This Alert is Part I of two Alerts relating to the recent decision of the U.S. Supreme Court upholding most of the Patient Protection and Affordable Care Act ("PPACA" or the "Act"). Part I discusses the decision. Part II discusses its practical effects as respects aspects of the Act which will become effective soon.
On June 28, 2012, the U.S. Supreme Court upheld the vast majority of PPACA. Many of its provisions were effective upon enactment. Others will not take effect until January 1, 2013 and beyond. Those provisions will take effect as scheduled unless Congress and the President act to the contrary. This Alert summarizes the Supreme Court's decision.
Background and Court Decision.
In National Federation of Independent Business v. Sebelius, the U.S. Supreme Court was asked whether two provisions of the Act were within the U.S. Congress' legislative powers under the U.S. Constitution. Those two provisions and a preliminary issue are discussed below.
The Preliminary Issue.
The Court  first considered whether it could hear the case. Under the Anti-Injunction Act, no person may sue to prevent the collection of a tax. Instead, a person must generally pay the tax and then sue for a refund. Thus, the Court examined whether Congress intended the penalty imposed by the individual mandate to be a "tax" within the meaning of the Anti-Injunction Act. The Court reasoned that, because the Act refers to the fee as a "penalty" and not a "tax", Congress must have intended that the fee should not be a "tax" as that term is used by the Anti-Injunction Act.
The Individual Mandate.
First, the Court was asked to consider whether the "individual mandate" was a valid exercise of Congress' power. The individual mandate imposes a "penalty" upon individuals who fail to maintain minimum essential health insurance coverage. For tax years beginning after December 31, 2013, non-exempt U.S. citizens and legal residents who do not maintain that coverage will be required to pay that penalty.
The Court next considered whether the individual mandate was a valid exercise of Congress' power under the Commerce Clause of the U.S. Constitution and the Necessary and Proper Clause. Under the Commerce Clause, Congress has the authority to regulate interstate commerce. Under the Necessary and Proper Clause, Congress may enact legislation necessary and proper to its exercise of the Commerce Clause power. The Court ruled that the latter is not an independent grant but is instead dependent on, and can only be exercised to implement, the Commerce Clause power or some other enumerated power.
The plaintiffs argued that, instead of regulating existing commerce, the individual mandate would force individuals to engage in commerce (i.e. buy health insurance).
The Court held that the power to regulate interstate commerce does not allow Congress to require persons to engage in interstate commerce ("The language of the Constitution reflects the natural understanding that the power to regulate assumes there is already something to be regulated"; "The language of the Constitution reflects the natural understanding that the power to regulate assumes there is already something to be regulated"; "The Framers gave Congress the power to regulate commerce, not to compel it."). Thus, the Court held that the Act could not be upheld under the Commerce Clause.
However, the power to regulate interstate commerce is only one of several powers granted to Congress under the U.S. Constitution. For example, Congress also has the power to levy and collect taxes under the "Tax Clause."
The Court concluded that the penalty imposed by the individual mandate is a tax within the meaning of the Tax Clause. In reaching this conclusion, the Court cited certain aspects of the penalty that are similar to taxes imposed by the Federal Government. For example, the penalty imposed by the individual mandate is not for unlawful conduct, is collected by the Internal Revenue Service, is paid with Federal income taxes, and varies (subject to floors and caps) proportionately with an individual taxpayer's gross income. On this basis, the Court upheld the individual mandate as a tax.
Second, the Court considered whether, under the Spending Clause, Congress could require States to expand coverage under their Medicaid programs or, if they didn't, forfeit all Federal Medicaid assistance. In sum, PPACA would have required States to expand the classes of individuals who are eligible for Medicaid, would have restricted States from imposing stricter eligibility standards or procedures than were in place on March 23, 2010 (the effective date of the Act), and would have established a level of "minimum essential coverage" that States would be required to provide. If any State refused to expand its coverage, then it would lose all Medicaid funding.
The Spending Clause grants Congress the power "to pay the Debts and provide for the ... general Welfare of the United States." The legitimacy of Spending Clause legislation, however, depends on whether a State voluntarily and knowingly accepts the terms of such programs ("[T]he Constitution simply does not give Congress the authority to require the States to regulate."). The Court held that when Congress threatens to terminate other grants as a means of pressuring the States to accept a Spending Clause program, the legislation runs counter to this Nation's system of federalism.
The Court reasoned that, because the penalty for States that do not adopt the new Medicaid standards imposed by PPACA would be so severe (forfeiture of all Federal Medicaid assistance), the expansion of the Medicaid program constituted coercion by the Federal Government. Citing Supreme Court precedent which prohibits the Federal Government from "commandeering" State legislatures for Congress' own purposes, the Court determined that the Medicaid expansion was akin to a "gun to the head". Accordingly, the Court struck down the Medicaid expansion provisions.
Having determined that the individual mandate was constitutional but that the Medicaid expansion was unconstitutional, the Court considered whether the entire Act should be struck down because it was partially unconstitutional. For example, as Justices Scalia, Kennedy, Thomas and Alita noted in dissent, unlike many Congressional enactments, the Act contained no severability clause that would save the constitutional portions of the Act if other portions were declared unconstitutional. And, if Congress had intended that the Act stand or fall as a whole, the Court should not re-write the Act to sustain it in part ("The Court today decides to save a statute Congress did not write."). The dissent noted that the Act contained numerous provisions, both related and unrelated to the individual mandate and the Medicaid expansion, and that, instead of dealing with all of those provisions separately, the Act was presented and approved as a package deal. Accordingly, if the entire package was not upheld, the dissent argued that it would be inappropriate to uphold that the remaining portions of the Act.
However, the majority (and thus the Court) concluded otherwise and upheld the constitutional portions of the Act.
 All references to the "Court's" decision are to the majority decision with respect to the issue involved.