Supreme Court Decides National Federation of Independent Business v. Sebelius

On June 28, 2012, the Supreme Court decided National Federation of Independent Business v. Sebelius, No. 11-393, holding that the two challenged provisions of the Patient Protection and Affordable Care Act (the "ACA"), which expand the scope of Medicaid and require most Americans to buy health insurance, are valid exercises of Congress's power under the taxing and spending clauses of the Constitution. But the federal government cannot coerce States to participate in the Medicaid expansion by threatening to withdraw all of their Medicaid funding, and Congress could not have enacted the health insurance mandate under its power to regulate commerce. The Court's decision has key implications for both Democrats and Republicans as they head into the fall election cycle.

The two provisions of the ACA at stake

In 2010, Congress enacted and President Obama signed into law the ACA, 124 Sta. 119. Two aspects of the law were immediately challenged by individuals and States as exceeding Congress's enumerated powers under the Constitution.

First, the ACA requires most Americans to purchase "minimum essential" health insurance, 26 U.S.C. § 5000A(b)(1), on pain of being required to pay a "penalty" that will be no less than several hundred dollars per year and no more than the cost of the annual premium for a specified level of coverage, § 5000A(c). The penalty will be paid to the IRS in the same manner as tax penalties. § 5000A(g)(1). This provision is commonly referred to as the "individual mandate."

Second, the ACA significantly expands the Medicaid program by providing health coverage to new classes of people that previously were not eligible, including adults without children and families with higher incomes. The Congressional Budget Office has estimated the cost of the expansion at approximately $100 billion per year, approximately 40% above current levels. The ACA will provide new funds to States that agree to participate in the expansion. Under the existing Medicaid Act, the Secretary of Health and Human Services has the discretion to withdraw all Medicaid funding from any State that does not comply with Medicaid's coverage requirements, which include the new requirements contained in the expansion. 42 U.S.C. § 1396c.

The constitutional grants of authority at issue

When the case arrived at the Supreme Court, it raised issues under the three separate grants of authority to Congress: (1) the power to "regulate Commerce ... among the several States," U.S. Const., Art. I, § 8, cl. 3; (2) the power to "lay and collect Taxes," id. Art. I, § 8, cl. 1; and (3) the power to "pay the Debts and provide for the ... general welfare of the United States," id. Art. I, § 8, cl. 1. Added to all these powers is Congress's power to "make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers," id. Art. I, § 8, cl. 18.

The threshold issue of the Anti-Injunction Act

Before the Court could reach the constitutional issues, it first had to decide whether its review was barred by the Anti-Injunction Act, which precludes "any person" from suing to "restrain[] the assessment or collection of any tax." 26 U.S.C. § 7421(a). The Court unanimously found the Anti-Injunction Act not to apply because the individual mandate was not a "tax" within the meaning of the Act. Congress chose to describe the payment as a "penalty," not a "tax," noted the Chief Justice in his majority opinion. Because the Anti-Injunction Act and the ACA are both "creatures of Congress's own creation, ... [h]ow they relate to each other is up to Congress." Hence, Congress's description of its own provision as not being a tax was controlling. This was the only issue on which all of the Justices agreed.

Affirming the individual mandate as an exercise of Congress's power to tax

Turning to the constitutionality of the individual mandate, a 5-4 majority sustained the mandate as an exercise of Congress's taxing power, even though Congress had described it as a "penalty" and had specifically avoided calling it a "tax." For constitutional purposes, Congress's self-description was not controlling, and the key characteristics of the exaction—its amount, its lack of a scienter requirement, and its means of collection through ordinary IRS processes—qualified it as a tax. In addition, "[w]hile the individual mandate clearly aims to induce the purchase of health insurance, it need not be read to declare that failing to do so is unlawful," thus distinguishing the mandate from a criminal penalty.

The Court held that, interpreted as a tax, the individual mandate falls within Congress's taxing power. The mandate is not a direct tax, such as a "head" tax or a tax on real estate, that must be apportioned among the States under Article I, § 9, clause 4. It is triggered by behavior, not imposed directly on every person. Inactivity, moreover, does not exempt a person from being taxed. And Congress has often used taxes to shape behavior.

 Declaring that the individual mandate cannot be sustained under the Commerce Clause

If the individual mandate had depended solely on the Commerce Clause, however, it would have been struck down. On this issue, the Chief Justice agreed with Justices Scalia, Kennedy, Thomas, and Alito in finding that Congress cannot use the Commerce Clause to "compel individuals not engaged in commerce to purchase an unwanted product." The power "to regulate commerce," wrote the Chief Justice in his solo opinion, "presupposes the existence of commercial activity to be regulated." It is not enough to predict that a person will someday participate in commercial activity. "Everyone will likely participate in the markets for food, clothing, transportation, shelter, or energy; that does not authorize Congress to direct them to purchase particular products in those or others markets today. The Commerce Clause is not a general license to regulate an individual from cradle to grave, simply because he will predictably engage in particular transactions." The Necessary and Proper Clause, moreover, allows Congress to implement its other powers, but it does not vest Congress "with the extraordinary ability to create the necessary predicate to the exercise of an enumerated power."

Affirming the expansion of Medicaid but preventing the federal government from using all Medicaid funds to coerce States to agree to participate in the expansion

No opinion regarding the expansion of Medicaid commanded a majority of the Court, but Chief Justice Roberts wrote an opinion joined by Justices Breyer and Kagan that provided the narrowest grounds for decision, so it is controlling. The Court has long recognized, wrote the Chief Justice, that Congress may use its spending power to grant federal funds to the States, and it may condition the grant upon the States' agreeing to take certain actions that Congress could not directly require them to take. "Congress may use its spending power to create incentives for States to act in accordance with federal policies." "But when pressure turns into compulsion," the legislation exceeds Congress's power. Under this framework, Congress was free to condition its grant of funds to be used in connection with the Medicaid expansion on instructions for using those funds. But Congress could not coerce States to participate in the expansion by threatening to withdraw all of their Medicaid funding if they declined, which would amount to "a gun to the head" of the States. "When ... conditions take the form of threats to terminate other significant independent grants, the conditions are properly viewed as a means of pressuring the States to accept policy changes." The Court held the appropriate remedy was not to strike the entire Medicaid expansion, but simply to rule that the federal government "cannot apply § 1396c to withdraw existing Medicaid funds for failure to comply with the requirements set out in the expansion."

Policy and Political Implications

The Court's decision, although it leaves the ACA in place, is not the last word on the subject.  While Republicans have not conclusively settled on their next steps, they are expected to spend their first week back from the July 4 recess highlighting the statute's impact on government spending, on jobs and the economy, and on regulation of the private sector. In the House, one or more full-repeal votes will occur that first week.

We do not anticipate that House (or Senate) Republicans will seek to rewrite the statute in any meaningful way this year but will instead wait to see the outcome of the elections this fall and then pursue (next year) a series of reforms of "Obamacare" through changes to the ACA's regulation of health insurance plans and to the bill's Medicare and Medicaid provisions. 

Democrats will by and large oppose any efforts to revisit health reform this year. However, we anticipate that next year Democrats will themselves pursue changes to the statute, either to correct technical or functional problems with the statute and to moderate certain provisions such as the 15-member board tasked with achieving cost savings in Medicare, which have proven unpopular, or otherwise to reduce the costs of particularly expensive provisions such as the Medicaid expansion. 

Likely vehicles for reforms next year (or potentially late this year in the lame duck, post-election session) include legislation addressing the debt ceiling, changing the budget sequester provisions, fixing the payments for doctors, altering the tax code and extending tax cuts, continuing appropriations for the federal government, or through a special budget Reconciliation measure. Even now, there are behind-the-scenes, bipartisan efforts in the context of entitlement reform and deficit reduction that may also carry revisions to the original ACA legislation.

The outcome of the election of course will impact substantially the ability and willingness of each party to pursue its objectives, whether alone or in bipartisan efforts. A full Republican sweep of the House, Senate, and White House will be taken by Republicans as a strong signal from the public to make substantial changes in the ACA. Mixed results, where Democrats control one House and/or the White House, may temper Republican assertiveness and generate bipartisan efforts.

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