By Sara Rosenbaum, Joel Teitelbaum, Katherine Jett Hayes, and Michal McDowell

Introduction

On November 14, 2011 the United States Supreme Court agreed to hear arguments on four issues that have arisen as a result of more than two dozen legal challenges to the Affordable Care Act (ACA) that were filed upon or immediately following enactment. Eventually, four federal appeals courts ruled on multiple aspects of the challenges: whether the parties had standing (i.e., had demonstrated that they would be concretely affected by the Act) and their claims were ripe (i.e., ready to be heard); whether the federal courts have the power under the Anti-Injunction Act to hear claims regarding the constitutionality of the individual coverage requirement; whether the individual coverage requirement is constitutional; whether, if the coverage requirement is unconstitutional, it can be severed from the remainder of the Act; whether the obligations required of employers are constitutional; and whether the Medicaid expansions violate the Tenth Amendment and are unconstitutionally coercive.

In Florida et al. v United States Department of Health and Human Services,^[1] which was brought by 26 states,^[2] the United States Court of Appeals for the Eleventh Circuit overturned the individual coverage requirement as unconstitutional while upholding the constitutionality of the Medicaid expansions. Two other circuit courts found the individual coverage requirement constitutional (Thomas More Law Center v Obama^[3] and Susan Seven-Sky v Holder^[4]). A fourth appellate court decision, in Liberty University v Geithner,^[5] dismissed the individual coverage requirement claim on the ground that it was precluded by the Anti-Injunction Act.

Underscoring the seminal nature of the case, the Supreme Court itself has created a special website for briefs and related materials at http://www.supremecourt.gov/docket/PPAACA.aspx. Oral arguments are set for March 26-28, 2012, and a decision is expected by the end of the Court’s term near the end of June.

The Supreme Court will consider four issues: (1) whether Congress has the power under Article I of the Constitution to enact the coverage requirement; (2) if the coverage requirement is found unconstitutional, whether it is severable from the remainder of the ACA; (3) whether the ACA’s requirement that states expand Medicaid eligibility or risk losing federal funds is unduly coercive in violation of the Tenth Amendment; and (4) whether the individual coverage requirement is a tax for purposes of the Anti-Injunction Act, meaning that plaintiffs seeking to challenge the requirement must wait until it takes effect in 2014.

1. The constitutionality of the individual coverage requirement

The constitutionality of the individual coverage requirement raises questions regarding the scope and limits of congressional powers under both the General Welfare clause (which authorizes Congress’s taxing and spending powers) and the Commerce Clause.^[6] The ACA carries out the coverage requirement through amendments to the Internal Revenue Code, by imposing a “penalty” on applicable taxpayers who do not present evidence of “minimum essential coverage” (i.e., employer coverage, coverage purchased individually, Medicare, Medicaid, Tricare, veterans health care programs certified by the Secretaries of Health and Human Services and Veterans Affairs, and certain other forms of coverage).^[7] The penalty for failure to maintain such coverage phases in and ultimately is capped at $695.00, adjusted after 2016 for inflation or 2.5 percent of taxable income above the filing limit.^[8]

Congress’s taxing and spending powers. Although the Justice Department argued that Congress’ taxing and spending powers offered a basis for the coverage requirement, the Eleventh Circuit rejected this argument, concluding that the law was structured as a penalty rather than a revenue-raising tax, that Congress did not intend the law to operate as a tax, and that the minimum essential coverage requirement thus failed to meet the minimum essential elements of a tax under Supreme Court precedent. (“The government would have us ignore all of this and instead hold that any provision found in the Internal Revenue Code that will produce revenue may be characterized as a tax. This we are unwilling to do.”^[9]) In Thomas More,^[10] the Sixth Circuit reached a similar conclusion, while one of the judges on the Fourth Circuit (which dismissed the challenge on Anti-Injunction Act grounds) concluded that the individual coverage requirement could be upheld as a lawful exercise of Congress’s taxing powers.^[11]

Congress’s Commerce Clause powers. The appellate courts disagreed over whether the individual coverage requirement can be upheld as a constitutional exercise of Congress’ Commerce Clause powers. Their disagreement essentially boils down to two matters: First, whether an individual’s decision not to be insured (whether as a matter of choice or for reasons of affordability or access based on health status) is the type of activity that Congress can regulate under the Commerce Clause; and second, if so, whether the solution (i.e., a requirement to purchase private insurance) is a constitutional solution.

On both matters, the appellate decisions diverged sharply. The Thomas More and Seven Sky^[12] majorities (along with a particularly strong concurring opinion by Judge Jeffrey Sutton in Thomas More) found the requirement constitutional, while the Florida majority reached the opposite conclusion. In reaching opposite conclusions, the appellate courts agreed on the basic parameters of the Commerce Clause. But they disagreed on the meaning of key previous Supreme Court cases that ultimately will help shape the outcome.^[13] Under these precedents, the courts disagree as to whether Congress can regulate an individual’s decision not to buy health insurance, as well as whether the solution it has devised (a requirement to purchase private insurance) is constitutional. In effect, the lower courts have disagreed over whether Congress can reach the individual conduct at issue in this case (buying or not buying insurance) as well as whether Congress has chosen a constitutional means of assuring that the population is insured.

Appellate rulings in favor of constitutionality under the Commerce Clause. The appellate court opinions favoring the constitutionality of the individual coverage requirement concluded that the ACA’s fundamental focus is on stabilizing the health care system as a whole, and that this frame of reference is essential because all Americans need and use health care, and because the need is essentially unpredictable. The majorities upholding the coverage requirement focus on Congress’s lengthy findings (ACA §1501) regarding the impact of uninsured people on the health care economy (over $40 billion in bad debt that is passed along to everyone through higher insurance premiums), the problems created by having so many Americans attempting to self-insure by going without coverage and trying to pay for care at the point of service use, and the importance to any solution of a stable insurance system, which compels creation of a healthy insurance pool. These related findings, for the majorities favoring constitutionality, form a solid basis for Congress’s decision to regulate individual conduct because what is really at stake is the “when and how” of paying for health care; viewed in this light, millions of individual cases can be aggregated into a significant impact on commerce.

The Sixth and D.C. Circuit decisions upholding the individual coverage requirement also expressed no concern with its unprecedented structure; from their perspective, the modern Supreme Court has given Congress a wide berth to test out innovative solutions to complex problems of national policy (in his concurrence, Judge Sutton of the Sixth Circuit went back further, pointing to the creation of the first national bank as an example of Congressional innovation). In so doing, the favorable majorities also rejected the notion that individuals are being pushed into a marketplace they choose to avoid. Indeed, in his Thomas More concurrence Judge Sutton, who is noted for his conservative judicial philosophy, dismissed the assertion that not buying a product could be characterized as “inactivity” at all: “No one is inactive when deciding how to pay for health care, as self-insurance and private insurance are two forms of action for addressing the same risk. Each requires affirmative choices; one is no less active than the other; and both affect commerce.”^[14]

Furthermore, the Seven-Sky and Thomas More majorities found no problem with an individual requirement to buy private insurance as a solution to the problem. In their view, Congress devised a quintessentially American solution to an intractable problem in the market, one that reshapes the market and individuals’ relationship to it, no different from reshaping individual farmers’ relationship to the market for wheat in the case of Wickard v Filburn. In his Thomas More concurrence, Judge Sutton was clear in pointing out that such a solution is not unconstitutional because it had never previously been attempted, noting that any solution that hinged on a Medicare-like approach of extending public insurance to all residents through use of the taxing power, while clearly constitutional, had proved to be politically impossible, leaving Congress with no choice but to forge a new pathway.

Appellate ruling striking down the individual coverage requirement under the Commerce Clause. The court of appeals for the Eleventh Circuit came out the other way. In striking down the individual coverage requirement, the Eleventh Circuit majority (with one judge dissenting and writing in favor of the requirement) held that rather than reshaping the market for health care, the purpose of the law was to force Americans into a private insurance market that they did not choose to enter. In this respect, the Florida majority asserted, the Act could be distinguished from other cases such as Wickard v Filburn and Gonzalez v Raich, which, rather than forcing people into markets, simply reordered their relationships with markets the challengers already were members of (growing wheat and marijuana, respectively, for personal use). Rather than defining the market as one for health care that all Americans are part of, the Eleventh Circuit defined the market as one for private insurance products. What appeared to move the Eleventh Circuit decision into the “unconstitutional” column was not the challengers’ inactivity arguments, which it dismissed as unhelpful. Instead, it was the nature of the solution, the idea of forcing people to buy private insurance, or, as the majority put it, “a mandate that Americans purchase and maintain health insurance from a private company for the entirety of their lives.”^[15]

Even more important, perhaps, was the Florida majority’s conclusion that there is no relationship between a requirement to buy private insurance and the type of economic activity necessary to reaching individual behavior under Supreme Court precedents. Had Congress chosen to condition the receipt of health care on being insured, the Eleventh Circuit concluded that the law would be constitutional: “When the uninsured actually enter the stream of commerce and consume health care, Congress may regulate their activity at the point of consumption.”^[16] But short of conditioning use of health care on being insured, the Eleventh Circuit concluded that Congress lacks any basis to reach the fact of simply not being insured: “It is immaterial whether we perceive Congress to be regulating inactivity or a financial decision to forego insurance. Under any framing the regulated conduct is defined by the absence of . . . the production, distribution, and consumption of commerce.”^[17]

Because of the absence of any connection between the insurance requirement and commerce, the Eleventh Circuit placed the ACA into the same category as other acts of Congress struck down as unconstitutional because the laws had no connection between commerce and the individual conduct being regulated.^[18] In so ruling, it refused to defer to Congress’ own findings regarding the link between the broader health care economy and being uninsured. The majority concluded that it is not enough for Congress simply to assert a connection between conduct and commerce:

Here the decision to forego insurance similarly lacks an established interstate tie or any “case-by-case inquiry.” Aside from the categories of exempted individuals, the individual mandate is applied across-the-board without regard to whether the regulated individuals receive, or have ever received, uncompensated care — or indeed, seek any care at all either now or in the future. Thus the Act contains no language “which might limit its reach to a discrete set of [activities] that additionally have an explicit connection with or effect on interstate commerce.”^[19]

The Florida majority also was troubled by the lack of “limiting principles” for use of Commerce Clause powers to require the purchase of market goods: “If Congress may compel individuals to purchase health insurance from a private company, it may similarly compel the purchase of other products from private industry, regardless of the ‘unique conditions’ the government cites as warrant for Congress’s regulation here.”^[20] Finally, the majority rejected the notion that the individual coverage requirement was a necessary component of a broader regulatory scheme, ruling that Congress could regulate the insurance industry without question but that an individual purchase requirement is not necessary to that task. Acknowledging the insurance crisis that might arise from regulating the market without connecting the regulation to a stable purchasing pool, the majority concluded that this was not its problem.

2. Whether if it is unconstitutional, the individual coverage requirement can be severed from the rest of the Act

If it strikes down the individual coverage requirement as unconstitutional, the Supreme Court must decide whether the rest of the law must fail. The Eleventh Circuit majority ruled that the individual coverage requirement can be severed from the remainder of the Act and that numerous options remained available to Congress to address the Act’s constitutional deficiencies. Essential to its decision were several considerations: the weak penalties that attach to those who refuse to buy coverage; the fact that no severability clause was included in the Act; and the fact that the market reforms make no reference to the mandate. In finding severability, the Eleventh Circuit overruled the federal district court in the Florida case, which ruled that, because the individual purchase requirement was an essential and indispensable part of the ACA, it was not severable and thus declared the entire ACA unconstitutional.^[21]

Supreme Court precedent states that an unconstitutional provision may be severed from other constitutional parts of a statute unless it is “evident that [Congress] would not have enacted those provisions which are within its power independently” of the unconstitutional provision.^[22] The Eleventh Circuit, as noted, found that the individual coverage requirement was severable, thereby reversing the trial court decision in the case, which overturned the entire law. But in Virginia ex rel. Cuccinelli v Sebelius^[23] (ultimately dismissed by the United States Court of Appeals for the Fourth Circuit without reaching the merits, for lack of standing), a separate federal trial court that declared the individual coverage requirement unconstitutional was unwilling to overturn the entire law and instead did so selectively, focusing on key market reforms.^[24] Yet another trial court, this one in Pennsylvania, reached a similar conclusion regarding the ambiguity surrounding congressional intent but ruled that the guaranteed issue and pre-existing condition exclusion clauses must “rise []and fall[]” with the individual purchase requirement.^[25]

Arguments favoring severability. In its petition for certiorari,^[26] the Department of Justice argues against “wholesale invalidation” of the ACA on several grounds: 1) remedies for constitutional flaws should be limited to severing problematic portions and keeping the rest of the statue intact;^[27] 2) provisions may only be invalidated on non-severability grounds if Congress clearly would not have enacted the provisions in the absence of the individual mandate;^[28] and 3) the State petitioners have not demonstrated that each of the provisions they content is non-severable burdens them.^[29] DoJ has argued that the guaranteed issue and community rating provisions are non-severable but that many provisions of the law are unrelated to the individual coverage requirement and should be preserved.

Arguments opposing severability. The National Federation of Independent Businesses (NFIB), one of the litigants in the Eleventh Circuit case, argues, on the other hand, that the ACA should be invalidated in the event the individual coverage requirement is found unconstitutional. The NFIB contends that without the individual coverage requirement, the rest of the ACA cannot operate independently in a manner consistent with Congress’ original legislative intent.^[30] The NFIB also asserts that the individual requirement is tied directly to the insurance reforms, which together form the “heart” of the ACA and thus, striking down the coverage requirement necessarily torpedoes the entire statute.^[31]

The states argue that the Supreme Court should address the severability question in the event the Court invalidates the individual purchase requirement to resolve the “confusion” that has surfaced among the lower courts, but to date they have not addressed how the severability question should be answered.^[32]

3. Whether the Medicaid expansion is unconstitutionally coercive

The Coercion Doctrine

The states’ case, and the Eleventh Circuit decision, rest on a special legal theory known as the “coercion doctrine,” characterized as “amorphous” by the Eleventh Circuit. First set forth by the Supreme Court in the New Deal era, the doctrine relates to Congress’ Spending Clause powers and was most recently addressed by the Court in South Dakota v. Dole.^[33] In Dole^[34] Based on this doctrine, the states have argued that the Medicaid expansion amounts to unconstitutional coercion.

The states’ argument: In their petition for certiorari,^[35] the states reject the Eleventh Circuit’s characterization of the law as non-coercive; they argue instead that the Medicaid expansion meets the coercion test because it is unprecedented in scope and “threaten[s] to withhold all federal funding under [Medicaid,] the single largest grant-in-aid program,” something that according to their brief has not happened before. As evidence of coercion, the states point to a number of factors: the fact that the ACA takes away their previous discretion under Medicaid to treat certain populations as optional as a result of the maintenance of effort provision; the fact that the ACA, in contrast to prior laws, would withhold all federal funding in the case of non-compliant states;^[36] the fact that the ACA couples the expansion with both a maintenance of effort requirement covering previously optional populations and new obligations to assure not just coverage but actual access to care; and finally, the fact that because the Medicaid expansions are part of a larger law that contains no other source of funding for the poorest Americans, Congress essentially has bootstrapped Medicaid into an offer that cannot be refused.^[37] According to the states, all of these factors, combined with an interpretation of the coercion doctrine by Judge Michael Luttig, a highly influential conservative judge on the Fourth Circuit Court of Appeals,^[38] make the Medicaid expansion unconstitutionally coercive.

The DoJ Response: In its response to the states’ petition, DoJ argues that the structure of the ACA Medicaid expansion is no different from previous Medicaid expansions of mandatory coverage groups, including expansions accompanying enactment of Supplemental Security Income in 1972 as well as those covering pregnant women and children.^[39] In all three instances, argues DoJ, Congress has conditioned states’ participation in Medicaid (and thus receipt of federal funding) on coverage of these populations.^[40] The Department of Justice also takes issue with the states’ characterization of the coercion doctrine and in particular with the Judge Luttig’s writings, which, according to DoJ, were remarks simply written in passing (known as “dicta”).^[41] In fact, DoJ points out that the Fourth Circuit explicitly rejected a Medicaid coercion challenge in West Virginia v. HHS.^[42] Indeed, DoJ continues, Judge Luttig has expressly written that “a valid coercion claim would lie [only] where the federal government withheld the entirety of a substantial federal grant on the ground that States refuse to fulfill their federal obligation in some insubstantial way.”^[43] The Department of Justice notes that by contrast, the Medicaid expansion could not be considered insubstantial since the Congressional Budget Office estimates that the provision will affect 16 million uninsured individuals.^[44]

4. Whether the Anti-Injunction Act bars consideration of the individual coverage requirement

The Supreme Court also agreed to hear arguments on whether the Anti-Injunction Act (AIA) bars federal courts from hearing a challenge to the individual coverage requirement until it goes into effect, a conclusion reached by both the Court of Appeals for the Fourth Circuit in Liberty University v Geithner and the D.C. Circuit Court in Seven-Sky v Holder.

Under the Constitution, Congress has the power to regulate the jurisdiction of the lower courts and thereby limit their ability to hear certain types of cases. The Anti-Injunction Act is just such a law, under which Congress has prohibited the federal courts from hearing suits that seek to bar the collection of federal taxes in advance of their imposition (but allowing people to challenge the legality of a tax at the point of collection).^[45] The heart of the matter, for Anti-Injunction Act purposes, is whether the penalty amounts to a tax and, if so, whether the courts thus are barred from hearing challenges until the tax actually is applied.

Appellate courts have issued conflicting decisions. In Florida and Thomas More, the courts held that the AIA did not bar federal court jurisdiction, since it does not bar legal challenges to what amount to “penalties” imposed for “substantive violations of laws not directly related to the tax code.”^[46] But in Liberty v Geithner, the Court of Appeals for the Fourth Circuit set aside the trial court ruling and dismissed the challenge, concluding that under Supreme Court precedents, even when a tax is merely secondary to the primary goal of a law, this does not mean that the law is not a tax.^[47] Citing several provisions of the Internal Revenue Code, the Fourth Circuit held that for the purposes of the AIA, Congress had made it clear that penalties are taxes, and that the AIA barred court jurisdiction.^[48]

The DoJ position. In its motion to dismiss the initial challenge to the law in Florida, the Department of Justice originally argued that the AIA bars the courts from hearing the case. But it is no longer taking this position. In its response to Liberty University’s request for a review of the Fourth Circuit’s ruling,^[49] DoJ has stated that the government no longer believed that the AIA should bar pre-enforcement challenges to the individual coverage requirement because^[50] for AIA purposes the law can be considered a penalty rather than collection of a tax. Since none of the parties in the ACA litigation now support the position that the AIA bars consideration of the individual mandate, the Supreme Court has appointed counsel to argue this position.

What Does All of This Mean?

Whatever the final result of this litigation, there are several levels of likely consequences.

From a constitutional perspective, a decision striking down the individual coverage requirement or the Medicaid expansion would have profound implications for the scope of congressional powers. As Judges Sutton (Sixth Circuit) and Kavanaugh (D.C. Circuit) point out, in the modern U.S. economy, Congress needs and possesses the power to devise market solutions to difficult problems. For example, one proposed solution to Medicare’s uncontrolled growth is to scrap the “traditional” government insurance program in favor of a compulsory insurance tax (the Medicare HI tax) coupled with a premium support solution. Would such a solution — typically advanced by conservative free-market thinkers — immediately be off the table since it would replace a public insurance system with compulsory participation in a market-based system?

The Medicaid coercion aspect of the case may be even more far-reaching. Congress might fashion a coverage incentive (voluntary enrollment, high penalties for non-enrollers) to take the place of an unconstitutional mandate, much like Medicare Parts B and D, both of which are voluntary. But if the Medicaid expansion is found to be unconstitutionally coercive, the fundamental structure of the program, along with those of other federal grant-in-aid programs, will be called into question, along with Congress’s powers to use federal spending to steer national policy. Perhaps the most eloquent statement on the consequences of such an outcome for Congressional lawmaking was offered by Senator Charles Grassley (R-IA) who, in an extraordinary Senate speech delivered on December 15, 2011, warned his colleagues of the meaning of a coercion ruling that adopts the states’ position:

Mr. President, if the Supreme Court rules the individual mandate unconstitutional, it will have the effect of striking down a new law that hasn’t been fully implemented. If the Supreme Court rules the Medicaid expansion in the Affordable Care Act unconstitutional, it has the potential to cause significant changes in a program that has been in operation for the last 46 years. [I]t is difficult to overstate the potential implications of this particular aspect of the Affordable Care Act case. A ruling for the states could affect future Medicaid policy, current Medicaid policy and broader federal-state partnerships. Mr. President, if the federal government cannot require expansion of the Medicaid program and pick up 92% of the tab, what can the federal government require? [I]f the current mandatory expansion of Medicaid is unconstitutional, what does that imply for previous expansions and policies? In 1989 and 1990, when Congress required states to expand eligibility for women and children, Congress did so without providing ANY additional funding for the states beyond the normal federal share. Mr. President, if the Supreme Court rules in favor of the states, will previous mandatory expansions of Medicaid be subject to challenge? [A] Supreme Court ruling on a coercion test necessarily has broader implications for all federal-state partnerships. It could threaten the fundamental structure of the Medicaid program by bringing into question all the requirements in the program today. It could require future Congresses to reconsider the structure of every federal-state partnership. If the Supreme Court accepts the states’ argument, a host of constitutional questions will surround the operation of many federal funding streams to the states. It would be difficult to overstate the significance of such a ruling.^[51]

From a health policy perspective, the meaning of the decision is more ambiguous. Regardless of the outcome, a new President and Congress could decide to repeal the Act in its entirety or to repeal major portions of the law, such as the individual coverage requirement, the Medicaid expansion, the market reforms, state Exchange structure and operations, and other provisions. Regardless of how the Supreme Court rules on the questions before it, in other words, its decision is not necessarily the final word, in part depending on the outcome of the 2012 election. Even were the Court to uphold the constitutionality of the Act’s individual coverage requirement and Medicaid expansion and thereby also dispose of the severability and AIA issues, the ongoing uncertainty around the final parameters of the Act could continue to slow state implementation.

At the same time, even with the political tensions surrounding the legislation, it should be remembered that during the most intense budget negotiations, neither side was willing to simply wipe out all of the Medicaid expansion funds and funding set aside for private insurance subsidies for low- and moderate-income families. This fact, coupled with the popularity of the insurance market reforms (both those that have taken effect and those to be implemented), suggest that the two central propositions of the ACA – that insurance should be accessible, and that insurance should be affordable – are ones that in fact are shared by both political parties, with the result that a way forward ultimately will emerge.