The American Interest
Policy, Politics & Culture
Obamacare on Trial
Published on March 23, 2012

In the challenge to President Obama’s signature health care law, the Patient Protection and Affordable Care Act (“ACA”), the Supreme Court  faces a daunting series of issues. The unprecedented schedule of oral arguments—a total of six hours—bespeaks the Court’s willingness to confront those issues squarely. The most historic decision since Roe v. Wade could well be in the works.

The case comes as several trends in the Court’s constitutional jurisprudence are coming to a head, raising the possibility of a sea-change in its approach to federalism. From the 1930s to the 1980s, the Court virtually abdicated its role as guardian of the Constitution’s limits on federal power, leaving it up to the “national political process” to restrain federal expansion. But since then the Court has carefully started to reassert its supervision over the limits to federal power across a range of issues, particularly those touching on “the structural framework of dual sovereignty.”

The Court’s emerging attitude was most recently expressed in Bond v. United States (2011), where it declared that “federalism secures to citizens the liberties that derive from the diffusion of sovereign power.” The author of that opinion was Justice Anthony Kennedy, who is widely expected to be the swing vote in the present case.

The Court has scheduled oral argument on four specific issues raised in the challenge to the ACA:

  1. On Monday morning, the Court hears ninety minutes of oral argument on whether the Anti-Injunction Act (AIA) bars any challenge to the individual insurance mandate until 2014, when the mandate’s “tax” penalty will first be assessed.
  2. On Tuesday morning, the Court hears two hours of argument on the issue that has received the most attention: Whether Congress has the constitutional power to require Americans to purchase health insurance.
  3. On Wednesday morning, the Court hears ninety minutes of argument on the issue of “severability,” namely what to do with the rest of the ACA if the individual mandate is struck down.
  4. Finally, on Wednesday afternoon, the Court hears an hour of argument on whether the ACA’s Medicaid expansion provisions constitute federal “coercion” of state governments.

The issues are interrelated in just the way the scheduling order suggests. The Court must dispose of the AIA issue before it can entertain the challenge to the individual insurance mandate. The individual mandate then receives the most airtime because the Court’s decision, one way or the other, will have historic consequences for the outer reaches of federal power. If the Court strikes down the mandate, it will then have to resolve the severability issue, namely what to do with the rest of the law. Finally, if the Court does not strike down the Medicaid expansion provisions together with the individual mandate, it will have to rule on the coercion challenge to the Medicaid provisions.

Anti-Injunction ActThe Anti-Injunction Act (AIA) bars challenges to taxes before they have actually been assessed, but allows challenges to fines and penalties. This is the one issue in the case that turns purely on statutory construction, rather than constitutional law. For different reasons, both sides believe that the AIA does not bar the challenge to the individual mandate. However, because the Fourth Circuit Court of Appeals dismissed a separate challenge to the ACA on this ground, the Supreme Court took the unusual step of appointing an amicus curiae to argue that the AIA does bar the current challenge.

The federal government has argued the mandate penalty is not a tax, as evidenced by the fact that it is called a “penalty” instead of a “tax,” and is not enforced in the same way that a normal tax would be. By contrast, both the state and private party challengers argue that the mandate imposes a substantive legal requirement separate from the tax penalty, and therefore the mandate is reviewable no matter how the Court rules on the AIA. In addition, the private party challengers argue, contrary to the federal government, that the AIA is not a jurisdictional bar, and so may be waived if not advanced by the government (which would be the case here). If the Court rules both that the AIA applies and that it bars the Court’s review of the mandate, it would only delay a final decision on the mandate for a few years. It is therefore highly unlikely that the Court will take this route. Hence, it will almost certainly reach the other, and far more important, issues in the case.

The Individual MandateThe Constitution gives Congress the power to “regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.” U.S. Const. art. I, § 8, cl. 3. Until the New Deal, the “Commerce Clause” was understood as a severe limitation on federal power. Since then, however, it has been interpreted to allow Congress to regulate virtually everything under the sun. Still, the ACA’s individual insurance mandate raises an unprecedented question: Does the power to regulate commerce “among the several States” allow Congress to require that individuals purchase particular goods or services?

The Supreme Court’s long and tortured Commerce Clause jurisprudence can fill up an entire semester class in law school, as any law student will attest. That jurisprudence traces the history of the Republic from its beginnings in a federal government of modest and extremely limited powers to the federal government we know today—one of all-pervasive regulatory authority.

In Gibbons v. Ogden (1824), the Supreme Court made it abundantly clear that the “purely internal” commerce of a state was entirely outside the federal commerce power. Commerce did not include agriculture, manufacture or mining, which took place before goods entered into commerce. Nor did it commerce include the use and consumption of goods once they left commerce in a final sale.

That tripartite division, which looked at the phases before, during and after interstate commerce as distinct, held firm until the 1930s notwithstanding major transformations in the national economy. The Court embraced a doctrine that allowed Congress to regulate activity with a “direct” effect on interstate commerce. The distinction between “direct” and “indirect” effects depended upon a clear distinction between economic activity that was “interstate commerce” properly so-called, and all other economic activity, which was the province of the States.

That critical distinction vanished with the Court’s New Deal decisions. In National Labor Relations Board v. Jones & Laughlin Steel (1937), the Court held that Congress can regulate those intrastate activities that “have such a close and substantial relation to interstate commerce that their control is essential or appropriate to protect that commerce from burdens and obstructions.” Still, the Court counseled,

[T]he scope of this power must be considered in the light of our dual system of government and may not be extended so as to embrace effects upon interstate commerce so indirect and remote that to embrace them, in view of our complex society, would effectually obliterate the distinction between what is national and what is local and create a completely centralized government.Alas, those cautionary words proved idle. Four years later, in United States. v. Darby (1941), the Court held that Congress’s power “extends to those activities intrastate which so affect interstate commerce . . . as to make regulation of them appropriate means to the attainment of a legitimate end, the exercise of the granted power of Congress to regulate interstate commerce.” The doctrine of “substantial effects” swallowed up both “direct” and “indirect” effects. It was then but a short step to Wickard v. Filburn (1942), in which the Court held that a farmer was subject to federal regulation when he harvested wheat to feed his family and farm animals. The effect of his activity on aggregate demand, “taken together with that of many others similarly situated, is far from trivial.”

Wickard stands for the principle that Congress can regulate virtually every class of activity, no matter how local, if that activity might affect the supply or demand for something in interstate commerce. But the set of activities that won’t somehow affect supply and demand for some good or service is vanishingly small. In fact, that set might even include inactivity—the key issue in the constitutional challenge to the ACA’s individual mandate.

Though the Court often pretends otherwise, Wickard was a complete repudiation of the federalism doctrine articulated by Chief Justice John Marshall in Gibbons. Marshall had insisted that “No direct general power . . . is granted to Congress” over an article “before it becomes an article . . . of commerce among the States.” In that original understanding, the commerce power simply did not include “the exclusively internal commerce of a State.” But after Wickard, the “exclusively internal commerce” of the states simply vanished from the realm of constitutional law. 

Wickard opened the floodgates to federal expansion, and for decades the federal government grew dramatically in its scope and intrusiveness. Chief Justice Hughes’s prescient warning in Schechter Poultry Corp v. United States (1935) that, if the distinction between direct and indirect effects were abandoned, “the federal authority would embrace practically all the activities of the people,” materialized with vertiginous speed and no end in sight.

After Wickard, the next time the Court struck down a law of Congress for exceeding the commerce power was in United States v. Lopez (1995). Lopez struck down a school-zone gun ban because the possession of a weapon could not be considered economic activity with a substantial effect on interstate commerce. The decision seemed to puncture the common perception after Wickard that Congress could regulate whatever it wanted. But Lopez unfortunately embraced the logic of Wickard, and thus did little to restore the pre-New Deal balance. Lopez stands for little more than the nearly naked assertion that the commerce power must have some limit, and even that modest proposition is almost impossible to square with Wickard.

The difficulty for the Court here is that the doctrine of “substantial effects” has no logical stopping point, as Justice Clarence Thomas pointed out in his famous Lopez concurrence. If the federal government can regulate any class of activity with a “substantial effect” on interstate commerce, it can regulate virtually all activity. Perhaps the precedents of the last 70 years cannot be undone, for to do that would effectively repeal most of the federal government as we know it today. But by the same token, as we argue in our Supreme Court amcus curiae brief on the individual mandate, those flawed precedents should not be extended into the wholly unprecedented arena of forcing individuals to engage in certain activities in order to conscript them into the service of a federal regulatory scheme.

The fact that the Court asked for two full hours of argument on this issue sets the stage for a historic new Commerce Clause precedent to emerge when the Court issues its final ruling. As with the other major issues in the case, the Court’s controlling precedents have not endured the test of time well and are in need of major refinement, if not wholesale revision. Hence, even if the Court ultimately upholds the individual mandate, it will likely also affirm that the Commerce Clause does in fact have some limit. Just how the Court will articulate that limit is anyone’s guess. But either way, the Court may well set a new standard that will shape the limits of federal power for decades to come.

SeverabilityIf the Supreme Court strikes down the individual mandate, it will have to decide what to do with the rest of the law. The issue of “severability” is exceedingly complicated—and it could have far more sweeping consequences for the ACA itself than the Court’s ruling on the individual mandate.

The key question here is whether the individual mandate is independent from the rest of the law, or is so interwoven with other provisions that it cannot be “severed” from them. It could then strike down other parts of the law. It might even strike down the whole law, as the trial court did. The challenge for the Court is that, if it strikes down the individual mandate, but leaves the rest (or even some part of the rest) in place, the country will be saddled with a law that no Congress ever actually passed—and one which could have catastrophic unintended consequences (see our primer for the AI on this issue).

The “severability” issue may seem arcane, but it raises a profound constitutional question. The Court has struck down legislative vetoes and presidential line-item vetoes because what results doesn’t satisfy the minimum constitutional requirements for a bill to become law—namely that every law must pass both houses of Congress and be presented to the President for his signature. But when the Court strikes down only one part of a law, it raises the same concern, for the end result is arguably a new law that does not satisfy the minimum constitutional requirement for a bill to become law. The irony here is that the whole rationale for the Court’s doctrine of severability—namely that it seeks to strike down no more of a law than necessary—is founded on respect for the prerogatives of Congress and the President.

Under the controlling precedents, when one part of a law is held unconstitutional, the remainder is normally upheld if (1) it will be “fully operative” as a law, unless (2) it is evident that Congress would not have enacted the remainder without the invalid part. The Court’s modern cases, chiefly Alaska Airlines v. Brock (1987), have applied the first prong of this test in a way that seems to require only that the remainder have some legal effect. But that approach seems fatally flawed. To satisfy the minimum requirement for a bill to become law, the post-excision remainder should not merely be operative as a law, but should operate in the way that Congress intended. That is the lesson of the older cases, in particular Champlin Refining Co. v. Corporation Comm’n of Oklahoma (1932) and its precedents.

In our Supreme Court amicus curiae brief on this issue, we argue that the Court should conduct a thorough analysis of statutory interactions, in order to understand how the insurance “reforms,” Medicaid expansion, and premium subsidies (essentially, Titles I and II of the ACA) were all interrelated with the individual mandate in the original legislative scheme. The better the Court understands the purpose of the mandate within the original legislative scheme, the clearer it will be that the core provisions of the ACA are wholly interwoven with the mandate and would have to be struck down with it. Without the mandate, these other provisions will not function as Congress intended and would never have passed.

It is crucial to understand the phenomenon that health policy analysts call the “adverse selection spiral.” The heart of the ACA is its provision for “guaranteed issue” of health insurance, which requires health insurance companies to provide insurance for all applicants regardless of health status. In a pure “guaranteed issue” scenario, healthy people have an overwhelming incentive to drop their health insurance and wait until they are sick to get it. As healthy people leave the rolls, the per-unit cost of insuring the remaining pool of (riskier) insured rises, which pushes premiums up, which in turn drives more healthy people off the rolls. In the end, the only people who enroll are those who are actually sick, such that premiums approach the actual cost of health care. Under such a scenario, the insurance industry eventually collapses.

This is what happened with the state reforms that followed in the wake of President Clinton’s failed health care effort. Eight states adopted “guaranteed issue” reforms for the individual insurance market. To prevent adverse selection, the reforms generally allowed insurers to exclude applicants with preexisting conditions. But even that did not prevent the individual health care market in these states from imploding because of adverse selection. The effects were catastrophic, and many states quickly repealed or drastically revised their guaranteed issue schemes, usually within just a few years.

In 2006, Massachusetts undertook to “fix” the disastrous results of its 1990s-era reforms with a comprehensive scheme that included a mandate to purchase health insurance or pay a tax penalty. That was supposed to solve the problem of adverse selection, and at first, it seemed to work: Insurance premiums dropped significantly.

They soon rose again as the reforms drove insurance costs up, but not before Congress had embraced the individual mandate as the “silver bullet” that would prevent adverse selection. In fact, Congress placed such faith in the mandate that the ACA ambitiously prohibits exclusions for preexisting conditions, on top of the other health insurance reforms.

In the original congressional design, all of the ACA’s health insurance reforms arguably depended on the individual mandate—not just “guaranteed issue” and the (related) prohibition on exclusions for preexisting conditions, but also “community rating” (limits to how much more insurers can charge the elderly than the young), the prohibition on annual benefit limits, comprehensive coverage requirements, limitations on co-pays and deductibles, preventive care coverage requirements, and even the reduction in subsidies to hospitals that care for the indigent.

All of these provisions raise the cost of insurance; and in combination with guaranteed issue, they create relentless adverse selection pressure. As the transcripts of congressional committee hearings, floor statements, and roll call votes make abundantly clear, Congress thought that the mandate was inextricably interwoven with the ACA’s other core provisions. In short, the ACA would never have passed without the individual mandate.

Curiously the parties agree on this point, so the Supreme Court appointed amici curiae to argue otherwise. That is because severability raises considerations that are not nearly so relevant to the parties in any case as they are to the Court’s relationship with the legislative and executive branches of government.

The federal government will agree with the states and private party challengers that the mandate cannot be severed from the rest of the law. But whereas the latter will use that as an argument in favor of striking down the whole law along with the mandate, the government will argue that the inseverability of the mandate from the rest of the law actually justifies the mandate’s constitutionality.

The Solicitor General will argue that the ACA’s dependency on the individual mandate makes the mandate constitutional under the Necessary and Proper Clause of the Constitution, which allows Congress to enact all laws that are necessary and proper to implement the other enumerated powers of Congress. But that argument misunderstands a crucial difference between the principle of severability and the function of the Necessary and Proper Clause. As enacted by Congress, the core provisions of the ACA cannot operate as intended without the mandate; the mandate is therefore “necessary” in that sense. But before passage, Congress could have resorted to any number of other devices to combat adverse selection—such as allowing exclusions for preexisting conditions, or even establishing a fully subsidized single-payer system. Prospectively, therefore, the mandate was not “necessary” to carry out the ACA. Moreover, as the Court made clear in Printz v. United States (1997), a law that violates the “structural framework of dual sovereignty” is not proper within the meaning of the Constitution.

If the Court strikes down the mandate while upholding the rest of the law, the ACA could unravel in spectacular fashion, pushing the health insurance industry to the brink of collapse. In fact, that may well happen even if the mandate is upheld. Yet the issue before the Court is not how the law will actually function, but rather how Congress intended the law to function.

The states and private party challengers will argue that all of the ACA is inextricably interwoven with the mandate, and must fall along with it. Though that is what the ACA’s opponents hope, this argument has its risks, because it may reach too far. The Court may balk at striking down an entire massive federal scheme because of a single sentence in the ACA. But the Court may also hesitate to “rewrite” the law by going through it section-by-section and determining on that case-by-case basis which provisions are independent from the mandate and me be left in place. And there are many provisions in the law—for example Title III on Medicare reform and virtually everything that follows after—that are clearly independent from the mandate.

Severability is a pickle, to be sure. On the one hand is the Court’s duty to strike down laws of Congress that are unconstitutional. On the other is the Court’s respect for co-equal branches of government, which argues for judicial restraint when striking down some invalid provision of a law.

But respect for the prerogatives of Congress and the President also cuts the other way: It is arguably unconstitutional for the Court to leave the country saddled with a law that no Congress ever enacted, or would ever have enacted. The constitutional concern raised by the Court’s severability doctrine is particularly acute because nobody can pass on the constitutionality of the Supreme Court’s own decisions. That argues against severability doctrine in general.

Should concern for judicial restraint cut the other way, and lead the Court to embrace a doctrine of striking down a law either in toto or not at all? That would run against the Court’s classic decision in Marbury v. Madison (1803), in which it struck down one marginal clause of the Judiciary Act of 1789, which created the federal judiciary, and left the rest of the law in place. The Court took a seemingly reasonable approach: the invalid provision was negligible and almost completely unrelated to the rest of the law. It was abundantly clear that the law would have passed without the offending clause, and striking down the whole law would in effect have repealed the entire federal judiciary. The logic of Marbury seems inescapable.

But there is perhaps a very good reason why the Court should reject that approach and embrace instead the far more sweeping rule of striking down whole laws if even one word is unconstitutional. Congress would be far more careful about including provisions of dubious legality in its comprehensive regulatory schemes, which would increase its incentive to police more carefully the constitutionality of its various aggrandizements.

The Court’s competing priorities in applying severability doctrine could spill over into its consideration of the individual mandate. If the Court’s severability options are all highly unpalatable, it might be inclined to uphold the individual mandate simply to avoid the enormous can of worms it will open if it strikes the mandate down.

Here, too, the case has all the making of a potentially historic shift in the Supreme Court’s jurisprudence. The Court’s determination on severability could profoundly alter how the Court handles laws that are partially unconstitutional. A key voice here will be that of Justice Antonin Scalia, who takes an ambivalent approach to the desirability of laws, and likes interpreting them in precisely the way they were written: “Garbage in, garbage out,” he likes to say. Of the nine, Scalia is perhaps most likely to cringe at the prospect of rewriting a law of Congress so that it “works.”

Medicaid ExpansionWhen the federal government taxes money away from residents in the various states, and offers to give it back to them only on condition that they comply with given federal conditions, a serious constitutional problem arises. If, under the taxing and spending power, Congress can coerce states into adopting national policy preferences on issues of state concern, then, as the Supreme Court said in United States v. Butler (1936), the taxing and spending power could become “the instrument for total subversion of the governmental powers reserved to the individual states.”

The ACA requires that states dramatically expand and modify their Medicaid programs as a condition of continuing to receive federal Medicaid matching funds. For the states, this penalty is overwhelming. Federal funds now take up more than a third of states’ budgets. By far the largest portion of that federal “aid” is Medicaid, which constitutes forty percent of all federal funds to the states.

State legislators faced with having to replace, say, 15 percent of their budget revenue find it politically impossible to tax their residents again for services they have already paid for. The threat of transferring billions of the state’s tax dollars to residents of other states, with nothing at all to show for it, is simply overwhelming. Despite their theoretical “freedom of choice,” state governments in reality have little choice but to comply.

And yet that theoretical freedom of choice is fundamental to the Court’s coercion doctrine. The seminal case is South Dakota v. Dole (1987), in which the Court ruled that Congress could penalize states that refused to raise their drinking to 21 by taking away up to 5 percent of federal highway funds. The state’s drinking age was not a condition on how federal funds were to be spent. It wasn’t even a condition on how state funds were to be spent. The issue of a given state’s drinking age was entirely collateral to a program whose sole purpose was to enlist the states in maintaining the federal highway system.

The Court has recognized that the federal government cannot commandeer state agencies. Federal “compulsion” of state governments is therefore impermissible. Yet in Dole the Court ruled that Congress could “encourage” states to adopt certain policies by attaching conditions to federal funds for the states—so long as Congress did not cross the line into compulsion. Writing for the majority, Chief Justice William Rehnquist recognized that “in some circumstances the financial inducement offered by Congress might be so coercive as to pass the point at which ‘pressure turns into compulsion.’”

This unfortunate reasoning was based on a conceptual fallacy. No matter how onerous the penalty, coercion always theoretically implies free will on the part of the coerced party. The cost-benefit analysis may be weighted infinitely towards accepting the condition rather than foregoing the “offered” benefit, but there is still a choice. Conversely, even if the penalty is a single dollar, there is still coercion. This is especially true when the dollar in question belongs to the coerced party to begin with.

Because it is based on a logical fallacy, the coercion doctrine of Dole has proved impossible to apply in practice. Since Dole, no federal court has held that any federal conditional grant program is unconstitutionally coercive. In fact, the decisions of the federal courts have almost exclusively been handed down on summary judgment motions, before any trial on the facts. This implies that no penalty, no matter how onerous, could result in a ruling of unconstitutional coercion.

In the trial court below, Judge Vinson granted summary judgment for the federal government on the Medicaid count, but he did so in a curious way. He ruled, in effect, that the federal government could impose any and all conditions it wanted on the money it gave to the states, and there wasn’t a thing he could do about it.

The court of appeals expressed something humorously akin to shock at this reasoning:

If anything can be said of the coercion doctrine in the Spending Clause context, however, it is that it is an amorphous one, honest in theory but complicated in application. But this does not mean that we can cast aside our duty to apply it; indeed, it is a mystery to us why so many of our sister circuits have done so. To say that the coercion doctrine is not viable or does not exist is to ignore Supreme Court precedent, an exercise this Court will not do. [ . . . ] If the government is correct that Congress should be able to place any and all conditions it wants on the money it gives to the states, then the Supreme Court must be the one to say it.But in fact Dole’s coercion doctrine is not “honest in theory.” It is profoundly flawed, both in theory and in application. By upholding the ACA’s Medicaid expansion provisions, the court of appeals in effect ruled that “Congress should be able to place any and all conditions it wants on the money it gives to the states.”

As we argue in our amicus brief on Medicaid expansion, it should be unconstitutional for Congress to change the conditions of a federal grant program in mid-stream. But the arguments against Medicaid expansion generally overlap with the constitutional arguments against Medicaid itself. In other words, there is woefully little room for the Court to strike down the Medicaid expansion provisions of the ACA on the basis of principles that don’t also render Medicaid itself, and all other conditional federal grant programs, unconstitutional. That makes it very unlikely that the Court will strike down the Medicaid expansion on the basis of coercion.

Yet even if it upholds the ACA’s Medicaid provisions, the Court could (and should) admit that Dole’s coercion doctrine is flawed and should be replaced. The Court should look to Justice Sandra Day O’Connor’s dissent in Dole, wherein she argued that, if the conditions attached to a federal grant program must be “related to the federal interest” in that program, as the majority agreed, then the conditions should only attach to how the federal funds are spent, and not to collateral state policy issues.

Holding that federal conditions cannot apply to collateral state policy issues probably would not threaten the ACA’s Medicaid expansion provisions, because there the conditions generally attach to how federal funds are to be spent. But the Court could rule that the conditions cannot attach to how state funds are to be spent.

That would require the federal government to substantially restructure Medicaid, and most other conditional federal grant programs. And it would severely limit the federal government’s ability to coerce state governments into adopting policies their residents don’t want. Here, too, the case has the makings of a historic shift in the Court’s jurisprudence.

The constitutional challenge to the ACA raises some of the most difficult issues the Supreme Court has ever had to confront in a single case. The unprecedented briefing schedule suggests that the Roberts Court just might rise to the occasion.

The Supreme Court’s controlling precedents in all three of the major constitutional issues raised in this case—Commerce Clause, severability, and federal coercion—have proven problematic in application and are clearly in need of refinement. In navigating those issues, the Court could well be guided by its renewed focus on federalism. The Court has shown an increased willingness to defend the “structural framework of dual sovereignty” and insist that states must “remain independent and autonomous within their proper sphere of authority,” as Justice Scalia put it in Printz. As is evident in the various opinions in Lopez, Printz, and Bond, the view that constitution’s federal structure is a real limitation on federal power now commands a clear majority of the Court.

For the first time since the 1930s, a majority of the Court seems ready to stand its ground and insist that the Constitution is more than just “some rigid idea about what government could or could not do,” as President Obama charmingly describes the document he is sworn to protect. Whichever way it rules, the Roberts Court will leave its unique imprimatur on the course of American history.

Mario Loyola is director of the Center for Tenth Amendment Studies, and lead author on the three amicus briefs filed by the Foundation for the Supreme Court in the ObamaCare challenge. Josiah Neeley is a policy analyst with the Center for Tenth Amendment Studies and co-author on two of the amicus briefs filed by the Foundation in the Supreme Court. Spencer Harris is a policy analyst with the Center for Health Care Policy.