On June 28, 2012, the United States Supreme Court upheld the constitutionality of the Patient Protection and Affordable Care Act, as amended. This article provides a background on the Patient Protection and Affordable Care Act, discusses the issues before the Court, explains the Court’s decision, and identifies potential next steps.
Overview of the Patient Protection and Affordable Care Act
The Patient Protection and Affordable Care Act (“PPACA”) was enacted on March 23, 2010. The Health Care and Education Reconciliation Act of 2010 was enacted on March 30, 2010, and amended the PPACA. Among other reforms, the PPACA (as amended) provides increased access to health insurance, expands federal private health insurance market requirements, and requires the creation of health insurance exchanges to provide individuals and small employers with access to health insurance. The PPACA generally eliminates lifetime and annual limits as well as pre-existing condition exclusions. It provides for both small business tax credits to help employers pay for the cost of group health insurance as well as coverage for adult children through the age of twenty-six. The PPACA will increase access to health insurance, in part, by expanding Medicaid eligibility and subsidizing private insurance premiums for eligible lower-income individuals enrolled in health insurance through health insurance exchanges. The PPACA includes a so-called “individual mandate,” whereby most individuals not covered by employer, private, or government sponsored insurance plans must pay a tax if they do not maintain “minimum essential” health insurance coverage.
Lawsuit: Florida v. U.S. Department of Health and Human Services
Following the enactment of the PPACA, a number of lawsuits were filed challenging its constitutionality. In particular, opponents of the PPACA asserted the individual mandate violated the United States Constitution. The most prominent of these lawsuits was Florida v. U.S. Department of Health and Human Services (” Florida v. HHS“).
Florida v. HHS was an action brought by state attorneys general and/or governors of twenty-six states, two private citizens, and the National Federation of Independent Business (collectively, “Florida”). Florida sued the Department of Health and Human Services, the Department of the Treasury, and the Department of Labor, seeking to have the PPACA declared unconstitutional. The suit was filed on March 23, 2010, in the United States District Court for the Northern District of Florida. On January 31, 2011, the court ruled the individual mandate was unconstitutional because it had not been enacted pursuant to Congress’s taxing powers and it exceeded Congress’s power under the Commerce Clause and the Necessary and Proper Clause. The court also held that the PPACA’s Medicaid expansion provisions were constitutional because States have the ability to withdraw from the voluntary program, thus the expansions did not amount to coercion. Finally, the court determined the individual mandate was not severable from the rest of the PPACA, thus rendering the entire PPACA unconstitutional. The court reasoned the individual mandate was so inextricably bound with the rest of the PPACA’s provisions that without the mandate, the law simply could not stand consistent with Congress’ original intent.
The federal government appealed the district court’s ruling that the individual mandate was unconstitutional and the individual mandate was not severable. Florida cross-appealed the district court’s ruling that Medicaid expansion was constitutional.
On appeal to the United States Court of Appeals for the Eleventh Circuit, a three judge panel affirmed the ruling of the district court in part, holding that the individual mandate was unconstitutional. The court reasoned that Congress lacked the authority to require individuals to enter into expensive, lifetime contracts with private insurance companies. However, the Eleventh Circuit overruled the district court on one point by finding the individual mandate was severable, thereby allowing the rest of the PPACA to remain intact. The court reasoned the PPACA contained hundreds of stand-alone provisions unconnected to the individual mandate, and that Florida could not meet the heavy burden to rebut the presumption of severability.
The federal government and Florida appealed the decision of the Eleventh Circuit to the United States Supreme Court. The federal government argued the Eleventh Circuit erred in holding the individual mandate was unconstitutional. Florida maintained that the court erred in finding that the individual mandate could be severed.
Issues Before the United States Supreme Court
The United States Supreme Court granted certiorari on November 14, 2011, and heard oral arguments on March 26 through March 28, 2012. The Court limited its review to four constitutional issues:
- Whether the Court had authority under the Anti-Injunction Act of 1867 to determine whether the individual mandate was constitutional.
- Whether the individual mandate was constitutional.
- Whether the individual mandate was severable from the rest of the PPACA and if not, whether the PPACA could survive if the mandate was struck down.
- Whether the expansion of Medicaid to a broader class of eligible individuals was constitutional.
The first issue before the Court was whether the Court could lawfully hear the challenge to the PPACA under the Anti-Injunction Act of 1867. The Anti-Injunction Act of 1867 generally prohibits challenges to a tax law before the law has taken effect. The PPACA’s individual mandate does not take effect until 2014, so a finding that the sanction for not complying with the individual mandate is a tax would have rendered courts without jurisdiction to review the constitutionality of the individual mandate until 2014. The federal government and Florida both argued the Court had jurisdiction to hear the case prior to 2014. The federal government’s position was that the monetary penalty for failing to buy health insurance was not a “tax” for purposes of the Anti-Injunction Act, although for other purposes the government argued the provision was a tax. Florida argued that its challenge was not to the payment of the tax itself, but to the requirement that individuals buy insurance.
The second issue before the Court was whether the individual mandate was constitutional. The federal government argued for the individual mandate’s constitutionality under Article I, Section 8, Clause 3 (the “Commerce Clause”) and Article I, Section 8, Clause 18 (the “Necessary and Proper Clause”) of the United States Constitution. Under these clauses, Congress is authorized to regulate interstate commerce or activities that have a substantial affect on interstate commerce. The federal government argued that health insurance should be considered interstate commerce given its widespread economic impact on Americans. Congress made specific findings in the PPACA that individuals who do not have health insurance drive up the costs of family premiums by more than $1,000 annually. The federal government asserted the decision not to purchase health insurance is an economic one that dramatically affects the interstate market for health care; accordingly, Congress has the power to regulate. The question of whether the individual mandate is a tax was only briefly touched on in oral arguments.
Conversely, Florida argued the individual mandate only affects uninsured individuals who do not otherwise participate in the health insurance market. According to Florida, the Commerce Clause requires existence of an activity in order to be regulated by Congress. Failure to purchase health insurance is inactivity; therefore, it cannot be regulated under the Commerce Clause. Florida argued that if Congress can compel individuals to purchase health insurance, there would be virtually no limits on other products Congress could force individuals to buy on the theory that every decision has some economic impact.
The third issue the Court considered was whether the individual mandate could be separated from the rest of the PPACA. The federal government argued the individual mandate provision was severable because Congress did not intend the entire law to fall simply because one provision was found unconstitutional The government maintained that even if the individual mandate was found unconstitutional, the remainder of the PPACA could remain in effect. In contrast, Florida contended the individual mandate was so intertwined with the rest of the PPACA that if the individual mandate was overturned, the rest of the PPACA had to be struck down as well.
The final issue before the Court was whether the United States Constitution permits the federal government to require states to adopt Medicaid eligibility expansions for states to remain eligible for federal Medicaid funds. Medicaid is a cooperative federal-state subsidization program whereby the federal government provides funds to all fifty states that voluntarily participate. Under the PPACA, Medicaid was expanded from covering only certain categories of low-income groups to all adults under the age of 65 with incomes up to 133 percent of the federal poverty level, which covers individuals earning approximately $15,000 annually or a family of four with a combined annual income slightly above $30,000. To help states cover the costs associated with Medicaid expansion, the PPACA provides that the federal government will fund the full cost through 2016, and beginning in 2017, the states will begin sharing the costs of the new covered population.
The federal government argued the PPACA merely incentivizes states to participate in the program by attaching conditions to the receipt of federal funds. The government’s contention was that there could be no coercion in a program in which states voluntarily participate. Conversely, Florida argued the Medicaid expansion was unconstitutional because it amounted to coercion and violated state sovereignty under the Tenth Amendment. Because Medicaid is such an essential program and states rely so heavily on the federal government to fund it, Florida argued that participation in the program’s expansion was not voluntary.
Opinion of the United States Supreme Court
On June 28, 2012, the Court issued its opinion in National Federation of Independent Business et al. v. Sebelius, Secretary of Health and Human Services, et al. (encompassing the appeal of Florida v. HHS). Chief Justice Roberts announced the judgment of the Court. The Court specifically resolved two constitutional questions: the constitutionality of the individual mandate and the constitutionality of the Medicaid expansion.
After analyzing the federal government’s general powers under the United States Constitution to tax, spend, and regulate interstate commerce, as well as the Court’s power as a co-ordinate branch of government to strike down unconstitutional laws, the Court considered whether it possessed authority to review the merits of the case under the Anti-Injunction Act. The Court determined the Anti-Injunction Act did not apply to the lawsuit, so the Court could proceed to the merits of the case. The Court reasoned that for purposes of the Anti-Injunction Act, Congress intended the individual mandate to be a “penalty” and not a “tax.” Therefore, the Anti-Injunction Act did not preclude the Court from reaching the merits of the case.
Following resolution of the Anti-Injunction Act issue, the Court considered the constitutionality of the individual mandate under the Commerce Clause. The Court acknowledged that Congress has broad authority under the Commerce Clause. However, the Court stated Congress had never attempted to use its power under the Commerce Clause to compel individuals who are not engaged in commerce to purchase a product. The Court observed the individual mandate does not regulate existing commercial activity, but instead compels individuals to become active in commerce by purchasing a product (i.e., health insurance) on the ground that their failure to do so affects interstate commerce. Therefore, Congress could not enact the individual mandate under the Commerce Clause. The Court also rejected the federal government’s argument that Congress had the power to enact the individual mandate under the Necessary and Proper Clause.
Instead of upholding the individual mandate under the Commerce Clause or the Necessary and Proper Clause, the Court upheld the individual mandate under the Taxing Clause. The Court considered whether the individual mandate could be upheld under Congress’s constitutional power to “lay and collect Taxes.” The Court framed the question as whether the individual mandate was constitutional because it imposed a tax on individuals who did not buy a product, rather than a mandate ordering individuals to purchase health insurance. Citing long-standing precedent, the Court noted that if a statute is susceptible to two meanings, one that is constitutional and one that is not, the Court should adopt the meaning that is constitutional. The Court observed that under the PPACA, the only consequence a person faces if he or she does not maintain health insurance is the payment of an additional tax. The Court determined the individual mandate had the characteristics of a tax, not a penalty, because it produced some revenue for the federal government, did not impose an exceedingly heavy burden, had no scienter requirement, and was not enforced by an agency responsible for punishing violations of the law. The Court condoned the use of taxes to influence individual behavior (the purchasing of health insurance), noting that taxes on cigarettes, marijuana, and sawed-off shotguns had been upheld as constitutional. Similarly, the Court reasoned Congress routinely uses its power under the Taxing Clause to create incentives, such as promoting professional education and home ownership. The Court acknowledged that although the individual mandate was designed to induce the purchase of health insurance, such legislative activity was not unlawful and individuals were free to choose to go without health insurance and pay the tax. The Court also rejected the argument that because the individual mandate was labeled a “penalty” and not a “tax,” it was unenforceable. The Court determined the label was not controlling.
Finally, the Court addressed the constitutionality of the Medicaid expansion provision under the Spending Clause. The Court explained the Spending Clause grants Congress the power to “pay the Debts and provide for the … general Welfare of the United States.” Under the Spending Clause, Congress may grant federal funds to states. Congress may also use its power under the Spending Clause to condition grants of federal funds to states upon states taking actions that Congress could not require them to take. Although Congress may impose conditions on states to ensure federal funds are used to provide for the general welfare in the manner Congress intends, Congress may not use its spending power to commandeer a state’s legislative or administrative apparatus for federal purposes.
The Court noted the PPACA’s Medicaid expansion provision significantly changed the nature of the program by expanding eligibility to the entire nonelderly population with income below 133 percent of the poverty level. The Court determined the Medicaid expansion provision was partially unconstitutional. The Court determined Congress could not withhold current Medicaid funding to penalize a state if it chose not to participate in the expanded eligibility requirements for Medicaid. However, Congress may require states to expand Medicaid eligibility for the state to receive federal funds associated with such expansion. Therefore, if states choose to expand Medicaid eligibility, they will be eligible for additional federal funding to cover the cost of expanded coverage, as well as current federal Medicaid funding. However, if a state does not choose to expand Medicaid eligibility, it will not lose current Medicaid funding, but will be ineligible for the additional funding that covers the cost of expanded eligibility.
Having resolved the constitutional issues, the Court did not need to address this question of severability.
Except for partially invalidating a portion of the PPACA’s Medicaid expansion provisions, the Court upheld the constitutionality of the PPACA. Accordingly, individuals, employers, insurers, health care providers, states, and others must continue to plan for and implement the PPACA and its related regulations. The following are several near-term health care reform actions to consider:
- The PPACA’s new $2,500 annul limit on contributions to health flexible spending arrangements (health FSAs) becomes effective January 1, 2013. Accordingly, cafeteria plans and health FSAs should be reviewed and amended to incorporate the new $2,500 annual contribution limit. Employee communications, such as summary plan descriptions (SPDs) and summaries of material modifications (SMMs) should also be reviewed, revised, and distributed.
- Beginning on the first day of the first open enrollment period that begins on or after September 23, 2012, the PPACA’s requirement to provide a summary of benefits and coverage (and related disclosures) applies to disclosures to participants and beneficiaries who enroll or re-enroll in group health coverage through an open enrollment period. Accordingly, employers, plan sponsors, and plan administrators should ensure they will be able to provide these notices in the required time periods.
Fraser Stryker is a leader in tax and employee benefits law. Attorneys in the Firm’s Taxation and Employee Benefits & ERISA Practice Groups advise individuals, business entities, governments, and nonprofit/tax-exempt organizations on a wide variety of tax and employee benefits matters and transactions. Fraser Stryker works with employers to implement and maintain employee benefit plans that help attract and retain top talent. Fraser Stryker is on the cutting edge of advising clients on all aspects of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010. Fraser Stryker’s Health Care Reform Response Team, composed of attorneys in the Employee Benefits and Health Care Practice Groups, also assist clients in complying with and implementing this major piece of legislation. Members of the Team work closely with employers, health care providers and facilities, insurance companies, human resources personnel, health plan administrators, and third party administrators to help them understand and implement these laws. The Health Care Reform Response Team attorneys have experience working with state and federal health care and health insurance regulators, the Department of Labor, and the Internal Revenue Service in all aspects of health insurance and health care delivery. For more information, please contact Nicole R. Konen.