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Health Care Reform Survives Constitutional Challenge, Marches Forward

By Catherine Gordon, JD | July 17, 2012

Ending the wait for a much-anticipated ruling, the Supreme Court on June 28, 2012, upheld the constitutionality of the Patient Protection and Affordable Care Act almost in its entirety. This decision brings the nation one step closer to the likelihood of the implementation of extensive health care reform affecting individuals, employers and insurers.

Brief History of the Case Leading to the Supreme Court

The passage by Congress of the Patient Protection and Affordable Care Act (ACA) and a companion bill, the Health Care and Education Reconciliation Act of 2010, proposed a sweeping reform of the health care system in the United States with various provisions going into effect beginning in 2010 and continuing in subsequent years.

While the legislation contains several provisions that are in contention, arguably the most controversial piece of the ACA is the provision that, starting in 2014, individuals will be required to carry health insurance through their employer, a public program (for example, Medicare or Medicaid), or a private insurer, or face a "penalty".

The National Federation of Independent Business, joined by several individuals and 26 states in National Federation of Independent Business, et al. v. Sebelius, challenged the mandate as unconstitutional. The plaintiffs also challenged the ACA's requirement that each state expand its Medicaid program by 2014 to cover certain individuals under the poverty line or lose all federal funding for the state's Medicaid program.

In a 5-4 decision, the Supreme Court held that the individual insurance mandate is constitutional as a tax, but took the teeth out of the requirement that states expand Medicaid eligibility.

Individual Insurance Mandate Penalty Passes Muster as a Tax

The main argument presented by the government supporting the mandate requiring an individual to carry or purchase insurance is that this requirement is a proper exercise of Congress' authority under the Commerce Clause of the Constitution to regulate commerce. This argument, as well as a secondary argument under the Necessary and Proper Clause of the Constitution, was rejected by the majority of the Supreme Court.

Instead, the Court held that the individual mandate is constitutional under the Taxing Clause of the Constitution because individuals who do not carry or purchase insurance as required by the ACA would be subject to a "penalty". This penalty, the Court held, despite its label, is for all intents and purposes a tax, and Congress has the authority to levy tax incentives under the Taxing Clause of the Constitution.

How did the Supreme Court reach the conclusion that the penalty was in actuality a tax? The Court justified the reasoning that the penalty for noncompliance with the insurance mandate can be characterized as a tax because:

  • The requirement is included in the Internal Revenue Code and enforced by the IRS.
  • The penalty is calculated based on taxable income, income tax filing status and the number of dependents.
  • The penalty doesn't apply to individuals who don't pay federal income taxes.
  • The penalty is paid when individuals file their income tax returns for the year.

"Because the Constitution permits such a tax, it is not our role to forbid it, or pass upon its wisdom or fairness," proclaimed Chief Justice Roberts, writing for the majority.

Federal Medicaid Funding Can't Be Withdrawn From States That Won't Play

Under the ACA, states that do not expand their Medicaid coverage by 2014 to cover individuals eligible under the Act, as well as providing a qualifying essential health benefits package, were to lose all Medicaid federal funding. The Supreme Court held that Congress went too far with this threat against states refusing to participate in the ACA's program, violating the Constitution's Spending Clause.

While the government can offer new funds as an incentive for states to expand their Medicaid programs, the Court stressed that for states that did not do so, withdrawing existing federal funding is not an option. The expanded Medicaid program can still be implemented but it will be on a state-by-state basis, with individual states free to opt out without fear of losing their existing federal funding.

What Does the Supreme Court's Decision Mean to You?

The Supreme Court's ruling means that the reforms enacted in the ACA will continue to be implemented, culminating in major reform to the nation's health care system, unless the Act is fettered through further political action or on other legal grounds in outstanding cases.

To help you prepare for the radical changes which are now a significant step closer to becoming a reality, look for our series of articles targeting the impact of health reform provisions for you as an individual and as a business owner.

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