid.”

The three justices concluded that the Medicaid expansion provision “violates the Constitution by threatening existing Medicaid funding.” According to the Roberts's opinion, “Congress has no authority to order the States to regulate according to its instructions.” While Congress can condition receipt of federal funds, the states must be given “a genuine choice on whether to accept the offer,” he said. The current provision gives states no such choice.

Roberts, however, proposed a remedy, saying that the provision would be constitutional if the federal government is precluded from denying noncomplying states all Medicaid funding. In other words, states that choose to comply with the expansion provision would receive regular Medicaid funding as well as additional funding available under PPACA, but those that do not comply simply would not get the additional funds.

Ginsburg, joined by Sotomayor, said Congress has the power to set the conditions for states' receipt of Medicaid funds. Moreover, Medicaid, as amended by PPACA, “is not two spending programs,” but one, with a single aim--to enable low-income individuals to afford health care. There is nothing that prevents the federal government from imposing additional conditions on the states, she said.

Given the remainder of the court's agreement with Roberts that the prospective withholding from the states of formerly available funds exceeds Congress's spending power, however, Ginsburg said she “entirely agree[d]” with Roberts as to the appropriate remedy.

The dissenters' view that the expansion should be scrapped, along with the rest of the statute, was “a radical departure from the Court's normal course,” Ginsburg said. It would be better to salvage the law as much as possible.

Because Roberts found the “withholding” of federal funds, not the grant of additional funds under PPACA, incompatible with the spending clause, “Congress' extension of Medicaid remains available to any State that affirms its willingness to participate,” Ginsburg said.

What that means, according to experts consulted by BNA, is that the Medicaid provision remains viable, but is limited. Jost said, based on his reading of the Ginsburg and Roberts opinions, that “states need not participate in the expansion, but if they do, they will get the full federal funding.” States cannot lose existing funding by refusing to participate, but “can lose funding if they agree to participate and then don't do it properly,” he said.

Gerson said Medicaid remains a “problematic area.” He said he does not believe the administration would “come down hard” on any state that declined to participate in the expansion and, in any case, the provision is saved if read to mean that states can refuse to participate in the expansion without risking funds they currently receive.

By Mary Anne Pazanowski  

Full text of the court's opinion is at http://op.bna.com/hl.nsf/r?Open=mapi-8vpkj5.

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