First published in NZ Lawyer, 10 August 2012.
Recently the United States Supreme Court issued a decision which in large part upholds President Obama's signature healthcare legislation (National Federation of Independent Business v Sebelius, 28 June 2012). It is undoubtedly one of the most significant decisions ever issued by the Court. Constitutionally, it is important guidance on the "Commerce Clause", as well as Congress's powers of taxation. Politically, it was a huge victory for President Obama at a critical time in the lead-up to the November 2012 elections. Practically, the decision should mean that many more Americans will obtain health insurance. This is particularly significant in a country where a single hospital stay typically costs upward of $10,000, the average individual spend on health-care expenses is over $7,000 per annum (amounting to hundreds of thousands of dollars in a lifetime), and approximately 50 million people are uninsured (see Sebelius per Ginsburg J. at 3 to 6).
The case concerned the Patient Protection and Affordable Care Act ("the Act"), an initiative of President Obama's that passed Congress in 2010. The Act's objective is to increase the number of Americans covered by health insurance and to decrease the cost of health care. One of the key provisions in the Act is the individual mandate which requires most Americans to maintain "minimum essential" health insurance cover ("the individual mandate"). Unless individuals receive health insurance through an employer or a government program, or are otherwise exempt, the means of satisfying this requirement is to purchase insurance from a private company. From 2014, the Act provides that those who do not comply with the mandate must make a "shared responsibility payment" to the Federal Government That payment is described in the Act as a "penalty" which is payable to the Inland Revenue Service ("IRS") with an individual's taxes, and "shall be assessed and collective in the same manner" as tax penalties.
Another key provision of the Act is the expansion of Medicaid. The Medicaid program in the U.S. offers federal funding to states to assist certain groups of people (including needy families, the elderly and the disabled) in obtaining medical care. The Act expands the scope of the Medicaid program, increases the number of individuals that the states must cover, and increases federal funding to cover the states' costs in expanding this program.
Twenty-six states, several individuals, and the National Federation of Independent Business brought proceedings in the Federal District Court challenging the constitutionality of the individual mandate and the Medicaid expansion. The Court of Appeals for the Eleventh Circuit (Alabama, Florida and Georgia) upheld the Medicaid expansion as a valid exercise of Congress's spending power, but concluded that Congress lacked authority to enact the individual mandate. The Supreme Court considered the issues on appeal.
The Commerce Clause
The U.S. Constitution grants Congress the power to "regulate commerce" among the states (Article 1, Section 8, Clause 3, or the so-called "Commerce Clause"). In deciding cases under the Commerce Clause, the Supreme Court has tended to focus on what constitutes inter-state commerce. This has been interpreted widely and the clause has been invoked to uphold everything from regulating a farmer's right to grow wheat for his own consumption (Wickard v Filburn, 317 U.S. 111 (1942)), to a ban on home-grown marijuana (Gonzales v Raich, 545 U.S. 1 (2005)).
In Sebelius, all of the Justices acknowledged that healthcare is a huge industry that cuts across state lines, and easily passed the "inter-state" test. However, the five conservative Justices (Roberts, Scalia, Kennedy, Thomas and Alito JJ.) focused on "activity" as a factor limiting the Commerce Clause. That is, the power to regulate commerce presupposes the existence of a commercial activity to be regulated. By this 5-to-4 conservative majority, the Court held that the individual mandate did not regulate existing commercial activity, but rather compelled individuals to become active in commerce by purchasing a product (health insurance). According to the majority, the Commerce Clause does not permit Congress to regulate "inactivity". The analogy used by Chief Justice Roberts was that the Commerce Clause could not give Congress the power to make people buy health insurance any more than it could allow Congress to address the diet problem by ordering people to buy healthy green vegetables like broccoli. "Under the Government's theory, Congress could address the diet problem by ordering everyone to buy vegetables" the Chief Justice wrote. "That is not the country the framers of our Constitution envisaged." (Roberts C.J. at 23).
The four liberal Justices (Ginsburg, Breyer, Sotomayor and Kagan JJ.) vehemently disagreed with the Court's finding on the Commerce Clause. Ginsburg J., writing for the dissenting liberal Justices on this issue, observed that everyone consumes health care at some point in his or her life. In requiring individuals to obtain insurance, Congress was therefore not mandating the purchase of a discrete, unwanted product. Rather, Congress was merely defining the terms on which individuals pay for an interstate good they consume. Persons subject to the mandate must now pay for medical care in advance (instead of at the point of service) and through insurance (instead of out of pocket). Establishing payment terms for goods in or affecting interstate commerce was, Ginsburg J. stated, "quintessential economic regulation well within Congress's domain." (Ginsburg J. at 22) She spent much of the balance of her 61 page opinion rebutting the broccoli argument, which she referred to as "the broccoli horrible". She stated (at 30):
"When contemplated in its extreme, almost any power looks dangerous. The Commerce power, hypothetically, would enable Congress to prohibit the purchase and home production of all meat, fish and dairy goods, effectively compelling Americans to eat only vegetables. Yet no one would offer the ‘hypothetical and unreal possibility' of a vegetarian state as a credible reason to deny Congress the authority ever to ban the possession and sale of goods."
The Court's ruling on the Commerce Clause has invoked much commentary from constitutional law scholars. According to Charles Fried, a Harvard Constitutional Law Professor and former Solicitor-General, "[t]he limitation of the Commerce clause runs counter to 75 years of Supreme Court jurisprudence" and is "a complete capitulation to the bogus logic of the broccoli argument and its proponents in the Tea Party." (James B. Stewart "In Obama's Victory, a Loss for Congress" The New York Times (New York, 29 June 2012)). Laurence Tribe, a renowned Constitutional Law scholar and former Professor to both President Obama and Chief Justice Roberts, has praised the overall outcome of the case, but described the majority's finding on the Commerce Clause as "entirely lacking in precedential, textual and historical support". In Tribe's view, the label "inactivity" is a misnomer, as the decision to wait and see whether future health problems demand the purchase of insurance is, in fact, an active choice. (Laurence H. Tribe "Chief Justice Roberts comes into his own and saves the Court while preventing a constitutional debacle" (2012) Supreme Court of the United States Blog <www.scotusblog.com>). Yale Constitutional Law Professor Akhil Reed Amar has stated that this aspect of the opinion reinvigorates a stricter understanding of all the powers of Government, specifically:
"The language about inactivity suggests that any laws that purport to order conduct, including existing laws, have the potential to be challenged. This could become a powerful tool to achieve a more limited federal government."
(James B. Stewart "In Obama's Victory, a Loss for Congress" The New York Times (New York, 29 June 2012)).
The Taxing Clause
Having held that the individual mandate could not survive under the Commerce Clause, the Court considered the government's alternative argument, that the individual mandate may be upheld as within Congress's constitutional power to "lay and collect Taxes" (Article 1, Section 8, Clause 1, known as "the Taxing Clause"). On this issue, to the surprise of many, Chief Justice Roberts joined the liberal members of the Court in finding that the individual mandate must be construed as imposing a tax on those who do not have health insurance, and that it could be upheld as within Congress's power to tax. The Chief Justice stated (at 44):
"The Affordable Care Act's requirement that certain individuals pay a financial penalty for not obtaining health insurance may reasonably be characterized as a tax. Because the Constitution permits such a tax, it is not our role to forbid it, or to pass upon its wisdom or fairness."
Central to this finding was the fact that the payment required is not so high that there is really no choice but to buy health insurance; that the payment is not limited to wilful violations (as penalties for unlawful acts often are); and that the payment is collected solely by the IRS through the normal means of taxation. There are no negative legal consequences to not buying health insurance, beyond requiring a payment to the IRS. As Chief Justice Roberts explained it (at 32):
"[I]t makes going without insurance just another thing the Government taxes, like buying gasoline or earning income. And if the mandate is in effect just a tax hike on certain taxpayers who do not have health insurance, it may be within Congress's constitutional power to tax."
The Chief Justice went on to state that the Court need not decide the precise point at which an exaction becomes so punitive that the taxing power does not authorise it. The line between a "tax" and a "penalty" is therefore a question for future litigation.
Expansion of Medicaid
The Court's finding on the expansion of Medicaid was perhaps of less constitutional significance, thought it will have important practical consequences. The Act had called for states to expand their Medicaid coverage to virtually everyone earning up to 133% of the federal poverty level. It encouraged states to expand their programs by having Washington pay 100% of the cost of the newly eligible enrolees for three years, with the subsidy decreasing after that to 90%. However, it also contained an implied threat to withdraw all federal financing for Medicaid if a state refused to expand. By a 7-to-2 vote, the Court said that was too coercive and not a valid exercise of Congress's spending power.
The Court's revision of the Act allows states to choose between participating in the expansion while receiving additional payments, or foregoing the expansion and retaining the existing payments. The Act had called for an all or nothing choice.
There is no doubt that the Sebelius decision will have lasting ramifications, but what exactly they are is as yet unclear. Can Congress require Americans to buy broccoli? Under the Commerce Clause, the answer is now clearly no. However, could Congress tax those who fail to buy broccoli and achieve the same goal? Applying the rationale from Sebelius, perhaps.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.