United States: 5-4 Supreme Court Upholds The Affordable Care Act, Rules The Individual Mandate A Constitutional "Tax"

Last Updated: July 10 2012
Article by Brian T. McGovern and Kate R. Woodrow

Most Read Contributor in United States, December 2018

Speaking for the 5-4 majority in National Federation of Independent Business v. Sebelius, U.S. Supreme Court Chief Justice John Roberts, joined by Justices Ginsburg, Breyer, Sotomayor, and Kagan, held that the most hotly contested provision of the federal Patient Protection and Affordable Care Act, the Individual Mandate, was a proper exercise of Congress's taxing power under the Constitution. The Supreme Court did not uphold it under the Commerce Clause, the principal ground advanced by the Obama Administration in defense of the constitutionality of the statute. The Court also found the expansion of the Medicaid program to be constitutional under the Spending Clause so long as the federal government does not bar states from continuing to participate in the existing Medicaid program on condition that they agree to the expanded coverage.

Individual Mandate

The Individual Mandate in the Affordable Care Act requires most Americans to maintain "minimum essential" health insurance coverage. 26 U.S.C. § 5000A. While many individuals will receive the required coverage through their employer, from the government through Medicare or Medicaid, or from some other third party, other individuals would be required to purchase insurance from an insurance company beginning in 2014. Failure to comply with the Individual Mandate will require those individuals to make a "shared responsibility payment" to the Federal Government. Id. at § 5000A(b)(1). This payment, described in the Affordable Care Act as a "penalty," is to be paid to the Internal Revenue Service ("IRS") with an individual's taxes, and "shall be assessed and collected in the same manner" as taxes.

Jurisdiction to Hear a Challenge to the Individual Mandate: A threshold issue for the Supreme Court to address was whether the courts have jurisdiction to decide the constitutionality of the Individual Mandate. Pursuant to the Anti-Injunction Act, "no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person, whether or not such person is the person against whom such tax was assessed." 26 U.S.C. § 7421(a). In other words, this statute bars litigation to enjoin the imposition of taxes until after the taxes are paid. Accordingly, if the Court found that the penalties under the Individual Mandate were a "tax," the challenge to the Individual Mandate would not be ripe for the Court's review, because the Individual Mandate does not go into effect until 2014 and nobody has been assessed a penalty yet. Notably, neither the federal government nor the petitioners argued that the Anti-Injunction Act prevented the Court from rendering a decision on the merits.

The Court stated that the Anti-Injunction Act and the Affordable Care Act are both "creatures of Congress's own creation" and how they relate to each other is for Congress to decide. Accordingly, the Court found that, because the Affordable Care Act described the exaction under the Individual Mandate as a "penalty," as opposed to "tax," the shared responsibility payments were not a "tax" for purposes of the Anti-Injunction Act, and the Court was not precluded from reviewing the constitutionality of the Individual Mandate now.

Commerce Clause: The Court next analyzed whether the Individual Mandate was constitutional under the Commerce Clause. The Commerce Clause allows the federal government to regulate goods or services involved in "interstate commerce," including broadly those activities that in the aggregate "substantially affect" interstate commerce, as the Supreme Court has interpreted the clause.

According to the federal government, the health care market is characterized by a cost-shifting problem. That is, every citizen will eventually need health care at some point in time and if they do not have insurance or cannot afford to pay for health care costs out of pocket, those costs will eventually be shifted to other individuals in the form of higher costs of care for those who are insured. The government contended that the Individual Mandate falls within Congress's power under the Commerce Clause because the failure to purchase insurance "has a substantial and deleterious effect on interstate commerce" due to the cost-shifting problem. The Court rejected the federal government's argument (in this regard, Chief Justice Roberts was joined by Justices Scalia, Kennedy, Thomas, and Alito), and held that Congress only has the power under the Commerce Clause to "regulate" economic activity, but not to compel individuals to engage in commerce and purchase an unwanted product, in this case, health insurance.

Necessary and Proper Clause: The Court similarly found that the Individual Mandate could not be sustained under the "Necessary and Proper" Clause of the Constitution. The Necessary and Proper Clause authorizes Congress to "make all Laws which shall be necessary and proper for carrying into execution" certain enumerated powers, including the Commerce Clause powers to regulate interstate commerce. The government argued that the Necessary and Proper Clause authorized Congress to enact the Individual Mandate because it served an integral part of the comprehensive scheme of economic regulations affecting the health insurance market. That is, the Individual Mandate was essential to Congress's regulation of the insurance market through the Affordable Care Act's insurance reform provisions, "guaranteed issue" (mandating insurers to provide health insurance, regardless of a person's medical history or current state of health) and "community-rating" (preventing insurers from charging unhealthy individuals higher premiums).1

The Court again rejected the federal government's argument, explaining that even if the Individual Mandate was necessary to the Affordable Care Act's insurance reform provisions, such an expansion of federal power is not a "proper" means for making those other provisions effective.

Taxing Power: The Court next analyzed whether the Individual Mandate could be upheld under Congress's power to "lay and collect Taxes." Under this theory, the government asked the Court to read the mandate, not so much as ordering individuals to purchase health insurance, but rather as imposing a tax on those who do not buy insurance. In this regard, the Court observed that because "every reasonable construction must be resorted to, in order to save a statute from unconstitutionality," the question is whether it is "fairly possible" to interpret the mandate as imposing a tax. To reconcile its earlier holding concerning the "penalties" associated with not complying with the Individual Mandate, the Court explained that while the Affordable Care Act described the "shared responsibility payments" as a penalty -- fatal to the application of the Anti- Injunction Act -- that description alone does not control whether an exaction is within Congress's constitutional power to tax.

In analyzing the shared responsibility payments, the Court distinguished the payments from penalties, noting that payments are not so high -- they could never be higher than the annual premium the individual would have to pay for qualifying private health insurance -- that there is no choice but to buy health insurance; that the payments are not limited to willful violations, as penalties for unlawful acts often are; and that the payment is collected solely by the IRS through normal means of taxation. Accordingly, the Court concluded that although the payments were not taxes for purposes of the Anti-Injunction Act, they were taxes for purposes of Congress's taxing power, and upheld the Individual Mandate on that basis.

Medicaid Expansion

The federal Medicaid program provides funding to participating states in order to provide health care benefits to certain groups, including pregnant women, children, needy families, the blind, the elderly, and the disabled in obtaining medical care. 42 U. S. C. § 1396a(a)(10). As a condition to receiving federal Medicaid funding, states must comply with certain criteria, such as mandatory coverage for certain groups and services. As the Supreme Court observed, the program is voluntary, but all 50 states currently participate and receive Medicaid funds. The federal share of Medicaid funds, between 50 and 83 percent of total program costs, can constitute up to ten percent of a state's budget.

The Affordable Care Act expanded the Medicaid program by requiring participating states to provide limited "essential health benefits" to most adults under age 65 whose income is up to 133 percent of the federal poverty level ("FPP"). 42 U. S. C. § 1396a(a)(10)(A)(i)(VIII). If all 50 states were to adopt the Affordable Care Act's expanded eligibility criteria, eligibility for Medicaid would increase to reach an estimated 16 million additional uninsured individuals. The federal government would cover 100% of the expanded coverage costs in 2014, with the federal share gradually decreasing to 90% in 2020 and thereafter. Id. at § 1396d(y)(1). Under the terms of the Affordable Care Act and existing Medicaid laws, a state that did not comply with the new coverage requirements would be at risk of losing not only the new funding for the expanded coverage, but all of its federal Medicaid funds. Id. at § 1396c.

The States challenging the Medicaid expansion argued that it violated Congress's powers under the Constitution's "Spending Clause." The Spending Clause provides that "Congress shall have Power. . . to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defense and general Welfare of the United States." Under Supreme Court precedents, Congress can place conditions on the receipt of funds by the states for the purpose of preserving Congress's control over the use of those funds. However, the states must have a legitimate choice whether to accept the conditions in exchange for funds. As Chief Justice Roberts noted in his opinion, this rule is driven by a concern that, if the states have no choice but to accept the federal funds, the federal government could implement unpopular programs and leave the states to absorb the political impact.

The key issue for the Supreme Court to decide was whether the Medicaid expansion provisions of the Affordable Care Act were either (a) constitutional "incentives" encouraging states to "act in accordance with federal policies[,]" or (b) an unconstitutional "commandeer[ing]" or coercion of a state's legislative and administrative authority for a federal purpose.

The Court upheld the constitutionality of the Medicaid expansion in the Affordable Care Act, with one qualification. A critical component of Chief Justice Robert's analysis was the conclusion that the Medicaid expansion was not merely expanding the existing Medicaid program, but was substantially altering the Medicaid program to cover entirely new categories of eligible beneficiaries. Viewed in that light, the Court held that conditioning continued receipt of federal funds under the existing Medicaid program upon the states' acceptance of the program's expansion was unduly coercive and unconstitutional. In other words, states that choose to expand their Medicaid programs may receive significant federal assistance to do so; states that choose not to expand their Medicaid programs may not be forced to risk losing their existing federal Medicaid funds.

Concurring and Dissenting Opinions (In a Nutshell)

In a concurring opinion Justice Ginsburg, joined by Justice Sotomayor, explains that they would have upheld the Medicaid expansion as constitutional in its entirety, including provisions conditioning the receipt of existing Medicaid funds on compliance with the expansion.

The dissenters, in an opinion authored by Justice Kennedy and joined by Justices Scalia, Thomas, and Alito, would have struck down the Individual Mandate and the Medicaid expansion provisions in their entirety. Additionally, they would have found that these provisions could not be severed from the remaining provisions of the Affordable Care Act and would have therefore struck down the Act in its entirety.

In a separate dissenting two page opinion, Justice Thomas further explained his views on the limitations of the Commerce Clause and why the Individual Mandate was not authorized under Congress's Commerce Clause powers.

End Result

The Supreme Court's ruling upholding the Affordable Care Act means that the Act's many current and future health care payment and delivery reforms and initiatives such as accountable care organizations, see Final Rule for Accountable Care Organizations Addresses Major Provider Concerns: Will Long Term Care Providers Dive In?, as well as Medicare reimbursement reductions, will remain in place. Other new laws embedded in the Affordable Care Act, such as the Physician Payment Sunshine Act and amendments to the fraud and abuse statutes, will also remain in effect. States will now have the option, not the requirement, to expand Medicaid coverage in exchange for the enhanced federal share of funding for the newly covered beneficiaries.


1. The government argued that the Individual Mandate was necessary to avoid the consequences of "adverse selection," whereby individuals wait to purchase insurance until they become ill, and the only individuals securing or purchasing insurance coverage are those in ill health and in need of medical care. If insurers cannot deny coverage based on a preexisting medical condition nor set premiums based on prior medical history or current health status, insurers would be faced with the proverbial "death spiral" of an increasingly costly pool of insured. If the pool were expanded to include individuals who are otherwise healthy via the Individual Mandate, the government argued, the risk can be spread among a larger pool, and the costs better managed.


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