Federalism At Work: The Health Care Act in the Supreme Court

For most Germans, the discussions pertaining to the hearings on the Affordable Care Act (ACA) in the Supreme Court of the United States from March 26 to March 28 seem incomprehensible. Universal coverage in health care, or at least near universal coverage, is so woven into the fabric of the German welfare state that legal discussions on the permissibility of such issues seem outlandish. But in actuality, the cases dealt with at the Supreme Court have less to do with the coverage decision as they do with the relationship of the federal level and the states. Since Germany, too, is a federal state, the issues at stake in this case should actually be quite understandable to Germans.

It is important to recognize that none of the challenges to the ACA are based on the claim that the law is unconstitutional as infringing on personal freedom. No one is challenging the right of states to introduce an individual mandate—and, as a matter of fact, Massachusetts has had one since 2007. All states have mandates for car insurance (but then again, you can choose not to have a car). All Americans are mandated to pay Social Security taxes for, among other things, Medicare coverage from age 65 onward. Rather, the challenges are based on the question of whether it is within the constitutional powers of Congress to legislate for a minimum coverage requirement and how far Congress can compel the states to carry out its coverage expansion. But before delving into the legal minutiae of the case, we should have look at the ACA itself.

The Affordable Care Act

The ACA is an extremely voluminous law.[1] That refers not only to the length of the document (2,700 pages), but also to the scope of provisions it contains. The main thrust is the expansion of coverage, with the aim of providing affordable health care for every American. However, it also provides for measures to control future cost increases (“bending the cost curve”), for new incentives and programmes for prevention and the improvement of public health systems, for increases in the number and improvement in the quality of health professionals, for the production and sale of generic-like biologic pharmaceuticals, for improvements in nursing home quality, etc.

Despite this wide array of provisions, it is, without a doubt, coverage expansion that lies at the heart of ACA. With this provision, Congress reacted to the grave problem of uninsured Americans. At the outset of the law’s creation, about 47 million Americans lacked health coverage.[2] According to official estimates, without reform, the number is set to rise to between 54 and 61 million in 2019. This widespread uninsured problem affects the whole market. Hospital emergency rooms and community centres are legally obliged to treat all patients, without regard to ability-to-pay. On official estimates, 37 percent of the health care costs for the uninsured were not compensated. Therefore, insurance providers end up passing these costs on to paying patients. Congress found that this cost-shifting increases the average premium for insured families by more than $1,000 per year. But, it may also impede the general economy. For fear of losing their coverage, people may avoid switching jobs or pursuing entrepreneurial opportunities.

The ACA tries to address these problems with a massive expansion of coverage. About half of this expansion will happen through increasing private health insurance. The other half will come through the expansion of public programmes—mainly Medicaid, the cooperative federal-state programme that funds medical care for individuals in need. For those with income below 138 percent of the federal poverty level, coverage will result from Medicaid expansion. The federal government will initially cover all costs of this expansion, gradually decreasing to 90 percent in 2020.

Those not covered by expanded Medicaid, Medicare, or employer-sponsored health insurance must turn to the individual health insurance market. Today, many face difficulties finding affordable insurance on this market.[3] Preclusion of pre-existing conditions, caps on benefits, and pricing according to health status mean that many are not able to receive coverage, or can only do so at prohibitive prices. The ACA puts an end to these discriminatory practices and creates health exchanges to facilitate choice.

However, these regulations create a new problem: If an individual knows he can get health insurance at any time at an affordable price, why buy it now? Why not wait until you are sick, and save the premiums in the mean time? In this way, health insurance will not work, since insurance by definition has to establish a risk pool between healthy and sick. This problem is not only theoretical. States that regulated their health insurance with guaranteed issue and community rating saw this “adverse selection” happening: the healthy leaving the risk pool, thus driving up the premiums, thereby inducing more healthy individuals to leave, etc.[4] Massachusetts solved this problem by introducing an individual mandate, i.e., requiring all individuals to buy health insurance coverage.[5] The ACA drew from this experience and includes an individual mandate in the form of a minimum coverage requirement.

The Legal Challenges

From about the moment that President Obama signed the ACA on 23 March 2010, the first states filed their litigation against the reform. Other states, individuals, and organizations quickly followed suit. Unlike in Germany, where the state governments can directly address the Federal Constitutional Court on issues of the constitutionality of an act (Normenkontrollklage), cases in the United States have to be filed at the district court level and find their way through the levels of jurisdiction to the Supreme Court. Four cases reached the Courts of Appeal. From these cases, the Supreme Court chose two challenges and two procedural questions to discuss:

  1. Are the minimum coverage requirement (individual mandate) and the right to assess a penalty against those who refuse to comply within Congress’s constitutional power?
  2. Does Congress unconstitutionally compel states to expand Medicaid eligibility by conditioning receipt of federal Medicaid funds on the expansion of eligibility?

The two procedural issues are a) if the Anti-Injunction Act bars the Supreme Court from addressing the issue before payments of the penalty have been made—the Anti-Injunction Act affirms this for taxes, so the main question is if the penalty can be regarded as tax; and b) if, in the case that the Court decides the minimum coverage requirement to be unconstitutional, this provision can be severed from the rest of the ACA, or if other, or all, provisions in the Act must fall with it.

On the minimum coverage requirement, the government argues that this provision is well within Congress’s power due to the Commerce Clause (Art. I, sec. 8, cl. 3) and the Necessary and Proper Clause (Art. I, sec. 8, cl. 18).[6] The Commerce Clause gives Congress the power to regulate interstate commerce; the Necessary and Proper Clause gives Congress the power to make all laws necessary and proper for carrying this regulation into execution. Thus, the government’s argument is such: Health insurance is interstate commerce, so Congress can regulate it with guaranteed issue and rating restrictions. But these guarantees and restrictions alone do not work, so the minimum coverage requirement is necessary and proper to carry this regulatory regime into execution.

The critics argue against this, claiming that the obligation to buy something regulates “inactivity” and not “activity,” and only activity can count as commerce.[7] In their view, Congress is creating commerce first in order to regulate it, and that exceeds Congress’s power. The government’s response is that nearly everybody, at some point, has to buy medical care, so everybody, if insured or not, is participating in the market. The decision to self-insure is an economic decision. But for the critics, this means confusing the market for medical care and health insurance. The government replies that the health insurance market only exists in order to pay for medical care, and that Congress is solely regulating the means to pay for such care. A further line of defense is that the mandate is covered by the Taxing Power (Art. I, sec. 8, cl. 1), since the only consequences of a failure to maintain minimum coverage are tax consequences. However, this depends on the penalty being a tax, which is contentious.[8]

Furthermore, critics argue, the mandate may be necessary, but not proper, since it gives Congress unlimited power. If Congress can mandate people to buy insurance, why not—in the notorious example—also to buy broccoli? The government points to the economic specialties of the health insurance market that make this regulatory regime unique. Yet, not everybody is convinced.

In the Medicaid question, the states are formally free to participate in the expansion. But if they do not participate, they fear losing all federal subsidies—not only for the newly eligible, but also for those already enrolled. Medicaid is a joint federal/state programme. In former cases, the Supreme Court ruled that in those programmes the federal government may attach strings to federal money, but these strings may not become “coercive.” Whereas the government argues that participation in Medicaid remains voluntary and stresses the generous federal funding, the petitioning states see the line to coercion crossed, since federal Medicaid spending represents 34.4 percent of taxes collected by the states nationwide.[9]

Could It Have Happened in Germany?

The question of Congress’s powers is a typical question in a federal state. In Germany, as in the United States, the federal level has only enumerated powers, whereas the states (Bundesländer) have a general presumption of power. The question of whether a specific legislation is covered by the enumerated powers also frequently arises in Germany.

In Germany, an individual mandate was introduced only in 2009. Before that, mandates existed for certain groups, but were not universal. Here, the German Federal Constitutional Court clearly saw the mandate within the federal parliament’s power: “To justify the goal expressed in the GKV-WSG [health reform act] of ensuring that all the inhabitants of the Federal Republic of Germany have affordable health cover in the statutory or private health insurance system, the legislature may invoke the principle of the social welfare state contained in the Basic Law (Grundgesetz – GG). The combination of compulsory insurance and obligation to enter into contracts in the basic category is appropriate to achieve the legislature’s goal of guaranteeing adequate and affordable health insurance cover for the category of persons allocated to private health insurance. If there were no obligation to enter into contracts, in particular persons with serious pre-existing conditions would have no possibility of being accepted by a private health insurance company because it would not accept them by reason of the increased risk.”[10]

So the question of whether the individual mandate was within the German federal parliament’s power was not that controversial—in any case, the federal level did not have to invoke an abstract “Commerce Clause,” but could refer to the “social welfare state principle.” However, there are other cases where ample controversy exists. For example, the German federal parliament wanted to ban smoking in pubs and restaurants. Here, legal scholars had divergent opinions. The scientific service office of the Bundestag presented a legal expertise affirming that the act was within federal powers. But in the end, due to the legal uncertainty, parliament backed off and buried the bill.[11] Legislating for smoking bans in pubs and restaurants was left to the sixteen Bundesländer, and Germany now has a patchwork of different rules throughout the Länder.

The Medicaid/coercion issue also had its own equivalent in Germany. In the postwar Basic Law, the federal level in Germany had the possibility to hand out grants to Bundesländer with strings attached. It quickly used its superior financial strength to leverage its influence into areas beyond its enumerated powers. The states complained, claiming this to be the “golden reins.” However, the case was not fought in court but in parliament. In 1968/69, it was decided to amend the constitution. Since then, it is forbidden for the federal level to spend its money on duties or responsibilities beyond those conferred by the Basic Law. There are exceptions (“Gemeinschaftsaufgaben”), such as universities or coast protection, but these are definitely listed in the Basic Law. Due to the lack of accountability, the Gemeinschaftsaufgaben have remained controversial, and in 2006 the list was reduced.

The Significance of the Supreme Court Decision

The legal arguments in this case are not what would appear strange to foreign eyes. The discussion could happen in Germany, or any other federal state for that matter. That which is baffling is the fervor of the political debate. For most other countries, a mandate for health insurance is an unremarkable fact of life. It has not led to a frequent adoption of broccoli-mandates. In this view, the ACA is a cautious law, trying to achieve the aim of universal coverage by means of existing infrastructure—actually the same approach Bismarck took in 1883. The paradoxical result of the Supreme Court declaring the mandate unconstitutional is that the only way left to achieve universal coverage in the United States would be by a single payer.

The balance of power between the federal and state level is a hot topic in all federal states. These federalism issues add to the already high level of political tension in the health care debate. After the conflicts concerning the New Deal in the late 1930s, the Supreme Court did not invalidate an act of Congress on the grounds that the legislation exceeded the congressional commerce power for the next sixty years.[12] In fact, this period saw a dramatic expansion of federal powers. Then, in the late 1990s, came a series of decisions limiting federal power, starting with United States v. Lopez. But in 2005, in Gonzales v. Raich, the Court again took a broad definition of interstate commerce. Therefore, apart from the obvious consequences for the health insurance market, the decision of the Supreme Court regarding the ACA will serve as an indicator of where the court currently stands in the perennial struggle between state and federation.

[1]   For an overview over all provisions of the law see John E. McDonough, Inside National Health Reform (Berkeley: University of California Press, 2011).

[2]   For these and the following figures see McDonough 2011, idem, and Brief for Petitioners (Minimum Coverage Provision), http://www.americanbar.org/content/dam/aba/publications/supreme_court_preview/briefs/11-398_petitioner.authcheckdam.pdf.

[3]   According to a recent survey, 35% of non-elderly adults that tried to purchase health insurance in the individual market were denied coverage, charged at a higher rate, or offered restricted coverage, Sara R. Collins et al, Help on the Horizon, http://www.commonwealthfund.org/Publications/Fund-Reports/2011/Mar/Help-on-the-Horizon.aspx?page=all.

[4]   See Conrad F. Meier, Destroying Insurance Markets (Chicago: The Heartland Institute, 2005); for the expierence in New Jersey see Alan C. Monheit et al., Community rating and sustainable individual health insurance markets in New Jersey, Health Affairs 23-4 (2004): 167-175.

[5]   John E. McDonough et al., The Third Wave of Massachusetts Health Care Access Reform, Health Affairs 25-6 (2006): w420-w431.

[6]   See Brief for Petitioners (Minimum Coverage Provision), idem.

[8]   See Briefs for Petitioners and Respondents, idem. To complicate things, the penalty could be a tax in the constitutional sense, but not in the Anti-Injunction Act sense.

[9]   See Brief for the Amici Curiae Economist in Support of State Petitioners Regarding Medicaid Expansion, http://www.americanbar.org/content/dam/aba/publications/supreme_court_preview/briefs/11-398_respondents_amcu_economists.authcheckdam.pdf.

[10]  German Federal Constitutional Court, Press Release 59/2009 of 10 June 2009, http://www.bundesverfassungsgericht.de/pressemitteilungen/bvg09-059en.html.

[11] See Kerstin Blum, Health vs. Profit: Anti-Smoking efforts in Germany, Health Policy Monitor, 11/2006, http://www.hpm.org/survey/ger/a8/1.

[12] See Linda Greenhouse, The U.S. Supreme Court (Oxford University Press, 2012), p. 65

The views expressed are those of the author(s) alone. They do not necessarily reflect the views of the American-German Institute.