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Supreme Court Considers Healthcare Law - Day Two

Publisher: Day Pitney Alert
March 27, 2012
Day Pitney Author(s) J. Bruce Boisture

This is a dispatch prepared by Day Pitney's Bruce Boisture, who attended today's Supreme Court session concerning the constitutionality of key provisions of the Patient Protection and Affordable Care Act.

The U.S. Supreme Court today held the second of three days of hearings to consider the constitutionality of two key provisions of the Patient Protection and Affordable Care Act ("ACA"). In two hours of oral argument this morning, the Court took up the question of the constitutionality of the so-called minimum-coverage requirement.[1]

Overview -- the Article I issue

The ACA makes fundamental changes in the health insurance market, aiming, in the words of one of its proponents, at "near universal health insurance coverage." Among other changes, it compels guaranteed issuance and community rating in the markets for individual coverage. It also requires (with some exceptions and some subsidies) that, beginning in 2014, all people who file a federal income tax return obtain health insurance coverage for themselves and their dependents or pay a penalty -- the controversial "minimum-coverage requirement."

Individuals, an association of businesses and 26 states have challenged the minimum-coverage requirement. They argue that neither the commerce clause nor the taxing power, both set forth in Article I of the Constitution, gives Congress the authority to enact such a requirement. The federal government, smarting from its recent loss on this issue in the U.S. Court of Appeals for the Eleventh Circuit, asserts to the contrary that the minimum-coverage requirement is well within Congress' broad authority under the commerce clause and in any event is a legitimate exercise of its authority to impose and collect taxes.

The challengers -- "The Constitution says I can sit this one out, thank you."

Those challenging the minimum-coverage requirement ground their opposition in the observation that the law will force individuals to buy health insurance that, by hypothesis, they would not otherwise purchase. This, they argue, is not the regulation of "extant commerce," which is within Congress' ambit, but rather the bringing into existence of commerce so that it can be regulated, which is outside the commerce clause pale. Such compulsory individual participation in commerce, they assert, is unprecedented. They urge that if it is permitted, it will mean Congress will be able to compel individuals to purchase automobiles in aid of the car industry or to engage in whatever other purchases Congress decides would enhance interstate commerce. Moreover, they argue, the minimum-coverage requirement does not support Congress' announced objective of regulating the payments system in the healthcare market, because the purchased insurance may never, in fact, be used to pay for medical services.

The minimum-coverage requirement also cannot be sustained as an exercise of Congress' taxation power under Article I, according to the parties arrayed against the statute. First, their challenge is to the mandate that individuals buy insurance, not to the penalty imposed if they fail to do so. Even if the taxing power supports the penalty provision, they conclude, it provides no support for the insurance-purchase requirement. And in fact, the penalty for failure to purchase insurance is a penalty for violation of the minimum-coverage law, not an Article I tax, as is evident from the ACA itself.

The defenders -- "This is national healthcare, like it or not, and you're all in the pool."

The federal government's defense of the constitutionality of the individual mandate rests on the fundamental observation that federal and state laws, supported by strong societal norms, have created a national healthcare system in which no one is denied essential care on account of inability to pay for that care. Because this system is available on these terms, and because (almost) everyone will use it if and when they become ill, we are all already engaged in this system of interstate commerce. The issue Congress faced, according to this argument, was not forcing participation in commerce, but rather making sure that everyone could and would pay fairly for their participation.

In the ACA, according to the federal government's position, Congress enacted a comprehensive restructuring of the healthcare payments system to address this issue. It enhanced incentives for employer-provided insurance, extended Medicaid coverage, and, in the individual health insurance market, required guaranteed issuance and community rating to make this insurance more available and affordable for the previously uninsured. As a necessary complement to these changes, Congress concluded (and made explicit legislative findings) that the minimum-coverage requirement is essential. According to the government's brief, "The provision is classic market regulation, intended to correct existing market failures and reduce risk-shifting and cost-shifting, in a way that respondents' hypotheticals are not."[2] This is a case in which the individual activity being regulated -- participating in the healthcare system without making adequate personal provision to pay for that participation -- substantially affects interstate commerce.[3]

The federal government also argues that Congress' power to tax under Article I authorizes the enactment of the minimum-coverage requirement. From this view, the individual mandate is nothing more or less than an ordinary tax incentive. The only sanction for failing to buy health insurance is the payment of the penalty. Finding precedent in the Supreme Court's cases for upholding a law under which "a tax will be abated upon the doing of an act that will satisfy the fiscal need," the government concludes that the individual mandate may be supported as just such a tax scheme.

Today's oral argument

Today's oral argument of the minimum-coverage issue was broad and narrow at the same time. At a fundamental level, it addressed what has become one of Congress' most extensive powers, the authority to regulate foreign and interstate commerce. But it did so in a very narrow context. All parties to the case agreed that both healthcare and health insurance are part of interstate commerce. All agreed that they are inextricably linked and subject to congressional regulation under the commerce clause. They further agreed that Congress could regulate this commerce by requiring that people seeking healthcare services have health insurance as a means of payment. What remained for extensive discussion is whether the commerce clause empowers Congress to require everyone to have health insurance all the time, or whether it can only require them to have it at the time that they seek medical care.

Solicitor General Donald B. Verrilli, Jr., representing the United States, advanced two commerce clause rationales to support the individual-insurance mandate. First, he argued, it is part of a comprehensive healthcare regulatory system that, among other things, reforms the health insurance market, which is an integral part of the healthcare system. Congress, having required guaranteed issuance and community rating in the individual health insurance market, could reasonably conclude that the minimum-insurance requirement is an essential additional regulatory element -- the third leg of the stool for this part of the healthcare system. Second, given that all people will need healthcare, that the timing and extent of this need is unknowable for each individual, that self-insurance frequently fails to provide the resources to pay for needed care, and that needed care is nonetheless provided at the expense of others, an individual's failure to maintain health insurance "substantially affects" interstate commerce, and Congress therefore has the constitutional authority to regulate it.

Almost all of the Court's questions of the Solicitor General focused on whether Congress has the authority under the commerce clause to "create commerce," as Justice Kennedy put it, by compelling people to purchase health insurance. Chief Justice Roberts asked if the federal government could also compel the purchase of cellphones to facilitate emergency services on interstate highways. Justice Alito asked if the expenses of burial, now often inadequately funded on a self-insured basis and therefore often shifted to others or the state, present the same justification for an insurance requirement. Justice Scalia asked if Congress could also require other purchases, such as health club memberships, to improve the performance of the healthcare system. In fact, asked the Chief Justice and Justice Alito, is there any limit on what Congress can compel people to purchase in support of a comprehensive regulatory system imposed by Congress on almost any area of interstate commerce?

The Solicitor General responded to these concerns with the assurance that the government's view of the commerce clause powers (as outlined above) would support only the rules aimed at the payment mechanism in the healthcare market. No other markets, he suggested, have the same combination of public provision of the good (healthcare) regardless of means to pay, unpredictability at an individual level of the timing and scope of need for the good, and demonstrated externalities.

Taking up this theme, Justice Ginsburg asked the Solicitor General whether the decision not to buy health insurance could be reasonably regarded as simply a decision to participate at public expense in the healthcare market. How, she asked, is the individual-coverage provision any different than the requirement that all wage earners contribute to the Social Security system, something they might not otherwise do unless required to do so? Justice Breyer pursued the same line, observing that Congress has already created a massive national healthcare system (through Medicaid, Medicare, ERISA, federal tax subsidies for employer-provided health insurance, and so forth). Within that system, he asked, is not the minimum-coverage requirement a reasonably necessary provision in support of the overall structure? If there were a program of national burial subsidies and regulation, would Congress not have commerce clause authority to establish a universal burial insurance requirement?

Justice Kagan asked the Solicitor General to confirm that all parties agreed that Congress could require that anyone seeking healthcare services have insurance at the point of sale, which he did. Is this then, she asked, just a question of timing -- buy it now or buy it later, when you need care? Yes, replied the Solicitor General, and questions of means, such as this one, are to be left to Congress. Justice Alito probed the differences in consequence between the two approaches, however, asking whether the early-purchase approach of the minimum-coverage provision also had the effect of forcing healthy individuals who would otherwise forgo insurance to subsidize the care of others. The Chief Justice, on the same point, noted that the mandated insurance package covered many types of medical services that would never be needed by some forced purchasers.

Justice Sotomayor turned the discussion to the government's alternative claim that Congress' taxing power supports the minimum-coverage provision, by asking the Solicitor General how a "penalty" such as this one could be classed as a "tax." The Solicitor General pointed to prior Court decisions in which "license fees" had been held to be supported by the taxing power. Justice Ginsburg asked whether the minimum-coverage penalty, meant to induce insurance purchases and not to raise revenue, could really be regarded as an exercise of Congress' power to tax. The Solicitor General observed in reply that all exercises of the taxing power create incentives, many quite intentionally. This penalty, he pointed out, is not punitive, applies without regard to the intent of the taxpayer, and has no other enforcement mechanism than the tax collection procedures, fitting it squarely within the Court's prior decisions on the extent of the taxing power.

Paul D. Clement, appearing on behalf of the states that are parties to the case, urged the Court that if it accepts Congress' right to force people to buy insurance, there will be no limit on congressional authority to force people into commerce. Justice Sotomayor asked how requiring the insurance purchase earlier could be different from requiring its purchase at the point of service, to which Mr. Clement replied that the former requires people to purchase something they do not need and would not otherwise purchase. In response, Justice Kennedy asked whether this isn't just a distinction without a difference -- are the uninsured healthy individuals not an actuarial reality for the system once the system is defined to provide care to all, without regard to means to pay? Mr. Clement replied that those who choose not to purchase health insurance should be regarded as "actuarially irrelevant" for this purpose and not be forced into the market to subsidize the healthcare costs of others.

Repeating the same question she had posed to the Solicitor General, Justice Ginsburg asked how the minimum-coverage provision differs from the Social Security tax, which is imposed on all wage earners. She asked if only a government-run insurance program can demand universal participation. No, replied Mr. Clement. Congress could have required everyone to pay additional taxes and then provided a subsidy to the insurance markets to support its guaranteed issuance and community rating requirements, he said. But, he insisted, it could not require some people to buy private health insurance to solve these problems in the healthcare market.

This, Justice Kagan observed, "is cutting the bologna pretty thin." She, the Chief Justice, and Justice Sotomayor pursued at length with Mr. Clement his contention that while everyone might be necessarily in the healthcare market, those subject to the minimum-coverage requirement are deliberately not in the separate healthcare market. Justice Kennedy more or less concluded this part of the discussion with his observation that given almost-universal provision of care, regardless of means, virtually everyone is, in fact, in the health insurance market, as an actuarial matter. Mr. Clement stuck to his guns, however, arguing that forcing the purchase of health insurance is not different than forcing the purchase of cars to support interstate commerce in automobiles.

Could it be done the other way around? Justice Sotomayor asked. That is, could Congress levy the medical cost-sharing fee universally, but provide an offsetting tax credit to those who maintain minimum levels of health insurance? No, replied Mr. Clement, this would be a disguised direct tax, illicit under the taxing powers, as defined in the Constitution.

Michael A. Carvin, representing the private litigants in the case, argued that permitting Congress to compel insurance purchases would be an unjustified expansion of its commerce clause authority. Failure to purchase health insurance, he argued, does not interfere with interstate healthcare commerce any more than the failure of teetotalers to purchase alcoholic beverages interferes with interstate commerce in liquor. Justice Kagan took issue with this, asking whether healthcare is different because everyone will eventually need medical care. To this, Mr. Carvin replied by outlining what emerged as a central theme of his argument: The dislocation in the healthcare market is caused by those individuals who do not pay their medical bills, not by those who do not buy health insurance. These are two separate markets, and Congress cannot follow a loose statistical correlation between the two groups (uninsured and deadbeats) across the divide from one market to the other, imposing compelled purchases on those who would not otherwise choose to participate in commerce in that market.

Instead, Mr. Carvin urged, the Court should find it beyond congressional power to compel the purchase of products, even in support of interstate commerce. Congress may regulate commerce, he suggested, but not use the commerce clause to justify outright wealth transfers from compelled purchasers to those benefiting from such purchases.

[1] For an overview of all of the issues under consideration by the Court in this case, please refer to our Alert published yesterday, March 26, 2012.

[2] Petitioners' (Federal Government's) Reply Brief (Minimum Coverage Provision), Dept. of Health and Human Services v. Florida, Docket No. 11-398, p. 18.

[3] "The uninsured as a class actively participate in the health care market, and Congress found that their 'attempt to self-insure' leads to the consumption of health care for which they cannot pay and the imposition of those costs on other market participants." Respondents' (Federal Government's) Brief (Severability), National Federation of Independent Businesses v. Secretary of Health and Human Services, Docket No. 11-393, at p. 7.