Supreme Court Update: National Federation of Independent Business v. Sebelius (11-393)

July 2, 2012 Supreme Court Update

Greetings, Court fans!

The Term ended with a bang last Thursday, but we'll continue to bring you our take on the Court's final decisions. This Update is devoted to National Federation of Independent Business v. Sebelius (11-393). Unless you have been resting comfortably on some (sadly fictional) media-free island, you know the outcome: the Patient Protection and Affordable Care Act ("ACA"), including its Individual Mandate, survived mostly intact. But if you've been waiting to wade into each of the Justices' perspectives, here's your chance.

As you know, the Chief joined with the liberal wing of the Court to uphold the Individual Mandate by a 5-4 vote. Less attention has been paid to the fact that 7 of the 9 Justices voted to invalidate a separate provision requiring States to accept a vast expansion of the Medicaid program – to essentially all individuals under 133% of the poverty line – in order to continue receiving any federal Medicaid funding at all. Under the Court's decision (this part 5-4), the federal government can condition States' receipt of additional funding on their acceptance of the expansion, but cannot force States to expand by threatening to withhold their existing Medicaid funding. While this aspect of the decision has not made as many headlines, it is a big deal. In fact, some States have already announced that they will opt out of the expansion, undermining Congress's goal to provide near-universal health insurance coverage. Now, take a deep breath – as we're going to dive into the details.

Writing for himself alone, the Chief began by making clear that by upholding the ACA, he wasn't endorsing it: policy judgments are "made by our Nation's elected leaders, who can be thrown out of office if people disagree with them. It is not our job to protect the people from the consequences of their political choices." Next, joined by Justices Ginsburg, Breyer, Sotomayor and Kagan, the Chief explained that the Anti-Injunction Act did not stand in the Court's way of addressing the constitutionality of the Individual Mandate. The Individual Mandate requires most individuals to maintain "minimum essential" health insurance coverage. Those who don't receive it from their employer or a government program must purchase coverage from a private insurer. And if they don't, beginning in 2014, they will have to make a "shared responsibility payment," described as a "penalty," but payable to the IRS along with regular taxes and "assessed and collected in the same manner" as tax penalties. The Anti-Injunction Act prohibits challenges to tax statutes before the funds have been paid (protecting the Government's ability to collect a consistent stream of revenue). Thus, if the Individual Mandate penalty were a "tax" for purposes of the Anti-Injunction Act, it could not be challenged until 2014, when people actually started to pay it. The Chief found this issue an easy one. The Anti-Injunction Act and the ACA "are both creatures of Congress's own creation. How they relate to each other is up to Congress, and the best evidence of Congress's intent is the statutory text." Here, Congress chose to call the payment a "penalty," not a tax, indicating its intent that the Anti-Injunction Act did not apply. (Notably, all of the parties wanted an answer on the ACA's validity now, not several years down the road, so the Court had to appoint an amicus to argue that the Anti-Injunction Act barred review, a position taken by the Fourth Circuit in one of the several challenges to the ACA.)

Having found that the Court could address the constitutional arguments now, the Chief next turned to the Commerce Clause challenge, where he again lost the liberals, and wrote only for himself. (And although the dissenters agreed with seemingly everything Roberts said on this topic, they did not formally join his opinion – prompting speculation that the dissenters are not very happy with the Chief. Indeed, many believe he switched sides, and went from writing a majority opinion that would have struck down the law, to writing the partial majority opinion that upheld it.) The Government argued that failure to buy health insurance has a substantial effect on interstate commerce because, in short, uninsured individuals eventually get sick. When they do, they receive health care whether or not they can pay for it. The costs are shifted from the uninsured to the hospitals and health care providers, then to the private insurers and the government, and then to everyone else in the form of higher premiums and taxes. The ACA attempts to address the problem of uninsured individuals by, among other things: prohibiting insurers from refusing to provide insurance based on preexisting health conditions (the "guaranteed-issue" provision); prohibiting insurers from making people pay more because of preexisting health conditions (the "community rating" provision); and subsidizing the cost of insurance, in an effort to make it accessible to everyone. These provisions aren't tenable, however, unless there are healthy people as well as unhealthy people in the insurance pool. The Individual Mandate was Congress's solution to this problem.

While the Chief agreed that the proper test for whether a law is authorized under the Commerce Clause is whether the conduct it seeks to regulate has a "substantial effect on interstate commerce," he explained that "Congress has never attempted to rely on that power to compel individuals not engaged in commerce to purchase an unwanted product." In his view, the touchstone was whether Congress was seeking to regulate "activity," a word he found present in virtually all past Commerce Clause cases. Here, Congress was not seeking to "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." This, Roberts felt, simply went too far, by bringing countless decisions an individual might make within the power of federal regulation. The Chief worried that if the Individual Mandate was within Congress's Commerce Clause authority, then so would be the power to require people to purchase more broccoli, given the costs of treating obese individuals who have unhealthy diets. The Chief also rejected the Government's argument that, even if the Individual Mandate was not authorized directly under the Commerce Clause, it was permitted under the Necessary and Proper Clause as an "integral part of a comprehensive scheme of economic regulation." Since the Necessary and Proper Clause can only reach regulations that are incidental to an enumerated power, "it does not license the exercise of any ‘great substantive and independent powers,'" like the Individual Mandate.

The liberals rejoined the Chief as he turned to the Government's alternative argument that the ACA was authorized under Congress's power to "lay and collect Taxes." For purposes of this argument, "the Government asks us to read the mandate not as ordering individuals to buy insurance, but rather as imposing a tax on those who do not buy that product." While the Court deferred to Congress's characterization of the "shared responsibility payment" as a "penalty" for purposes of the Anti-Injunction Act, the Court had to look at the "substance" of the payment to determine its constitutionality. And, as Roberts stressed, "‘any reasonable construction of a statute must be resorted to, in order to save a statute from unconstitutionality.'" Here, the ACA provides that individuals "shall" buy insurance or make a "shared responsibility payment." While the requirement to buy insurance appears to be mandatory, the only remedy is making the "shared responsibility payment" to the IRS along with one's regular taxes. Further, the amount of the payment varies based on a person's income, just like other taxes. While the purpose of the payment is clearly to encourage buying insurance, many taxes are imposed to encourage behavioral changes. Accordingly, while Congress labeled the payment a "penalty," it functions as a tax and thus the Court must review whether Congress had authority under its taxing power to impose it. The Court found that it did. Congress's power to tax and spend goes beyond its power to regulate under the Commerce Clause. That power is limited by the prohibition on direct taxes, unless those taxes are apportioned such that each State pays in proportion to its population. But only two forms of taxation have been considered "direct taxes" historically, capitations (a tax on a person "‘without regard to property, profession, or any other circumstances'") and land taxes. The "shared responsibility payment" doesn't fall into either category and is therefore permissible.

The Chief recognized that some might be troubled by the fact that Congress could achieve through its taxing and spending power what it could not under the Commerce Clause. He had three responses. First, "it is abundantly clear the Constitution does not guarantee that individuals may avoid taxation through inactivity." While Congress's Commerce Clause authority does not reach the regulation of inactivity, "the Constitution has made no such promise with respect to taxes." Second, "Congress's ability to use its taxing power to influence conduct is not without limits," because legislation may be invalidated where it goes so far that its character becomes a penalty. Third, the power to tax does not give Congress the same degree of control over individual behavior, as it is limited to requiring an individual to pay money to the Federal Treasury. By contrast, where Congress may directly regulate, it can require specific conduct (e.g., actually buying broccoli and – horror – perhaps even eating it), upon the threat of criminal sanctions.

Next, the Chief, joined now by Justices Breyer and Kagan, turned to the constitutionality of the Medicaid expansion provision. The current Medicaid program covers only certain categories of low income individuals, specifically pregnant women, needy families, the blind, the elderly and the disabled. The States also have significant flexibility as to the coverage levels for parents of needy families. The ACA would expand Medicaid to cover all individuals under the age of 65 with incomes below 133% of the federal poverty line. This would be a massive expansion of the current program. The federal government would foot most of the bill initially, but States would assume additional costs in the future as well. In Robert's view, this expansion would so fundamentally rework the existing law as to more properly be characterized as a new program. Congress can place conditions on the receipt of federal funds where a State has a legitimate choice as to whether to accept the funds. But "when the pressure turns to compulsion, the legislation runs contrary to our system of federalism. The Constitution simply does not give Congress the authority to require the States to regulate." Here, existing Medicaid funding is such a large percentage of States' budgets that the States really had no choice but to accept the Medicaid expansion. Accordingly, the Chief, Beyer, and Kagan found the Medicaid expansion unconstitutional to the extent that it made existing Medicaid funding contingent on States' acceptance of the expanded program. (The dissenters also found this portion of the legislation unconstitutional, thus forming a 7 Justice majority on this point.)

Having found that Congress could not penalize States that refused to participate in the expanded Medicaid program, Roberts next turned to whether this portion of the ACA was severable from the expansion of the Medicaid program overall and the larger Act. He (joined now by all the liberals, including those who would have found the entire Medicaid provision constitutional) found that it was. The expansion of the Medicaid program itself is constitutional. While Health and Human Services ("HHS") cannot take away a State's existing funding to compel it to adopt the broader program, that is the only unconstitutional provision. Removing HHS's authority to do so completely remedies the constitutional violation. Section 1396c includes a severability clause, indicating Congress's intent in this regard. "States may now choose to reject the expansion," "but we do not believe that Congress would have wanted the whole Act to fall, simply because some [States] may choose not to participate."

The Chief ended the way he began, emphasizing that "the Court does not express any opinion on the wisdom of the Affordable Care Act. Under the Constitution, that judgment is reserved to the people."

Justice Ginsburg, joined in full by Justice Sotomayor and in part by Justices Breyer and Kagan, concurred in part and dissented in part. Ginsburg began with a detailed recitation of the ways in which uninsured individuals substantially and negatively impact interstate commerce, echoing the Government's arguments. This problem cannot be solved without a requirement to buy insurance because putting in place guaranteed-issue and community rating provisions without a mandate would lead to adverse selection from the insurance pool – only sick people would buy insurance, driving up the price, causing more people not to buy and so on. States can't solve this problem alone because of collective action problems. If one State puts in place a better system that covers more people, sick individuals from other States can opt in by moving (or sometimes just showing up for care when needed), again throwing off the risk pool. Health care is a huge part of the national economy and the problem simply can't be solved without intervention at the federal level. Further, it is abundantly clear that the federal government could lawfully put into place a federal single payer program – like Medicaid or Medicare. If that is so, Congress certainly did not run afoul of the constitution by putting into place a more limited law that preserves a role for States and the private market.

In Justice Ginsburg's view, moreover, the Chief's activity/inactivity distinction had no grounding in caselaw and was fundamentally flawed. Almost anything characterized as activity can be recharacterized as inactivity. For example, could the government lawfully bar people from buying meat, dairy and grain (thus requiring them to buy only vegetables and fruit), but not directly require them to buy broccoli (because it is forcing them into the market)? It is unlikely that either law would pass muster – but not because of the action/inaction rationale embraced by the Chief and the dissent! And uninsured people are not "doing nothing." They all eventually use health care services. Congress simply attempted to regulate how they pay for those services – by requiring payment in advance through insurance premiums. Accordingly, the law falls well within Congress's authority under the Commerce Clause. Even if it didn't, it would be permitted by Congress's authority under the Necessary and Proper Clause because it is integral to the overall ACA structure.

Ginsburg, now joined only by Sotomayor, also parted ways with Roberts on the constitutionality of the Medicaid expansion. Congress had expressly reserved to itself the power to amend or repeal the Medicaid Act and required States to abide by any amendments to continue obtaining funds. Congress had previously made numerous changes to the law, including adding pregnant women to its coverage. These changes were not different in kind from the change made by Congress in the ACA, which simply expanded the scope of needy people covered by the law, and for those newly added people, reducing the minimum coverage necessary and increasing federal reimbursement – thus footing most of the bill for the expansion in coverage. The finding of "compulsion" thus had no factual foothold. Congress could have simply repealed the Medicaid Act, passed the ACA with the old and new provisions combined as "Medicaid II" and no one could complain. There was no reason for Congress to jump through such procedural hoops. Ginsburg made clear, however, that in light of the majority's conclusion that withholding States' existing Medicaid funds if they didn't accept the expansion would be unconstitutional, the right remedy was to sever that provision and allow those States that wished to participate to do so (thus making 5 votes for severing this provision and upholding the general Medicaid expansion and the ACA).

In a departure from the usual practice, Justices Scalia, Kennedy, Thomas, and Alito shared co-author status on a dissenting opinion. The dissenters found no support for the Individual Mandate under the Commerce Clause or the taxing power, viewed the Medicaid expansion as exceeding Congress's authority to attach conditions to federal funds under the Spending Clause, and – concluding that the ACA without these two provisions was not the ACA at all – would have struck down the entire statute as unconstitutional. On the Commerce Clause, the dissenters agreed with the Chief, making a majority of sorts on this issue. In the dissenters' view, to extend the Commerce Clause to the failure to engage in commercial activity (here, buying health insurance) would be to "make mere breathing in and out the basis for federal prescription." The dissenters echoed the Chief's points on the Commerce Clause – including the specter of forced-broccoli-buying. (In a separate, single-paragraph opinion, Justice Thomas reiterated his longstanding opposition to the "substantial effects" test under the Commerce Clause, and opined that the Court's continued use of that test had opened the door to the Government's "unprecedented" position in this suit that it had authority to regulate not just economic activity, but also inactivity, with a substantial effect on interstate commerce.)

The dissenters parted ways with the Chief on the taxing power, however. The dissenters acknowledged the rule that statutes should be construed in a manner that renders them constitutional if "fairly possible," but saw "simply no way" to interpret the ACA as a tax without rewriting the statute. Section 5000A provides that individuals "shall" purchase minimum coverage, refers to it as a "requirement," and imposes a "penalty" for failure to do so. The payment at issue therefore meets the classic definition of a penalty: it is an "exaction" imposed by statute as punishment for an unlawful act, i.e., not buying insurance. The dissenters dismissed as "self-serving litigating positions" the Solicitor General's assurances that the Treasury Department and Health and Human Services did not view §5000A as imposing a legal obligation – positions that contradicted the Government's arguments in a related litigation, to boot. Nor were the dissenters swayed by the fact that the IRS would be collecting the payment, that the amount of the payment was keyed to income, or that there was no scienter requirement. The IRS collects many other penalties that are unrelated to taxes, penalties often take into account ability to pay, and penalties for strict-liability offenses are commonplace. The dissenters were dismayed by what they saw as the majority's rewriting of the statute, particularly because the rewrite imposed a tax: "Imposing a tax through judicial legislation inverts the constitutional scheme, and places the power to tax in the branch of the government least accountable to the citizenry."

Having found that the Individual Mandate is not a tax for purposes of Congress's taxing power, the dissenters had "no difficulty" in concluding for themselves that it is not a tax for purposes of the Anti-Injunction Act. But the dissenters lashed out at the Government's – and by extension, the majority's – efforts to have their cake and eat it, too. How could the exact same textual indications show that the Individual Mandate was a tax for one purpose and not the other? "That carries verbal wizardry too far," the dissenters admonished, "deep into the forbidden land of the sophists."

The dissenters teamed up with the Chief again – this time with Justices Breyer and Kagan – on the question of whether the ACA's expansion of Medicaid was constitutional when combined with a threat to States to cut off all Medicaid funding if States didn't accept the expansion. They found that, in part, it was not. The dissenters expanded on the Chief's assessment that the ACA gave the States no real choice but to accept the expansion so they wouldn't lose all of their federal Medicaid funds. Congress hadn't even included a backup plan to deliver aid in case any State refused – because Congress knew that they couldn't. The expansion therefore crossed the line between a permissible condition and impermissible coercion under the Spending Clause. But that's where the dissenters' agreement with the Chief ended. Having found the Medicaid Expansion as written to be unconstitutional, the dissenters would invalidate any expansion of Medicaid under the ACA. The solution proposed by the Government, and adopted by the majority – allowing States to choose between expanding eligibility and receiving extra funds, or maintaining their current eligibility and funds – put States in the untenable position of having to choose between expanding Medicaid or having their citizens pay huge tax sums to the federal fisc to pay for Medicaid expansion in other States. "If this divisive dynamic between and among States can be introduced at all, it should be by conscious congressional choice, not by Court-invented interpretation."

More broadly, having found both the Individual Mandate and the Medicaid Expansion to be unconstitutional, the dissenters would strike down the ACA in its entirety. Under the Court's precedents, unconstitutional provisions are severable only when the remaining provisions in the statute would operate as Congress designed them, and if Congress would have enacted the remaining provisions standing alone. Here, Congress clearly passed the ACA to bring about affordable, "near-universal" coverage. The Individual Mandate and the Medicaid Expansion were part of a complex web of changes to the health care and insurance system, including insurance regulations, Medicare reimbursements to hospitals, and employer responsibilities. Without the two provisions at issue, the remaining provisions would not achieve the goal of near-universal coverage, and could pose unexpected burdens on patients, providers, insurers, and/or taxpayers. Minor provisions (read: pork) that weren't directly related to the ACA's goal of universal coverage should also be struck down, because there was no reason to believe that Congress would have enacted them independently. But the dissenters did not carry the day, so most of the ACA's provisions – ranging from the game-changing Individual Mandate, to the more pedestrian requirement that chain restaurants display their nutritional content, and the much-lampooned tanning booth tax – will remain the law . . . that is, unless the Republicans make good on their vows to repeal it.

If you made it this far, we're impressed. Even if you've only skimmed, here's your reward: a quick cheat sheet on the votes with which to impress your friends and neighbors:

Can we address the Individual Mandate at all?
Yes: Because it's not a tax for purposes of the Anti-Injunction Act: Chief, Ginsburg, Breyer, Sotomayor, Kagan
Yes: Because it's not a tax, period: Scalia, Kennedy, Thomas, Alito

Is the Individual Mandate constitutional under the Commerce Clause?
Chief, Scalia, Kennedy, Thomas, Alito
Yes: Ginsburg, Breyer, Sotomayor, Kagan

Is the Individual Mandate constitutional under the taxing power?
Yes: Chief, Ginsburg, Breyer, Sotomayor, Kagan
No: Scalia, Kennedy, Thomas, Alito

Is the Medicaid Expansion constitutional under the Spending Clause?
Chief, Breyer, Kagan, Scalia, Kennedy, Thomas, Alito
Yes: Ginsburg, Sotomayor

Given that the Medicaid Expansion is not constitutional, can those provisions be severed from the rest of the statute?
Chief, Ginsburg, Breyer, Sotomayor, Kagan
No: Scalia, Kennedy, Thomas, Alito

If you were counting, you may have noticed that Roberts had a 5 (or more) Justice majority for every position he took. But it is certainly the oddest shifting majority we've seen in a while.

We'll be back soon with our take on the few remaining decisions of the Term!

Kim & Jenny

From the Appellate and Complex Legal Issues Practice Group at Wiggin and Dana. For more information, contact Kim Rinehart or any other member of the Practice Group at 203-498-4400