National Federation of Independent Business Et Al. vs Sebelius, Secretary of Health and Human Services, Et Al

National Federation of Independent Business Et Al. vs Sebelius, Secretary of Health and Human Services, Et Al (Obama Healthcare Law)


In 2010, Congress enacted the Patient Protection and Affordable Care Act, 124 Stat. 119. The Act aim to increase the number of Americans covered by health insurance and decrease the cost of health care. The present case concerned constitutional challenges to two key provisions, commonly referred to as the individual mandate and the Medicaid expansion. The individual mandate require most Americans to maintain “minimum essential” health insurance coverage.26 U. S. C. §5000A. The mandate does not apply to some individuals, such as prisoners and undocumented aliens. §5000A(d). Many individuals will receive the required coverage through their employer, or from a government program such as Medicaid or Medicare. But for individuals who are not exempt and do not receive health insurance through a third party, the means of satisfying the requirement is to purchase insurance from a private company.

Beginning in 2014, those who do not comply with the mandate must make a “shared responsibility payment” to the Federal Government. §5000A(b)(1). That payment, which the Act describe as a “penalty,” is calculated as a percentage of household income, subject to a floor based on a specified dollar amount and a ceiling based on the average annual premium the individual would have to pay for qualifying private health insurance. In 2016, for example, the penalty will be 2.5 percent of an individual’s household income, but no less than $695 and no more than the average yearly premium for insurance that covers 60 percent of the cost of 10 specified services (e.g., prescription drugs and hospitalization) 42 U. S. C. §18022. The Act provide that the penalty will be paid to the Internal Revenue Service with an individual’s taxes, and shall be assessed and collected in the same manner as tax penalties, such as the penalty for claiming too large an income tax refund. 26 U. S. C. §5000A(g)(1). The Act, however, bar the IRS from using several of its normal enforcement tools, such as criminal prosecutions and levies. §5000A(g)(2). And some individuals who are subject to the mandate are nonetheless exempt from the penalty—for example, those with income below a certain threshold and members of Indian tribes. §5000A(e).

Many States filed a complaint in the Federal District Court for the Northern District of Florida, as well as several individuals, and the National Federation of Independent Business. The plaintiffs alleged that the individual mandate provisions of the Act exceeded Congress’s powers under Article I of the Constitution. The District Court agreed, holding that Congress lacked constitutional power to enact the individual mandate. [780 F. Supp. 2d 1256 (ND Fla. 2011)].The District Court determined that the individual mandate could not be severed from the remainder of the Act, and therefore struck down the Act in its entirety. The Court of Appeals for the Eleventh Circuit affirmed in part and reversed in part. The court affirmed the District Court’s holding that the individual mandate exceeded Congress’s power. [648 F. 3d 1235 (2011)]. The panel unanimously agreed that the individual mandate did not impose a tax, and thus could not be authorized by Congress’s power to “lay and collect Taxes.” U. S. Const., Art. I, §8, cl. 1. A majority also held that the individual mandate was not supported by Congress’s power to “regulate Commerce among the several States.” According to the majority, the Commerce Clause did not empower the Federal Government to order individuals to engage in commerce, and the Government’s efforts to cast the individual mandate in a different light were unpersuasive. Having held the individual mandate to be unconstitutional, the majority examined whether that provision could be severed from the remainder of the Act. The majority determined that, contrary to the District Court’s view, it could. The court thus struck down only the individual mandate, leaving the Act’s other provisions intact.648 F. 3d, at 1328.

The second provision of the Affordable Care Act challenged was the Medicaid expansion. Enacted in 1965, Medicaid offer federal funding to States to assist pregnant women, children, needy families, the blind, the elderly, and the disabled in obtaining medical care. In order to receive that funding, States must comply with federal criteria governing matters such as who receives care and what services are provided at what cost. By 1982 every State had chosen to participate in Medicaid. Federal funds received through the Medicaid program have become a substantial part of state budgets. The Affordable Care Act expand the scope of the Medicaid program and increase the number of individuals the States must cover. The Act increase federal funding to cover the States’ costs in expanding Medicaid coverage, although States will bear a portion of the costs on their own. If a State does not comply with the Act’s new coverage requirements, it may lose not only the federal funding for those requirements, but all of its federal Medicaid funds.

Along with their challenge to the individual mandate, the state plaintiffs in the Eleventh Circuit argued that the Medicaid expansion exceeded Congress’s constitutional powers. The Court of Appeals unanimously held that the Medicaid expansion is a valid exercise of Congress’s power under the Spending Clause. And the court rejected the States’ claim that the threatened loss of all federal Medicaid funding violated the Tenth Amendment by coercing them into complying with the Medicaid expansion. Supreme Court granted certiorari to review the judgment of the Court of Appeals for the Eleventh Circuit with respect to both the individual mandate and the Medicaid expansion.

Before the Supreme Court, the Government advanced two theories for the proposition that Congress had constitutional authority to enact the individual mandate. First, the Government argued that Congress had the power to enact the mandate under the Commerce Clause. Under that theory, Congress may order individuals to buy health insurance because the failure to do so affects interstate commerce, and could undercut the Affordable Care Act’s other reforms. Second, the Government argued that if the commerce power did not support the mandate, the Court could nonetheless uphold it as an exercise of Congress’s power to tax. According to the Government, even if Congress lacked the power to direct individuals to buy insurance, the only effect of the individual mandate is to raise taxes on those who did not do so, and thus the law may be upheld as a tax.

The Court observed that it is true that the Act described the payment as a “penalty,” not a “tax.” But while that label was fatal to the application of the Anti-Injunction Act, it did not determine whether the payment may be viewed as an exercise of Congress’s taxing power. It is up to Congress whether to apply the Anti-Injunction Act to any particular statute, so it made sense to be guided by Congress’s choice of label on that question. That choice did not, however, control whether an exaction was within Congress’s constitutional power to tax. The Supreme Court rejected the plaintiffs contention that Congress’s choice of language—stating that individuals “shall” obtain insurance or pay a “penalty”—required reading §5000A as punishing unlawful conduct, even if that interpretation would render the law unconstitutional.

The Court observed that its precedent demonstrated that Congress had the power to impose the exaction in §5000A under the taxing power, and that §5000A need not be read to do more than impose a tax. That was sufficient to sustain it. “The question of the constitutionality of action taken by Congress does not depend on recitals of the power which it undertakes to exercise.” [Woods v. Cloyd W. Miller Co. (1948)]. Even if the taxing power enabled Congress to impose a tax on not obtaining health insurance, any tax must still comply with other requirements in the Constitution. Plaintiffs argued that the shared responsibility payment did not do so, citing Article I, §9, clause 4. That clause provide: “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or Enumeration herein before directed to be taken.” This requirement meant that any “direct Tax” must be apportioned so that each State pay in proportion to its population. According to the plaintiffs, if the individual mandate imposed a tax, it is a direct tax, and it is unconstitutional because Congress made no effort to apportion it among the States. The Supreme Court held that a tax on going without health insurance did not fall within any recognized category of direct tax. It is not a capitation. Capitations are taxes paid by every person, “without regard to  property, profession, or any other circumstance.” [Hylton v. United States(1796)]. The whole point of the shared responsibility payment is that it is triggered by specific circumstances—earning a certain amount of income but not obtaining health insurance. The payment is also plainly not a tax on the ownership of land or personal property. The shared responsibility payment was thus held not a direct tax that must be apportioned among the several States.

There may, however, be a more fundamental objection to a tax on those who lack health insurance. Even if only a tax, the payment under §5000A(b) remained a burden that the Federal Government impose for an omission, not an act. If it is troubling to interpret the Commerce Clause as authorizing Congress to regulate those who abstain from commerce, perhaps it should be similarly troubling to permit Congress to impose a tax for not doing something. The Supreme Court held that Affordable Care Act’s requirement that certain individuals pay a financial penalty for not obtaining health insurance may reasonably be characterized as a tax and the Constitution did permit such a tax.

The States also contended that the Medicaid expansion exceed Congress’s authority under the Spending Clause. They claimed that Congress was coercing the States to adopt the changes it want by threatening to withhold all of a State’s Medicaid grants, unless the State accept the new expanded funding and comply with the conditions that come with it. This, they argued, violated the basic principle that the “Federal Government may not compel the States to enact or administer a federal regulatory program.” [New York v. United States (1992)].

The Supreme Court observed that the Spending Clause grant Congress the power “to pay the Debts and provide for the general Welfare of the United States.” U. S. Const., Art. I, §8, cl. 1. Congress may use the power to grant federal funds to the States, and may condition such a grant upon the States’ “taking certain actions that Congress could not require them to take.” [College Savings Bank]. Such measures “encourage a State to regulate in a particular way, and influence a State’s policy choices.” [New York]. The conditions imposed by Congress ensure that the funds are used by the States to “provide for the general Welfare” in the manner Congress intended.

The Supreme Court observed that there are limits on Congress’s power under the Spending Clause to secure state compliance with federal objectives. Spending Clause legislation is as much in the nature of a contract. The legitimacy of Congress’s exercise of the spending power thus rest on whether the State voluntarily and knowingly accept the terms of the ‘contract.’ Respecting this limitation is critical to ensuring that Spending Clause legislation does not undermine the status of the States as independent sovereigns in the federal system. For this reason, “the Constitution has never been understood to confer upon Congress the ability to require the States to govern according to Congress’ instructions.” [New York]. Otherwise the two-government system established by the Framers would give way to a system that vests power in one central government, and individual liberty would suffer.

The Court agreed with the States objection that Congress had crossed the line distinguishing encouragement from coercion, in the way it has structured the funding: Instead of simply refusing to grant the new funds to States that will not accept the new conditions, Congress had also threatened to withhold those States’ existing Medicaid funds. The States claimed that this threat serves no purpose other than to force unwilling States to sign up for the dramatic expansion in health care coverage effected by the Act. In the present case, the financial “inducement” Congress had chosen was much more than “relatively mild encouragement”. Section 1396c of the Medicaid Act provide that if a State’s Medicaid plan does not comply with the Act’s requirements, the Secretary of Health and Human Services may declare that further payments will not be made to the State. 42 U. S. C. §1396c. A State that opt out of the Affordable Care Act’s expansion in health care coverage thus stand to lose not merely “a relatively small percentage” of its existing Medicaid funding, but all of it. The threatened loss of over 10 percent of a State’s overall budget, in contrast, is economic dragooning that would leave the States with no real option but to acquiesce in the Medicaid expansion.

The Court held that though Congress was not precluded from offering funds under the Affordable Care Act to expand the availability of health care, and requiring that States accepting such funds comply with the conditions on their use. What Congress was not free to do was to penalize States that choose not to participate in that new program by taking away their existing Medicaid funding. Section 1396c give the Secretary of Health and Human Services the authority to do just that. It allowed her to withhold all further Medicaid payments to the State if she determined that the State was out of compliance with any Medicaid requirement, including those contained in the expansion. In light of the Court’s holding, the Secretary couldnot apply §1396c to withdraw existing Medicaid funds for failure to comply with the requirements set out in the expansion.

The Affordable Care Act was held constitutional in part and unconstitutional in part. The individual mandate couldnot be upheld as an exercise of Congress’s power under the Commerce Clause. That Clause authorized Congress to regulate interstate commerce, not to order individuals to engage in it. In the present case it was reasonable to construe what Congress had done as increasing taxes on those who have a certain amount of income, but choose to go without health insurance. Such legislation was within Congress’s power to tax. As for the Medicaid expansion, that portion of the Affordable Care Act violated the Constitution by threatening existing Medicaid funding. Congress had no authority to order the States to regulate according to its instructions. Congress may offer the States grants and require the States to comply with accompanying conditions, but the States must have a genuine choice whether to accept the offer. The States were given no such choice in the present case: They must either accept a basic change in the nature of Medicaid, or risk losing all Medicaid funding. The remedy for that constitutional violation was to preclude the Federal Government from imposing such a sanction. That remedy did not require striking down other portions of the Affordable Care Act. The judgment of the Court of Appeals for the Eleventh Circuit was thus affirmed in part and reversed in part.