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Guest Article

Deloitte logo

(From the December 20, 2010 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

District Court Rules PPACA's Individual Mandate Is Unconstitutional

While acknowledging that a higher court would ultimately resolve the issue, the U.S. District Court for the Eastern District of Virginia struck down the individual mandate in the Patient Protection and Affordable Care Act (PPACA) as unconstitutional. The court ruled that the Commerce Clause of the U.S. Constitution, on which the Federal government's authority for the provision rests, does not allow the government "to compel an individual to involuntarily enter the stream of commerce by purchasing a commodity in the private market."

The decision in Commonwealth of Virginia v. Sebelius (E.D. Va. December 13, 2010) is juxtaposed against other District Court decisions that so far have upheld the PPACA - and is viewed as just the beginning of the protracted process by which the States will be challenging the new law as it takes effect. As noted in the ruling:

This case ... turns on atypical and uncharted applications of constitutional law interwoven with subtle political undercurrents. The outcome of this case has significant public policy implications. And the final word will undoubtedly reside with a higher court.

Although the court ruled unconstitutional the PPACA's requirement for individuals to maintain minimum essential coverage, it did not issue an injunction because it viewed the likelihood of irreparable harm occurring during the pendency of appellate review as minimal given that the provision does not take effect until 2014.

Commerce Clause and the Individual Mandate

The Secretary of the Department of Health and Human Services (DHHS) defended the individual mandate as a valid exercise of the Federal government's power under the Constitution's Article I Commerce Clause, which allows Congress to regulate activities that substantially affect interstate commerce. She argued that uninsured individuals - in the aggregate - consume tens of billions of dollars in uncompensated care each year, which substantially affects interstate commerce. She rejected the Commonwealth's premise that an individual could simply elect not to participate in the healthcare market, arguing that every individual will at some point in time require medical care.

[T]he conduct of the uninsured - their economic decision as to how to finance their health care needs, their actual use of the health care system, their migration in and out of coverage, and their shifting of costs on to the rest of the system when they cannot pay - plainly is economic activity.

On the other side, the Commonwealth argued that the decision not to purchase health insurance is not an economic activity and - notwithstanding any aggregate economic effect such individual inaction may have on interstate commerce - cannot be mandated under the Commerce Clause. It noted that other Federal laws which require an individual to take action - e.g., to report and pay taxes, to register for selective service, and to report for military duty - are grounded in specific provisions of the Constitution (such as the power to assess taxes, or to provide and maintain an Army and Navy). No specific constitutional authority exists to require the purchase of health insurance, it asserted. Ultimately, the Commonwealth argued that, while Congress has broad power to regulate activities that substantially affect interstate commerce, it does not have the power to regulate inactivity simply because it affects interstate commerce.

The court agreed with the Commonwealth, noting that every application of Commerce Clause power found to be constitutionally sound by the Supreme Court involved some sort of action, transaction, or deed that was placed in motion by an individual or legal entity. Reasoning that the regulatory powers of the Commerce Clause are triggered by some type of self-initiated action, the court ruled that provisions compelling an individual to purchase a commodity in the private market (i.e., the mandate for individuals to purchase minimum health coverage under Section 1501 of the PPACA) exceeded the powers granted to Congress under the Commerce Clause.

General Welfare Clause and the Individual Mandate

Alternatively, the Secretary of DHHS argued that the individual mandate is a valid exercise of the power to tax under the General Welfare Clause of Article I Section 8 of the Constitution, which gives Congress the broad power to lay and collect taxes and requires only that the associated regulatory provisions bear a "reasonable relation" to the statute's taxing power. The Secretary asserted that PPACA Section 1501 - which added § 5000A to the Internal Revenue Code, by which an additional income tax liability is imposed on individuals who fail to maintain the required health coverage - satisfies the requirement of a tax and its related regulatory provision and, as such, the two constitute a valid exercise of Congress's power to tax.

The Commonwealth disagreed with the characterization of the liability imposed under Code § 5000A as a tax. Rather, it claimed the liability was a penalty. The Commonwealth noted that Code § 5000A itself refers the payment as a "penalty," and argued that the purpose of the provision was not to raise revenue for the general welfare, but rather to compel individuals to purchase health insurance. Quoting an earlier Supreme Court decision, it argued:

The two words [tax and penalty] are not interchangeable ... and if an exaction [is] clearly a penalty it cannot be converted to a tax by the simple expedient of calling it such.

The Commonwealth argued that Congress's power to impose a penalty is much more constrained than its ability to impose a tax, since a penalty must serve to effectuate the valid exercise of an enumerated power.

The court agreed with the Commonwealth, finding that PPACA Section 1501 imposed a penalty and not a tax for an individual's failure to maintain minimum essential health coverage. It referred to the legislative history of Code § 5000A in which the term "tax" was changed to "penalty" before the final Congressional vote, and found no plausible argument that the purpose of the payment was to raise revenue. As such, it reasoned that the penalty could survive only if the related regulatory provision - the individual mandate - was itself a valid exercise of an enumerated power. Since it had earlier held that it was not, the penalty was also struck down as unconstitutional.

As expected, the U.S. Justice Department announced it will appeal the decision.

Deloitte logoThe information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact:

Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955.

Copyright 2010, Deloitte.

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