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June 2012

National Federation of Independent Business et al. v. Sebelius, Secretary of Health and Human Services

567 U.S. ___ (2012), Case No: 11-393

The United States Supreme Court (“the Court”) today upheld much of the Patient Protection and Affordable Care Act (“the Act”) enacted by Congress in 2010.  One key issue decided was whether the Act’s requirement that individuals buy health insurance by 2014 or be subject to a penalty was constitutional.  The Court held the individual mandate was constitutional as Congress had the power to assess a tax against those who did not purchase insurance.  The Court held that Congress’s attempt to require purchase of health insurance under the Commerce and Necessary and Proper Clauses was unconstitutional as Congress did not have the authority to compel an act of commerce, only to regulate activities already in commerce. The Court further held that the Act’s Medicaid expansion provision penalizing states by withholding Medicaid funding if the State chose not to expand was a violation of the Spending Clause and coercive. 

Background

Congress enacted the Act in 2010 in a comprehensive attempt to restructure national health insurance markets.  The Act’s stated purpose was threefold: (1) to lower the cost of health care; (2) to improve the quality of health care; and (3) to make health care more accessible, especially to the currently uninsured.  Key provisions of the Act included: requiring individuals to purchase health insurance by 2014 or be subject to a fine (the “individual mandate”); requiring insurance companies to cover dependent children to age 26; prohibiting denial of coverage based on a pre-existing condition; prohibiting life time limits on insurance; and creating federal subsidies to assist people to pay the premiums.  The Act also established health-care exchanges in the states to create a marketplace for small businesses and uninsureds to comparison shop.

The Act expanded Medicaid’s scope and increased the number of individuals that States must cover.  For example, by 2014 the Act required States to provide Medicaid coverage to an expanded number of adults; the Act increased federal funding to cover the expanded coverage; and if a State refused to comply, the Act would reduce federal funding and cut off all Medicaid funding to the State. 

Twenty six states challenged the constitutionality of the Act.  The Eleventh Circuit and Sixth Circuit issued conflicting rulings regarding the constitutionality of the individual mandate.  26 U.S.C. § 5000A. The Eleventh Circuit also held that the mandate requirement was severable from the remainder of the Act.


Individual Mandate Is Constitutional

In a 5-4 decision, the Supreme Court upheld the constitutionality of the individual mandate pursuant to Congress’s power to “lay and collect Taxes.”  (Art. I, § 8, Cl. 1.) The Supreme Court also held that the Commerce Clause and the Necessary and Proper Clause did not afford bases for finding the individual mandate constitutional. 

The Court first concluded that the individual mandate is not a valid exercise of Congress’s power under the Commerce Clause (Art. I, § 8, Cl. 3).  “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.”  (Pg. 20.)  “The Framers gave Congress the power to regulate commerce, not to compel it, and for over 200 years both our decisions and Congress’s actions have reflected this understanding.  There is no reason to depart from that understanding now.”  (Pg. 24.)  The Court also held the individual mandate was unsupported by the Necessary and Proper Clause (Art. I, § 8, Cl. 18).  Prior cases upholding laws under this clause involved “exercises of authority derivative of, and in service to, a granted power.”  (Pg. 29.)  Here, the individual mandate would work a “substantial expansion” of federal authority and draw individuals under regulatory authority who would otherwise be beyond it.  (Id.) 

The Court upheld the individual mandate based on the Government’s argument under Congress’s power to “lay and collect Taxes.”  (Art. I, § 9, Cl. 4).   The payment for failure to purchase insurance may be considered a tax for constitutional purposes.  “Our precedent demonstrates that Congress had the power to impose the exaction in §5000A under the taxing power, and that §5000A need not be read to do more than impose a tax.  This is sufficient to sustain it.”  (Pg. 39.)  The Court found that the Act’s labeling of the payment as a penalty was not fatal.  The payment for failure to purchase health insurance is not so high that a person is forced to buy insurance; the payment is not limited to willful violations as penalties for unlawful conduct often are; and the collection process will be through the IRS by normal taxation means.  (Pgs. 34-35.)  The Court held that the mandate complies with the Direct Tax Clause requiring that tax not be collected “unless in Proportion to the Census or Enumeration herein before directed to be taken.”  (Art. I, § 9, Cl. 4).  The tax for not purchasing health insurance is not like a direct tax under the Court’s prior precedents and need not be apportioned so that State’s pay in proportion to population.  (Pgs. 40-41.)

Medicaid Expansion Is Unconstitutional But Court Strikes Down Only Provision Allowing Federal Government to Withhold All Medicaid Funds

A plurality of the Court held that the Act’s Medicaid expansion was unconstitutional and coercive by threatening States to cut off all existing Medicaid funding if they refused to comply with the expansion.  (Pgs. 51-52.)

The Court upheld Congress’s right under the Spending Clause (Art. I, § 8, Cl. 1) to offer funds to States to expand Medicaid coverage to millions of new individuals.  Under the Spending Clause, Congress may establish cooperative state-federal programs.  (Pg. 48.) However, Congress cannot simply require states to regulate.  Congress’s threat to terminate all Medicaid funding as a means of pressuring the States to adopt an expanded program runs counter to the Nation’s system of federalism.  (Pgs. 50-51.)   In exchange for receiving federal funds, States can agree to expand Medicaid coverage.  A State choosing to accept the federal funds Medicaid expansion is required to follow the Act’s new rules and expand coverage.  (Pg. 55.)  However, a State may refuse to participate in expanding Medicaid under the Act, without losing all federal Medicaid funds.  A State can choose to leave its Medicaid plan in its current form and receive funds.  (Pg. 56.)

Please click here for the opinion. 

This and other case bulletins, as well as other publications of Gordon & Rees LLP, may be found at www.gordonrees.com

 

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