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Examining Judge Hudson’s Decision On The Individual Mandate

December 14th, 2010

On December 12, 2010, Judge Henry Hudson of the Eastern District of Virginia became the first federal judge to hold a provision of the Affordable Care Act unconstitutional

The lawsuit was filed by the Attorney General of the Commonwealth of Virginia immediately after the reform statute was signed into law in March.  It challenges the constitutionality of the minimum essential coverage requirement, known informally as the “individual mandate.”  This provision requires all uninsured individuals lawfully present in the United States and not incarcerated to purchase a basic, high cost-sharing, health insurance policy or pay a penalty, as long as their income exceeds the tax filing limit, they can afford a health insurance policy for 8 percent of their income or less, they do not have a religious objection to being insured and they do not belong to a health care sharing ministry.

Fourteen federal judges have already dismissed cases challenging the law, with two of those decisions explicitly upholding the constitutionality of the minimum coverage requirement.  The federal government’s winning streak, however, has now ended.

The Background

Virginia adopted a statute purporting to nullify the minimum essential coverage requirement even before Congress enacted the Affordable Care Act, and the lawsuit was brought to enforce this statute.  Judge Hudson had earlier this year denied a Justice Department motion to dismiss the Virginia case, holding that the Commonwealth had standing to defend its legislation.  In his earlier decision, Judge Hudson had also held that the Commonwealth had an arguable claim that the minimum coverage requirement was unconstitutional.  Subsequent briefs filed by the Justice Department and by amici (interested parties who file as “friends of the court,” or amici curiae) supporting the reform law apparently failed to change Judge Hudson’s mind.

The powers of Congress are established by the Constitution.  Unlike the states, Congress lacks plenary power to adopt laws to protect the public safety and promote the public welfare, but rather may only enact laws pursuant to its powers enumerated in the Constitution, primarily in Article I, section 8.

The Commonwealth argued that none of the enumerated powers support the enactment of the minimum essential coverage requirement.  The federal government responded that the requirement was supported by three enumerated powers—the power of Congress to regulate interstate commerce, the “necessary and proper” clause, and the power to “lay taxes and make expenditures for the general welfare.”  Judge Hudson decided that none of these powers supports the adoption of the minimum essential coverage requirement, and thus concluded that the statute is unconstitutional.

The Commerce Clause Argument

After disposing of preliminary matters, Judge Hudson’s opinion moved to the Commerce Clause argument.  Judge Hudson began by describing the arguments of the parties on this issue.  The federal government contended that ensuring universal participation in health insurance markets was essential to making those markets work for people with preexisting medical conditions.  Unless healthy as well as unhealthy persons buy health insurance, insurance cannot be made available to those with poor health who need it most.  The minimum essential coverage requirement is the “vital kinetic link that animates Congress’s overall regulatory reform of interstate health care and health insurance markets,” and was thus necessary and proper for the enactment of the entire regulatory scheme.  The federal government also argued that the court should not second guess the decisions of Congress, which only need be “rationally related” to a legitimate purpose.

The Commonwealth, on the other hand, stuck to a narrow point—the Commerce clause, it contended, only permits regulation of existing “economic activity.”  It does not permit Congress to compel an individual to engage in economic activity in which that individual chooses not to engage.    The necessary and proper clause does not justify the adoption of a statute unless that particular statute is itself independently supported by another of the powers of Congress, in this case the interstate commerce authority. 

Judge Hudson agreed entirely with the state.  He held that Congress can only regulate “economic activity;” a “self-initiated change of position voluntarily [placing] the subject within the stream of commerce.”  The judge cited two cases in which the Court had a decade ago struck down as unsupported by the commerce clause federal laws regulating conduct that was not economic in nature as precedent for his conclusion that laws must regulate “economic activities” to be valid.   He further stated that every Supreme Court case upholding regulation under the commerce clause involved “economic activity.”  He concluded that because the minimum essential coverage requirement does not regulate ongoing economic activity, but rather requires the involuntary initiation of activity, it cannot be justified by the commerce power.

The “Necessary And Proper” Clause Argument

Having reached this conclusion, Judge Hudson also rejected summarily the necessary and proper argument.  Since the minimum essential coverage requirement is not itself validated by the commerce clause, it cannot be upheld under the necessary and proper clause.  The necessary and proper clause, in his opinion, adds nothing to the commerce clause.  A provision cannot be upheld because it is necessary and proper to complete a regulatory scheme which regulates commerce unless the provision is independently justified by the commerce clause.

Contrasting Judge Hudson’s Reasoning With That Of Two Judges Who Upheld The Law

Curiously, Judge Hudson nowhere mentions the two federal court decisions that have already upheld the minimum essential coverage requirement, one decided recently by another Virginia federal court judge (although he does cite an earlier decision by Judge Vinson, the judge hearing a Florida challenge to the law by twenty state attorneys general).  The judges in those cases concluded that the commerce clause (which nowhere mentions “economic activity”) in fact permits Congress to regulate economic decisions. 

Judge Moon in the other Virginia case noted that both of the leading twentieth century Supreme Court cases on the commerce clause, Wickard v. Filburn and Gonzales v. Raich, involved individuals who claimed to be outside the stream of commerce, one growing wheat for personal consumption and one growing marijuana for personal medical use.  In both cases, the Court had rejected this argument, finding that the individual’s conduct in fact affected interstate commerce.  Judge Moon and Judge Steeh in a Michigan case both accepted the rationality of the findings of Congress that the decisions of healthy individuals to refuse to purchase insurance directly affect interstate commerce, both because they make the cost of insurance more expensive for persons in poorer health who do purchase it and because everyone eventually gets sick and has an accident, and when this happens the costs of caring for the uninsured are shifted to others — the government, employers, and responsible persons who purchase insurance.  Judge Hudson, his vision focused narrowly on the “activity” issue, rejected this argument.

The Taxing Power Argument

Judge Hudson also rejected the federal government’s argument that the minimum essential coverage requirement was a legitimate exercise of Congress’s power to tax and spend.  This argument was also rejected by Judge Vinson in the Florida case and has not been relied upon by any of the cases upholding the law.  The federal government had argued that under Supreme Court precedent a fee imposed to sanction conduct that Congress otherwise lacks the power to regulate can be upheld as a tax if it otherwise generates revenue.  It also noted that the minimum essential coverage requirement penalty is located in the tax code, only assessed on people with income above the tax filing limit, based on family income, and collected through the tax system. 

The court, relying mostly on cases from the twenties and thirties which the federal government had derided as superannuated, held that there is a significant difference between a tax and a penalty, and that Congress had clearly designated the minimum essential coverage exaction as a penalty.  A penalty, the court held, is only constitutional if it enforces an otherwise constitutional requirement; having already concluded that there is no independent constitutional justification for the minimum essential coverage requirement, the court held that it could not be justified under the taxing power.  It was thus necessary, the court concluded, to strike down the provision to prevent “the unbridled exercise of federal police power.”

The Question Of Severability: Do Other Parts Of The Affordable Care Act Survive?

The court next turned to the question of severability—does striking down the minimum essential coverage requirement require striking down the statute as a whole?  Statutes often contain a “severability clause,” stating that if part of the statute is declared unconstitutional the rest of the statute remains untouched.  The Affordable Care Act does not, so the court turned to the general tests of severability — determining if the remainder of the statute can function without the unconstitutional provision and whether Congress would have enacted the statue without it.  Concluding that it could not make these determinations, the court held that only the minimum coverage requirement and “directly dependent provisions which make specific reference” to it would be stricken.  Since there are no such provisions, the remainder of the health reform law remains untouched.

The Remedy

Finally, the court turned to the remedy.  Concluding that an injunction was premature and unnecessary, and that the case in any event was going higher, the court settled for a judgment declaring the provision unconstitutional.

Where We Go From Here

This case is going higher, as are some of the cases upholding the statute.  The Florida case will also be appealed, regardless of its result.  The courts of appeals will rule on the minimum coverage requirement, and perhaps eventually the Supreme Court.  But in the meantime, implementation of the reform law is moving forward at the federal and at the state level.  Monday’s decision does not strike a fatal blow to that law—the provisions of the law that are already in effect are obviously not dependent upon it.  It should be possible to implement the insurance reforms without it, although insurance will likely be much more expensive and the cost of uncompensated care will remain high.  Paradoxically, the cost to the federal government might be lower if fewer people choose to enroll for Medicaid and for the premium subsidies if they are not required to do so.  But it is estimated that 16 million more Americans would remain uninsured without the mandate

For the moment, however, opponents of the health reform law are jubilant.  Their claim that the law is an unconstitutional expansion of the power of the federal government has received the imprimatur of a judge, if only one judge and only as to one provision of the law.  In the end, the battle for health reform remains primarily a political, not a legal battle.  But this legal victory has dramatically enlivened the anti-reform movement.  To that extent, it is a very significant development on the road to health reform.

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1 Trackback for “Examining Judge Hudson’s Decision On The Individual Mandate”

    December 14th, 2010 at 11:43 pm

10 Responses to “Examining Judge Hudson’s Decision On The Individual Mandate”

  1. Bradley Flansbaum Says:

    In staking out their position, many conservatives and most libertarians convey health care as a privilege, not a right. Fair enough.

    EMTALA, a federal law, is explicit, and rightfully gives every individual (including non-citizens) the ability to get emergency and acute care until stable. Individuals will barter, negotiate (sometimes at 10 cents on the dollar) or walk away from their bills. Again, this is a right federal law guarantees.

    Has any state governor, policy figure of import, or academic reconciled these two concepts, mainly, one can stake out a grand platform of opt out, yet embedded in that platform is a back door to both receive life saving care, and also have the ability to escape or moderate payment.

    I do understand that some will risk crushing debt and then preserve their credit and reputation and pay up. I will give those folks a pass, but they are likely the minority, ie, those that can pay 100% full freight into a hospital bill.

    However, this disconnect must be explained. I hardly doubt any elimination of the individual mandate will offer the option of simultaneously expunging EMTALA from the books.

    Would Gov’s Pawlenty or Perry attempt to offer an opinion on this matter? I would even take a second rate op-ed columnists’ fair shot. You dont want the mandate. Fine. Lets make “inactivity” mean what it really implies.

  2. KTerkelsen Says:

    Tim Jost’s precis very helpful. Virginia and Florida cases may make it necessary for the states to legislate their own individual mandates. When challenges to the individual mandate go to higher courts, it is unlikely the entirety of ACA will be struck down even if the Virginia and Florida challenges to the individual mandate prevail. That is because other parts of the reform package are within Congress’ powers even if the individual mandate is not, and the appellate courts, including the Supreme Court, would be loath to stop the valid exercise of those Congressional powers. Consequences of not having a Federal individual mandate then flow to the states. Some states, like Massachusetts, may use their legislative powers to mandate participation even if the Federal mandate goes away, because they will quickly see that, by failing to create incentives for full participation, premiums will become unbearable as more and more people with pre-existing conditions enter the insurance pool beginning in 2014. That in turn would lead more and more people to opt out of insurance — until they become sick or need medical services — triggering a death spiral and eventually unraveling the whole market.

  3. ajarends Says:

    Prof. Jost, thanks as always for your insightful commentary. I am grateful you found Robert Laszewski’s post–it was very helpful. I know anecdotally health plans have seen similar issues in Massachusetts, where the penalty is even higher, so this is a real concern.

    On the issue of purchasing across state lines, I have often thought that even prior to PPACA’s support for cross-state purchasing and regional Exchanges that there was nothing stopping states from deciding on their own to allow their citizens to purchase across state lines. Is this correct? It seems that state legislatures, insurance commissioners, and governors would be exploring this–unless they have other reasons for prohibiting such purchases.

  4. Timothy Jost Says:

    Interesting discussion. In response to Christina Ho’s question, see the Norman Ornstein’s post today at AEI, and Robert Laszewski’s post on the Kaiser Health News,

    With respect to David Witt’s point, the ACA effectively ends state mandates by establishing a national essential benefits standard and requiring states to pay for any additional services they require of qualified health plans. It also permits interstate health insurance sales compacts. It clearly regulates the sale of insurance, which the Supreme Court has recognized as interstate commerce for decades.

    Travis B and kdhart also make good points, and Jeff Goldsmith’s observations are always worth noting.

  5. Robert Power Says:

    The savior of the individual mandate, its knight on a white horse, may ride into town wearing strange garb: as an economist. Hudson’s economic-inactivity argument fails completely when one reads a compelling Florida amicus brief filed by dozens of economic scholars.

    The economists eviscerate the argument by pointing out that health coverage is a product unlike any other product. The mandate “will not open the door to unfettered power” because the mandate addresses “a unique market imperfection”. This is the ground upon which the higher courts can stand (and should stand) to dismiss the entire economic-inactivity line of thought.

  6. ChristinaSHo Says:

    This line of speculation may be premature, as indeed this decision is but one contrary view against 14 others that have rejected constitutional challenges to the mandate. However, if the mandate were to be struck ultimately by the Supreme Court, the rest of the ACA, including the insurance reforms, might still be salvageable, not simply due to severability but with a legislative patch. For instance, the penalty could be delayed to when the individual finds him or herself in need of care and tries to join the insurance rolls as a late enrollee. Almost everyone enrolls in Medicare Part B to avoid just that kind of delayed penalty. Paul Starr has also been describing an “opt-out” policy where those individuals who elect not to purchase insurance would be barred from opting back in for an extended period of time. I would be curious to hear other ideas for legislative fixes that could be prepared should the worst-case scenario, a Supreme Court decision striking the mandate, comes to pass.

  7. David Witt Says:

    Irony seems to be thick in Washington. A main argument centers on interstate commerce, but the bill specifically left out allowing interstate purchasing of insurance by the public. This cross state purchasing was one of the biggest areas for savings for the public on insurance costs. The reason is mandates, also the point of the lawsuits in another ironic twist. Each state has its own mandates on what must be covered if a carrier sells insurance in its state. Some states have as many as 60 mandates that effectively double the cost of insurance in that state. Hair transplants and even personal trainers are included as mandates. Other states have as few as 10 mandates with the average about 17. Note that in another ironic vein the Federal law for ERISA only has two mandates. Purchasing insurance from another state in interstate commerce could really save individuals a lot of money without reducing their real coverage. This interstate commerce argument seems hollow to me unless the Obamacare bill is amended to include real interstate commerce.

  8. Travis B Says:

    The federal government penalizing me every year for not having a mortgage compared to other citizens who have a mortgage. Still have yet to see a compelling reason how beening penalized through the tax code for not have health insurance compared to other citizens who have health insurance is any different.

  9. Jeff Goldsmith Says:

    Tim’s last point is the essential point: “In the end, the battle for health reform remains primarily a political, not a legal battle.” A Supreme Court decision to invalidate either the mandate or (far less likely) the whole law would be a political decision, and a very costly one.

    Health reform’s greatest vulnerability is its lack of broad popular support, which lowers the political cost of such a decision. Health reform’s immediate vulnerability is not its constitutionality, but the Congressional appropriations process denying HHS, IRS, etc. the funds to implement the law.

  10. kdhart Says:

    It seems to me that the error in this opinion is the judge’s analysis of what commerce is being regulated. It is both the health insurance market and the market for health care. While the individual’s decision not to participate in the the health insurance market may or may not be economic activity, except to those who for religious reasons refuse health care (and who are exempt from the mandate provision), everyone participates in the health care market.

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