The U.S. Supreme Court has upheld most of the Patient Protection and Affordable Care Act of 2010 (P.L. 111-148), as amended by the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152) (collectively, PPACA or ACA). The key provision of the law –the requirement that individuals pay a penalty if they fail to carry health insurance for themselves and their dependents –was held constitutional, although the requirement to purchase insurance, and the mechanism used to expand Medicaid coverage were not.
CCH Comment. Also known as “Obamacare,” the health care reform law attempts to achieve near-universal health care by reforming the health care insurance market while also expanding government programs and subsidies.
Summary
The Court concluded that the federal government did not have the power to require individuals to buy health insurance, but it did have the power to impose a penalty on those who failed to do so. The Code Sec. 5000A(a) individual mandate that required persons to carry minimum essential health coverage for themselves and their dependents exceeded the federal government’s powers under the Commerce Clause (Article I, §8, clause 3) because it would require inactive individuals to become active in interstate commerce. In addition, regardless of how integral the mandate was to the health care reform law as a whole, the Necessary and Proper Clause (Article I, §8, clause 18) did not provide independent authority for it.
However, the shared responsibility payment that Code Sec. 5000A(b) imposed for violating the mandate was a constitutional exercise of the federal government’s Taxing Power under Article I, §8, clause 1. The Taxing Power is broader than the Commerce Power, because it gives the federal government a lesser amount of control over individual conduct, limited to financial coercion but not extending to criminal punishments. Although it was identified as a penalty, the payment is actually a tax because it was not intended to be punitive: its amount is relatively small, it applies even if the taxpayer does not knowingly violate the mandate, and the IRS has the sole authority to assess and collect it. The fact that the payment was intended to affect individual conduct does not preclude it from being a tax, especially since there are no criminal penalties for failing to carry insurance. In addition, the payment does not violate the prohibition on direct or capitation taxes (Article I, §9, clause 4) because it is triggered by specific circumstances, and is not imposed on every person or on the ownership of land or personal property.
Although the penalty actually functions as a tax, it is not subject to the Anti-Injunction Act under Code Sec. 7421(a). Since Congress characterized the payment as a penalty, rather than a tax, it was clear that Congress did not intend for the Anti-Injunction Act to apply. This intention is not affected by the fact that the penalty is a tax for purposes of determining whether Congress had the power to impose it. The issue of the Anti-Injunction Act was a matter of statutory interpretation, so the language Congress used determined the outcome. However, the constitutional issue of whether Congress has the power to impose the tax was determined by the way the penalty actually operated, rather than what it was called.
Finally, the federal government could not withhold existing federal Medicaid funding in order to force a state to extend Medicaid coverage to individuals whose income was less than 133% of the applicable federal poverty levels. The extension so exceeded the original parameters of the Medicaid program that states could not be considered to have voluntarily agreed to it at the time they agreed to participate in the Medicaid program. However, this provision could simply be severed from the remainder of PPACA.
Background
The chief legal challenge to PPACA lay with the individual mandate –the requirement that individuals carry health insurance for themselves and their dependents, or pay a penalty with their tax returns (Code Sec. 5000A). The suit challenging the law was originally brought by two individuals, 26 states, and the National Federation of Independent Business (NFIB). Two additional individual plaintiffs were added when questions arose as to whether the two original private plaintiffs had standing to challenge the law.
The U.S. District Court for the Northern District of Florida invalidated the entire law (2011-1 USTC ¶50,193). The U.S. Court of Appeals for the 11th Circuit agreed that the individual mandate was unconstitutional, but upheld the rest of the law (2011-2 USTC ¶50,573). The U.S. Supreme Court agreed to review the case, and heard extensive oral arguments in late March.
CCH Comment. Several other courts have also considered PPACA suits.
- Suits were dismissed because the plaintiffs lacked standing (that is, they had not been harmed by the law) by the Third Circuit (New Jersey Physicians, Inc., CA-3, 2011-2 USTC ¶50,554) and the Ninth Circuit (S. Baldwin, CA-9, 2011-2 USTC ¶50,577) (the Supreme Court did not consider the standing issue).
- The Fourth Circuit dismissed one suit as barred by the Anti-Injunction Act (Liberty University, Inc., CA-4, 2011-2 USTC ¶50,613), and another because the state plaintiff lacked standing (Commonwealth of Virginia, CA-4, 2011-2 USTC ¶50,612).
- PPACA was upheld by the Sixth Circuit (Thomas More Law Center, CA-6, 2011-2 USTC ¶50,473) and the District of Columbia Circuit (S. Seven-Sky, CA-D.C., 2011-2 USTC ¶50,713).
For its review, the Supreme Court broke the controversy into four questions:
(1) Did the Anti-Injunction Act prohibit the suit as premature?
(2) If it did not, was the individual mandate constitutional?
(3) If the mandate was not constitutional, could it be severed from the rest of PPACA, or must the entire Act fail?
(4) Was the expansion of Medicaid constitutional?
Given its decision to uphold the penalty for violating the mandate, the Court did not consider the issue of whether the mandate could be severed from PPACA.
Anti-Injunction Act
The Anti-Injunction Act (AIA) under Code Sec. 7421(a) bars suits to restrain the assessment or collection of tax. It is part of a network of statutes that effectively prohibits most tax suits (outside the Tax Court) until the tax has been paid and administrative remedies have been exhausted. Thus, if the penalty for failing to carry health insurance was a tax, the AIA could delay any lawsuits until 2015, when someone finally had to pay it.
CCH Comment. It might seem strange that the Court even considered this issue, since all of the parties argued that the AIA did not preclude the suit. However, the AIA is usually regarded as a bar to a court’s jurisdiction over a case, which meant the Court could raise the issue itself, and then appoint outside parties to argue in favor of preclusion.
In an opinion written by Chief Justice John Roberts (joined by Justices Breyer, Ginsburg, Sotomayor and Kagan), the Court concluded that the AIA did not apply to the shared responsibility payment. The payment is a penalty, not a tax, because Congress called it a penalty. Since the AIA and PPACA are both statutes, they were both creations of Congress. Thus, the language Congress used in the one –PPACA –determined whether the other –the AIA –applied. In its dissenting opinion, the minority (Justices Scalia, Kennedy, Thomas and Alito) agreed that the AIA did not bar the suit because the penalty is not a valid tax, since it exceeds the government’s powers under the Commerce Clause.
Constitutionality
Having decided that it had jurisdiction over the suit, the Court moved on to the substantive question of whether the individual mandate and the penalty for violating it are unconstitutional. The government identified three separate sources of its authority to impose the mandate: the Taxing Power, the Commerce Clause, and the Necessary and Proper Clause.
Taxing Power
The Taxing Power gives Congress the authority to “lay and collect Taxes, Duties, Imposts and Excises” (U.S. Constitution, Article I, §8, clause 1). Although the government claimed that the penalty for violating the individual mandate is not a tax for purposes of the Anti-Injunction Act, it argued that it is a tax for purposes of Taxing Power. The Court agreed.
The Taxing Power issue was a matter of the federal government’s constitutional power and, for that purpose, Congress’s use of the word “penalty” did not change the fact that the sanction is actually a tax. The critical distinction was between an acceptable tax that encouraged individuals to behave in a particular way (that is, to carry health insurance in order to avoid the penalty), as opposed to an unacceptable penalty for behaving in a particular way. The shared responsibility payment qualified as an acceptable tax for several reasons:
- The amount of the payment was fairly small, and could not exceed the cost of the insurance itself (Code Sec. 5000A(c)).
- The penalty applied regardless of whether the taxpayer intended to violate the mandate (in legal terms, there was no scienter requirement, an element that limits most criminal punishments to those who knowingly break the law).
- The only way to collect the penalty is through the IRS, using the usual means for collecting taxes, except that the most punitive collection methods –liens, levies and criminal sanctions –are expressly forbidden (Code Sec. 5000A(g)(2)).
- The penalty is the only means for enforcing the mandate, so individuals could choose to pay the penalty instead of carrying health insurance without breaking any law or risking any further punishment.
CCH Comment. Echoing the “can Congress make people eat broccoli” discussions made during the oral arguments for this case, Chief Justice Roberts used this analogy: “Suppose Congress enacted a statute providing that every taxpayer who owns a house without energy efficient windows must pay $50 to the IRS. The amount due is adjusted based on factors such as taxable income and joint filing status, and is paid along with the taxpayer’s income tax return. Those whose income is below the filing threshold need not pay. The required payment is not called a “tax,” a “penalty,” or anything else. No one would doubt that this law imposed a tax, and was within Congress’s power to tax.”
However, concluding that the penalty is really a tax raised the issue of whether it is an unconstitutional direct or capitation tax that violated Article I, §9, clause 4. The Court concluded that it did not. The only taxes that had ever been characterized as unconstitutional under this provision were taxes imposed on every person, regardless of their status or circumstances, and on the ownership of real or personal property. The shared responsibility payment is neither. It is triggered only by particular circumstances –the taxpayer’s failure to carry minimum essential health insurance.
Commerce Clause
Although the penalty for violating the individual mandate is an acceptable exercise of the federal government’s Taxing Power, the individual mandate itself is not an acceptable exercise of the government’s authority over interstate commerce.
The Commerce Clause gives the federal government the power to regulate interstate commerce (Article I, §8, clause 3). Congress relied on this power when it enacted the individual mandate, finding that requiring individuals to carry health insurance was “commercial and economic in nature, and substantially affects interstate commerce” (PPACA §1501(a)(1)). Congress noted that health insurance is sold and claims are paid across state lines, and the federal government plays a significant role in regulating the health insurance market (PPACA §1501(a)(2)). Congress also tied the mandate to the expanded insurance coverage provided by the Act, particularly guaranteed issue, which requires insurers to issue policies to virtually everyone who applies for them; and community rating, which requires insurers to charge fairly uniform rates, regardless of the insured’s condition.
The plaintiffs did not challenge the federal government’s power over the insurance market in general. Instead, they argued that foregoing health insurance is a matter of economic in activity that kept the uninsured out of interstate commerce. In their view, by forcing people into the stream of commerce, the mandate went well beyond the federal government’s enumerated constitutional powers. Five Justices –Roberts, Scalia, Kennedy, Thomas and Alito –agreed.
CCH Comment. Here, Chief Justice Roberts made explicit reference to the “can Congress make everyone eat broccoli” argument, comparing the mandate to Congress ordering everyone to buy vegetables because improved nutrition would improve health and, therefore, reduce aggregate health care costs.
In arguing for the mandate, the federal government stressed a unique feature of the health care market: virtually everyone participates in it. Uninsured people may not get adequate health care, but through a patchwork of sources –charities, Medicaid, emergency rooms, etc. –most receive at least occasional health care. Thus, a decision to forego health insurance did not amount to a refusal to participate in the health care market. In fact, a decision to forego health insurance could be viewed as an active decision to self-insure, rather than a decision to be inactive in the health insurance market.
CCH Comment. One of the uninsured individuals who originally challenged the mandate illustrated this argument. She argued that she should be allowed to invest money in her auto repair business rather than using the funds to purchase health insurance. However, while this case was pending, her business failed, and she and her husband filed a bankruptcy petition that listed more than $4,000 in unpaid medical bills, including some owed to out-of-state providers.
The Court was not persuaded. Regardless of their past or future participation in the health care market, most uninsured individuals are not currently engaged in any commercial activity involving health care. Thus, the Commerce Clause could not reach them.
Necessary and Proper Clause
The Necessary and Proper Clause authorizes Congress to make all laws that are necessary and proper for carrying out the federal government’s enumerated powers (Article I, §8, clause 18). The government argued the individual mandate is necessary and proper because it is an integral part of PPACA’s reforms of the health insurance market. In this analysis, the health care market is indisputably a matter of interstate commerce, PPACA is a comprehensive package of reforms intended to improve that market, and the individual mandate is an essential element of that package.
According to the state plaintiffs, the Necessary and Proper Clause does not give the federal government any independent power; it only allows the government to do what it has to in order to carry out powers it is granted elsewhere. Thus, the mandate did not become Necessary and Proper simply because it is part of a comprehensive scheme of economic regulation. In fact, since nothing in the Constitution gives the federal government the authority to require individuals to enter the health insurance market, the Necessary and Proper Clause was irrelevant.
The Court agreed. The same majority that invalidated the mandate held that the Necessary and Proper clause does not give the federal government an independent authority to impose the mandate. Thus, even if the mandate is necessary to PPACA’s reforms as a whole, it is not a proper means of making those reforms effective.
Medicaid Expansion
Finally, in a nontax aspect of the case, the Court determined that the federal government could not cancel existing Medicaid funding for states that refuse to implement PPACA’s expansion of Medicaid eligibility to adults whose income does not exceed 133 percent of the federal poverty level (42 U.S.C. 1396c and 1396d). Medicaid was originally intended to help targeted populations, such as pregnant women, children, needy families, and the elderly. An expansion of the program to all adults below a certain income level goes beyond the federal government’s power to alter or amend the program. The threat to withhold all of a state’s federal Medicaid funds, rather than just the additional funds provided for the expansion, amounts to coercion that exceeds the federal government’s Spending Power under Article I, §8, clause 1.
Affirming in part and reversing in part CA-11, 2011-2 USTC ¶50,573.
National Federation of Independent Business v. Sebelius, SCt, 2012-2 USTC ¶50,423
Other References:
Code Sec. 5000A
CCH Reference – 2012FED ¶2900.31
CCH Reference – 2012FED ¶2900.56
CCH Reference – 2012FED ¶2900.64
CCH Reference – 2012FED ¶2900.795
CCH Reference – 2012FED ¶34,963.02
CCH Reference – 2012FED ¶34,963.30
Code Sec. 7402
CCH Reference – 2012FED ¶41,605.18
Code Sec. 7421
CCH Reference – 2012FED ¶41,683.01
CCH Reference – 2012FED ¶41,683.24
Tax Research Consultant
CCH Reference – TRC INDIV: 42,550
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TRC IRS: 45,152
CCH Reference -
TRC LITIG: 9,250
