In a high-profile test of the Supreme Court’s approach to constitutional limits on Congressionalpower, the Court has upheld the Patient Protection and Affordable Care Act of 2010 (the “Act”), the sweeping federal overhaul of the nation’s health insurance system. See National Federation of Independent Business v. Sibelius, 565 U.S. ___ (June 28, 2012). A majority of the justices found that the Act’s “individual mandate,” which requires citizens to purchase health insurance, was constitutional under Congress’s power to tax, although a different majority of the Court—with the Chief Justice as the swing vote—held that the individual mandate violated the Commerce Clause.  

A majority of the justices also upheld the Act’s expansion of the Medicaid program—but only so long as States may opt out of the expanded provisions without losing their pre-existing federal funding for Medicaid.  

The long-awaited decision eliminates much of the uncertainty that had surrounded the health care industry over whether the Act’s wide-ranging provisions would go into effect. Now, barring further legislation, the industry will see (among other things) an expansion of federal rights to private insurance coverage, new taxes on drug and device manufacturers, FDA licensing of “generic” versions of biologic products, and enhanced disclosure of financial relationships between drug makers and physicians. Such developments may well spur activity by dealmakers, including private equity firms that invest in health care.  

Some uncertainty remains, however, as the debate over the Act now moves to the political realm, with President Obama and Governor Romney taking to the campaign trail and the Republican Congressional delegation scheduling votes for an attempted repeal. In addition, those who look to the expansion of Medicaid as a potential revenue source face uncertainty about the extent to which the States will opt out of the new program.  

As significant as the decision is for health care, it is arguably even more significant for the Court’s federalism jurisprudence. Five justices have stated a willingness to deem federal legislation beyond Congress’s Commerce Clause powers. A majority of justices has also indicated a willingness to strike down the conditioning of federal spending on the States’ acquiescence to what the Court regards as coercive policy requirements.  

The Act

The legislation, which seeks to “increase the number of Americans covered by health insurance and decrease the cost of health care,” prohibits insurance companies from denying coverage based on pre-existing conditions and from charging higher premiums to unhealthy individuals. To offset the cost of covering these groups, the Act requires all Americans to maintain a minimum level of health care coverage, thus drawing into the insurance pool millions of healthy people who might otherwise forgo coverage, and thereby lowering premiums. This “individual mandate,” which is scheduled to go into effect in 2014, will be enforced by fines on the uninsured administered by the Internal Revenue Service. Congress claimed authority to enact the individual mandate under the Commerce Clause, and the Government principally defended the provision as a valid exercise of the federal power to regulate conduct that “substantially affects” interstate commerce. The Government also argued that the mandate was within Congress’s power to tax, an alternative rationale that ultimately carried the day.  

The Act also dramatically increases the scope of the Medicaid program in an effort to provide more coverage to those who cannot afford it. Medicaid provides federal aid to States for health care coverage of the poor, conditioned on the States’ agreement to administer the program pursuant to federal standards. The Medicaid expansion provisions of the Act increase the size of the program by requiring States to make eligible all individuals under 65 with incomes below 133 percent of the poverty line. Although the Act provides additional funding for this expansion, it requires the States to adopt the new guidelines or risk losing all Medicaid funding. The States argued that this threat to withhold all of a State’s Medicaid grants was an unduly coercive condition, exceeding Congress’s authority under the Spending Clause.  

Summary of the Decision

Although the Act runs to 900 pages, the constitutional challenge, led by twenty-six States and certain individual plaintiffs, targeted just the individual mandate and the Medicaid expansion. The questions for the Supreme Court were whether it had jurisdiction to hear the case under the Anti-Injunction Act, whether Congress had the power under the Constitution to enact the challenged provisions, and, if not, whether the law should be struck down in its entirety.  

  • The Court held that the Anti-Injunction Act, which bars a challenge to a federal tax before it has been enforced on a party attempting to bring suit, did not divest the Court of jurisdiction. According to the Court, Congress chose to describe the individual mandate (what Congress called the “shared responsibility payment”) as a “penalty,” not a “tax.” Although Congress’s characterization was not binding on the Court in reviewing the constitutionality of the Act, it was sufficient for purposes of the Anti-Injunction Act, particularly given that the Anti-Inunction Act and the Act were both “creatures of Congress’s own creation.” Accordingly, the Anti-Injunction Act did not require individuals to wait to sue until after they had paid the penalty for failure to buy insurance.  
  • A five-justice majority (the Chief Justice and, in a separate opinion, Justices Ginsburg, Breyer, Sotomayor, and Kagan) held that the individual mandate was within the federal power to tax for the general welfare. A different five-justice majority (the Chief Justice and, in a separate opinion, Justices Scalia, Kennedy, Thomas, and Alito), however, held that the individual mandate was not a valid exercise of the Commerce Clause power.
  • The Court ruled 7-2 that the Medicaid expansion exceeded Congress’s power to attach conditions to federal grants because it coerced States into accepting the program by threatening the withdrawal of all Medicaid support, not just denial of the funds for the expansion of the program. By a 5-4 margin, the Court held that the proper remedy in such a situation was to invalidate the coercive condition, rather than the entire expansion of Medicaid, leaving States with the option to participate but without the risk of losing all Medicaid funding if they decline to do so.  

Significant Provisions of the Act

Although the constitutional challenges targeted only two portions of the Act, the Act itself contains many important changes to the legal landscape of the health care industry. The Court’s decision means that the Act (as modified with respect to the Medicaid expansion) survives, including the provisions that:  

  • prevent insurance companies from denying coverage for pre-existing conditions;
  • require employers with more than 50 employees to provide minimum coverage;
  • require most individuals to obtain health insurance or pay a tax penalty;
  • enact strict performance and quality standards for hospitals under Medicare;
  • tax drug, device, and medical supply products and require manufacturers to disclose
  • payments to teaching hospitals and physicians; and
  • give the Food and Drug Administration enhanced authority to approve so-called
  • “biosimilars,” which are akin to generic versions of biologic products.  

Not all of these provisions have taken effect; some become effective later in the decade. But absent further judicial action in a different case or some change from Congress, all will now go into effect as scheduled.  

The Individual Mandate Is Beyond the Commerce Power

The Government’s principal defense of the individual mandate was that it represents a valid exercise of Congress’s broad power under the Commerce Clause to regulate conduct that, in the aggregate, has a “substantial effect” on interstate commerce. The Government argued that when millions of healthy Americans fail to purchase health insurance, they adversely affect the national market for health care by shifting costs to insureds, resulting in higher premiums. Five justices (Roberts, and, writing separately in a joint opinion, Scalia, Kennedy, Thomas, and Alito) rejected this argument and concluded that the individual mandate exceeds the power of Congress to regulate interstate commerce.  

The Chief Justice distinguished Congress’s concededly broad power to regulate existing commercial activity from the power “to compel individuals not engaged in commerce to purchase an unwanted product.” “The power to regulate commerce,” he wrote, “presupposes the existence of commercial activity to be regulated.” “The individual mandate, however, 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.” The Chief Justice, like the four dissenters, viewed this theory of the Commerce Clause power as exceeding constitutional limits: “People, for reasons of their own, often fail to do things that would be good for them or good for society.” But the mere fact that such failures in the aggregate affect interstate commerce cannot authorize Congress “to use its commerce power to compel citizens to act as the government would have them act.”  

Justice Ginsburg, joined by Justices Breyer, Sotomayor, and Kagan, disagreed. Emphasizing the size and complexity of the national health care market, and the burden imposed upon it by the large number of individuals without health insurance, Justice Ginsburg viewed the individual mandate as well within the Court’s post-New Deal formulation of the Commerce Clause power, and called the Chief Justice’s position “stunningly retrogressive.” (Ginsburg, J.). Justice Ginsburg noted that in addition to driving up prices in the national market, the uninsured consume billions of health care products and services each year, often crossing state lines to do so.  

The Individual Mandate Is Within Congress’s Power to Tax

Although a majority of the Court would have invalidated the individual mandate as outside the commerce power, the Chief Justice accepted the Government’s alternative argument that the mandate could be upheld as a tax. Joined by the four justices who would have rejected the Commerce Clause challenge, the Chief Justice provided the decisive vote (and rationale) to render the mandate constitutional.  

The Chief Justice acknowledged that construing the mandate as a tax was not the most natural reading of the Act. But he viewed it as the Court’s duty to do so, if reasonably possible, to avoid invalidating an Act of Congress. Relying heavily on the IRS’s authority to enforce compliance with the mandate by levying a penalty, the Chief Justice concluded that the mandate was sufficiently susceptible to characterization as a tax and therefore valid under Congress’s authority to tax and spend for the general welfare.  

The Chief Justice’s conclusion that the individual mandate is constitutional as a tax found four concurring votes, but nonetheless received criticism from the other members of the Court. Justice Ginsburg, concurring along with Justices Breyer, Sotomayor, and Kagan, criticized the Chief Justice for reaching to decide the Commerce Clause issue if the mandate could be approved as a tax. And the dissenters found the individual mandate a penalty for both Anti- Injunction Act and constitutional purposes, not a tax at all.  

The Medicaid Expansion Violates the Spending Clause, But Need Not Be Vacated In Its Entirety

As noted above, the Medicaid expansion survived but in modified form. Seven justices (with Justices Breyer and Kagan joining Chief Justice Roberts, and the four dissenters writing separately) found that the Medicaid expansion was so “coercive” as to interfere unduly with State sovereignty. The Court relied principally on cases arising under the Tenth Amendment, which forbids Congress from “commandeering” State legislatures to enact federal policies. The Chief Justice accepted the States’ argument that the Medicaid expansion “crossed the line distinguishing encouragement from coercion.” By conditioning continued funding of States’ entire Medicaid allotment—accounting, on average, for over 20 percent of the total budget—on acceptance of the expanded program, Congress was wielding “a gun to the head.” The four dissenting justices agreed that “if States really have no choice other than to accept the package, the offer is coercive, and the conditions cannot be sustained under the spending power.”  

Justice Ginsburg, here joined only by Justice Sotomayor, disagreed that the Medicaid expansion program was unconstitutional because she viewed it as an amendment to the existing program, rather than a “new” program for which conditions could be tethered only to the funds relating to the new provisions.  

Because a majority of the justices found the Medicaid expansion unconstitutional, the Court had to determine an appropriate remedy. The dissenting justices would have struck down the entire Medicaid expansion. But the Chief Justice, joined by Justices Ginsburg, Breyer, Sotomayor, and Kagan, held the Medicaid expansion could survive without the coercive condition. Thus, while Congress may withhold the additional funding of the Medicaid expansion from States that choose not to participate in the expansion, Congress may not withhold all Medicaid funding from those States.  

Federalism Implications

The commerce power and the power to condition funding are two of the federal government’s most powerful tools for shaping national policy. Since the New Deal, with the occasional exception, the Supreme Court has broadly construed federal power under both the Commerce and Spending Clauses.  

The Court’s decision on health care reform may signal a shift. With the majority’s view of the Commerce Clause, the Court has identified an outer boundary on federal power by holding that federal laws that require parties to engage in conduct are beyond the scope of permissible “regulation” of activity affecting commerce. The ramifications of this definition of “regulation” as requiring a pre-existing activity to regulate are unclear, but it provides a precedent for those seeking to limit federal power.  

The Spending Clause ruling may also turn out to be significant. Although prior decisions had indicated that spending conditions might be too “coercive” to pass constitutional muster, the Court had never identified and struck down a condition on such grounds. Because all spending conditions encourage States to take action, there will undoubtedly be increased litigation over when Congress has crossed the line to “coercion.” That line, as Justice Ginsburg pointed out, is not well defined.  

Finally, it remains to be seen whether the Court’s willingness to reach the Commerce Clause issue will, as Justice Ginsburg appears to fear, represent a change in the Court’s approach to deciding constitutional issues. In short, while the decision will have a significant impact on health care in America, it may ultimately be remembered equally for its impact on the jurisprudence of Congressional power and federalism.