Supreme Court Upholds Federal Health Care Reform

By Lenora W. Pate,  Cynthia Ransburg-Brown, and Kelli F. Robinson of Sirote & Permutt

Supreme Court Upholds Federal Health Care Reform

On June 28, 2012, the U.S. Supreme Court issued its highly-anticipated opinion in National Federation of Independent Business v. Sebelius deciding the constitutionality of the Act.  By a 5-4 margin – with Chief Justice Roberts casting the deciding vote - the Court ruled that the Act’s highly-debated “individual mandate,” which requires most Americans to maintain “minimum essential” health care coverage or pay a “shared responsibility payment” (penalty) to the IRS, was not constitutional under Congress’ Commerce Clause power. 

Writing for the majority, however, Chief Justice Roberts creatively upheld the Act under Congress’ Taxing power, stating that “it is reasonable to construe what Congress has done as increasing taxes on those who have a certain amount of income, but choose to go without health insurance.”  Hence, what was written by Congress as an individual “mandate,” with a penalty, was converted by the Chief Justice’s creative construction to an individual “option,” with a tax on certain individuals who choose to go without health insurance.  The Chief Justice concluded that the financial “penalty” could be reasonably characterized as a “tax,” in part because “for most Americans the amount due will be far less than the price of insurance and by statute can never be more,” and “may often be a reasonable financial decision to make the payment rather than purchase insurance.” If, instead, the “tax” had been coercive, or so great that it would have compelled action, Chief Justice Roberts noted that it would have been an actual “penalty” and could not have been upheld under the Congress’ Taxing power.

The majority of the Court also ruled that the Medicaid expansion provisions of the Act, while constitutional, could not be forced upon the States by coercively threatening the loss of existing federal Medicaid funding if a State chose not to expand its Medicaid program to cover all adults at or below 133% of the poverty level.  While Congress may offer the States certain funding under its Spending power and require certain conditions relating specifically to such offer of funds, the States must, however, have a “genuine choice” whether to accept the offer.  Finding that the Medicaid expansion provisions could be severed without affecting the remainder of the Act, the Court, in its opinion, removed the coercive threat by prohibiting the Federal Government from withdrawing existing Medicaid funds from any State which chooses not to expand its Medicaid program.

While upholding the constitutionality of the Act, the Court, in essence, converted an individual “mandate” to purchase health insurance to an individual “option” with a tax on certain individuals if not purchased, and converted what was, in effect, a coercive mandatory Medicaid expansion on the States to an option by the States.  It is not clear what impact these two judicially created “options” will have on the overall goal of the Act of insuring all Americans, considering that the individual mandate and the Medicaid expansion provisions were considered key to achieving near universal health insurance coverage under the Act.  We can expect much cost benefit analysis, assessing the cost of coverage versus the limited tax, and the potential cost of expansion of Medicaid by the States, before the verdict is in on such impact!

What we do know, however, is that all of the other provisions of the Act are on track to move forward on what has now become an aggressive timetable, with numerous penalties, taxes and other incentives and disincentives embedded throughout the Act.   To learn more about the Act and its implications for individuals and employers, see Sirote & Permutt’s library of Health Care Alerts HERE. 

Background.  The suit challenging the Act was originally brought by two individuals, twenty-six (26) States, and the National Federation of Independent Business.  Two additional individual plaintiffs were added when questions arose as to whether the two original private plaintiffs had standing to challenge the Act.  In October 2010, the U.S. District Court for the Northern District of Florida invalidated the entire Act.  In August 2011, the U.S. Court of Appeals for the Eleventh Circuit agreed that the individual mandate was unconstitutional, but reversed and upheld the rest of the Act.  The U.S. Supreme Court agreed to review the case, and heard extensive oral arguments in late March 2012. 

The Court considered four central issues in its opinion:

1. Anti-Injunction Act.  The Court first considered whether the case was premature under the Anti-Injunction Act, a federal law requiring a taxpayer to first pay the tax assessment before he can challenge a tax’s legality.  The challenge before the Court involved collection of the “shared responsibility payment” from those who do not comply with the individual mandate, which will not be payable by anyone until 2014.  The Court decided that Congress did not intend the payment to be treated as a “tax” for purposes of the Anti-Injunction Act and noted that the Act describes the payment as a “penalty,” not a “tax.”  While the “penalty” label did not control whether the payment is a tax for purposes of the Court’s Constitutional analysis, it did determine application of the Anti-Injunction Act.  Therefore, the Court held that the Anti-Injunction Act did not bar this suit.

2. Individual Mandate.  The Court held that the individual mandate exceeded Congress’ power under the Commerce Clause and the Necessary and Proper Clause of the U.S. Constitution.  The individual mandate’s imposition of a penalty for failing to purchase health insurance was not commerce that could be regulated by Congress.  Although Congress has the power to regulate an existing business or activity, it does not have the power to regulate inactivity or compel the creation of a new business or activity or commerce.  Thus, the Court found the individual mandate to be impermissible and unconstitutional under the Commerce Clause, as well as the Necessary and Proper Clause of the U.S Constitution.

Five justices, however, agreed that the individual mandate “penalty” may reasonably be characterized as a “tax,” and held that Congress has power under the U.S. Constitution’s Taxing and Spending Clause to order individuals to pay a tax for failure to have health insurance.  According to the Court’s opinion, “the shared responsibility payment merely imposes a tax citizens may lawfully choose to pay in lieu of buying health insurance.”  Consequently, the Court upheld the penalty as a constitutional exercise of Congress’ power to tax.

3. Severability.  Because the individual mandate was in effect converted to an option with a tax and held to be constitutional, the issue of whether it could be severed from the rest of the Act was declared moot.

4. Expansion of Medicaid Program.  The Court ruled that Congress could not threaten to withhold all existing Medicaid funding from a State for failure to expand its Medicaid coverage under the Act, but noted that this threatened withholding could be severed from the Medicaid expansion provisions without otherwise invalidating the rest of the Act.  In essence, the Court determined that Congress cannot penalize States that choose not to participate in the expansion of Medicaid coverage under the Act by taking away their existing Medicaid funding. 

We will continue to monitor the effects of this important Supreme Court decision.

Sirote & Permutt’s Health Care Practice Group stands ready to assist you with any questions that you may have concerning PPACA.  For additional information, please contact Lenora W. Pate at 205-930-5162 (lpate@sirote.com), Cynthia Ransburg-Brown at 205-930-5389 (cransburgbrown@sirote.com), or Kelli F. Robinson (krobinson@sirote.com) at 205-930-5158.