Unraveling The Supreme Court’s Landmark Healthcare Decision

At over nine-hundred pages, not including mountains of administrative regulations promulgated to implement its many provisions, the Patient Protection and Affordable Care Act is a nightmare to fully comprehend. Also difficult is the Supreme Court’s decision issued yesterday. My hope in this post is provide an objective and understandable summary of the law, analysis of the decision, and commentary on the practical and political implications moving forward.

The Affordable Care Act

All healthcare policy is constrained by an “iron triangle”: (1) quality, (2) cost, and (3) access. These components often work against each other (e.g. increasing quality will often increase cost which can decrease access; decreasing costs increases access but can reduce quality). The Affordable Care Act consists of many moving parts, but as a whole they were designed to address each part of the triangle, especially access.

In order to accomplish this, one of the primary aims of the Act is to increase utilization of preventative care. Healthcare, like any industry, is subject to cost shifting. Virtually everyone, insured or not, consumes healthcare. The uninsured, who make up tens of millions, typically do so only to lack the capacity to pay for the care and consequently inflate everyone else’s premiums. Further, these same uninsured individuals consume disproportionately more expensive emergency care, which aggravates this cost-shifting tendency further. It is hardly surprising that most chapter seven bankruptcies occur because of healthcare expenses. What is surprising is that most of those people are insured.

To combat this, Section 1307 of the Act prohibits insurers from denying individuals based on preexisting conditions and section 1301 requires insurers to cover, without cost sharing, a long list of preventative care services. These include, among other things, mammograms, colonoscopies, flu shots, and tobacco cessation interventions. By more people being insured and by insurance policies being required to cover preventative care services, the goal is for less cost shifting to occur and less expensive emergency treatment to be consumed. However, these alone would quickly render insurers insolvent—healthy people would delay purchasing health insurance until they became sick, while a disproportionate volume of unhealthy people would buy insurance and file expensive claims. Simply put, many more people would be cashing out than paying in.

Enter the Individual Mandate.

Section 5000A(a) requires everyone to be insured by 2014. Broadly speaking, this can include your current personal health insurance policy, employee health benefits plan, or insurance through Medicare or your state Medicaid program. I use the word “require” loosely. It will not be a crime to be uninsured; it would merely be reflected as a penalty on your income taxes. You could choose to pay the penalty. Further, to collect on the penalty, the IRS is denied many of its enforcement powers such as criminal prosecutions and levies. The penalty is phased in through 2016: $95 in 2014, $325 in 2015, and $695 in 2016. However, even with the incentives towards preventative care, insurance is and will continue to be expensive. An individual mandate by itself would quickly render many low-income consumers insolvent.

Enter Medicaid expansion.

Section 2001 expands full Medicaid coverage to individuals up to 133 percent of the poverty line ($30,000 for a family of four). In addition, by a downward sliding scale, individuals earning up to 400 percent of the poverty line ($92,000 for a family of four) will have their private insurance plan subsidized. Thus, for low- and middle-income individuals, a significant percentage of their required healthcare premiums would be paid by the government. This has the dual effect of making it affordable to comply with the law and eliminating any incentive to simply elect to pay the tax penalty.

In sum:

  • insurers must completely cover a long list of preventative care services
  • insurers may not deny people for preexisting conditions beginning 2014
  • individuals are required to be insured by 2014
  • Medicaid will cover or subsidize more individuals by 2014

The policies work together to increase access, while curbing cost increases.

But these are just a few provisions of the Affordable Care Act. I cover these because these were addressed by the Supreme Court’s landmark decision yesterday in National Federation of Independent Business v. Sebelius. In addition to these provisions the Affordable Care Act includes the creation of an online exchange in which every health benefits plan offered in the state would be available to compare and purchase, a ban on lifetime coverage caps, enhancements to Medicaid anti-fraud enforcement, an insured Bill of Rights, grants for states to implement electronic health record systems, and much much more.

P.L. 111-148, the culmination of decades of work to reform our national healthcare apparatus, was not, however, without opponents.

The Opinion

Immediately upon signing into law, opponents of the Act filed suit, alleging the individual mandate and the Medicaid expansion to be unconstitutional. What follows is an explanation of the lawsuit and the majority opinion.

The first and most important thing to understand is that, unlike state governments, which have unlimited power unless taken away by the constitution, the Federal government has no power unless granted by the constitution. The opponents of the individual mandate claimed that no part of the constitution granted the Federal government the power to require people to purchase insurance, while the government responded that the individual mandate was authorized by the Interstate Commerce Clause and the Taxation Clause.

The Commerce Clause reads as follows: “[The Congress shall have Power t]o regulate Commerce with foreign Nations, and among the several States.” Since it’s birth in 1787, the Commerce Clause has grown with age, with a growth spurt from the late 1930s until the 1990s.

In Gibbons v. Ogden in 1824, Chief Justice Marshall held that the Commerce Clause validated Federal regulation of waterways. In Heart of Atlanta Motel v. United States, the Supreme Court ruled that the Civil Rights Act of 1964, which aimed in part to prevent discrimination against African Americans, could be applied to a motel because that motel served customers who travel across state lines. By far the most controversial application of the Commerce Clause occurred in 1942 in Wickard v. Filburn. The Agricultural Adjustment Act of 1938 established wheat production limits in order to increase wheat prices for farmers during the Great Depression. Roscoe Filburn grew wheat which, without exception, he never sold but instead used for personal consumption. Filburn argued that, because his wheat was kept entirely in state, the production limit could not constitutionally be applied to him. The Court reasoned that Filburn’s production reduced the amount of wheat he would buy on the open market, and because wheat was traded nationally, Filburn’s production was affecting interstate commerce.

Yeah. So, if you find that reasoning a bit suspect, so do I.

However, after two-centuries of interpretation, Courts have found that the Commerce Clause allows Congress to regulate (1) the channels of commerce, (2) instrumentalities or things that pass in interstate commerce, and (3) activities that have a substantial effect on interstate commerce. It is not surprising that the third one would be especially controversial.

After Wickard, it would not be until United States v. Lopez in 1995 that the Supreme Court invalidated a law that was advocated to be within the Commerce Clause. The Gun-Free School Zones Act of 1990 essentially made it a crime to in a school zone possess a firearm that had passed through interstate commerce. The law, certainly with Heart of Atlanta in mind, was limited to firearms in interstate commerce. Of course, practically speaking, that includes all firearms. The Court, however, struck this down, announcing a new requirement that the regulated activity itself be commercial in nature. The Court held that carrying a firearm within a school zone is too attenuated from commercial activity to be regulated by the Commerce Clause.

Fast forward to the current year. The government, in its response to the petition to strike down the Individual Mandate as unconstitutional, argued to the Supreme Court that the power to require individuals to carry insurance is a valid exercise of the interstate commerce power. They argued that failure to purchase insurance substantially effects interstate commerce by creating the cost-shifting problem. Healthcare and insurance are indisputably commercial activities.

Chief Justice John Roberts Jr. wrote the majority opinion. Joined by the reliably conservative bloc of Justices Scalia, Thomas, and Alito, as well as the conservative—though less reliably conservative—Justice Kennedy, Roberts rejected the argument that the Individual Mandate comes in under the Commerce Clause. The opinion never disputed that failure to purchase health insurance affects interstate commerce. However, Roberts stressed that in every expansion of the Commerce Clause, what was regulated was activity. Here, was is regulated is inactivity. If the federal government can regulate all inactivity that negatively effects interstate commerce, the Affordable Care Act could be amended to force you to do just about anything, including … yes … eat broccoli. Roberts concluded that was just too far removed from what the Framers had in mind when they drafted the Commerce Clause.

And with that came one of the most important decisions on the Commerce Clause—one that will be analyzed and Socraticized in law schools until we get taken over by China.

The government alternatively asserted that the Individual Mandate was constitutional as an application of the Taxation Power. Article one, section eight reads: “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defen[s]e and general Welfare of the United States.” They pointed out that the penalty for not enrolling in a qualified health plan looks like a tax: It is paid as part of Federal income taxes, is paid into the Treasury Department, is found in the Internal Revenue Code, and is enforced by the IRS.”

The counter to this argument is that the Act describes the payment as a “penalty” rather than a tax and that the elected officials in support of the Act’s passage declared that they would not have to raise any taxes to fund its provisions.

However, Roberts, this time with the liberal bloc, made the decisive and highly anticipated decision— the Individual Mandate is a “tax” within Article One of the Constitution.

One might ask, as did a particular person of David Leonhardt of the New York Times: “How can the individual mandate violate the commerce clause but be constitutional under taxing power?” His answer explained it well:

Think of it this way: Imagine that the government passed a law mandating that all Americans have children and also said that the penalty for not having children would be higher taxes. Then imagine that the Supreme Court ruled the so-called child mandate was unconstitutional but also said that Congress could pass a law requiring people without children to pay higher taxes.

Now leave the hypothetical world behind. Congress has in fact passed a law saying that people without children pay higher taxes. It is called the child tax credit, which reduces the taxes of people with children.

The court’s ruling on health care today is not precisely the same as this hypothetical situation, but it is not so different. Congress’s constitutional power to tax is broader than its constitutional power to regulate commerce. So, the court ruled, Congress can require people who do or do not engage in certain behavior to pay higher taxes.

Addressed next was the constitutionality of the Medicaid expansion. Medicaid is a partnership between the Federal and state governments. The government offers money to the states and, in exchange, the government requires that the states use the money to certain low-income and disabled persons. Medicaid can be thought of as a contract. These type of arrangements between the Federal and state governments are upheld as being within the Spending Clause—the second part of the Taxation Clause. Like in the formation of any contract, the offeror can limit acceptance to the fulfillment of conditions.

As stated, the expansion provisions in the Act required that states increase their coverage to include those up to 133 percent of the poverty line and subsidies up to 400 percent of the poverty line. If a state refused to administer this expansion, the law required that the state lose ALL of its Medicaid funds. The opponents of this provision, argued that this was unconstitutionally coercive, that the government cannot insist of new requirements to receive benefits that were already being given. This is analogous to an old case in contract law, Alaska Packers’ Association v. Domenico, in which a group of fishermen, once at sea, refused to perform their duties unless the captain modified their contracts to increase their pay. The court in that case held that a contract modification is not enforceable when the modification is merely to perform a “pre-existing duty.”

Roberts essentially applied the Spending Clause version of the pre-existing duty rule. He held that the Federal government could condition additional funding on the performance of the additional duties. However, conditioning pre-existing funding on the performance of additional duties is impermissibly coercive under the Spending Clause. Under this reasoning, the statutory rule was changed to reflect the constitutional rule.

In sum, the Individual Mandate was upheld under the Taxation Clause and the Medicaid Expansion was modified under the Spending Clause.

My Commentary

Many of us who had been following this case and who regularly read Supreme Court opinions did not expect the Chief Justice to side with the liberal bloc on either the Commerce Clause or Tax and Spend Clause argument. If anyone was to be the swing vote on that side, it was to be Justice Kennedy, who, in Gonzales v. Raich in 2005, sided with the majority which held that the Commerce Clause permits federal laws outlawing marijuana.

The short sighted among us are going to demonize the chief justice for going liberal. I’ve heard more than a few times in the past day that Roberts has “gone Souter,” a reference to Justice Souter who became a liberal after being appointed by President George H.W. Bush. This is unfair. History is going to look back at this decision as one of the most important moments in conservative jurisprudence. Similar to how, in Marbury v. Madision, Chief Justice Marshall augmented the power of the Court in the long run by denying itself power in the short run, Chief Justice Roberts denied the Federal government an immense amount of power in the long run by granting it power in the short run.

First, the law was upheld narrowly. Second, his tone toward the prudence of the Affordable Care Act is unmistakably negative throughout the opinion. You get the sense that he wrote the opinion while plugging his nose. Third, he instituted a limitation on the Commerce Clause at least as important as the one in Lopez. One might ask whether Heart of Atlanta would be safe under the Roberts opinion. Finally, as I explain below, the integrity of the Affordable Care Act is in jeopardy because of the Medicaid holding.

Few people are going to understand the holding in regard to the Individual Mandate. Even fewer are going to understand the holding in regard to the Medicaid Expansion, or even know that the Medicaid Expansion was even at issue. But in political terms, that holding gave Republicans a tremendous grip on the future of the Act. If you recall earlier, for many, the requirement to acquire health insurance is a tremendous burden without public assistance. This burden is much more tolerable when more people are being covered or subsidized by Medicaid.

Now that states have much more of a choice as to whether they will expand their Medicaid coverage, I can tell you right now that many red states (likely even my own) will decline the expansion. In the long run, states were going to lose money over the expansion anyway. Expanding was economical only as a means of avoiding losing ALL Medicaid funding. Failure to expand Medicaid coverage is going to make Obamacare increasingly unpopular as people become increasingly penalized for not enrolling in insurance. This is the stealth power in Roberts’s opinion that seems by and large lost on most of Tea Land.

Additionally, in what might be seen as the irony of the year, the ruling upholding the Individual Mandate, has the potential to hurt President Obama’s 2012 reelection bid.

Politics is a constant game of manipulation, played by both sides. For many reasons having nothing to do with the Affordable Care Act, there is a high likelihood that United States will struggle to reduce its unemployment figures this year. This is especially true if the European Union continues its problems with its peripheral states’ finances. However, opponents of the Affordable Care Act are going to have a wide open target. Why are struggling to add jobs? Obamacare. I can cite intelligent people on both sides of that argument and I have nothing to add to it here. The point is, regardless of its accuracy, the argument is going to be made. Often. It already is.

Macro economics and high finance are games of expectations. A fund manager is certainly concerned with whether Obamacare itself will hurt the economy. But the fund manager is equally concerned with whether people expect Obamacare will hurt the economy. The power of expectations to rapidly create bulls and bears has been understand since, at the latest, John Maynard Keynes. Whether the Republican leadership is correct or not, they are going to influence many people into believing the Affordable Care Act is bad for the economy. And by that alone, it might hurt the economy.

*Again, I’m withholding judgment on the merits of their arguments, I’m just pointing out the reality of the effect of their claim.*

Lastly, to my mind, Obama is going to struggle to articulate to average voters the difference between an Article One tax (a broad term including the Mandate’s penalty for noncompliance) and an across-the-board kind of income tax—the kind he promised would not need to be raised to pay for the provisions of the Affordable Care Act. The Republicans are going to emphasize that, because the Mandate was upheld pursuant to the Taxation clause, Obama lied to voters in saying that their taxes would not need to be raised to pay for the Act. Whether this is fair is debatable, but it certainly is shrewd.

Yesterday was profoundly important, culminating much, but as I hope you can see, leaving much unresolved. The Republican Party is no doubt sulking at yesterday’s decision. I sense they are going to be thankful come November.


8 thoughts on “Unraveling The Supreme Court’s Landmark Healthcare Decision

  1. cindy says:

    I appreciate your attempt to help us by explaining things, but I still don’t really understand, and the details are still overwhelming. Is there any way to distill this further, giving us only the “bottom line”? What are the intentions? What will be different? How will it affect low/middle/upper class citizens?

    • Cindy, totally understand. There’s a lot going on in this thing. The most important things to understand about the law are (1) it requires that everyone be insured by 2014, (2) it will provide financial assistance for many people to be insured by that time, (3) it requires that every health insurance plan cover, without cost sharing, a whole host of preventative care services, (4) it establishes one single online exchange in every state where in simple language you can understand the coverage of each insurance plan and then purchase an insurance plan, and (5) it prohibits insurers from denying you coverage based on a preexisting condition that you might have. If I had to summarize the law, that is the big five.

      The intent in all this is get more people insured and more people going in for check ups before conditions in their body get worse and significantly more expensive to treat.

      I hope this was useful. Let me know if you have any other questions.

  2. Good article.
    Obviously the decision is to become a big political point for the Romney campaign, but I wonder, in the end, where the chips will fall. Health Care reform is not exactly the worst thing to be accused of, and of the voting class that already hates Obama, I don’t think this decision will allow them to vote twice. I instead foresee that any opinion poll casting this law as negative will begin to shift, at least among Democrats and independents.

    • Cindy,

      Republicans are against it for several reasons. The primary one is the individual mandate. One has to admit, that is no insubstantial intrusion on personal economic liberty. We require drivers to carry insurance but only drivers. Further, the requirement to carry auto insurance is imposed by states as opposed to the Federal government. At least in rhetoric, Republicans are more accepting of rules and regulations on the state level.

      The irony of this is that the scheme of the Affordable Care Act was created by the Heritage Foundation, one of the most conservative organizations in the country. It was then advocated as an alternative to Clinton’s idea for a more single-payer system by Newt Gingrich during his time as Speaker of the House. Further it was actually adopted by Mitt Romney in Massachusetts.

      Now in fairness to Gingrich and the Republicans then, they claim that they did it because Clinton’s even more socialized plan forced their hand. Where they lose credibility in my mind is the fact that if it is unconstitutional today, as they claim, then it was unconstitutional then too. Yet, the Republican leadership raised no issues of its constitutionality when it was advocated by their party.

      So to me, at least part of the answer to your question is simply: it is advocated by the other party.

  3. Duane says:

    .Well written Chris! The main problem is no one understands ObamaCare Except the medicare insurance from my Social Security goes from $106 to $214 in 2014. All insurance will go up considerably – you can’t pay out more unless you take in more – Thus – it is a TAX now not insurance premiums. Most big companies have already received waivers so they do not have to comply, i.e. McDonalds to name one. The people that are hurt are the ones who pay their way and have insurance and their insurance costs will increase.

    Why is the public split 50-50 on ObamaCare? The 50% that has insurance and will see their costs go up are against and the 50% that don’t pay medical expenses are for it. Same percentage as the 50% who pay tax and the 50% that pay no income tax.

    It is the same thing with income tax rates – people who don’t pay taxes want the rates to go up – so they get more handouts. Don’t even talk about the EIC – that is just pure welfare and does not belong in the tax laws.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s