In one of the most controversial and closely watched cases in decades, the U.S. Supreme Court has upheld1 the constitutionality of most of the Patient Protection and Affordable Care Act (ACA),2 President Barack Obama’s signature legislative accomplishment. While the court disposed of various legal and constitutional challenges to the ACA, the decision’s larger significance cannot be understated, since it also addressed the limits of congressional authority under the Constitution, re-affirmed state sovereignty, and threw a potential hot potato into the presidential race.

The shifting coalitions of the justices in deciding the various issues presented were also nothing short of remarkable, as was how Chief Justice John Roberts Jr. navigated the court in reaching the outcome. What follows are some of the highlights of the nearly 200-page decision.

Challenges

The court’s decision addressed challenges to two of the ACA’s key provisions. The first was the ACA’s so-called individual mandate, which compels individuals to purchase health insurance coverage for themselves, or pay a penalty. Congressional Democrats, in crafting the ACA, were careful to refer to this payment as a penalty rather than a tax, although in fact the penalty is to be calculated and paid as part of an individual’s income tax return, and it would be paid to the Internal Revenue Service (IRS).

The challengers argued that the mandate exceeded Congress’ authority under the Constitution’s Commerce and Necessary and Proper Clauses because it regulated not economic activity but inactivity, i.e., the choice by an individual not to purchase health insurance coverage, which in turn would affect the health insurance and health provider marketplace.

The second part of the ACA that was challenged was the mandatory expansion of state Medicaid programs to cover more lower income individuals. The federal government currently pays about half of the costs of state Medicaid programs. Under the ACA, a state that refused to expand its Medicaid coverage would lose not only the additional federal funding provided by the ACA for such an expansion, but all federal funding for its Medicaid program.

Anti-Injunction

The court first addressed a procedural challenge: the argument that since the individual mandate does not take effect until 2014, challenges to the mandate are barred by the federal Anti-Injunction Act (AIA),3 which prohibits suits seeking injunctions against the assessment or collection of taxes until after the taxes have been paid or an enforcement action to collect the tax has been initiated by the IRS. The AIA applies to federal taxes, but not to non-tax penalties.

The court found that the AIA did not bar the challenge to the ACA’s individual mandate and its associated penalty for failure to purchase health insurance. The court concluded that even though the ACA requires that the penalty be “assessed and collected in the same manner” as taxes, Congress did not intend the penalty to be a tax for the purposes of the Anti-Injunction Act. (5-4: Roberts, Ginsburg, Breyer, Sotomayor, Kagan.)

Individual Mandate

Next, the court addressed the central issue of whether the individual mandate is constitutional. The court held that it was not a valid exercise of Congress’ power under the Commerce Clause4 of the Constitution. Roberts’ opinion noted that, while Congress has expansive power under the Commerce Clause to regulate what people do, sustaining the individual mandate under the Commerce Clause would confer upon Congress inappropriate authority to regulate what people choose not to do. He reasoned that while the framers of the Constitution gave Congress the power to regulate commerce, this does not extend to compelling people to engage in commerce:

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. Every day individuals do not do an infinite number of things. In some cases they decide not to do something; in others they simply fail to do it. Allowing Congress to justify federal regulation by pointing to the effect of inaction on commerce would bring countless decisions an individual could potentially make within the scope of federal regulation, and under the government’s theory—empower Congress to make these decisions for him.

Similarly, the court decided that the individual mandate was not sustainable under the Constitution’s Necessary and Proper Clause.5 Roberts found that even if the individual mandate is necessary to fulfill the ACA’s various reforms, such an expansion of federal power is not a proper means for making those reforms effective. (5-4: Roberts; Scalia, Kennedy, Thomas, Alito in their separate opinion.)

The court then accepted the Obama administration’s alternative argument that the penalty for failure to comply with the individual mandate is authorized by Congress’ broad taxing authority under the Constitution. Roberts, departing from the four justices who determined that the mandate was unconstitutional under the Commerce or Necessary and Proper Clauses, found that even though Congress referred to it as a penalty throughout the ACA, it is in fact a tax (which it was not for purposes of his Anti-Injunction Act analysis).

He reasoned that the penalty an individual will pay for non-compliance with the mandate is an “exaction” and as such, falls within Congress’ authority under the Constitution to levy and collect taxes.6 He referenced the fact that the payment in lieu of carrying health insurance is not so high that an individual has no choice but to buy health insurance; that the imposition of the payment is not limited to willful violations; and that the ACA prescribes that the payments will be collected solely by the IRS, through normal means of taxation, utilizing federal income tax return forms. Lastly, he reasoned that the ACA can be read as merely imposing a tax upon those who go without health insurance, and likened it to taxes on gasoline consumption or earned income. (5-4: Roberts, Ginsburg, Breyer, Sotomayor, Kagan.)

Medicaid Expansion

Next, the court found that, while Congress can encourage states to expand their Medicaid programs, the requirement that states must expand their Medicaid programs in conformance with the ACA or lose all federal Medicaid contributions was coercive, did not leave states with a meaningful choice as to whether or how much to expand their Medicaid programs, and was an unconstitutional intrusion upon the sovereignty of the states. (7-2: Roberts, Breyer, Kagan; Scalia, Kennedy, Thomas, Alito in their separate opinion.) Lastly, the court held that the severability provision in the Medicaid Act7 permitted the forfeiture to be severed from the remainder of the ACA’s Medicaid expansion provisions. (5-4: Roberts, Ginsburg, Breyer, Sotomayor, Kagan.)

Justice Ruth Bader Ginsburg wrote an opinion concurring in part and dissenting in part for herself and Justices Stephen Breyer, Sonia Sotomayor and Elena Kagan. She began with a lengthy policy explanation about the need for the ACA, then argued that Congress had a rational basis for concluding that the uninsured substantially affect interstate commerce. She reasoned that an individual’s decision to forgo health insurance is actually a decision to “self-insure,” which in turn is an economic decision that Congress has the authority to address under the Commerce Clause. Similarly, she argued that the mandate was within the authority conferred upon Congress under the Necessary and Proper Clause to realize the ACA’s purposes. Ginsburg took an expansive view of what constitutes economic activity. She argued that since everyone will, at some point, consume health care products and services, and since it is Congress’ role to delineate the boundaries of the market that it seeks to regulate:

Congress could reasonably have viewed the market from a long-term perspective, encompassing all transactions virtually certain to occur over the next decade…not just those occurring here and now.

She continued:

In requiring individuals to obtain insurance, Congress is therefore not mandating the purchase of a discrete unwanted product. Rather, Congress is merely defining the terms on which individuals pay for an interstate good they consume: Persons subject to the mandate must now pay for medical care in advance (instead of at the point of service) and through insurance (instead of out of pocket). Establishing payment terms for goods in or affecting interstate commerce is quintessential economic regulation well within Congress’ domain.

Ginsburg dismissed Roberts’ concern that Congress’ power over commerce would otherwise know no limits:

Congress would remain unable to regulate non-economic conduct that has only an attenuated effect on interstate commerce and is traditionally left to state law.

She described the majority’s ruling that the mandate was unconstitutional under the Commerce and Necessary and Proper clauses as not only unnecessary, but also as “bearing a disquieting resemblance” to Supreme Court decisions in the early 20th century that regularly struck down state and federal laws aimed at reforming societal problems through economic regulation. Lastly, she and Sotomayor disagreed with the seven other justices who found that forcing a state to forfeit all of its federal Medicaid funds for refusing to go along with the ACA’s expansion of state Medicaid programs, was unconstitutional coercion. She argued that Congress is empowered to appropriate funds in the service of the general welfare as it sees fit, and that enacting the forfeiture penalty abridged no state’s right to existing or pre-existing funds.

Dissent

Justices Antonin Scalia, Anthony Kennedy, Clarence Thomas and Samuel Alito, authored an unusual joint dissent. They argued that the entire ACA should be struck down as exceeding federal power both for mandating that individuals purchase health insurance and for denying “all Medicaid funding” to states that do not consent to the ACA’s Medicaid expansion. The first part of their dissent aligned with Roberts’ finding that the ACA’s individual mandate was not a proper exercise under the Commerce and Necessary and Proper Clauses. They asserted that when Congress requires nearly all citizens to purchase insurance, this goes beyond regulating commerce to direct the creation of commerce:

[Those who do not purchase health insurance] are quite simply not participants in [the health care] market, and cannot be made so (and thereby subjected to regulation) by the simple device of defining participants to include all those who will, later in their lifetime, probably purchase the goods or services covered by the mandated insurance. Such a definition of market participants is unprecedented, and were it to be a premise for the exercise of national power, it would have no principled limits.

They warned:

If Congress can reach out and command even those furthest removed from an interstate market to participate in the market, then the Commerce Clause becomes a font of unlimited power, or in Hamilton’s words, “the hideous monster whose devouring jaws…spare neither sex nor age, nor high nor low, nor sacred nor profane.”

While agreeing with Roberts that the Medicaid forfeiture provision was unconstitutionally coercive, the dissenting justices would have struck down the ACA in its entirety based upon the constitutional invalidity of both the individual mandate and the Medicaid expansion as central provisions of the ACA. The dissenting justices also pointedly criticized the court’s holding that the individual mandate penalty is not a tax for purposes of the AIA, but is a tax for purposes of constitutional analysis. They argued that treating the mandate as merely imposing a tax was not interpreting the ACA, but rather a wholesale judicial re-writing of the ACA.

Conclusion

The highest court has now spoken, and implementation of the bulk of the enormously complex ACA will continue, at least for the time being. The fate of the ACA is no longer in the judicial arena, but back in the hands of Congress, and its ultimate fate may be decided by the voters in November.

What is clear from the decision is that the court has, on the one hand, re-asserted state sovereignty, and curtailed further expansion of congressional power under the Commerce and Necessary and Proper Clauses. On the other hand, it has opened the door to expanded congressional power under its taxation authority. Moreover, by declaring once and for all that the penalty under the ACA’s individual mandate is actually a tax, it has opened up the president and congressional Democrats to election year attacks accusing them of having enacted a broad tax increase. In its efforts to resolve the constitutional challenges to the ACA, the court seems to have created almost as much controversy as it resolved.

Francis J. Serbaroli is a shareholder in Greenberg Traurig and the author of “The Corporate Practice of Medicine Prohibition in the Modern Era of Health Care,” published by BNA.

Endnotes:

1. National Federation of Independent Business v. Sebelius, 527 US—, No. 11-393 and 11-398, 2012 WL 2427810, June 28, 2012.

2. Public Law 111-148 (P.L. 111-152 is the final law for ACA).

3. 26 USC §742(a).

4. U.S. Constitution, Article 1 Section 8.

5. Id.

6. Id.

7. 42 USC §1303.