by The Supreme Court issued a 5-4 decision yesterday that upheld the constitutionality of the individual mandate provisions of the Affordable Care Act as a tax – not as an exercise of the Commerce Clause –but struck down provisions that would have allowed the federal government to withdraw existing Medicaid funding from states that refused to provide expanded access to Medicare in accordance with the Act. The federal government’s ability to withhold expanded Medicaid funding from non-cooperating states was upheld.
Chief Justice John Roberts wrote a 59-page majority opinion joined in parts by Justices Breyer and Kagan. I summarize it in greater detail below. Justice Ginsburg, joined in full by Justice Sotomayor, wrote a dissenting opinion that would have upheld the mandate on Commerce Clause grounds and would have left the Medicaid expansion provisions intact. Justices Breyer and Kagan joined in portions of the dissenting opinion. Justices Kennedy, Scalia, Thomas and Alito joined in a second dissenting opinion finding both the individual mandate and the expansion of Medicaid to be unconstitutional, and also not to be “severable” from the rest of the Act, such that the entire law must fall.
The significance of this decision – to millions of Americans with no access or compromised access to health care – to the insurance and health care industries – to the presidential candidates – to the legacy of the Supreme Court and to its role as a check to the legislative branch – cannot be underestimated. The decision ends some uncertainties but creates others, and as a result the Affordable Care Act will remain a political “football” whose ultimate fate still hangs somewhat in the balance, at least until November.
Below I have summarized and tried to explain in “plain English” some of the key holdings of the majority opinion.
The Individual Mandate/Shared Responsibility Payments
The Affordable Care Act amended the Internal Revenue Code to add a new chapter 48 – titled Maintenance of Minimum Essential Coverage – and a new section codified at 26 U.S.C. § 5000A. Referred to colloquially as the “individual mandate” it provides that those not excepted from the law on religious or poverty grounds must obtain “minimum essential coverage” for themselves and their dependents effective January 1, 2014. Persons who do not do so will be subject to a “shared responsibility payment” — a financial penalty that is due with their annual tax return, starting in April 2015. The shared responsibility payments first payable in 2015 equal the greater of (a) $95 per adult and $47.50 per child (up to a family maximum of $285) or (b) an amount equal to 1% of household income. They will increase over time to the greater of $695 per adult ($2,085 family max) or 2.5% of income, but shall never exceed the national average premium for “bronze” level coverage in an exchange.
The Legal Issues at Stake:
- Whether the individual mandate exceeded Congress’s powers under the Commerce Clause of the U.S. Constitution, which allows the federal government to regulate interstate commerce.
- Whether, under the “Anti-Injunction Act,” the Court could even rule on the mandate before “shared responsibility payments” first are assessed in 2015. That Act prevents taxpayers from challenging a tax law until they have paid the tax and are seeking a refund, and concomitantly prevents federal courts from ruling on tax laws that are simply “on the books” and not actively in effect.
What the Court Ruled:
- The most straightforward reading of the individual mandate is that it commands individuals to purchase insurance. The Commerce Clause does not grant that power to Congress, because it may only regulate pre-existing commercial activity, not compel the activity it intends to regulate.
- However, the individual mandate may “for constitutional purposes be considered a tax.” Even though it is labeled a “penalty,” not a tax, the Court may take a “functional approach” to interpreting the provision, “[d]isregarding the designation . . . and viewing its substance and application.”
- Put otherwise, Congress cannot regulate inactivity, but it can tax inactivity.
- On the other hand, the Anti-Injunction Act does not apply because the Affordable Care Act describes the “shared responsibility payment” as a penalty, not a tax, and Congress did not intend the payment to be treated as a tax.
- You heard that correctly – the Court disregarded the “penalty” label for purposes of the Commerce Clause issue, but looked only at the penalty label for purposes of the Anti-Injunction Act.
- The Court did this because it has a duty to interpret a law “ to save [uphold] it, if fairly possible.” It states: “[t]he question is not whether [calling the mandate a tax] is the most natural interpretation of the mandate, but only whether it is a ‘fairly possible’ one.”
What it Means:
- The individual mandate that Congress passed is not constitutional as a mandate – only when interpreted as a tax. Because the government denied the mandate was a tax when the law was pending and because a taxing provision would not have passed Congress (the Act barely squeaked through, as it is) the Affordable Care Act will remain subject to further legal attacks and repeal efforts.
- That does not mean employers can continue to “wait and see” what happens with the Affordable Care Act. They must must finally dig in to the Act’s complex requirements – including most specifically the employer “pay or play” rules – assess the likely impact on their businesses, and gear up for 2014.
- The mandate survived but remains structurally unsound in that the penalty/tax is set far too low to achieve the intended result of increased coverage. To truly push young, healthy taxpayers into the insurance market, the penalty/tax should be set no lower than the “cheapest” bronze-level coverage available on an exchange. Instead, that is the ceiling for the penalty/tax.
- Interestingly, language in the majority opinion differentiating a “penalty” from a “tax” makes it quite clear that the Court would not have concluded that a significantly higher “shared responsibility payment” was a constitutional tax, and instead would have concluded that it was a penalty.
Medicaid Expansion
Medicaid is a federally subsidized health program that the States make available to financially needy persons who are not yet eligible for Medicare through age or disability. Effective in 2014, the Affordable Care Act expands Medicaid coverage to adults with incomes up to 133% of the federal poverty level, including, for the first time, to childless adults. It increases federal funding to the States to cover their costs in expanding Medicaid coverage. The Act further provides that States that refuse to expand Medicaid coverage will forfeit not only the additional funding earmarked for expanded coverage, but will forfeit all federal Medicaid funds through which the States currently extend coverage to the needy. (Section 2001 et seq. of the Affordable Care Act, amending the Social Security Act at 42 U.S.C. 1396a.) States are wary of the expansion because they eventually will be responsible for paying up to 10% of the added costs themselves (the expansion is fully funded through 2016).
The Legal Issues at Stake:
- Whether conditioning all Medicare funding on state cooperation with the Medicaid expansion exceeded Congress’s “Spending Clause” powers under the Constitution.
What the Court Ruled:
- The Medicaid expansion violates the Constitution to the extent it threatens non-cooperating States with loss of existing Medicaid funding.
- Spending Clause programs are in the nature of a contract between federal and state governments. As such they may be enforced only as against states that “voluntarily and knowingly” accept their terms; threatening loss of all Medicaid funding made this aspect of the expansion coercive and unconstitutional.
- The Spending Clause does allow Congress to withhold expanded Medicaid from states that do not implement Medicaid program expansions.
What it Means:
- The Medicaid expansion is severely crippled. Each state may make its own decision to expand, and take additional federal funding, or “stand pat” with their current Medicaid budget. Remember – 26 states tried to overturn the Affordable Care Act.
- This will hamstring implementation of the Act as a whole, and will create uncertainty and complications for multi-state employers.
E is for ERISA 
Excellent overview. Thank you for taking the time to post.
Thanks!