Washington Lawyer

Affordable Care Act and the Scope of Federal Power

From Washington Lawyer, January 2013

By Thai Phi Le

wheelchairOn March 23, 2010, President Barack Obama signed the Patient Protection and Affordable Care Act (ACA) into law. Legal challenges promptly commenced. While the issue driving the legislation was health care, the challenges to the constitutionality of the law centered on the scope of federal power. Was the federal government making unconstitutional demands on the American people? Were state rights being violated in an overreaching federal attempt to regulate commerce?

The most scrutinized and controversial provisions of the ACA are the imposition of an “individual mandate” that requires individuals to either buy health insurance or pay a penalty imposed by the Internal Revenue Service (IRS), and the expansion of Medicaid to include those with incomes up to 133 percent of the federal poverty level. The challenge to the ACA, formally known as National Federation of Independent Business v. Sebelius, eventually made its way to the U.S. Supreme Court. The nine justices listened to three days of oral arguments in March 2012 and handed down their decision on June 28.

Chief Justice John Roberts Jr. wrote the majority opinion upholding the individual mandate, but as a tax and not under the powers granted to the federal government by the Commerce Clause. In addition, the Court ruled that individual states could opt out of the Medicaid expansion without the consequent loss of federal funding stipulated by the ACA.

For months after the ruling, there was considerable speculation over whether the health care law would be fully implemented. With Republican presidential candidate Mitt Romney vowing to “repeal” the legislation if elected, the fate of the ACA was thus a prominent issue during the campaign. If Romney had won, the ACA would have faced a doubtful future. However, on November 6 President Obama was reelected, thereby ensuring that the ACA will be implemented, with some of the major provisions of the law going into effect by January 2014.

While the future of the ACA is no longer in doubt, the full impact of the Supreme Court ruling remains to be seen. Did the High Court create a new precedent that will impact future cases? What does the ruling portend for the scope of federal power in federal–state relations?

Commerce and Regulation
The individual mandate has been the most controversial provision of the ACA, and in making the Obama administration’s case, U.S. Solicitor General Donald B. Verrilli Jr. answered a barrage of questions from the justices about whether the government was seeking a different type of power it never had before under the Commerce Clause.

The Commerce Clause is no stranger to legal challenges, with scores of academics, politicians, and attorneys perpetually questioning the reach of the federal government. Article 1, Section 8, of the U.S. Constitution grants the federal government the power “[t]o regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.” The clause contains 16 words, but those 16 words have created legal tensions for more than two centuries.

Over the years the Supreme Court has oscillated between an expansive interpretation of federal power and a more restricted view of it, depending on the composition of the Court and the issues brought to the fore in specific cases. Given the nature of the Court’s ruling on the health care reform law, it stands out as a landmark case. Among the questions that arose was why the individual mandate was upheld as a tax and not as a power granted under the Commerce Clause.

For Patricia Millett, a partner at Akin Gump Strauss Hauer & Feld LLP who heads the firm’s Supreme Court practice, the ruling on the individual mandate is puzzling. Chief Justice Roberts stated that in the tax provision, people have a choice: either buy insurance or pay the tax. There is no real mandate.

“The tax analysis is perfectly legitimate as a constitutional matter,” Millett says. “What I really don’t understand is why he didn’t back that up and say, in the Commerce Clause area there actually isn’t a mandate, there’s a choice. I can’t give you a great explanation for why in the Commerce Clause area they looked only at the mandate provision and not the structure of the statute as a whole.”

The key, it seems, is located in the variations of the word compel. Compel. Compelled. Compelling. Compulsion. No matter how you break it down, the majority of the justices held that the mandate unconstitutionally compelled people into the health insurance market.

“The difference [between taxing and requiring someone to buy insurance] is just the mechanism used to achieve the behavior that you’re trying to achieve. The reason that the Court ultimately decided that this should be considered under the taxing clause is that the compulsion to purchase the insurance is not backed up,” says Caroline Brown, a partner at Covington & Burling LLP, where she is cochair of the firm’s health care industry practice and chair of its federal–state programs practice. The way the mandate is set up, there’s no other penalty or consequence for failing to buy insurance aside from owing a tax. People will not be violating the law if they choose not to buy insurance.

During oral arguments in March, Verrilli said Congress was looking only to regulate existing commerce, existing economic activity, whereas Paul D. Clement, a former U.S. solicitor general who represented the 26 states in their challenge to the health care law, argued that the federal government was seeking a brand new power. The government, Clement claimed, was seeking to create commerce by mandating—or “compelling”—people to buy insurance to regulate the market. The Court’s ruling has not put the matter to rest.

Randy Barnett, the Carmack Waterhouse Professor of Legal Theory at Georgetown University Law Center, crafted the activity/inactivity argument against the ACA, which boils down to the idea that the government is trying to regulate people’s lack of participation—their economic inactivity—in the insurance market. This is not a power given to Congress under the Commerce Clause, he says.

“If this had been done before in our history, we would have seen lots of examples trotted out about how this had been done. But obviously, it hadn’t been done. [ACA defenders] had to go back to the Militia Act of 1792 to try to find some example of where somebody had to do something,” Barnett says. “It tells you something about how unprecedented this was that those were the examples they had come up with.”

Millett, however, believes that due to the nature of the insurance market, the decision to buy insurance can be characterized as commerce and economic activity. People with insurance are paying for the promise that they’ll receive care when they need it later. “I grew up on Popeye cartoons. When Wimpy says ‘I’ll [gladly] pay you Tuesday for a hamburger today,’ that’s economic activity,” Millett says. “In the same way that I say I’d like this dress right now. I’ll put it on my credit card and pay for it next month. No one disputes that that’s economic activity.”

The government has guaranteed people that if they find themselves outside the emergency room, they will receive care regardless of whether or not they have insurance coverage. “Given that, the decision not to buy insurance is not really inactivity by people who intend to use the health care system. . . . The decision is actually an active decision to rely upon a system of promised care. It’s simply whether they will pay for it now or pay for it later,” Millett adds.

In January 2011, more than 100 law professors joined in the fight to protect the use of the Commerce Clause to regulate the health care market and the purchase of insurance. In their petition, the group argued that “Congress’s power to regulate the national healthcare market is unambiguous. The national market in healthcare insurance and services, which Congress found amounts to over $2 trillion annually and consumes more than 17% of the annual gross domestic product, is unquestionably an important component of interstate commerce.”

Like Millett, the professors believe that virtually every individual in the United States participates in the health care market during their lifetime. According to U.S. Census estimates, approximately 85 percent of the U.S. population has had health insurance in any given year in the last five years. In an interview with The Washington Post, Charles Fried, a professor of law at Harvard University who served as U.S. solicitor general in the Reagan administration, said 95 percent of the population participates in the health care market in every five-year period. With those facts, legal scholars argue that characterizing the uninsured—or self-insured as the group refers to this segment of the population—as “not engaging in ‘commercial’ activity” is wrong.

“That’s true that the majority of Americans participate in this sort of commerce, but again the question goes to the regulation of it versus compelling you to actually do something,” says Holly Rocco Feraci, founder and principal of Eques Consulting.

Barnett offers the same argument. “We participate in the food market. We participate in lots of markets. If that means we choose to do that, the government can make us do anything it wants. We are no longer citizens. We are subjects of the government, subjects to be commanded about in a way that has not been done before in our history,” he says.

Barnett also points out that participating in the health care market and buying health insurance are two separate activities. Chief Justice Roberts said as much when he wrote that “[h]ealth insurance and health care consumption … are not the same thing.”

“You’ll hear a lot of people say health care is a right, not a privilege. This is saying it’s not a right, it’s a requirement. If it were a right, it would be free. This isn’t. You’re required to pay for it out of your own pocket, and if you don’t, you’re going to get taxed,” Feraci says.

What Mandate?
Soon after the Supreme Court handed down its decision, headlines announced that the justices had upheld the individual mandate. But is there really a mandate?

“What Chief Justice Roberts ruled is that there’s no requirement to buy health insurance in this country,” Barnett says. “This is one of the myths of the case. He invalidated the individual mandate.”

In his opinion, the chief justice wrote that people have a choice. By opting not to buy insurance, they must pay a tax penalty. “The reason why that’s okay is that it’s a relatively low penalty. If it were so punitive that it would coerce you to buy insurance, then it might be unconstitutional,” Barnett says.

But another mandate exists, and it’s not the one splashed across newspapers, Millett says. “What the Supreme Court Commerce Clause decision left in place says it’s fine for Congress to compel me to pay for the insurance for these people who aren’t buying it now. We need to keep in mind there’s already a mandate out there. When I buy insurance . . . I buy it for my family, but I’m also buying it for three or four people I’ll never meet in my life because my prices factor in the expense of having to pay for people who aren’t buying their own insurance. There’s already compulsion to buy insurance. It’s just who has to buy it,” Millett adds.

Don’t blame the uninsured for the rising costs, though, warns Barnett. Blame the government’s mandate. “The federal government did not mandate that everyone receive emergency room care. Instead, it conditioned the receipt of Medicaid and Medicare funding on the delivery of such care. So it was an exercise of the spending power,” Barnett says. “It may well be that this government mandate has raised the cost of everyone’s insurance, just as a tax would, but this does not mean that those without insurance are doing this.”

He also adds that it’s not reasonable to assume that insurance premiums cover preexisting conditions. “That’s the whole purpose of the mandate—to cover those with preexisting conditions while limiting the premiums that can be charged. Those costs will be imposed on the young and healthy. So it is the ACA itself that is shifting costs.”

Fringe or Precedent?
As with any landmark Supreme Court case, legal analysts, from the extreme to the restrained, have attempted to gauge the ruling’s effects on future legislation. There have been scattered media reports that the Court’s decision marks a step toward undoing New Deal legal precedents. While not going too far to say that specific legislation will be struck down, the petition signed in January by more than 100 law professors in support of the ACA states that the “current legal challenges to the constitutionality of this legislation seek to jettison nearly two centuries of settled constitutional law.”

Those views are distorted, Barnett says. The Commerce Clause is safe. “I was arguing for two years [in Gonzales v. Raich] against people who said that if we were to prevail, it would be the end of the Commerce Clause as they know it and the end of all government,” Barnett says. “I said that’s not true. We’re basically saying [in the health care case] this new thing that they’ve never done before, they can’t do. It doesn’t mean that they can’t undo anything that’s already been done.”

“Some people will point to the dissenting view and say that you’ve got five justices that would have undone the New Deal agreement. That somehow creates precedent,” Feraci says. She disagrees, believing that the ruling will be narrowly interpreted. “The Supreme Court hasn’t overturned a law of this magnitude, perhaps because they do give deference to Congress.”

Chief Justice Roberts’ reading of the Commerce Clause, however, may make some proponents of broad federal power anxious. Even Justice Ruth Bader Ginsburg said in her opinion that the chief justice’s “crabbed reading of the Commerce Clause harks back to the era in which the Court routinely thwarted Congress’ efforts to regulate the national economy in the interest of those who labor to sustain it.”

Perhaps the question is more atmospheric, Millett says. Where is the Court headed in its approach toward congressional power and federalism? “The bigger question is … whether a combination of the chief justice’s long Commerce Clause analysis and the joint dissent analysis is a shot across the bow, is a signal that the Court is interested in returning to as it was in the late ’90s and early aughts of revisiting other precedent, either strengthening its scrutiny or narrowing the room that Congress has under the Commerce Clause,” she says.

But Roberts wrote his opinion alone, with four dissenting justices who didn’t join him in that portion of the opinion. “There’s a majority if you count noses, but there’s not an opinion of the Court. It’s not binding precedent,” says Brown, the cochair of the health care industry practice at Covington.

The application of the case seems limited. Barnett doesn’t see where another Commerce Clause challenge might come from. It’s possible if conservatives pass a medical malpractice reform act. He notes that the two versions of the bill he’s seen have been based on a very expansive reading of the Commerce Clause, but for now it’s purely speculative.

“The chance that Congress is going to walk into this again is highly unlikely. They will find ways of regulating and imposing limitations that are framed more as regulation as opposed to compelling people to enter the stream of commerce,” Millett says. “It’s not that hard for Congress to be able to frame regulation and legislation in terms that won’t so easily be characterized as requiring activity of people who are inactive or entering the marketplace when they’re out.”

As for the Court’s ruling placing the mandate under the tax code, it remains to be seen if that part of the decision will be binding in the future. It’s only one vote. However, Barnett also points to the Court’s 1978 decision in the affirmative action case Regents of the University of California v. Bakke, where Justice Lewis Powell Jr. was the only justice who stated that race could be a factor in admissions to achieve diversity. That opinion stood alone for more than 20 years, with few people considering it as precedent. It wasn’t until the 2003 Grutter v. Bollinger case that five justices accepted Powell’s diversity rationale.

“It took a long time,” Barnett says. “This tax rationale that the chief justice has come up with so far is his own. It’s not clear how much staying power it’s going to have. It was a very convoluted opinion. It’s not clear that anybody is committed to this thing as a principle of law. It may not actually survive this case for any future cases.”

Medicaid Surprise for States
Initially lost in the furor over the individual mandate was the Court’s 7–2 ruling regarding the Medicaid expansion provision. While the expansion itself was deemed constitutional, the justices stated that the federal government went too far by threatening states with the withdrawal of all their Medicaid funding if they didn’t participate in the expansion.

The decision took many by surprise. “Like most observers, I thought that the ballgame was really around the individual mandate,” says Billy Wynne, senior vice president and principal at Health Policy Source, Inc. “Then there was the wrinkle around Medicaid. . . . We all got to read the opinion to see that the Court had done something significant in the Medicaid space. I would not have predicted that based on precedent that that’s what the Court would do.”

Legal precedent seemed fairly clear. In 1987, in South Dakota v. Dole, the Supreme Court stated that it was within Congress’s spending powers to restrict highway funds if the state did not comply with a federal policy to increase the drinking age to 21. Reasonable conditions could be attached to a state’s receipt of federal funding, the Court ruled. There is a line, though, where the conditions cannot be so punitive that they are overly coercive.

“The Court had never actually crossed that line before. I think the line’s there, but we never actually crossed it. And they did it, 7–2. I don’t think anybody could have predicted that. That was a big surprise on the spending clause front,” Millett says.

Regardless of whether or not they agree with the decision, attorneys specializing in Medicaid now have to readjust their usual perception of how the program works. Brown, who has devoted more than 20 years to the practice area, cites this sentence regarding Medicaid by heart: “Although participation in the Medicaid program is entirely optional, once a State elects to participate, it must comply with the requirements of Title XIX.” Those words start virtually every decision about Medicaid. “That sentence I have probably read 1,000 times,” Brown says. “It was very hard to take a step back and say you can actually say that if you’re in the program, you don’t have to comply with all the rules.”

Significant Expansion
What makes the Medicaid expansion in the ACA so different that the Supreme Court’s decision seemed out of step with previous cases and the generally accepted compliance condition to participate in the Medicaid program? In his opinion, Chief Justice Roberts stated that the expansion was so large that it created a completely separate federal program that was not a part of the traditional Medicaid.

“The breadth of the Medicaid expansion required in the [ACA] is really unique,” Wynne says. The federal government is asking states to extend coverage to any person under 65 who does not have Medicare and with income at or below 133 percent of the federal poverty level. The federal government will cover 100 percent of the expansion costs for the first three years, and then decrease its responsibility in the succeeding years.

Under the ACA, states must also offer essential health benefits, which are items and services in at least 10 categories: ambulatory patient services; emergency services; hospitalization; maternity and newborn care; mental health and substance use disorder services, including behavioral health treatment; prescription drugs; rehabilitative and habilitative services and devices; laboratory services; preventive and wellness services and chronic disease management; and pediatric services, including oral and vision care.

These new essential benefits are very significant changes to the Medicaid program that states signed up for initially, wrote Chief Justice Roberts. In addition, the federal matching payments to cover the new Medicaid participants created by the expansion come from a distinctly different funding provision than the original program. According to the chief justice, those features distinguish the expansion itself as a new type of Medicaid program.

When the original Medicaid program was created in 1965, it was relatively small and aimed to help states offer medical assistance to low-income families, the elderly, and people with disabilities. When it was enacted, the program was placed under Title 42 of the U.S. Code.

“Medicaid is now so huge that the U.S. Code citation for [it] is impossible to follow. It’s like [section] 1396a(zz-4)i. There’s not enough room to accommodate how big it’s grown,” Brown says.

The U.S. Census Bureau reports that as of 2010 Medicaid covers 15.9 percent of the U.S. population, or 48.6 million Americans. “Medicaid changes all the time. It has grown exponentially from its modest beginnings. Now you have a decision that says this last growth was too much. It was so much that it created a different program,” Brown says.

On the other hand, there are several existing programs that might fail the legal muster of “too much” growth, yet they still found their way into Medicaid. Legislation throughout the 1980s widened the net of Medicaid beneficiaries. In 1986 states were required to cover treatment for emergency medical conditions of illegal immigrants who would normally be covered by Medicaid if not for their immigration status. As part of the Medicare Catastrophic Coverage Act of 1988, states had to phase in coverage for infants and pregnant women whose family income reached up to 100 percent of the federal poverty level. There was also the Omnibus Budget Reconciliation Act of 1989, which mandated states to broaden Medicaid eligibility to include children under six in families with incomes at or below 133 percent of the federal poverty line.

“It’s going to be very difficult sometimes, with pieces of Medicaid, to say, Is this one of those mandates that was sufficiently different from what existed before that Congress could not have required states to do it at the price of losing all their funding if they don’t?” Brown says.

An Offer They Can’t Refuse
The sheer amount of money at stake was the overriding element that fueled the majority opinion. According to the Henry J. Kaiser Family Foundation, more than $389 billion was spent nationwide on Medicaid in 2010. Medicaid can encompass more than 10 percent of a state’s budget.

“There is nothing else like that in spending clause legislation out there. Nothing. This is really the big kahuna when it comes to the amount of money that is involved, and its impact on state budgets is extraordinary,” Millett says. To withhold that much money from states if they fail to comply is too coercive, the courts ruled. It left them with basically no choice but to expand.

“This was a clear step of the federal government going a little too far,” Feraci says, who believes the Court corrected it by allowing states to opt out without fear of losing funding.

Millett disagrees. “I don’t think [the government] overreached. I don’t think they forced anyone to do anything. I really do think states within our systems are independent and sovereign. It’s the way the Constitution designed it. But the way the Constitution designed it means that sometimes they may have to make hard decisions and say no. I do think that doesn’t make it a force any more than I have to make a lot of hard choices in my life and have to accept contracts that I don’t particularly like,” she says.

While Wynne believes that citing threatened budgets is a valid argument, it’s not unique to Medicaid. “Every state has a razor–thin budget, especially now after the recession and everything. [In] every choice that involves some spending, someone who is opposed to it could say it will break the budget,” he says.

The withdrawal of Medicaid funding may also not be as real a threat as it appears on paper. The statute does clearly say that if a state does not follow a Medicaid mandate, the secretary of the U.S. Department of Health and Human Servicescan withhold some or all Medicaid funding. What it does not imply is that a state will automatically lose its money.

“It puts you at risk of losing it,” Brown says. “I’ve practiced in this area for 20 years. I have once seen a letter that threatened to hold a minute portion of the state’s Medicaid funding for failure to comply with a mandate. It’s hard to know what the secretary would have actually done if the state did not comply with the mandate.”

A Look Into the Future
While the individual mandate stole the headlines, the Medicaid ruling may have greater, long-term impact. “Within the context of the implementation of the Affordable Care Act, I think it’s fair in retrospect to say that the Medicaid piece is more pivotal,” Wynne says. “In terms of the dilemma or choice posed to states, the Medicaid decision is incredibly significant. Huge economic consequences. Huge consequences for coverage of people at the lower end of the income scale. This is clearly a very big deal, and there’s a lot of uncertainty that remains around it.”

Among the most uncertain aspects of the decision is the placement of that elusive “line.” This may have been the first time that the Court drew the line limiting the government’s spending powers, but some wonder if it might also be the last. States would have a lot to prove that another program’s effects to state livelihood are comparable to the Medicaid expansion, Millett says.

“Someone is going to have to show more than all states have it. You’re going to have to show more than the law affects a lot of people because that’s a part of the analysis,” Millett says. “They’re going to have to show that the amount of money is so distinctive from the amount of money that goes to highway funds, which is pretty big, and other such programs.” She doesn’t anticipate seeing traditional statutes such as money for education or racial and gender equality get struck down.

“Whether ultimately [this Medicaid expansion] is the only thing that fails this [line] test, it is still significant for the law because it has opened a door for challenges that have seemed to be on the verge of closing,” Millett says.

The door has been opened, but the clash between federal government and the states over federal dollars is unlikely to boil over soon as a result of the health care decision. “I believe the primary motive of the litigants in this case was to overturn the entire Affordable Care Act. . . . I would not infer that this is the beginning of some massive protest among states over federal spending. I don’t think the Court’s decision gives a ton of fuel to that kind of new campaign,” Wynne says.

But the possibilities still exist, according to Brown. “All of these programs start the same way—somewhat small and then once they’re hooked on the money, the obligations attached to them tend to grow. I think it’s a decision that will get a lot of airplay.”

The first hard deadline for states came on November 16, when they had to decide whether to establish a health care exchange, an online marketplace where individuals can shop for health insurance. As of November 28, 17 states and the District of Columbia have opted to establish state-based health insurance exchanges, 17 chose to default to a federally facilitated exchange, 6 were planning to create partnership exchanges with the federal government, and 10 remained undecided.

As the new presidential term begins in January, negotiations between states and the federal government regarding the Medicaid expansion are likely to commence. The discussions will offer insight into how much leeway states will have and how much pushback they’ll give for the government to maximize participation in the expansion.

“I do believe, longer term, most if not all states will go along with this [Medicaid expansion] to some degree or another, even if the state is objecting now,” Wynne says. “Even if a state opts out in the first iteration of this, new political regimes will come into play. New dynamics will develop.”

A similar mentality may cross over into a general backing of the law. In just a little over a week after President Obama’s reelection, some states such as Florida already have lowered their defenses, backing away from their opposition to the ACA. Americans are also warming up to the law, with only 33 percent of people now supporting a repeal of the act as compared to 45 percent in July, according to a Kaiser Family Foundation poll released in November.

Regardless of the opinion polls, the 2012 election firmly sealed the fate of the health care law. Implementation is imminent, but it will take years to fully unveil the long-term influence of the case. Whether or not the Court will use the precedent’s far-reaching language evident in Justice Roberts’ opinion to seriously constrain congressional authority in the future is a question that awaits resolution.

Reach Thai Phi Le at tle@dcbar.org.