National Federation of Independent Business v. Sebelius (2012)

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Full case name: National Federation of Independent Business, et al. v. Sebelius, Secretary of Health and Human Services, et al. (2012)

The Supreme Court case which upheld the constitutionality of the Patient Protection and Affordable Care Act of 2010 by finding the individual mandate validly imposed through Congress’ taxing power and the Medicaid expansion legal by judicially prohibiting the Secretary from withdrawing existing Medicaid funds from states that refuse compliance with the ACA. (Read the opinion here.)

This case involved the judicial review of the Patient Protection and Affordable Care Act of 2010 (“ACA” or the “Act”), one of Congress’ seminal pieces of legislation produced under the Obama presidency. Twenty-six states, several individuals, and the National Federation of Independent Business brought suit against the Secretary of Health and Human Services (“Secretary”), Kathleen Sebelius, in the Eleventh Circuit. The primary challenges concerned the individual mandate, which imposed a ‘penalty’ or ‘tax’ on certain individuals who failed to obtain health insurance through their employer, the government, or a private company, and the expansion of Medicaid to specified individuals below the poverty line. Federal funding to states’ Medicaid programs was conditioned on acceptance of the Act’s terms.

Chief Justice Roberts wrote the majority opinion, to which Justices Breyer, Ginsburg, Sotomayor, and Kagan joined. The Court opened its opinion with an exposition on constitutional theory, noting that un-enumerated federally exercised powers, and yet not in violation of the Constitution or Bill of Rights, nonetheless must be struck down. The founding documents of the United States curb centralized power by restricting the federal government to only affirmatively authorized powers. Non-enumerated powers, known generally as “police power,” remain with the states.

The Court first addressed the argument advanced by the Fourth Circuit in their refusal to determine the merits of the constitutionality of the ACA. The Court noted that “[t]he Anti-Injunction Act provides that ‘no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.’” Accordingly, taxes may only be judicially challenged after payment, with prevailing litigation affording a refund. Chief Justice Roberts described the function of the individual mandate as a “penalty” collected in the same manner as tax penalties by the IRS. Individuals who do not obtain health insurance must make a “shared responsibility payment” which is calculated based on annual household income and rates of available insurance premiums. This payment contains a formula for determining both a floor and a cap. The IRS is prohibited from using some of its usual enforcement mechanisms in context of the ACA, like criminal prosecutions and levies.

The Court concluded that the shared responsibility payment is labeled within the ACA as a penalty, not a tax, and that Congress’ use of the label ‘tax’ to describe other functions of the ACA’s provisions evinces Congress’ understanding that the shared responsibility payment would be treated differently from a tax for purposes of the Anti-Injunction Act.

The Court next turned to the merits of the primary challenge to the ACA—the individual mandate. The two theories advanced for the constitutionality of this provision include the Commerce Clause and Congress’ power to tax. The Government, on behalf of the ACA, first argued that the healthcare system creates a shifting market with regards to costs for medical services. For example, if a person is treated in a hospital and cannot pay the full amount due, the hospital will pass on those costs to insurers through higher rates, who in turn absorb those costs by charging policyholders with higher premiums. The Government contended that the ACA addresses this issue by including more healthy people in the health insurance pool, whose premiums will likely be higher than their healthcare costs, and by requiring the individual mandate to prevent those who would otherwise go without insurance from passing on their costs to others.

The Court ultimately dismissed the Commerce Clause argument, noting that despite the expansive power the Court has historically granted to Congress under this clause to regulate interstate commerce and the activities associated therewith, the central point has always been that there was an ‘activity.’ The Court found that the individual mandate does not target existing commercial activity, but rather compels individuals to become involved in one. For Congress to be able to regulate individuals for doing nothing oversteps the bounds of its Constitutional grant of authority it possesses under the Commerce Clause. The Court applied similarly reasoning to the Government’s argument that the Necessary and Proper Clause imbues the individual mandate with constitutionality. Rather, the Court held that based on its precedent, the individual mandate is simply too broad in scope to be deemed proper to the aims of the ACA, especially when there is no Commerce Clause to support the means by which a ‘necessary and proper’ legislative power is exercised.

The Court lastly turned to the taxing power argument, which it found satisfactory to uphold the legality of the individual mandate. The Court held that the shared responsibility payment holds many similar characteristics to a traditional tax—it is paid with an individual’s tax returns, assessed and collected by the IRS, and results in revenue for the Government. In responding to its earlier conclusion that the shared responsibility is a penalty for purposes of the Anti-Injunction Act, the Court nonetheless decided that such a determination does not control whether this payment is within Congress’ authorization to tax. In conclusion, the shared responsibility is deemed a tax because the amount due will be much less than the price of insurance, the characteristics of the payment bear resemblance to a tax, the government already taxes to induce certain conduct (e.g., cigarette tax to encourage cessation), and the payment does not connote unlawful behavior by the payor—in fact, such payment may be a calculated decision depending on their respective costs. Therefore, Congress validly exercised its taxing power.

The second main challenge to the ACA regarded its Medicaid expansion. Medicaid provides funding to states to assist vulnerable populations in attaining healthcare. In order to receive that funding, certain federal guidelines must be complied with. Since Medicaid’s enactment in 1965, this part of a state’s budget has come to constitute over 10 percent in most states’ revenue totals. As part of the ACA, if a state does not expand coverage to include the newly covered individuals, then that state might lose not only funding from the federal government for those requirements, but the entirety of its federal Medicaid funds.

The states argued that such a program “violates the basic principle that the ‘Federal Government may not compel the States to enact or administer a federal regulatory program.’” The Court ran through various precedents in explaining that while the Government may exercise its spending power to influence states, it may not exercise that power to directly govern them in accordance with federal aims that run contrary to a state’s desires. Such a system would disrupt the balance of federalism inherent within the Constitution. The Court held that the terms that accompany the expansion of Medicaid within the ACA amounts to coercion, leaving states with virtually no choice but to comply or risk losing approximately 10% of a given state’s annual revenue. The Court concluded that this alteration to Medicaid is not a shift in degree, but kind, and practically amounts to the creation of a new program that states have no viable choice but to accept should they wish to continue to provide pre-ACA Medicaid services. The Court cured this Constitutional violation through the severability clause by holding that the Secretary may withhold those funds that would go towards the Medicaid expansion identified in the ACA should a state not comply, but may not withhold existing funds.

In a concurring opinion by Justice Ginsburg, she writes that not only does she join the Court’s majority opinion with respect to the taxing power issue, but would also uphold the individual mandate under the Commerce Clause. Additionally, she would hold that the Spending Clause authorizes the Medicaid expansion as written in the ACA.

In the dissent joined by Justices Scalia, Kennedy, Thomas, and Alito, the Court would hold that Congress does not possess power under the Commerce Clause, taxing power, or Spending Clause to compel individuals and states to engage in the kind of sweeping behavior the ACA mandates.