January 01, 2013

The Affordable Care Act after the Supreme Court’s Ruling

The Public Policy Conundrum Facing Congress

The United States has long had the most expensive healthcare system in the world. Our national health-related spending has accounted for almost one-fifth of the gross national product, or several trillion dollars, which is far more than in any other country. Yet, there has been little correlation between the money paid for health care in America and the effectiveness of the American healthcare system, which former Senator Daschle once described “as islands of excellence in a sea of mediocrity.” Tom Daschle, Prospects for Health Care Reform in 2009, 27 Yale L. & Pol’y Rev. 173, 176 (2008). A comparison of health outcomes in other countries shows that the United States ranked twenty-eighth out of 37 countries in infant mortality and thirty-first in life expectancy among 192 other countries. The Save the Children Foundation ranked the United States twenty-second in the world on women’s health, twenty-seventh on mothers’ health, and thirty-third on children’s health—behind Poland, Slovakia, and Latvia.

In enacting the Affordable Care Act (ACA), Pub. L. No. 111-48, 124 Stat. 1192, codified as amended in scattered sections of the Internal Revenue Code and 42 U.S. Code, Congress recognized that having a large percentage of the population without health insurance increases the cost and decreases the availability of health care for everyone, not just for those who do not have insurance. When the uninsured seek health care, they tend to impose greater healthcare costs on the system and achieve poorer outcomes, because they have had less health care in the past. Because state and federal laws require hospitals to provide a certain degree of care to individuals without regard to their ability to pay, allowing upwards of 50 million people to use the healthcare system without insurance means that the healthcare industry must pass on the cost of more than $43 billion in uncompensated care to insurers and governments, and they then pass those costs on to taxpayers and the insured population in the form of higher premiums and higher taxes. Congress estimated that the cost of uncompensated care raises family health insurance premiums, on average, by over $1,000 per year. 42 U.S.C. § 18091(2)(F).

Congress also understood that the large number of Americans who choose to self-insure imperils the security of health insurance for those who choose to buy insurance. As studies show, without a broad and stable risk pool that includes all Americans, insurers’ solvency will be imperiled if they are compelled to issue policies to all applicants without regard to preexisting conditions and to renew all policies regardless of the cost of continuing to insure the policyholder. Congress recognized that it could compel the health insurance industry to accept the risk of covering people who currently cannot buy insurance at affordable prices due to preexisting conditions only if insurers are able to spread risk across a larger pool of policyholders who are, on average, healthier than the existing pool of insured Americans.

Congress had several options available to solve the “free rider” problem and make health care available and affordable for all Americans. The solution historically associated with liberal Democratic Party platforms was a complete government takeover of health insurance—essentially an automatic enrollment, Medicare-for-all, Social-Security-like, single payor scheme. This type of plan lacked the political support or votes required for passage, although everyone acknowledged that such a plan fell within Congress’s power to tax and spend and thus was constitutionally sound. Instead, Congress opted for a more modest approach traditionally associated with Republican politicians that builds on the structure of the private health insurance industry and relies, in part, on market forces to lower the price of insurance.

Through a variety of provisions that go into effect gradually over the course of four years, the ACA (1) restructures the way the private health insurance industry operates through a variety of “antidiscrimination” provisions designed to ensure that health insurance is available to all Americans at affordable prices; and (2) creates a sufficiently broad and stable pool of insureds to allow the insurance industry to assume the risk of insuring all Americans at affordable prices.

ACA’s Antidiscrimination Provisions Affecting Health Insurance

Many uninsured people are not uninsured by choice. They are uninsured because they cannot buy insurance because of a preexisting condition. A recent Government Accountability Office (GAO) study found that, on average, insurers deny coverage to 19 percent of applicants nationwide, and one-quarter of insurers deny more than 40 percent of the applications they consider. And these denials often are not based on a serious preexisting condition. The GAO report confirmed what many know from personal experience—insurers will deny coverage to anyone who has a chronic condition or who takes a prescription drug on an ongoing basis. Over the past three years, 12.6 million nonelderly adults were denied insurance coverage or charged higher premiums due to a preexisting condition.

The ACA’s antidiscrimination provisions prevent insurers from continuing to cherry-pick the healthiest applicants and deny coverage to potentially unprofitable applicants. Specifically, they:


  1. require private health insurers to accept all applicants without regard to preexisting conditions;
  2. force insurers to discontinue the practice of setting rates based on health status and gender;
  3. limit how much premiums may vary because of age;
  4. require health insurers to use a “community rating” model rather than an “experience rating” model. A community rating model bases rates and premiums on the overall cost of care in a particular geographic area, usually a county, metropolitan area, or a state. An “experience rating” model bases rates on the experience of a narrowly defined risk pool and thus makes health insurance more expensive for people who have preexisting conditions or susceptibility to certain conditions;
  5. require health insurers to justify premium increases and pay rebates to insureds if less than 80 percent of premium dollars are spent on clinical care and quality;
  6. prohibit lifetime and annual limits on coverage;
  7. limit insurer’s rights to rescind coverage; and
  8. set minimum standards for the coverage provided in private health insurance policies.


The plaintiffs in the litigation challenging the validity of the ACA, National Federation of Independent Business v. Sebelius, 132 S. Ct. 2566 (2012), did not attack any of these antidiscrimination provisions directly. Instead, they argued that the antidiscrimination provisions were inseverable from other, allegedly unconstitutional, provisions. The Supreme Court rejected the plaintiffs’ inseverability arguments. The antidiscrimination provisions, therefore, are all the law of the land. Some of them have already gone into effect. All will be in effect when the ACA is fully operational on January 1, 2014.

ACA Provisions Affecting the Pool of Insureds

In order to ensure a sufficiently broad and stable risk pool to support its “antidiscrimination” provisions, the ACA (1) expands the federal Medicaid program to include individuals with annual incomes below 133 percent of the federal poverty level (FPL); (2) mandates that employers with at least 50 employees offer employees acceptable health insurance or pay a penalty; and (3) then, as a last resort, mandates that all individuals obtain insurance or pay a penalty. For individuals who neither qualify for Medicaid nor receive insurance through an employer, the only means of satisfying the individual mandate is to purchase insurance.

The Supreme Court agreed to decide the constitutionality of two of these provisions: the individual mandate and the expansion of Medicaid. Some additional background on the individual mandate and the Medicaid expansion is required for a full understanding of the Court’s analysis.

The Individual Mandate

The individual mandate requires most Americans to maintain “minimum essential” health insurance coverage. Beginning in 2014, those who do not comply with the mandate must make a “[s]hared responsibility payment” to the federal government. 26 U.S.C. § 5000A(b). That payment, which the ACA describes as a “penalty,” is calculated as a percentage of household income, subject to a floor based on a specified dollar amount and a ceiling based on the average annual premium the individual would have to pay for qualifying private health insurance. In 2016, for example, the penalty will be 2.5 percent of an individual’s household income, but no less than $695 and no more than the average yearly premium for insurance that covers 60 percent of the cost of 10 specified services, including prescription drugs and hospitalization. The ACA provides that the penalty will be paid to the Internal Revenue Service (IRS) with an individual’s taxes and “shall be assessed and collected in the same manner” as tax penalties. Id. § 5000A(g)(1). The ACA, however, bars the IRS from using several of its normal enforcement tools, such as criminal prosecutions and levies. And some individuals who are subject to the mandate are nonetheless exempt from the penalty—for example, those with income below a certain threshold and members of Indian tribes.

As nearly everyone now knows, the U.S. Supreme Court upheld the individual mandate on grounds that took many people by surprise, with Chief Justice Roberts joining with the four justices appointed by Democratic administrations to form a 5–4 majority. Although the ACA’s proponents scrupulously avoided mentioning the “T” word or invoking the taxing power under Article 1, Section 8, Clause 1 of the U.S. Constitution during the debate leading to the ACA’s passage, and, instead, justified the Act as an exercise of Congress’s power to regulate interstate commerce under Article I, Section 8, Clause 3 of the U.S. Constitution, it was ultimately Congress’s power to tax and spend that saved the requirement that all Americans purchase insurance from defeat in the Supreme Court.

In order to uphold the individual mandate under the taxing power in Article I, Section 8, Clause 1, the Court first had to find that the Anti-Injunction Act did not deprive it of authority to do so. The Anti-Injunction Act provides that “no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed.” 26 U.S.C. § 7421(a) (emphasis added). The Act precludes suits to enjoin enforcement of “any tax” and forces taxpayers challenging the validity of a tax to do so in the taxpayer’s individual lawsuit for a refund after the tax has been paid. Because the “shared responsibility payment” that those who do not comply with the mandate must pay to the federal government does not take effect until 2014, if the payment is a tax for purposes of invoking Congress’s taxing power, the Anti-Injunction Act would appear to deprive the Court of jurisdiction to decide the matter until 2015, when the first payments are made.

The Court said not so, and on this point and this point only the Court was unanimous. Chief Justice Roberts explained that labels matter in determining the applicability of the Anti-Injunction Act, and Congress chose to label the “shared responsibility payment” a “penalty” in the ACA. He pointed out that Congress enacted the Anti-Injunction Act to ensure the collection of a consistent stream of revenue, and thus Congress is free to decide whether a particular imposition is subject to the Anti-Injunction Act. Although Congress can describe something as a penalty but direct that it nonetheless be treated as a tax for purposes of the Anti-Injunction Act, Congress did not do so in the ACA. The chief justice accordingly concluded that the Anti-Injunction Act did not apply, and proceeded to consider the merits of the lawsuit.

The four dissenting justices reasoned that labels matter in determining whether the individual mandate falls within Congress’s taxing power just as much as they do in determining the applicability of the Anti-Injunction Act. In their view, if Congress calls something a “penalty,” it can not be a tax for purposes of the taxing power.

Chief Justice Roberts and the four “liberal” justices thought otherwise. In their view, the “shared responsibility payment” can be a penalty for Anti-Injunction Act purposes but a tax for constitutional taxing power purposes. They reasoned that, while the taxing power does not allow Congress to command people to purchase insurance, it does allow Congress to impose a tax on people who choose not to buy insurance. The sticking point was whether the “shared responsibility payment” can be read as a tax. The chief justice acknowledged that the “most straightforward” reading is that the payment is designed to enforce the mandate. However, he determined that, in order to uphold the mandate as a valid exercise of Congress’s taxing power, he need only find that the alternative interpretation—that the mandate merely establishes a condition (not having insurance) that triggers a tax—is a “reasonable” or “fairly possible” one.

In finding this alternative interpretation to be sufficiently reasonable, the chief justice noted that the “shared responsibility payment” looks like a tax. It is paid into the Treasury by “taxpayer[s]” when they file their tax returns. Id. § 5000A(b). It does not apply to individuals who do not pay federal income taxes because their household income is less than the filing threshold in the Internal Revenue Code. For taxpayers who do owe the payment, its amount is determined by such familiar factors as taxable income, number of dependents, and joint filing status. The requirement to pay is found in the Internal Revenue Code and enforced by the IRS “in the same manner as taxes.” Id. § 6201(a). Finally, it produces revenue for the government. Indeed, the payment is expected to raise about $4 billion per year by 2017.

In the end, the chief justice noted that the key feature distinguishing penalties from taxes is that penalties punish. The mere fact that the purpose of the “shared responsibility payment” is to induce people to purchase insurance does not justify treating the payment as a penalty rather than a tax. “[T]axes that seek to influence conduct are nothing new,” explained the chief justice. Nat’l Fed’n of Indep. Bus. v. Sebelius, 132 S. Ct. 2566, 2596 (2012). The critical question in the chief justice’s analysis was whether the individual mandate provision can be construed to make the failure to purchase insurance unlawful. The chief justice concluded that it did not, pointing out that the ACA attaches no negative legal consequences to the failure to buy insurance beyond requiring payment to the IRS. The fact that Congress estimated that four million people each year will choose to pay the IRS rather than buy insurance convinced the chief justice that Congress did not view failure to comply with the mandate as unlawful. “Congress did not think it was creating four million outlaws.” Id. at 2597.

Recognizing that his reasoning allowed Congress to tax people for not doing something that he believes it cannot compel them to do, the chief justice took pains to explain the distinctions between Congress’s power to tax and Congress’s power to regulate interstate commerce. He noted that nothing in the Constitution guarantees that individuals may avoid taxation through inactivity. Moreover, in his view, Congress’s power to tax conduct is far less threatening to individual liberty than its power to regulate conduct directly under the Commerce Clause. The Commerce Clause, he pointed out, allows the federal government to “bring its full weight to bear” to compel behavior, with severe criminal sanctions for those who refuse to comply. The taxing power, by contrast, “is limited to requiring an individual to pay money into the Federal Treasury, no more. If a tax is properly paid, the Government has no power to compel or punish individuals subject to it.” Id. at 2600. He stressed that “imposition of a tax nonetheless leaves an individual with a lawful choice to do or not do a certain act, so long as he is willing to pay a tax levied on that choice.” Id.

The Medicaid Expansion

First enacted in 1965, Medicaid offers federal funding to states to assist pregnant women, children, needy families, the blind, the elderly, and the disabled in obtaining medical care. The ACA expands the population of Medicaid-eligible individuals to include childless adults for the first time in many states, and it increases the maximum income allowed for eligible families and individuals. States are not required to participate in the Medicaid program, but if they do, they must comply with federal criteria governing matters such as who receives care and what services are provided at what cost. By 1982, every state had chosen to participate in Medicaid. Federal funds received through the Medicaid program have become a substantial part of state budgets, now constituting over 10 percent of most states’ total revenue.

Over the years, Congress has amended the Medicaid program on more than 50 occasions, adding millions to the Medicaid-eligible population. The ACA’s expansion of the Medicaid population is the most recent of these. However, compared to past expansions, the ACA requires the federal government to pick up a much larger share of the tab. In 2014, federal funds will cover 100 percent of the costs for newly eligible beneficiaries; that rate will gradually decrease before settling at 90 percent in 2020. By comparison, federal contributions toward the care of beneficiaries eligible pre-ACA range from 50 to 83 percent, and averaged 57 percent between 2005 and 2008.

The constitutional challenge to the ACA’s expansion of the Medicaid program was based on the importance of federal Medicaid funding to state governments’ budgets and the consequences for the states of losing that funding. Under the ACA, a state that does not comply with the ACA’s new coverage requirements may lose, not only the federal funding for those requirements, but all of its federal Medicaid funds. See 42 U.S.C. § 1396c.

The Court’s willingness to review Congress’s power under the Spending Clause to expand the right of poor people to health benefits under the Medicaid program took many by surprise because the Court had discussed the theoretical underpinnings for the challenge only in dicta. The Court had long recognized that Congress may use the spending power to grant federal funds to states, and may condition such a grant upon the states “taking certain actions that Congress could not require them to take.” Coll. Sav. Bank v. Fla. Prepaid Postsecondary Educ. Expense Bd., 527 U.S. 666, 686 (1999). At the same time, language in the Court’s opinions makes clear that Congress cannot force the states to do something they do not want to do. The validity of Congress’s exercise of the spending power rests on whether states have a genuine choice to accept or reject federal funds and to participate or not participate in the federal program.

The Supreme Court had never struck down a federal spending statute on the ground that it did not give the states a legitimate choice and was thus unduly coercive. However, the Court had intimated that the coercion theory might limit Congress’s spending power in South Dakota v. Dole, 483 U.S. 203 (1987), a case that challenged the requirement that states raise their drinking ages to 21 as a condition of receiving certain federal highway funds. The Court in that case upheld the spending condition, but suggested in dicta that a condition imposed on a state through the Spending Clause might be unconstitutional if it were a requirement the federal government could not otherwise impose on a state and “the financial inducement offered by Congress” to the states to participate in the federal/state program were “so coercive as to pass the point at which ‘pressure turns into compulsion.’” Id. at 211. The Court dismissed South Dakota’s claim as “more rhetoric than fact” because the state was threatened with the loss of only five percent of the grant money for roads.

Various state governments claimed that the possibility of losing all Medicaid funding was unduly coercive, given their dependence on Medicaid funding. Their argument failed in every lower court.

The coercion argument, however, succeeded in the Supreme Court based on the legal fiction that Medicaid is two federal programs—the existing Medicaid program and the new program created by the ACA and set to go into effect in 2014. Seven justices agreed that the Medicaid expansion is not really an expansion but, in effect, a second Medicaid Act. This set the stage for their conclusion that Congress cannot use the threat of loss of funding for an existing program to coerce a state to participate in a new program. In their view, it was unduly coercive for Congress to condition receipt of existing Medicaid funds on compliance with the requirements in the new Medicaid Act passed as part of the ACA. The chief justice contrasted the relatively small amount of money at risk in Dole to the threatened loss of all the states’ Medicaid funding, and concluded that the ACA’s financial “inducement” to the states “is much more than ‘relatively mild encouragement’—it is a gun to the head.” Sebelius, 132 S. Ct. at 2604. He characterized the “threatened loss of over 10 percent of a State’s overall budget” as “economic dragooning that leaves the States with no real option but to acquiesce in the Medicaid expansion.” Id. at 2605. Responding to the Eleventh Circuit’s position that the states had plenty of notice that Congress might amend the Medicaid Act when they accepted their original Medicaid funding, the chief justice explained that the Medicaid expansion “accomplishes a shift in kind, not merely degree.” Id.

Implications of the Supreme Court’s Partial Invalidation of the Medicaid Expansion

The Supreme Court’s holding that the Medicaid expansion is invalid under the coercion theory could have profound implications for the validity of many federal programs. Many federal programs, and not just healthcare programs, operate through conditional grants to the states, and these programs may become mired in litigation in light of the Court’s ruling. Education and environmental funding programs, as well as laws that condition federal funding on compliance with certain antidiscrimination rules, such as Title IX (sex discrimination), are likely to be the first targets.

Unfortunately, the litigation is likely to be long and protracted because the Court provided little guidance on how to determine whether federal spending conditions are coercive. The chief justice saw “no need to fix a line” because “wherever that line may be, [the ACA] is surely beyond it.” Id. at 2606. Neither did the dissenters. As Justice Ginsburg asked, “When future Spending Clause challenges arrive, as they likely will in the wake of today’s decision, how will litigants and judges assess whether ‘a State has a legitimate choice whether to accept the federal conditions in exchange for federal funds’?” Id. at 2640 (Ginsburg, J., dissenting in part). Is the size of the federal program the critical factor? Is the size of the state’s budget important? What about the degree of political pressure state officials feel in deciding whether to accept or reject federal dollars for a popular program that may unduly burden the state’s budget? Answers to these questions will have to be sought in future litigation.

The Road Ahead

The Supreme Court’s decision removes the legal clouds over the ACA. But the political clouds remain. The Republican Party made “repeal-and-replace” its mantra in the recent election. At least four Republican governors have stated openly that they do not intend to implement the law. South Carolina Governor Nikki Haley in an open letter to the law’s opponents on the Monday following the Supreme Court’s decision maintained that they would “cede[] nothing” and “not give up the leverage” the law gives Republicans in the election by setting up the insurance exchanges required by the law. Others have stated that they will take advantage of the Supreme Court’s ruling on the Medicaid expansion to refuse Medicaid funds appropriated under the ACA.

The motivation for these threats is, of course, entirely political. The reality on the ground is often quite different. After emotions calm, governors will be hard pressed to justify refusing to accept what Justice Kagan described during oral argument as “a boatload of money”—money that, after all, their own citizens sent to the federal government in the form of income taxes—to provide health insurance for their neediest citizens through the Medicaid expansion.

The reality is that healthcare reform is here to stay, regardless of who won the November presidential election. Although much irrational demagoguery has made its way into the debate over healthcare reform, enough light has been shed on the flaws in the U.S. healthcare system to make a return to the pre-ACA status quo untenable. Only if Republicans won a filibuster-proof majority in the Senate would significant parts of the ACA have faced possible repeal, and then it would have been doubtful that Republicans would have repealed the more popular parts of the law, such as the guaranteed issue, community rating, and preexisting condition provisions. Now that President Obama has won reelection, all serious discussion of total repeal may be at an end. However, Congress is likely to revisit parts of the ACA. At the very least, Congress will want to correct a variety of drafting errors that resulted from the failure of the final bill to go through the usual reconciliation process.

One substantive policy question Congress might want to revisit is the individual mandate, which some commentators believe is too weak. As the chief justice noted, “for most Americans the amount due [under the penalty/tax for failure to comply with the individual mandate] will be far less than the price of insurance, and, by statute, it can never be more.” Sebelius, 132 S. Ct. at 2595–96. Moreover, the ACA specifically prohibits both criminal sanctions and levies on the taxpayer’s property for failure to pay the penalty/tax. The IRS is limited to subtracting the penalty/tax from the taxpayer’s refund or placing collection calls to the taxpayer. This begs the question of whether too many people will elect to pay the penalty/tax in lieu of buying insurance and put off buying insurance until they are sick or injured, resulting in the adverse-selection “death spiral” that was at the heart of the debate over the need for the mandate in the first place. The answer to that question depends on how many of the uninsured are uninsured by choice and on the effectiveness of other provisions of the ACA—such as the employer mandate, the subsidies available to people who cannot now afford insurance, and the opportunity to purchase insurance in a more competitive environment on the exchanges—in reducing the number of people who do not have insurance.