# State of Florida v. U.S. Department of HHS

> Court of Appeals for the Eleventh Circuit · August 12, 2011

URL: https://www.frixlaw.com/law-library/cases/3048533

## Case

- **Court:** Court of Appeals for the Eleventh Circuit
- **Decided:** August 12, 2011
- **Precedential status:** Published
- **Opinion:** Opinion
- **Nature of suit:** NEW
- **Cited by:** 0 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/3048533

## How later opinions describe it (automated extraction)

- holding that a state’s waiver of its sovereign immunity is not voluntary where Congress has made it a condition of the state’s participation in an otherwise lawful activity

## Opinion text

[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT FILED
________________________ U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
Nos. 11-11021 & 11-11067 AUG 12, 2011
JOHN LEY
________________________ CLERK

D.C. Docket No. 3:10-cv-00091-RV-EMT

STATE OF FLORIDA, by and through Attorney General, STATE OF SOUTH
CAROLINA, by and through Attorney General, STATE OF NEBRASKA, by and
through Attorney General, STATE OF TEXAS, by and through Attorney General,
STATE OF UTAH, by and through Attorney General, et. al.,

Plaintiffs - Appellees - Cross-Appellants,

versus

UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES,
SECRETARY OF THE UNITED STATES DEPARTMENT OF HEALTH AND
HUMAN SERVICES, UNITED STATES DEPARTMENT OF THE TREASURY,
SECRETARY OF THE UNITED STATES DEPARTMENT OF TREASURY,
UNITED STATES DEPARTMENT OF LABOR, SECRETARY OF THE
UNITED STATES DEPARTMENT OF LABOR,

Defendants - Appellants - Cross-Appellees.
________________________

Appeals from the United States District Court
for the Northern District of Florida
________________________

(August 12, 2011)
Before DUBINA, Chief Judge, and HULL and MARCUS, Circuit Judges.

DUBINA, Chief Judge, and HULL, Circuit Judge:1

Soon after Congress passed the Patient Protection and Affordable Care Act,

Pub. L. No. 111-148, 124 Stat. 119 (2010), amended by Health Care and

Education Reconciliation Act of 2010 (“HCERA”), Pub. L. No. 111-152, 124 Stat.

1029 (2010) (the “Act”), the plaintiffs brought this action challenging the Act’s

constitutionality. The plaintiffs are 26 states, private individuals Mary Brown and

Kaj Ahlburg, and the National Federation of Independent Business (“NFIB”)

(collectively the “plaintiffs”).2 The defendants are the federal Health and Human

Services (“HHS”), Treasury, and Labor Departments and their Secretaries

(collectively the “government”).

The district court granted summary judgment (1) to the government on the

state plaintiffs’ claim that the Act’s expansion of Medicaid is unconstitutional and

(2) to the plaintiffs on their claim that the Act’s individual mandate—that

1
This opinion was written jointly by Judges Dubina and Hull. Cf. Waters v. Thomas, 46
F.3d 1506, 1509 (11th Cir. 1995) (authored by Anderson and Carnes, J.J.) (citing Peek v. Kemp,
784 F.2d 1479 (11th Cir.) (en banc) (authored by Vance and Anderson, J.J.), cert. denied, 479
U.S. 939, 107 S. Ct. 421 (1986)).
2
The 26 state plaintiffs are Alabama, Alaska, Arizona, Colorado, Florida, Georgia, Idaho,
Indiana, Iowa, Kansas, Louisiana, Maine, Michigan, Mississippi, Nebraska, Nevada, North
Dakota, Ohio, Pennsylvania, South Carolina, South Dakota, Texas, Utah, Washington,
Wisconsin, and Wyoming.

2
individuals purchase and continuously maintain health insurance from private

companies3—is unconstitutional. The district court concluded that the individual

mandate exceeded congressional authority under Article I of the Constitution

because it was not enacted pursuant to Congress’s tax power and it exceeded

Congress’s power under the Commerce Clause and the Necessary and Proper

Clause. The district court also concluded that the individual mandate provision

was not severable from the rest of the Act and declared the entire Act invalid.

The government appeals the district court’s ruling that the individual

mandate is unconstitutional and its severability holding. The state plaintiffs cross-

appeal the district court’s ruling on their Medicaid expansion claim. For the

reasons that follow, we affirm in part and reverse in part.4

INTRODUCTION

Legal issues concerning the constitutionality of a legislative act present

important but difficult questions for the courts. Here, that importance and

3
As explained later, unless the person is covered by a government-funded health program,
such as Medicare, Medicaid, and others, the mandate is to purchase insurance from a private
insurer.
4
We review the district court’s grant of summary judgment de novo. Sammy’s of Mobile,
Ltd. v. City of Mobile, 140 F.3d 993, 995 (11th Cir. 1998). We review de novo a constitutional
challenge to a statute. United States v. Cunningham, 607 F.3d 1264, 1266 (11th Cir.), cert.
denied, 131 S. Ct. 482 (2010).

3
difficulty are heightened because (1) the Act itself is 975 pages in the format

published in the Public Laws;5 (2) the district court, agreeing with the plaintiffs,

held all of the Act was unconstitutional; and (3) on appeal, the government argues

all of the Act is constitutional.

We, as all federal courts, must begin with a presumption of constitutionality,

meaning that “we invalidate a congressional enactment only upon a plain showing

that Congress has exceeded its constitutional bounds.” United States v. Morrison,

529 U.S. 598, 607, 120 S. Ct. 1740, 1748 (2000).

As an initial matter, to know whether a legislative act is constitutional

requires knowing what is in the Act. Accordingly, our task is to figure out what

this sweeping and comprehensive Act actually says and does. To do that, we

outline the congressional findings that identify the problems the Act addresses,

and the Act’s legislative response and overall structure, encompassing nine Titles

and hundreds of laws on a diverse array of subjects. Next, we set forth in greater

depth the contents of the Act’s five components most relevant to this appeal: the

insurance industry reforms, the new state-run Exchanges, the individual mandate,

5
Pub. L. No. 111-148, 124 Stat. 119 (2010), Pub. L. No. 111-152, 124 Stat. 1029 (2010).
Some of the sections of the Act have not yet been codified in the U.S. Code, and for those
sections we cite to the future U.S. Code provision, along with the effective date if applicable.

4
the employer penalties, and the Medicaid expansion.

After that, we analyze the constitutionality of the Medicaid expansion and

explain why we conclude that the Act’s Medicaid expansion is constitutional.

We then review the Supreme Court’s decisions on Congress’s commerce

power, discuss the individual mandate—which requires Americans to purchase an

expensive product from a private insurance company from birth to death—and

explicate how Congress exceeded its commerce power in enacting its individual

mandate. We next outline why Congress’s tax power does not provide an

alternative constitutional basis for upholding this unprecedented individual

mandate. Lastly, because of the Supreme Court’s strong presumption of

severability and as a matter of judicial restraint, we conclude that the individual

mandate is severable from the remainder of the Act. Our opinion is organized as

follows:

I. STANDING

II. THE ACT

A. Congressional Findings
B. Overall Structure of Nine Titles
C. Terms and Definitions
D. Health Insurance Reforms
E. Health Benefit Exchanges
F. Individual Mandate

5
G. Employer Penalty
H. Medicaid Expansion

III. CONSTITUTIONALITY OF MEDICAID EXPANSION

A. History of the Medicaid Program
B. Congress’s Power under the Spending Clause

IV. SUPREME COURT’S COMMERCE CLAUSE DECISIONS

V. CONSTITUTIONALITY OF INDIVIDUAL MANDATE UNDER
THE COMMERCE POWER

A. First Principles
B. Dichotomies and Nomenclature
C. Unprecedented Nature of the Individual Mandate
D. Wickard and Aggregation
E. Broad Scope of Congress’s Regulation
F. Government’s Proposed Limiting Principles
G. Congressional Findings
H. Areas of Traditional State Concern
I. Essential to a Larger Regulatory Scheme
J. Conclusion

VI. CONSTITUTIONALITY OF INDIVIDUAL MANDATE UNDER
THE TAX POWER

A. Repeated Use of the Term “Penalty” in the Individual Mandate
B. Designation of Numerous Other Provisions in the Act as “Taxes”
C. Legislative History of the Individual Mandate

VII. SEVERABILITY

I. STANDING

As a threshold matter, we consider the government’s challenge to the

6
plaintiffs’ standing to bring this lawsuit. “Article III of the Constitution limits the

jurisdiction of federal courts to ‘cases’ and ‘controversies.’” Socialist Workers

Party v. Leahy, 145 F.3d 1240, 1244 (11th Cir. 1998) (citations omitted). As we

have explained:

The case-or-controversy constraint, in turn, imposes a dual limitation on
federal courts commonly referred to as “justiciability.” Basically,
justiciability doctrine seeks to prevent the federal courts from
encroaching on the powers of the other branches of government and to
ensure that the courts consider only those matters that are presented in
an adversarial context. Because the judiciary is unelected and
unrepresentative, the Article III case-or-controversy limitation, as
embodied in justiciability doctrine, presents an important restriction on
the power of the federal courts.

Id. (citations omitted). Indeed, there are “three strands of justiciability

doctrine—standing, ripeness, and mootness—that go to the heart of the Article III

case or controversy requirement.” Harrell v. The Fla. Bar, 608 F.3d 1241, 1247

(11th Cir. 2010) (quotation marks and alterations omitted).

As for the first strand, “[i]t is by now axiomatic that a plaintiff must have

standing to invoke the jurisdiction of the federal courts.” KH Outdoor, LLC v. City

of Trussville, 458 F.3d 1261, 1266 (11th Cir. 2006). “In essence the question of

standing is whether the litigant is entitled to have the court decide the merits of the

dispute or of particular issues.” Primera Iglesia Bautista Hispana of Boca Raton,

7
Inc. v. Broward Cnty., 450 F.3d 1295, 1304 (11th Cir. 2006) (quotation marks

omitted). To demonstrate standing, a plaintiff must show that “(1) he has suffered,

or imminently will suffer, an injury-in-fact; (2) the injury is fairly traceable to [the

statute]; and (3) a favorable judgment is likely to redress the injury.” Harrell, 608

F.3d at 1253; see also Lujan v. Defenders of Wildlife, 504 U.S. 555, 560–61, 112

S. Ct. 2130, 2136 (1992). “The plaintiff bears the burden of establishing each of

these elements.” Elend v. Basham, 471 F.3d 1199, 1206 (11th Cir. 2006). And

standing must be established for each claim a plaintiff raises. See Harrell, 608

F.3d at 1253–54. “We review standing determinations de novo.” Bochese v. Town

of Ponce Inlet, 405 F.3d 964, 975 (11th Cir. 2005).

In fact, “[s]tanding is a threshold jurisdictional question which must be

addressed prior to and independent of the merits of a party’s claims.” Id. at 974

(quotation marks and alteration omitted). And “we are obliged to consider

questions of standing regardless of whether the parties have raised them.” Id. at

975.

Notably, the government does not contest the standing of the individual

plaintiffs or of the NFIB to challenge the individual mandate. In fact, the

government expressly concedes that one of the individual plaintiffs—Mary

8
Brown—has standing to challenge the individual mandate. See Government’s

Opening Br. at 6 n.1 (“Defendants do not dispute that plaintiff Brown’s challenge

to the minimum coverage provision is justiciable.”). Nor does the government

dispute the state plaintiffs’ standing to challenge the Medicaid provisions.

The only question raised by the government is whether the state plaintiffs

have standing to challenge the individual mandate. The government claims that the

state plaintiffs do not have standing because they are impermissibly suing the

government as parens patriae—or as representatives of their citizens—in

violation of the rule articulated in Massachusetts v. Mellon, 262 U.S. 447, 485–86,

43 S. Ct. 597, 600 (1923).6 The state plaintiffs respond that they are not in

violation of the Mellon rule, but rather have standing to challenge the individual

mandate for three independent reasons: first, because the increased enrollment in

Medicaid spurred by the individual mandate will cost the states millions of dollars

in additional Medicaid funding; second, because they are injured by other

provisions of the Act—such as the Medicaid expansion—from which the

individual mandate cannot be severed; and finally, because the individual mandate

6
In Mellon, the Supreme Court held that states cannot sue the federal government in a
representative capacity to protect their citizens from the operation of an allegedly
unconstitutional federal law. 262 U.S. at 485–86, 43 S. Ct. at 600. This has come to be known as
the Mellon rule.

9
intrudes upon their sovereign interest in enacting and enforcing state statutes that

shield their citizens from the requirement to purchase health insurance. States’

Opening Br. at 67–69.

Although the question of the state plaintiffs’ standing to challenge the

individual mandate is an interesting and difficult one, in the posture of this case, it

is purely academic and one we need not confront today. The law is abundantly

clear that so long as at least one plaintiff has standing to raise each claim—as is

the case here—we need not address whether the remaining plaintiffs have

standing. See, e.g., Watt v. Energy Action Educ. Found., 454 U.S. 151, 160, 102 S.

Ct. 205, 212 (1981) (“Because we find California has standing, we do not consider

the standing of the other plaintiffs.”); Vill. of Arlington Heights v. Metro. Hous.

Dev. Corp., 429 U.S. 252, 264 & n.9, 97 S. Ct. 555, 562 & n.9 (1977) (“Because

of the presence of this plaintiff, we need not consider whether the other individual

and corporate plaintiffs have standing to maintain suit.”); ACLU of Fla., Inc. v.

Miami-Dade Cnty. Sch. Bd., 557 F.3d 1177, 1195 (11th Cir. 2009) (“Because

Balzli has standing to raise those claims, we need not decide whether either of the

organizational plaintiffs also has standing to do so.”); Jackson v. Okaloosa Cnty.,

21 F.3d 1531, 1536 (11th Cir. 1994) (“In order for this court to have jurisdiction

10
over the claims before us, at least one named plaintiff must have standing for each

of the claims.”); Mountain States Legal Found. v. Glickman, 92 F.3d 1228, 1232

(D.C. Cir. 1996) (“For each claim, if constitutional and prudential standing can be

shown for at least one plaintiff, we need not consider the standing of the other

plaintiffs to raise that claim.”). Because it is beyond dispute that at least one

plaintiff has standing to raise each claim here—the individual plaintiffs and the

NFIB have standing to challenge the individual mandate, and the state plaintiffs

undeniably have standing to challenge the Medicaid provisions—this case is

justiciable, and we are permitted, indeed we are obliged, to address the merits of

each. Accordingly, we turn to the constitutionality of the Act.

II. THE ACT

A. Congressional Findings

The congressional findings for the Act, including those relating to the

individual mandate, are contained in two pages, now codified in 42 U.S.C.

§ 18091(a)(1)–(3). Approximately 50 million people are uninsured.7 The

7
U.S. Census Bureau, P60-238, Income, Poverty, and Health Insurance Coverage in the
United States: 2009, at 23 tbl.8 (2010) (“Census Report”), available at
http://www.census.gov/prod/2010pubs/p60-238.pdf. Although the congressional findings do not
state the precise number of the uninsured, the parties use the 50 million figure, so we will too.
Copies of the Internet materials cited in this opinion are on file in the Clerk’s Office. See
11th Cir. R. 36, I.O.P. 10.

11
congressional findings focus on these uninsureds, health insurance, and health

care. Id.

1. The Uninsured and Cost-Shifting Problems

The congressional findings state that some individuals make “an economic

and financial decision to forego health insurance coverage and attempt to self-

insure, which increases financial risks to households and medical providers.” Id.

§ 18091(a)(2)(A). In its findings, Congress determined that the decision by the

uninsured to forego insurance results in a cost-shifting scenario. Id.

§ 18091(a)(2)(F).

Congress’s findings identify a multi-step process that starts with

consumption of health care: (1) some uninsured persons consume health care; (2)

some fail to pay the full costs; (3) in turn the unpaid costs of that health care—$43

billion in 2008—are shifted to and spread among medical providers; (4) thereafter

medical providers, by imposing higher charges, spread and shift the unpaid costs

to private insurance companies; (5) then private insurance companies raise

premiums for health policies and shift and spread the unpaid costs to already-

insured persons; and (6) consequently already-insured persons suffer higher

premiums. Id. § 18091(a)(2). Also, some uninsured persons continue not to buy

coverage because of higher premiums. Id.

12
The findings state that this cost-shifting scenario increases family premiums

on average by $1,000 per year. Id. § 18091(a)(2)(F). Although not in the findings,

the data show the cost-shifting increases individual premiums on average by $368

to $410 per year.8 The cost-shifting represents roughly 8% of average premiums.9

In its findings, Congress also points out that national health care spending in

2009 was approximately $2.5 trillion, or 17.6% of the national economy.10 Id.

§ 18091(a)(2)(B). Thus, the $43 billion in shifted costs represents about 1.7% of

total health care expenditures. Of that $2.5 trillion in national health care spending

in 2009, federal, state, and local governments paid $1.1 trillion, or 44%.11

8
Uncompensated care costs translate into “a surcharge of $368 for individual premiums
and a surcharge of $1017 for family premiums in 2008.” See Families USA, Hidden Health Tax:
Americans Pay a Premium 7 (2009), available at http://familiesusa2.org/assets/pdfs/hidden-
health-tax.pdf (cited by both the plaintiffs and the government).
9
“[A] ‘hidden tax’ on health insurance accounts for roughly 8% of the average health
insurance premium” and “[t]his cost-shift added, on average, $1,100 to each family premium in
2009 and about $410 to an individual premium.” Br. of Amici Curiae Am. Ass’n of People with
Disabilities, et al., in Support of the Government at 15 (citing Ben Furnas & Peter Harbage, Ctr.
for Am. Progress Action Fund, The Cost Shift from the Uninsured 1–2 (2009), available at
http://www.americanprogressaction.org/issues/2009/03/pdf/cost_shift.pdf (calculations based on
a 2005 analysis by Families USA)).
10
See Centers for Medicare & Medicaid Services (“CMS”), National Health Expenditure
Web Tables tbls.1, 5, 11, available at
http://www.cms.gov/NationalHealthExpendData/downloads/tables.pdf (derived from
calculations).
11
See CMS, National Health Expenditure Web Tables, supra note 10, at tbl.5. The
governments’ health care spending in 2009 included $503 billion for Medicare and $374 billion
for Medicaid and the Children’s Health Insurance Program (“CHIP”).
Projected Medicare spending is $723.1 billion in 2016 and $891.4 billion in 2019. CMS,
Nat’l Health Expenditure Projections 2009–2019 tbl.2, available at
13
Private insurers still paid for 32% of health care spending in 2009,12 id.,

through: (1) primarily private employer-based insurance plans, or (2) the private

individual insurance market. The private employer-based health system covers 176

million Americans. Id. § 18091(a)(2)(D). The private individual insurance market

covers 24.7 million people.13 Undisputedly, “[h]ealth insurance and health care

services are a significant part of the national economy.” Id. § 18091(a)(2)(B).

2. $90 Billion Private Underwriting Costs Problem

Congress also recognized that many of the uninsured desire insurance but

have been denied coverage or cannot afford it. Its findings emphasize the barriers

created by private insurers’ underwriting practices and related administrative

costs. Id. § 18091(a)(2)(J). Private insurers want healthy insureds and try to

protect themselves against unhealthy entrants through medical underwriting,

especially in the individual market. As a result of medical underwriting, many

uninsured Americans—ranging from 9 million to 12.6 million—voluntarily sought

health coverage in the individual market but were denied coverage, charged a

http://www.cms.gov/NationalHealthExpendData/Downloads/NHEProjections2009to2019.pdf.
With the Act’s Medicaid expansion and other factors, projected Medicaid and CHIP
spending is $737.5 billion in 2016 and $896.2 billion in 2019. Id.
12
See CMS, National Health Expenditure Web Tables, supra note 10, at tbl.3 (derived
from calculations).
13
See Census Report, supra note 7, at 22–25 & 23 tbl.8 (derived from calculations).
14
higher premium, or offered only limited coverage that excludes a preexisting

condition.14

In its findings, Congress determined that the “[a]dministrative costs for

private health insurance” were $90 billion in 2006, comprising “26 to 30 percent

of premiums in the current individual and small group markets.” Id. The findings

state that Congress seeks to create health insurance markets “that do not require

underwriting and eliminate its associated administrative costs.” Id. The Act

requires private insurers to allow all applicants to enroll. 42 U.S.C. § 300gg-1(a).

Congress stated that the Act, by eliminating underwriting costs, will lower health

insurance premiums. Id.

3. Congress’s Solutions

Given the 50 million uninsured, $43 billion in uncompensated costs, and

$90 billion in underwriting costs, Congress determined these problems affect the

national economy and interstate commerce. Id. § 18091(a)(2). The congressional

findings identify what the Act regulates: (1) the “health insurance market,” (2)

14
HHS, Coverage Denied: How the Current Health Insurance System Leaves Millions
Behind, http://www.healthreform.gov/reports/denied_coverage/index.html (citing
Commonwealth Fund Biennial Health Insurance Survey, 2007); Sara R. Collins, et al., The
Commonwealth Fund, Help on the Horizon: How the Recession Has Left Millions of Workers
Without Health Insurance, and How Health Reform Will Bring Relief xi (2011), available at
http://www.commonwealthfund.org/~/media/Files/Surveys/2011/1486_Collins_help_on_the_hor
izon_2010_biennial_survey_report_FINAL_31611.pdf.
15
“how and when health care is paid for,” and (3) “when health insurance is

purchased.” Id. § 18091(a)(2)(A), (H). The findings also state that the Act’s

reforms will significantly reduce the number of the uninsured and will lower

health insurance premiums. Id. § 18091(a)(2)(F).

To reduce the number of the uninsured, the Act employs five main tools: (1)

comprehensive insurance industry reforms which alter private insurers’

underwriting practices, guarantee issuance of coverage, overhaul their health

insurance products, and restrict their premium pricing structure; (2) creation of

state-run “Health Benefit Exchanges” as new marketplaces through which

individuals, families, and small employers, now pooled together, can

competitively purchase the new insurance products and obtain federal tax credits

and subsidies to do so; (3) a mandate that individuals must purchase and

continuously maintain health insurance or pay annual penalties; (4) penalties on

private employers who do not offer at least some type of health plan to their

employees; and (5) the expansion of Medicaid eligibility and subsidies.

The Act’s Medicaid expansion alone will cover 9 million of the 50 million

uninsured by 2014 and 16 million by 2016.15 The Act’s health insurance reforms

15
CBO’s Analysis of the Major Health Care Legislation Enacted in March 2010: Before
the Subcomm. on Health of the H. Comm. on Energy & Commerce 112th Cong. 18 tbl.3 (2011)
(Statement of Douglas Elmendorf, Director, Cong. Budget Office) [hereinafter CBO, Analysis],
available at http://www.cbo.gov/ftpdocs/121xx/doc12119/03-30-HealthCareLegislation.pdf.
16
remove private insurers’ barriers to coverage and restrict their pricing to make

coverage accessible to the 9 to 12 million uninsured who were denied coverage or

had their preexisting conditions excluded.16 The Act’s new Exchanges, with

significant federal tax credits and subsidies, are predicted to make insurance

available to 9 million in 2014 and 22 million by 2016.17

Congress’s findings state that the Act’s multiple provisions, combined

together:18

(1) “will add millions of new consumers to the health insurance market” and

“will increase the number and share of Americans who are insured”;

(2) will reduce the number of the uninsured, will broaden the health

insurance risk pool to include additional healthy individuals, will increase

economies of scale, and will significantly reduce insurance companies’

administrative costs, all of which will lower health insurance premiums;

(3) will build upon and strengthen the private employer-based health

insurance system, which already covers “176,000,000 Americans”; and

(4) will achieve “near-universal” coverage of the uninsured.

16
See HHS, Coverage Denied, and Collins, supra note 14.
17
CBO, Analysis, supra note 15, at tbl.3.
18
The congressional findings refer six times to the individual mandate “requirement,
together with the other provisions of this Act.” 42 U.S.C. § 18091(a)(2)(C), (E), (F), (G), (I), (J).
17
Id. § 18091(a)(2).

Although the congressional findings summarily refer to “the uninsured,” the

parties’ briefs and the 52 amici briefs contain, and indeed rely on, additional data

about the uninsured. Before turning to the Act, we review that data.19

4. Data about the Uninsured and Uncompensated Care

So who are the uninsured? As to health care usage, the uninsured do not fall

into a single category. Many of the uninsured do not seek health care each year. Of

course, many do. In 2007, 57% of the 40 million uninsured that year used some

medical services; in 2008, 56% of the 41 million uninsured that year used some

medical services.20

As to medical services, 50% of uninsured people had routine checkups in

the past two years; 68% of uninsured people had routine checkups in the past five

19
There has been no evidentiary objection by any party to the data and studies cited in the
parties’ briefs or in any of the amici briefs. In fact, at times the parties cite the same data.
20
HHS, Agency for Healthcare Research and Quality, Medical Expenditure Panel Survey,
Household Component Summary Tables (“MEPS Summary Tables”), Table 1: Total Health
Services–Median and Mean Expenses per Person with Expense and Distribution of Expenses by
Source of Payment: United States, 2007 & 2008, available at
http://www.meps.ahrq.gov/mepsweb/data_stats/quick_tables.jsp (follow “Household Component
summary tables” hyperlink; then select 2007 or 2008 for “year” and follow the “search”
hyperlink; then follow the hyperlink next to “Table 1").
The Medical Expenditure Panel Survey (“MEPS”) is a set of large-scale surveys of
families and individuals, their medical providers (including doctors, hospitals, and pharmacies),
and employers across the United States. It is conducted under the auspices of HHS.
18
years.21 In 2008, the uninsured made more than 20 million visits to emergency

rooms,22 and 2.1 million were hospitalized.23 The medical care used by each

uninsured person cost about $2,000 on average in 2007, and $1,870 on average in

2008.24

When the uninsured do seek health care, what happens? Some pay in full.

Some partially pay. Some pay nothing. Data show the uninsured paid on average

37% of their health care costs out of pocket in 2007, and 46.01% in 2008,25 while

21
June E. O’Neill & Dave M. O’Neill, Who Are the Uninsured? An Analysis of America’s
Uninsured Population, Their Characteristics and Their Health, EMP ’T POLICIES INSTITUTE , 21
tbl.9 (2009), available at http://epionline.org/studies/oneill_06-2009.pdf.
22
Br. of Amici Curiae Am. Hosp. Ass’n et al. in Support of the Government at 11 (citing
Press Release, HHS, New Data Say Uninsured Account for Nearly One-Fifth of Emergency
Room Visits (Jul. 15, 2009), available at http://www.hhs.gov/news/press/2009pres/
07/20090715b.html).
23
In 2008, U.S. hospitals reported more than 2.1 million hospitalizations of the uninsured.
Office of the Assistant Sec’y for Planning and Evaluation, HHS, The Value of Health Insurance:
Few of the Uninsured Have Adequate Resources to Pay Potential Hospital Bills 5 (2011),
available at http://aspe.hhs.gov/health/reports/2011/valueofinsurance/rb.shtml.
24
MEPS Summary Tables, supra note 20. An Economic Scholars’ amici brief, filed in
support of the government, states: “The medical care used by each uninsured person costs about
$2000 per year, on average.” Br. of Amici Curiae Economists in Support of the Government at
16 (citing “Agency for Health Care Quality and Research, Medical Expenditure Panel Survey,
Summary Data Tables, Table 1" (see MEPS Summary Tables, supra note 20); Jack Hadley, et
al., “Covering the Uninsured in 2008: Current Costs, Sources of Payment, and Incremental
Costs,” 27(5) HEALTH AFFAIRS W399-415 (2008)).
In contrast, this same amici brief points out: “In 2007, the average person used $6,186 in
personal health care services.” Id. at 11 (citing “Center for Medicare and Medicaid Services,
National Health Expenditure Accounts”); see CMS, National Expenditure Web Tables, supra
note 10, at tbl.1.
25
See MEPS Summary Tables, supra note 20.
19
third parties pay another 26% on their behalf.26 Not surprisingly, the poorer

uninsured, on average, consume more health care for which they do not pay.27

Even in households at or above the median income level ($41,214) in 2000, the

uninsured paid, on average, less than half their medical care costs.28

It is also undisputed that people are uninsured for a wide variety of reasons.

The uninsured are spread across different income brackets:

(1) less than $25,000: 15.5 million uninsured, or about 31%;

(2) $25,000 to $49,999: 15.3 million uninsured, or about 30%;

(3) $50,000 to $74,999: 9.4 million uninsured, or about 18%;

(4) $75,000 or more: 10.6 million uninsured, or about 21%.29

As the data show, many of the uninsured have low to moderate incomes and

simply cannot afford insurance. Some of the uninsured can afford insurance and

tried to obtain it, but were denied coverage based on health status.30 Some are

26
See Families USA, Hidden Health Tax, supra note 8, at 2 (cited by both the plaintiffs
and the government).
27
Bradley Herring, The Effect of the Availability of Charity Care to the Uninsured on the
Demand for Private Health Insurance, 24 J. HEALTH ECON . 225, 229–31 (2005).
28
Herring, supra note 27, at 231 (“[T]he median income for all household[s] in the U.S. is
roughly 300% of poverty, and the poverty threshold was US$13,738 for a family of three in
2000.”); see id. at 230 tbl.1.
29
See Census Report, supra note 7, at 23 tbl.8.
30
See HHS, Coverage Denied, and Collins, supra note 14.
20
voluntarily uninsured and self-finance because they can pay for their medical care

or have modest medical care needs. Some may not have considered the issue.

There is no one reason why people are uninsured. It is also not surprising,

therefore, that Congress has attacked the uninsured problem through multiple

reforms and numerous avenues in the Act that we outline later.

Given these identified problems, congressional findings, and data as

background, we now turn to Congress’s legislative response in the Act.

B. Overall Structure of Nine Titles

The sweeping and comprehensive nature of the Act is evident from its nine

Titles:

I. Quality, Affordable Health Care for All Americans

II. Role of Public Programs

III. Improving the Quality and Efficiency of Health Care

IV. Prevention of Chronic Disease and Improving Public Health

V. Health Care Workforce

VI. Transparency and Program Integrity

VII. Improving Access to Innovative Medical Therapies

VIII. Community Living Assistance Services and Supports

21
IX. Revenue Provisions31

The Act’s provisions are spread throughout many statutes and different titles in the

United States Code. As our Appendix A demonstrates, the Act’s nine Titles

contain hundreds of new laws about hundreds of different areas of health

insurance and health care. Appendix A details most parts of the Act with section

numbers. Here, we merely list the broad subject matter in each Title.

Title I contains these four components mentioned earlier: (1) the insurance

industry reforms; (2) the new state-run Exchanges; (3) the individual mandate; and

(4) the employer penalty. Act §§ 1001–1568. Title II shifts the Act’s focus to

publicly-funded programs designed to provide health care for the uninsured, such

as Medicaid, CHIP, and initiatives under the Indian Health Care Improvement Act.

Id. §§ 2001–2955. Title II contains the Medicaid expansion at issue here. Title II’s

provisions also create, or expand, other publicly-funded programs. Id.

Title III primarily addresses Medicare. Id. §§ 3001–3602. Title IV

concentrates on prevention of illness. Id. §§ 4001–4402. Title V seeks to increase

the supply of health care workers through education loans, training grants, and

other programs. Id. §§ 5001–5701.

Title VI creates new transparency and anti-fraud requirements for physician-

31
There is also a tenth Title dedicated to amendments to these nine Titles.
22
owned hospitals participating in Medicare and for nursing facilities participating

in Medicare or Medicaid. Id. §§ 6001–6801. Title VI includes the Elder Justice

Act, designed to eliminate elder abuse, neglect, and exploitation. Id.

Title VII extends and expands certain drug discounts in health care facilities

serving low-income patients. Id. §§ 7001–7103. Title VIII establishes a national,

voluntary long-term care insurance program for purchasing community living

assistance services and support by persons with functional limitations. Id. §§

8001–8002. Title IX contains revenue provisions. Id. §§ 9001–9023.

We include Appendix A because it documents (1) the breadth and scope of

the Act; (2) the multitudinous reforms enacted to reduce the number of the

uninsured; (3) the large number and diverse array of new, or expanded, federally-

funded programs, grants, studies, commissions, and councils in the Act; (4) the

extensive new federal requirements and regulations on myriad subjects; and (5)

how many of the Act’s provisions on their face operate separately and

independently.

We now examine in depth the five parts of the Act largely designed to

reduce the number of the uninsured. Because of the Act’s comprehensive and

complex regulatory scheme, it is critical to examine what the Act actually does and

does not do. We start with some terms and definitions.

23
C. Terms and Definitions

The Act regulates three aspects of health insurance: (1) “markets,” the

outlets where consumers may purchase insurance products; (2) “plans,” the

insurance products themselves; and (3) “benefits,” the health care services or items

covered under an insurance plan.

1. Markets

Given its focus on making health insurance available to the uninsured, the

Act recognizes and regulates four markets for health insurance products: (1) the

“individual market”; (2) the “small group market”; (3) the “large group market”;

and (4) the new Exchanges, to be created and run by each state.

The term “individual market” means “the market for health insurance

coverage offered to individuals other than in connection with a group health plan.”

42 U.S.C. §§ 300gg-91(e)(1)(A), 18024(a)(2).

The term “group market” means “the health insurance market under which

individuals obtain health insurance coverage (directly or through any arrangement)

on behalf of themselves (and their dependents) through a group health plan

maintained by an employer.” Id. § 18024(a)(1).

Within the “group market,” the Act distinguishes between the “large group

market” and the “small group market.” The term “large group market” refers to the

24
market under which individuals purchase coverage through a group plan of a

“large employer.” Id. §§ 300gg-91(e)(3), 18024(a)(3). A “large employer” is an

employer with over 100 employees. Id. §§ 300gg-91(e)(2), 18024(b)(1).

The term “small group market” refers to the market under which individuals

purchase coverage through a group plan of a “small employer,” or an employer

with no more than 100 employees. Id. §§ 300gg-91(e)(4), (5), 18024(a)(3), (b)(2).

The term “Exchanges” refers to the health benefit exchanges that each state

must create and operate.32 Id. § 18031(b). Companies (profit and nonprofit)

participating in the Exchanges will offer insurance for purchase by individuals and

employees of small employers. See id.; id. § 18042. The uninsured can obtain

significant federal tax credits and subsidies through the Exchanges. See 26 U.S.C.

§ 36B; 42 U.S.C. § 18071. In 2017, the states will have the option to open the

Exchanges to large employers. 42 U.S.C. § 18032(f)(2)(B).

2. “Essential Health Benefits Package” Term

Two key terms in the Act are: (1) “essential health benefits package” and (2)

“minimum essential coverage.” Although they sound similar, each has a different

meaning.

32
The Act allows a state to opt out of creating and operating an Exchange, in which case
the federal government (or a nonprofit contractor) will establish the Exchange. 42 U.S.C.
§ 18041(c).
25
The term “essential health benefits package” refers to the comprehensive

benefits package that must be provided by plans in the individual and small group

markets by 2014. Id. § 300gg-6(a) (effective Jan. 1, 2014); id. § 18022(a). The Act

does not impose the essential health benefits package on plans offered by large

group employers to their employees.

An “essential health benefits package” must: (1) provide coverage for the

“essential health benefits” described in § 18022(b); (2) limit the insured’s cost-

sharing, as provided in § 18022(c); and (3) provide “either the bronze, silver, gold,

or platinum level of coverage” described in § 18022(d). Id. § 18022(a).

The Act leaves it to HHS to define the term “essential health benefits.” Id.

§ 18022(b). However, that definition of “essential health benefits” must include at

least these ten services:

(A) Ambulatory patient services.
(B) Emergency services.
(C) Hospitalization.
(D) Maternity and newborn care.
(E) Mental health and substance use disorder services, including
behavioral health treatment.
(F) Prescription drugs.
(G) Rehabilitative and habilitative services and devices.
(H) Laboratory services.
(I) Preventive and wellness services and chronic disease management.
(J) Pediatric services, including oral and vision care.

26
Id. § 18022(b)(1).33 The bronze, silver, gold, and platinum levels of coverage

reflect the levels of cost-sharing (or actuarial value of benefits) in a plan and do

not represent the level or type of services. Id. § 18022(d)(1)–(2). For example, a

bronze plan covers 60% of the benefits’ costs, and the insured pays 40% out of

pocket; a platinum plan covers 90%, with the insured paying 10%. Id.

§ 18022(d)(1)(A), (D).

3. Individual Mandate’s “Minimum Essential Coverage” Term

The Act uses a wholly different term—“minimum essential coverage”—in

connection with the individual mandate. “Minimum essential coverage” is the type

of plan needed to satisfy the individual mandate. A wide variety of health plans

are considered “minimum essential coverage”: (1) government-sponsored

programs, (2) eligible employer-sponsored health plans, (3) individual market

health plans, (4) grandfathered health plans, and (5) health plans that qualify for,

and are offered in, a state-run Exchange. 26 U.S.C. § 5000A(a), (f)(1).

Many of these plan types will satisfy the mandate even if they do not have

the “essential health benefits package” and regardless of the level of benefits or

33
In defining “essential health benefits,” HHS must ensure that the scope of essential
health benefits is “equal to the scope of benefits provided under a typical employer plan.” 42
U.S.C. § 18022(b)(2). HHS must take additional elements into consideration, such as balance
among the categories of benefits, discrimination based on age or disability, and the needs of
diverse segments of the population. Id. § 18022(b)(4).
27
coverage. The requirement of the “essential health benefits package” is directly

tied to some of the insurance product reforms, but not the individual mandate.

We turn to the Act’s first component: the insurance reforms.

D. Health Insurance Reforms

To reduce the number of the uninsured, the Act heavily regulates private

insurers and reforms their health insurance products. We list examples of the

major reforms.

1. Guaranteed issue. Insurers must permit every employer or individual

who applies in the individual or group markets to enroll. 42 U.S.C. § 300gg-1(a)

(effective Jan. 1, 2014). However, insurers “may restrict enrollment in coverage

described [in subsection (a)] to open or special enrollment periods.”34 Id. § 300gg-

1(b)(1) (effective Jan. 1, 2014).

2. Guaranteed renewability. Insurers in the individual and group markets

must renew or continue coverage at the individual or plan sponsor’s option in the

absence of certain exceptions, such as premium nonpayment, fraud, or the

34
The Act directs HHS to promulgate regulations with respect to enrollment periods. 42
U.S.C. § 300gg-1(b)(3) (effective Jan. 1, 2014). Insurers must establish “special enrollment
periods for ‘qualifying events.’” Id. § 300gg-1(b)(2). “Qualifying events” include, for example:
(1) “[t]he death of the covered employee”; (2) “[t]he termination (other than by reason of such
employee’s gross misconduct), or reduction of hours, of the covered employee’s employment”;
and (3) “[t]he divorce or legal separation of the covered employee from the employee’s spouse.”
29 U.S.C. § 1163.
28
insurer’s discontinuation of coverage in the relevant market. Id. § 300gg-2(b).

3. Waiting periods. Under group health plans, insurers may impose waiting

periods of up to 90 days before a potential enrollee is eligible to be covered under

the plan. Id. §§ 300gg-7 (effective Jan. 1, 2014), 300gg-3(b)(4). The Act places no

limits on insurers’ waiting periods for applications in the individual market.

4. Elimination of preexisting conditions limitations. Insurers may no

longer deny or limit coverage due to an individual’s preexisting medical

conditions. The Act prohibits preexisting condition exclusions for children under

19 within six months of the Act’s enactment, and eliminates preexisting condition

exclusions for adults beginning in 2014.35 Id. § 300gg-3.

5. Prohibition on health status eligibility rules. Insurers may not establish

eligibility rules based on any of the health status-related factors listed in the Act.36

35
For dates effective as to children and then adults, see Pub. L. No. 111-148, Title I,
§ 1255 (formerly § 1253), 124 Stat. 162 (2010) (renumbered § 1255 and amended, Pub. L. No.
111-148, Title X, § 10103(e), (f)(1), 124 Stat. 895 (2010), and codified in note to 42 U.S.C.
§ 300gg-3).
36
Health status-related factors include:
(1) Health status.
(2) Medical condition (including both physical and mental illnesses).
(3) Claims experience.
(4) Receipt of health care.
(5) Medical history.
(6) Genetic information.
(7) Evidence of insurability (including conditions arising out of acts of domestic
violence).
(8) Disability.
(9) Any other health status-related factor determined appropriate by the [HHS]
29
Id. § 300gg-4 (effective Jan. 1, 2014).

6. Community rating. In the individual and small group markets and the

Exchanges, insurers may vary premium rates only based on (1) whether the plan

covers an individual or a family; (2) “rating area”; (3) age (limited to a 3–to–1

ratio); and (4) tobacco use (limited to a 1.5–to–1 ratio). Id. § 300gg(a)(1). Each

state must establish one or more rating areas subject to HHS review. Id.

§ 300gg(a)(2)(B). This rule prevents insurers from varying premiums within a

geographic area based on gender, health status, or other factors.

7. Essential health benefits package. The individual and small group

market plans must contain comprehensive coverage known as the “essential health

benefits package,” defined above. Id. §§ 300gg-6(a) (effective Jan. 1, 2014),

18022(a). The Act does not impose this requirement on large group market plans.37

8. Preventive service coverage. Insurers must provide coverage for certain

enumerated preventive health services without any deductibles, copays, or other

cost-sharing requirements. Id. § 300gg-13(a).

Secretary.
42 U.S.C. § 300gg-4(a) (effective Jan. 1, 2014).
37
Rather, the large group market is subject to only a few coverage-reform requirements
that apply broadly to either all insurance plans or group health plans in particular. See Amy
Monahan & Daniel Schwarcz, Will Employers Undermine Health Care Reform by Dumping Sick
Employees?, 97 VA . L. REV . 125, 147 (2011).
30
9. Dependent coverage. Insurers must allow dependent children to remain

on their parents’ policies until age 26. Id. § 300gg-14(a).

10. Elimination of annual and lifetime limits. Insurers may no longer

establish lifetime dollar limits on essential health benefits. Id. § 300gg-

11(a)(1)(A), (b). Insurers may retain annual dollar limits on essential health

benefits until 2014.38 Id. § 300gg-11(a).

11. Limits on cost-sharing by insureds. “Cost-sharing”39 includes out-of-

pocket “deductibles, coinsurance, copayments, or similar charges” and “qualified

medical expenses.”40 Id. § 18022(c)(3)(A). Annual cost-sharing limits apply to

group health plans, health plans sold in the individual market, and qualified health

plans offered through an Exchange.41 Id. §§ 300gg-6(b) (effective Jan. 1, 2014),

18022(a), (c).

38
HHS shall determine what restricted annual limits are permitted on the dollar value of
essential health benefits until 2014. 42 U.S.C. § 300gg-11(a)(1), (2). “Subsection (a) shall not be
construed to prevent a group health plan or health insurance coverage from placing annual or
lifetime per beneficiary limits on specific covered benefits that are not essential health
benefits . . . .” Id. § 300gg-11(b).
39
“Cost-sharing” does not include “premiums, balance billing amounts for non-network
providers, or spending for non-covered services.” 42 U.S.C. § 18022(c)(3)(B).
40
“Qualified medical expense” is defined in 26 U.S.C. § 223(d)(2).
41
Annual limits on cost-sharing are equal to the current limits on out-of-pocket spending
for high-deductible health plans under the Internal Revenue Code (for 2011, $5,950 for self-only
coverage and $11,900 for family coverage), adjusted after 2014 by a “premium adjustment
percentage.” 42 U.S.C. §§ 300gg-6(b) (effective Jan. 1, 2014), 18022(c)(1); 26 U.S.C.
§ 223(c)(2)(A)(ii), (g); I.R.S. Pub. 969, at 3 (2010).
31
12. Deductibles. Deductibles for any plans offered in the small group

market are capped at $2,000 for plans covering single individuals and $4,000 for

any other plan, adjusted after 2014. Id. §§ 300gg-6(b) (effective Jan. 1, 2014),

18022(c)(2). The deductible limits do not apply to individual plans or large group

plans. See id.

13. Medical loss ratio. Insurers must maintain certain ratios of premium

revenue spent on the insureds’ medical care versus overhead expenses. Id.

§ 300gg-18(a), (b)(1). In the large group market, insurers must spend 85% of their

premium revenue on patient care and no more than 15% on overhead. Id. § 300gg-

18(a), (b)(1)(A)(i). In the individual and small group markets, insurers must spend

80% of their revenue on patient care and no more than 20% on overhead. Id.

§ 300gg-18(a), (b)(1)(A)(ii). This medical-loss ratio requirement applies to all

plans (including grandfathered plans). Id. § 300gg-18(a), (b)(1). Insurers must

report to HHS their ratio of incurred claims to earned premiums. Id. § 300gg-

18(a).

14. Premium increases. HHS, along with all states, shall annually review

“unreasonable” increases in premiums beginning in 2010. Id. § 300gg-94(a)(1).

Issuers must justify any unreasonable premium increase. Id. § 300gg-94(a)(2).

15. Prohibition on coverage rescissions. Insurers may not rescind

32
coverage except for fraud or intentional misrepresentation of material fact. Id.

§ 300gg-12.

16. Single risk pool. Insurers must consider all individual-market enrollees

in their health plans (except enrollees in grandfathered plans) to be members of a

single risk pool (whether enrolled privately or through an Exchange). Id.

§ 18032(c)(1). Small group market enrollees must be considered in the same risk

pool. Id. § 18032(c)(2).

17. Temporary high risk pool program. To cover many of the uninsured

immediately, the Act directs HHS to establish a “temporary high risk health

insurance pool program” to offer coverage to uninsured individuals with

preexisting conditions until the prohibition on preexisting condition exclusions for

adults becomes effective in 2014. Id. § 18001(a). The premiums for persons with a

preexisting condition remain what a healthy person would pay. Id.

§§ 18001(c)(2)(C), 300gg(a)(1). The Act allocates $5 billion to HHS to cover this

high-risk pool. When this temporary program ends in 2014, such individuals will

be transferred to coverage through an Exchange. Id. § 18001(a)–(d), (g).

18. State regulation maintained. States will license insurers and enforce

both federal and state insurance laws. Id. § 18021(a)(1)(C). The Act provides for

the continued operation of state regulatory authority, even with respect to

33
interstate “health care choice compacts,” which enable qualified health plans to be

offered in more than one state.42 Id. § 18053(a).

In addition to reforming health insurance products, the Act requires the

creation of Exchanges where the uninsured can buy the new products. We examine

this second component of the Act, also designed to make insurance more

accessible and affordable and thus reduce the number of the uninsured.

E. Health Benefit Exchanges

1. Establishment of State-Run Exchanges

By January 1, 2014, all states must establish “American Health Benefit

Exchanges” and “Small Business Health Options Program Exchanges,” which are

insurance marketplaces where individuals, families, and small employers can shop

for the Act’s new insurance products. Id. § 18031(b). Consumers can compare

prices and buy coverage from one of the Exchange’s issuers. Id. § 18031(b), (c).

Exchanges centralize information and facilitate the use of the Act’s significant

federal tax credits and other subsidies to purchase health insurance. See 26 U.S.C.

42
Health care choice compacts allow qualified health plans to be offered in the individual
markets of multiple states, yet such plans will “only be subject to the laws and regulations of the
State in which the plan was written or issued.” 42 U.S.C. § 18053(a)(1)(A). The issuer of such
qualified health plans offered through health care choice compacts “would continue to be subject
to market conduct, unfair trade practices, network adequacy, and consumer protection standards
. . . of the State in which the purchaser resides” and “would be required to be licensed in each
State in which it offers the plan under the compact.” Id. § 18053(a)(1)(B)(i)–(ii).
34
§ 36B; 42 U.S.C. §§ 18031, 18071, 18081–83. States may create and run the

Exchanges through a governmental or nonprofit entity. 42 U.S.C. § 18031(d)(1).

States may establish regional, interstate, or subsidiary Exchanges. Id.

§ 18031(f). The federal government will provide funding until January 1, 2015, to

establish Exchanges. Id. § 18031(a). Insurers may offer their products inside or

outside these Exchanges, or both. Id. § 18032(d).

Importantly, the Exchanges draw upon the states’ significant experience

regulating the health insurance industry. See id. § 18041. The Act allows states

some flexibility in operations and enforcement, though states must either (1)

directly adopt the federal requirements set forth by HHS, or (2) adopt state

regulations that effectively implement the federal standards, as determined by

HHS. Id. § 18041(b). In a subsection entitled, “No interference with State

regulatory authority,” the Act provides that “[n]othing in this chapter shall be

construed to preempt any State law that does not prevent the application of the

provisions of this chapter.” Id. § 18041(d).

2. Qualified Individuals and Employers in the Exchanges

The Act provides that “qualified individuals” and “qualified employers”

may purchase insurance through the Exchanges. Id. § 18031(d)(2). Although

35
“qualified individuals” is broadly defined,43 “qualified employers” are initially

limited to small employers, but in 2017, states may allow large employers to

participate in their Exchanges. Id. § 18032(f)(2)(A), (B). Qualified employers can

purchase group plans in or out of Exchanges. Id. § 18032(d)(1).

3. Qualified Health Plans in the Exchanges

The Act prescribes the types of plans available in the Exchanges, known as

“qualified health plans.” Id. § 18031(d)(2)(B)(i). A “qualified health plan” is a

health plan that: (1) is certified as a qualified health plan in each Exchange

through which the plan is offered; (2) provides an “essential health benefits

package”; and (3) is offered by an issuer that (a) is licensed and in good standing

in each state where it offers coverage, and (b) complies with HHS regulations and

any requirements of the Exchange. Id. § 18021(a)(1). The issuer must agree, inter

alia, to offer at least one plan in the “silver” level and one in the “gold” level in

each Exchange in which it participates, as described in § 18022(d). Id. §

18021(a)(1)(C). The issuer must charge the same premium rate regardless of

43
A “qualified individual” is a legal resident who (1) seeks to enroll in a “qualified health
plan” in the individual market through the Exchange, and (2) resides in the state that established
the Exchange. 42 U.S.C. § 18032(f)(1), (3). Prisoners and illegal aliens may not purchase
insurance through Exchanges. Id. § 18032(f)(1)(B), (3).
36
whether a plan is offered in an Exchange or directly.44 Id.

4. “Essential Health Benefits Package” and Catastrophic Plans

The “essential health benefits package” is required of all qualified health

plans sold in the Exchanges. Id. § 18021(a)(1)(B). States may require that a

qualified health plan offered in that state cover benefits in addition to “essential

health benefits,” but the state must defray the costs of additional coverage through

payments directly to patients or insurers. Id. § 18031(d)(3)(B).

One significant exception to the “essential health benefits package”

requirement is the catastrophic plan in the individual market only. In and outside

the Exchanges, insurers may offer catastrophic plans which provide no benefits

until a certain level of out-of-pocket costs—$5,950 for self-only coverage and

$11,900 for family coverage in 2011—are incurred. Id. § 18022(e); see id.

§ 18022(c)(1), (e)(1)(B)(i); 26 U.S.C. § 223(c)(2)(A)(ii), (g); I.R.S. Pub. 969, at 3

(2010). The level of out-of-pocket costs is equal to the current limits on out-of-

pocket spending for high deductible health plans adjusted after 2014. 42 U.S.C.

§ 18022(e), (c)(1).

44
HHS establishes the criteria for certification of insurance plans as “qualified health
plans” and develops a rating system to “rate qualified health plans offered through an Exchange
in each benefits level on the basis of the relative quality and price.” 42 U.S.C. § 18031(c)(1), (3).
States must rate each health plan offered in an Exchange (in accordance with federal standards)
and certify health plans as “qualified health plans.” See id. § 18031(e).
37
This catastrophic plan exception applies only if the plan: (1) is sold in the

individual market; (2) restricts enrollment to those under age 30 or certain persons

exempted from the individual mandate; (3) provides the essential health benefits

coverage after the out-of-pocket level is met; and (4) provides coverage for at least

three primary care visits. Id. § 18022(e)(1), (2).

5. Federal Premium Tax Credit

To reduce the number of the uninsured, the Act also establishes

considerable federal tax credits for individuals and families (1) with household

incomes between 1 and 4 times the federal poverty level; (2) who do not receive

health insurance through an employer; and (3) who purchase health insurance

through an Exchange.45 26 U.S.C. § 36B(a), (b), (c)(1)(A)–(C).

To receive the credit, eligible individuals must enroll in a plan offered

45
Specifically, the amount of the federal tax credit for a given month is an amount equal
to the lesser of (1) the monthly premiums for the qualified health plan or plans, offered in the
individual market through an Exchange, that cover the taxpayer and the members of the
taxpayer’s household, or (2) the excess of: (a) the monthly premium the taxpayer would be
charged for the second lowest-cost silver plan over (b) 1/12 of the taxpayer’s yearly household
income multiplied by the “applicable percentage,” a percentage which ranges from 2.0% to 9.5%,
depending on income. 26 U.S.C. § 36B(b)(3)(A)–(C).
An example helps translate. For a family of four with an income of $33,075 per year,
assuming that the premium in the second lowest-cost silver plan covering the family is $4,500
per year ($375 per month), the federal tax credit would be $3,177 per year ($264.75 per month).
See Families USA, Lower Taxes, Lower Premiums: The New Health Insurance Tax Credit 8
(2010), available at http://www.familiesusa.org/assets/pdfs/health-reform/Premium-Tax-
Credits.pdf. Without the federal tax credit, the family pays $375 per month; with the credit, the
family pays $110.25 per month, or a total of $1,323, instead of the full $4,500 premium. Id. The
federal tax credit provides a major incentive for the uninsured (in the individual market) to
purchase insurance from a private insurer but through the Exchange.
38
through an Exchange and report their income to the Exchange. 42 U.S.C.

§ 18081(b). If the individual’s income level qualifies, the Treasury pays the

premium tax credit amount directly to the individual’s insurance plan issuer. Id.

§ 18082(c)(2)(A). The individual pays only the dollar difference between the

premium tax credit and the total premium charged. Id. § 18082(c)(2)(B). The

credit amount is tied to the cost of the second-cheapest plan in the silver level

offered through an Exchange where the individual resides, though the credit may

be used for any plan purchased through an Exchange.46 See 26 U.S.C. § 36B(b)(2).

6. Federal Cost-Sharing Subsidies

The Act also provides a variety of federal cost-sharing subsidies to reduce

the out-of-pocket expenses for individuals who (1) enroll in a qualified health plan

46
Commentators have explained the operation of the tax credit for households between
one and four times the federal poverty level as follows:
For taxable years after 2013, certain low- and moderate-income individuals who
purchase insurance under a health insurance exchange that the states are required to
create will receive a refundable credit that subsidizes their purchase of that insurance.
. . . According to the Social Security Administration, the current poverty level for a
single individual is $10,830; thus a single individual can have household income of
as much as $43,320 and still qualify to have his insurance cost subsidized by the
government. For a family of four, the current poverty level is $22,050; such a family
can have household income as large as $88,200 and still qualify for a subsidy.
Douglas A. Kahn & Jeffrey H. Kahn, Free Rider: A Justification for Mandatory Medical
Insurance Under Health Care Reform, 109 MICH . L. REV . FIRST IMPRESSIONS 78, 83 (2011).
HHS has since raised the poverty level for 2011 to $22,350 for a family of four and
$10,890 for a single individual. 76 Fed. Reg. 3637, 3638 (Jan. 20, 2011). Thus, a single
individual can have a household income of as much as $43,560 and still be eligible for a federal
tax credit. A family of four can have a household income of as much as $89,400 and still be
eligible for a federal tax credit. See 42 U.S.C. § 18071(b).
39
sold through an Exchange in the silver level of coverage, and (2) have a household

income between 1 and 4 times the federal poverty level. 42 U.S.C. § 18071.

As noted earlier, the Exchanges, with significant federal tax credits and

subsidies, are predicted to make insurance available to 9 million in 2014 and 22

million by 2016.47 We now turn to the Act’s third component: the individual

mandate.

F. Individual Mandate

The individual mandate and its penalty are housed entirely in the Internal

Revenue Code, in subtitle D, labeled “Miscellaneous Excise Taxes.” 26 U.S.C.

§ 5000A et seq. The Act mandates that, after 2013, all “applicable individuals” (1)

shall maintain “minimum essential coverage” for themselves and their dependents,

or (2) pay a monetary penalty. Id. § 5000A(a)–(b). Taxpayers must include the

penalty on their annual federal tax return. Id. § 5000A(b)(2). Married taxpayers

filing a joint return are jointly liable for any penalty. Id. § 5000A(b)(3)(B).

47
CBO, Analysis, supra note 15, at 18 tbl.3. The CBO predicts that by 2019, 24 million
will be insured through the Exchanges, with at least four-fifths receiving “federal subsidies to
substantially reduce the cost of purchasing health insurance coverage,” on average $6,460 per
person. Id. at 2, 18–19 tbl.3.
The CBO estimates that this 9 million increase in 2014 will be partially offset by a 3
million decrease in individual-market coverage outside the Exchanges. Id. The number obtaining
coverage in the individual market outside the Exchanges is projected to decrease because the Act
incentivizes individuals—through premium tax credits, subsidies, and otherwise—to purchase
policies through the Exchanges. Similarly, the 22 million increase in Exchange-based coverage in
2016 will be partially offset by a 5 million decrease in those covered by individual-market
policies obtained outside the Exchanges. Id.
40
1. “Minimum Essential Coverage”

At first glance, the term “minimum essential coverage,” as used in the

Internal Revenue Code, sounds like it refers to a base level of benefits or services.

However, the Act uses a different term—the “essential health benefits package” in

Title 42—to describe health care benefits and services. 42 U.S.C. § 300gg-6(a)

(effective Jan. 1, 2014). In contrast, “minimum essential coverage” refers to a

broad array of plan types that will satisfy the individual mandate. 26 U.S.C.

§ 5000A(f)(1).

An individual can satisfy the mandate’s “minimum essential coverage”

requirement through: (1) any government-funded health plan such as Medicare

Part A, Medicaid, TRICARE, or CHIP; (2) any “eligible employer-sponsored

plan”; (3) any health plan in the individual market; (4) any grandfathered health

plan; or (5) as a catch-all, “such other health benefits coverage” that is recognized

by HHS in coordination with the Treasury. Id. The mandate provisions in § 5000A

do not specify what benefits must be in that plan. The listed plans, in many

instances, satisfy the mandate regardless of the level of benefits or coverage.

2. Government-Sponsored Programs

For example, a variety of government-sponsored programs will satisfy the

individual mandate. For individuals 65 or over, enrolling in Medicare Part A will

41
suffice. Id. § 5000A(f)(1)(A)(i). Individuals and families may satisfy the mandate

by enrolling in Medicaid, if eligible. Id. § 5000A(f)(1)(A)(ii). Qualifying children

under age 19 can satisfy the mandate by enrolling in CHIP. Id.

§ 5000A(f)(1)(A)(iii). Government-sponsored programs for veterans, active and

former military personnel and their families, active Peace Corps volunteers, and

active and retired civilian Defense Department personnel and their dependents

satisfy the mandate. Id. § 5000A(f)(1)(A)(iv), (v), (vi).

3. Eligible Employer-Sponsored Plans

Individuals may also satisfy the mandate by purchasing coverage through

any “eligible employer-sponsored plan.” Id. § 5000A(f)(1)(B). An “eligible

employer-sponsored plan” is a “group health plan or group health insurance

coverage” offered “by an employer to the employee,” which is defined broadly as:

(1) a governmental plan established by the federal, state, or local government for

its employees; (2) “any other plan or coverage offered in the small or large group

market within a State”; or (3) a grandfathered health plan offered in a group

market. Id. § 5000A(f)(2). Health plans of large employers satisfy the individual

mandate whatever the nature of the benefits offered to the employee.48

48
Because of these looser restrictions, some commentators have found it surprising that
employer-sponsored coverage qualifies as “minimum essential coverage” under the Act. See
Monahan & Schwarcz, supra note 37, at 157 (“Surprisingly, . . . [the Act] appears to define
employer-provided coverage as automatically constituting minimum essential coverage for
42
Whether a “self-insured health plan” of large employers satisfies the

mandate is another story.49 The mandate’s § 5000A(f)(2) refers to plans in the

“small or large group market.” Id. § 5000A(f)(2) (emphasis added). A “self-

insured health plan,” by definition, is not sold or offered in a “market.” It is thus

not clear whether large employers’ self-insured plans will constitute “eligible

employer-sponsored plans” in § 5000A(f)(2) and thereby satisfy the mandate. It

may be that HHS will later recognize “self-insured plans” under the “other

coverage” or “grandfathered plan” categories in the mandate’s § 5000A(f)(2).

4. Plans in the Individual Market

Individuals can also satisfy the mandate by purchasing insurance in the

individual market through Exchanges or directly from issuers. Id.

§ 5000A(f)(1)(C). The Act imposes the “essential health benefits package”

requirement on plans sold in the individual and small group markets. 42 U.S.C.

§ 300gg-6 (effective Jan. 1, 2014). However, in the individual market, insurers can

offer catastrophic plans to persons under age 30 or certain persons exempted from

the mandate. Id. § 18022(e).

individuals, despite the minimal requirements applicable to such plans.”).
49
The Act defines an “applicable self-insured health plan” to include self-insured plans
providing health care coverage where “any portion of such coverage is provided other than
through an insurance policy.” 26 U.S.C. § 4376(c).
43
5. Grandfathered Plans

An already-insured individual can fulfill the individual mandate by being

covered by any “grandfathered health plan,” 26 U.S.C. § 5000A(f)(1)(D), which is

any group health plan or health insurance coverage in which an individual was

enrolled on March 23, 2010.50 42 U.S.C. § 18011(a)(1), (e).

While not subject to many of the Act’s product reforms, grandfathered plans

must comply with some provisions, among them the extension of dependent

coverage until age 26, the medical-loss ratio requirements, and the prohibitions on

(1) preexisting condition exclusions, (2) lifetime limits on coverage, (3) excessive

waiting periods, and (4) unfair rescissions of coverage. Id. § 18011(a)(2)–(4), (e).

Under the “interim final regulations” issued by HHS, plans will lose their

grandfathered status if they choose to significantly (1) cut or eliminate benefits;

(2) increase copayments, deductibles, or out-of-pocket costs for their enrollees; (3)

decrease the share of premiums employers contribute for workers in group plans;

50
The Act also allows the enrollment of family members and newly hired employees in
grandfathered plans without losing the plans’ grandfathered status. 42 U.S.C. § 18011(b), (c).
Under the “interim final regulations” issued by HHS, “[a] group health plan or group health
insurance coverage does not cease to be grandfathered health plan coverage merely because one
or more (or even all) individuals enrolled on March 23, 2010 cease to be covered, provided that
the plan has continuously covered someone since March 23, 2010 (not necessarily the same
person, but at all times at least one person).” 45 C.F.R. § 147.140(a)(1)(i).
44
or (4) decrease annual limits.51 45 C.F.R. § 147.140(g).

6. “Other Coverage Recognized” by HHS

The individual mandate even provides a catch-all that leaves open the door

to other health coverage. The “minimum essential coverage” requirement may be

met by any other coverage that HHS, in coordination with the Treasury, recognizes

for purposes of meeting this requirement. 26 U.S.C. § 5000A(f)(1)(E).

7. Exemptions and Exceptions to Individual Mandate

The individual mandate, however, does not apply to eight broad categories

of persons, either by virtue of an exemption from the mandate or an exception to

the mandate’s penalty. The Act carves out these three exemptions from the

individual mandate: (1) persons with religious exemptions; (2) aliens not legally

present in the country; and (3) incarcerated persons. Id. § 5000A(d).

The Act also excepts five additional categories of persons from the

individual mandate penalty: (1) individuals whose required annual premium

contribution exceeds 8% of their household income for the taxable year;52 (2)

51
See also HealthReform.gov, Fact Sheet: Keeping the Health Plan You Have: The
Affordable Care Act and “Grandfathered” Health Plans,
http://www.healthreform.gov/newsroom/keeping_the_health_plan_you_have.html; Families
USA, Grandfathered Plans under the Patient Protection and Affordable Care Act (2010),
available at http://www.familiesusa.org/assets/pdfs/health-reform/Grandfathered-Plans.pdf.
52
The required contribution for coverage means, generally, the amount required to
maintain coverage either in an employer-sponsored health plan or in a bronze-level plan offered
on an Exchange. See 26 U.S.C. § 5000A(e)(1)(A).
45
individuals whose household income for the taxable year is below the federal

income tax filing threshold in 26 U.S.C. § 6012(a)(1); (3) members of Indian

tribes; (4) individuals whose gaps in health insurance coverage last less than three

months; and (5) as a catch-all, individuals who, as determined by HHS, have

suffered a “hardship” regarding their ability to obtain coverage under a qualified

health plan. Id. § 5000A(e).

8. Calculation of Individual Mandate Penalty

If an applicable individual fails to purchase an insurance plan in one of the

many ways allowed, the individual must pay a penalty. Id. § 5000A(b)(1). The

annual penalty will be either: (1) a flat dollar amount, or (2) a percentage of the

individual’s income if higher than the flat rate. Id. § 5000A(c)(1). However, the

percentage-of-income figure is capped at the national average premium amount for

bronze-level plans in the Exchanges.53 Id.

The flat dollar penalty amount, which sets the floor, is equal to $95 in 2014,

$325 in 2015, and $695 in 2016. Id. § 5000A(c)(2)(A), (c)(3)(A)–(C). Beyond

2016, it remains $695, except for inflation adjustments.54 Id. § 5000A(c)(3)(D).

53
If the individual fails to fulfill the mandate requirement for only certain months as
opposed to a full year, the penalty for each month of no coverage is equal to one-twelfth of the
greater of these figures. 26 U.S.C. § 5000A(c)(2)–(3).
54
The flat dollar amount applies to each individual and dependent in the taxpayer’s
household without minimum essential coverage, but will not exceed three times the flat dollar
amount (even if more than three persons are in the household). 26 U.S.C. § 5000A(c)(2)(A). A
46
The percentage-of-income number that will apply, if higher than the flat

dollar amount, is a set percentage of the taxpayer’s income that is in excess of the

tax-filing threshold (defined in 26 U.S.C. § 6012(a)(1)).55 Id. § 5000A(c)(2). In

any event, the total penalty for the taxable year cannot exceed the national average

premium of a bronze-level qualified health plan. Id. § 5000A(c)(1).

9. Collection of Individual Mandate Penalty

An individual who fails to pay the penalty is not subject to criminal or

additional civil penalties. Id. § 5000A(g)(2)(A), (B). The IRS’s authority to use

liens or levies does not apply to the penalty. Id. § 5000A(g)(2)(B). No interest

accrues on the penalty. The Act contains no enforcement mechanism. See id. All

the IRS, practically speaking, can do is offset any tax refund owed to the

uninsured taxpayer.56

We now review the Act’s fourth component aimed at reducing the number

of the uninsured: the employer penalty.

G. Employer Penalty

family’s flat dollar penalty in 2016 would not exceed $2,085 ($695 multiplied by 3).
55
The percentage by which the taxpayer’s household income exceeds the filing threshold
is phased in over three years: 1% in 2014, 2% in 2015, and 2.5% in 2016 and thereafter. 26
U.S.C. § 5000A(c)(2)(B)(i)–(iii).
56
Of course, the government can always file a civil lawsuit, but the cost of that suit would
exceed the modest penalty amount.
47
The Act imposes a penalty, also housed in the Internal Revenue Code, on

certain employers if they do not offer coverage, or offer inadequate coverage, to

their employees. Id. § 4980H(a), (b). The penalty applies to employers with an

average of at least 50 full-time employees. Id. § 4980H(a), (b), (c)(2). The

employer must pay a penalty if the employer: (1) does not offer its full-time

employees the opportunity to enroll in “minimum essential coverage” under an

“eligible employer-sponsored plan” as defined in § 5000A(f)(2); or (2) offers

minimum essential coverage (i) that is “unaffordable,” or (ii) that consists of a

plan whose share of the total cost of benefits is less than 60% (i.e., does not

provide “minimum value”); and (3) at least one full-time employee purchases a

qualified health plan through an Exchange and is allowed a premium tax credit or

a subsidy. Id. § 4980H(a), (c).

The employer penalty is tied to an employer’s failure to offer “minimum

essential coverage.” Id. § 4980H(a), (b). Recall that “minimum essential coverage”

is not the same thing as the “essential health benefits package.” Thus, a large

employer may avoid the penalty so long as it offers any plan in the large group

market in the state, and the plan is “affordable” and provides “minimum value.”

Id. § 4980H(b)(1), (c)(3).

A small employer’s plan, however, must include an “essential health

48
benefits package” and also be “affordable” and provide “minimum value.” 42

U.S.C. §§ 300gg-6(a) (effective Jan. 1, 2014), 18022(a)(1)–(3). The Act also

provides tax incentives for certain small employers (up to 25 employees) to

purchase health insurance for their workers. 26 U.S.C. § 45R.

1. Calculation of Penalty Amount

The penalty amount depends on whether the employee went to the

Exchange because the employer’s plan (1) was not “minimum essential coverage”

or (2) was either “unaffordable” or did not provide “minimum value.” The penalty

translates to $2,000 to $3,000 per employee annually. Id. § 4980H.

An employer that does not offer “minimum essential coverage” to all full-

time employees faces a tax penalty of $166.67 per month (one-twelfth of $2,000)

for each of its full-time employees, until the employer offers such coverage

(subject to an exemption for the first 30 full-time employees). Id. § 4980H(a),

(c)(1), (c)(2)(D). This particular penalty applies for as long as at least one

employee, eligible for a premium tax credit or a subsidy, enrolls in a qualified

health plan through an Exchange. Id.

In the “unaffordable coverage”57 or “no minimum value” scenarios, the

57
Employer-sponsored coverage that is not “affordable” is defined as coverage where the
employee’s required annual contribution to the premium is more than 9.5% of the employee’s
household income (as defined for purposes of the premium tax credits in the Exchanges). 26
U.S.C. § 36B(c)(2)(C)(i). This percentage of the employee’s income is indexed to the per capita
49
employer faces a tax penalty of $250 per month (one-twelfth of $3,000) for each

employee who (1) turns down the employer-sponsored plan; (2) purchases a

qualified health plan in an Exchange; and (3) is eligible for a federal premium tax

credit or subsidy in an Exchange.58 Id. § 4980H(b)(1).

2. Automatic Enrollment

An automatic enrollment requirement applies to employers who (1) have

more than 200 employees and (2) elect to offer coverage to their employees. Id.

§ 218a. Such employers must automatically enroll new and current full-time

employees, who do not opt out, in one of the employer’s plans. Id. The maximum

90-day waiting period rule applies, however. Id.; 42 U.S.C. § 300gg-7 (effective

Jan. 1, 2014).

3. Temporary Reinsurance Program for Employers’ Early Retirees

To reduce the number of the uninsured, the Act provides for immediate

coverage for even retired employees 55 years and older who are not yet eligible for

growth in premiums for the insurance market as determined by HHS. Id. § 36B(c)(2)(C)(iv).
Note that the definition of “unaffordable” for the purposes of obtaining a federal tax credit or
subsidy is not the same standard that is used to determine whether an individual is exempt from
the individual mandate because that individual cannot afford coverage. Compare id.
§ 36B(c)(2)(C)(i), with id. § 5000A(e)(1).
58
The employer’s penalty, in this instance, does not exceed the maximum penalty for
offering no coverage at all. The penalty for any month is capped at an amount equal to the
number of full-time employees during the month multiplied by one-twelfth of $2,000, or $166.67
(subject to the exemption for the first 30 full-time employees). See 26 U.S.C. § 4980H(b)(2), (c).
50
Medicare. A federal temporary reinsurance program will reimburse former

employers who allow their early retirees and the retirees’ dependents and spouses

to participate in their employment-based plans. The federal government will

reimburse a portion of the plan’s cost.59 42 U.S.C. § 18002(a)(1), (a)(2)(C).

We turn to the Act’s fifth component: the Medicaid expansion, which alone

will cover millions of the uninsured.

H. Medicaid Expansion

The Act expands Medicaid eligibility and subsidies by amending 42 U.S.C.

§ 1396a, the section of the Medicaid Act outlining what states must offer in their

coverage plans. The Act imposes these substantive requirements on the states’

plans, starting in 2014, unless otherwise noted:

(1) States will be required to cover adults under age 65 (who are not

pregnant and not already covered) with incomes up to 133% of the federal poverty

level (“FPL”). Id. § 1396a(a)(10)(A)(i)(VIII). This is a significant change, because

previously the Medicaid Act did not set a baseline income level for mandatory

eligibility. Thus, many states currently do not provide Medicaid to childless adults

59
The plan shall submit claims for reimbursement to HHS, and HHS shall reimburse the
plan for 80% of the costs of claims in excess of $15,000 but not greater than $90,000. 42 U.S.C.
§ 18002(c)(2). The reimbursements will be available until January 1, 2014. Id. § 18002(a)(1).
This federally-subsidized temporary program closes the gap between now and 2014, when the
Exchanges, with their federal tax credits and subsidies, become operational.
51
and cover parents only at much lower income levels.

(2) States will be required to provide Medicaid to all children whose

families earn up to 133% of the FPL, including children currently covered through

separate CHIP programs. Id. §§ 1396a(a)(10)(A)(i)(VII), 1396a(l)(1)(D),

1396a(l)(2)(C). States currently must provide Medicaid to children under age 6

with family income up to 133% of the FPL and children ages 6 through 18 with

family income up to 100% of the FPL. Id. §§ 1396a(a)(10)(A)(i)(IV), (VI), (VII),

1396a(l)(1)(B)–(D), 1396a(l)(2)(A)–(C).

(3) States are required to at least maintain existing Medicaid eligibility

levels for adults and children (that were in place as of March 23, 2010) until a

state’s Exchange is fully operational. Id. § 1396a(gg)(1). Whereas states

previously had the option to raise or lower their eligibility levels, states cannot

institute more restrictive eligibility standards until the new policies take place. Id.

(4) Children under age 26 who were receiving Medicaid but were “aged

out” of foster care will be newly eligible to continue receiving Medicaid. Id.

§ 1396a(a)(10)(A)(i)(IX) (effective Jan. 1, 2014).

(5) The new law will increase Medicaid payments for primary care services

provided by primary care doctors to 100% of the Medicare payment rates for 2013

and 2014. Id. § 1396a(a)(13)(C). States will receive 100% federal funding for the

52
cost of the increasing payment rates for 2013 and 2014.60 Id. § 1396d(dd).

Having covered the Act’s five major components, we examine the two

components challenged as unconstitutional: (1) the Medicaid expansion and (2)

the individual mandate.

III. CONSTITUTIONALITY OF MEDICAID EXPANSION

The state plaintiffs challenge the district court’s grant of summary judgment

in favor of the government on the state plaintiffs’ claim that the Act’s expansion of

the Medicaid program, enacted pursuant to the Spending Clause, is unduly

coercive under South Dakota v. Dole, 483 U.S. 203, 211, 107 S. Ct. 2793, 2798

(1987). For the reasons given below, we conclude that it is not.

A. History of the Medicaid Program

Medicaid is a long-standing partnership between the national and state

sovereigns that has been in place for nearly half a century. “In 1965, Congress

enacted the Medicaid Act, 42 U.S.C. § 1396 et seq., as Title XIX of the Social

Security Act.” Moore ex rel. Moore v. Reese, 637 F.3d 1220, 1232 (11th Cir.

2011); see also Harris v. McRae, 448 U.S. 297, 301, 100 S. Ct. 2671, 2680 (1980).

“Medicaid is a jointly financed federal-state cooperative program, designed to help

states furnish medical treatment to their needy citizens.” Reese, 637 F.3d at 1232.

60
See also Julie Stone, et al., Cong. Research Serv., R41210, Medicaid and the State
Children’s Health Insurance Program (CHIP) Provisions in the PPACA 2–4 (2010).
53
The Medicaid Act “prescribes substantive requirements governing the scope of

each state’s program.” Curtis v. Taylor, 625 F.2d 645, 649 (5th Cir. 1980).61

“Section 1396a provides that a ‘State plan for medical assistance’ must meet

various guidelines, including the provision of certain categories of care and

services.” Reese, 637 F.3d at 1232 (citing 42 U.S.C. § 1396a). “Some of these

categories are discretionary, while others are mandatory for participating states.”

Id. (citing 42 U.S.C. § 1396a(a)(10)).

Under the Act, the Medicaid program serves as a cornerstone for expanded

health care coverage. As explained above in Section II(H), the Act expands

Medicaid eligibility and provides significant Medicaid subsidies to the

impoverished. As a result of the Act’s Medicaid expansion, an estimated 9 million

of the 50 million uninsured will be covered for health care by 2014 (and 16

million by 2016 and 17 million by 2021).62

The federal government will pay 100% of the fees associated with the

increased Medicaid eligibility and subsidies beginning in 2014 and until 2016;

that percentage will then drop gradually each year until reaching 90% in 2020. 42

61
In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981) (en banc), this
Court adopted as binding precedent all decisions of the former Fifth Circuit issued before the
close of business on September 30, 1981.
62
CBO, Analysis, supra note 15, at 18 tbl.3.
54
U.S.C. § 1396d(y)(1). The federal government will not cover administrative

expenses associated with implementing the new Medicaid policies. See id. Under

42 U.S.C. § 1396c, a state whose plan does not comply with the requirements

under § 1396a will be notified by HHS of its noncompliance, and “further

payments will not be made to the State (or, in [HHS’s] discretion . . . payments

will be limited to categories under or parts of the State plan not affected by such

failure), until [HHS] is satisfied that there will no longer be any such failure to

comply.” Id. § 1396c.

B. Congress’s Power under the Spending Clause

The Spending Clause provides that “Congress shall have Power . . . to pay

the Debts and provide for the common Defence and general Welfare of the United

States.” U.S. CONST. art. I, § 8, cl. 1. The Spending Clause permits Congress to

“fix the terms on which it shall disburse federal money to the States.” Pennhurst

State Sch. & Hosp. v. Halderman, 451 U.S. 1, 17, 101 S. Ct. 1531, 1539 (1981).

“[L]egislation enacted pursuant to the spending power is much in the nature of a

contract: in return for federal funds, the States agree to comply with federally

imposed conditions.” Id. at 17, 101 S. Ct. at 1540.

There are four primary restrictions on legislation enacted pursuant to the

Spending Clause. First, the exercise of the spending power must be in pursuit of

55
the general welfare. See Helvering v. Davis, 301 U.S. 619, 640, 57 S. Ct. 904, 908

(1937). Second, the conditions on the receipt of federal funds must be reasonably

related to the legislation’s stated goal. Dole, 483 U.S. at 207, 107 S. Ct. at 2796.

Third, Congress’s intent to condition funds on a particular action must be

unambiguous and must enable the states to knowingly exercise their choice

whether to participate. Pennhurst, 451 U.S. at 17, 101 S. Ct. at 1540. Finally, the

federal legislation cannot “induce the States to engage in activities that would

themselves be unconstitutional.” Dole, 483 U.S. at 210, 107 S. Ct. at 2798. The

state plaintiffs do not contend the Act’s Medicaid expansion violates any of these

restrictions.63

Rather, the state plaintiffs argue that the Medicaid expansion violates an

additional limitation on the use of the spending power to encourage state

legislation, one that derives not from the spending power alone, but also from the

63
The state plaintiffs suggest that the conditions imposed here violated the second Dole
restriction because they have no reasonable relationship to the size of the federal inducement.
States’ Opening Br. at 48, 53. In so arguing, the plaintiffs misinterpret Dole. The Supreme Court
made clear that the required relationship is between the conditions imposed and “the federal
interest in particular national projects or programs,” Dole, 483 U.S. at 207, 107 S. Ct. at 2796
(quotation marks omitted)—that is, “the purpose of federal spending.” New York v. United
States, 505 U.S. 144, 167, 122 S. Ct. 2408, 2423 (1992). The state plaintiffs mistakenly assert
that the required relationship is between the conditions imposed and “the size of the federal
inducement.” States’ Opening Br. at 53. The condition Congress imposes here on the receipt of
federal funds—requiring Medicaid coverage of certain newly eligible individuals—is undeniably
related to the purpose of the Medicaid Act, which is to “provid[e] federal financial assistance to
States that choose to reimburse certain costs of medical treatment for needy persons.” McRae,
448 U.S. at 301, 100 S. Ct. at 2680.
56
Tenth Amendment’s reservation of certain powers to the states. U.S. CONST.

amend. X; see Charles C. Steward Mach. Co. v. Davis, 301 U.S. 548, 585, 57 S.

Ct. 883, 890 (1937); West Virginia v. HHS, 289 F.3d 281, 286–87 (4th Cir. 2002).

Congress may not employ the spending power in such a way as to “coerce” the

states into compliance with the federal objective. See Dole, 483 U.S. at 211, 107 S.

Ct. at 2798; Steward Mach., 301 U.S. at 589–91, 57 S. Ct. at 892–93; cf. Coll. Sav.

Bank v. Fla. Prepaid Postsecondary Educ. Expense Bd., 527 U.S. 666, 687, 119 S.

Ct. 2219, 2231 (1999) (holding that a state’s waiver of its sovereign immunity is

not voluntary where Congress has made it a condition of the state’s participation

in an otherwise lawful activity). This restriction is different from the restrictions

stemming from the spending power because it addresses whether the legislation,

while perhaps an appropriate use of the spending power, goes beyond the

Spending Clause by forcing the states to participate in a federal program. Cf.

Printz v. United States, 521 U.S. 898, 117 S. Ct. 2365 (1997) (holding that

Congress may not enact a law pursuant to one of its enumerated powers and then

compel state officers to execute those federal laws); see also Steward Mach., 301

U.S. at 585, 57 S. Ct. at 890. That is, the coercion test asks whether the federal

scheme removes state choice and compels the state to act because the state, in fact,

has no other option.

57
The coercion doctrine was first discussed at length by the Supreme Court in

Charles C. Steward Machine Co. v. Davis. In that case, a corporation challenged

the imposition of an employment tax under the newly enacted Social Security Act.

Addressing the corporation’s argument that the federal government improperly

coerced states into participation in the Social Security program, the Supreme Court

stated:

The difficulty with the petitioner’s contention is that it confuses motive
with coercion. Every tax is in some measure regulatory. To some extent
it interposes an economic impediment to the activity taxed as compared
with others not taxed. In like manner every rebate from a tax when
conditioned upon conduct is in some measure a temptation. But to hold
that motive or temptation is equivalent to coercion is to plunge the law
in endless difficulties. The outcome of such a doctrine is the acceptance
of a philosophical determinism by which choice becomes impossible.
Till now the law has been guided by a robust common sense which
assumes the freedom of the will as a working hypothesis in the solution
of its problems. . . . Nothing in the case suggests the exertion of a power
akin to undue influence, if we assume that such a concept can ever be
applied with fitness to the relations between state and nation. Even on
that assumption the location of the point at which pressure turns into
compulsion, and ceases to be inducement, would be a question of
degree, at times, perhaps, of fact.

301 U.S. at 589–90, 57 S. Ct. at 892 (quotation marks and citation omitted)

(emphasis added).

This discussion of the coercion doctrine was later revived by the Supreme

Court in South Dakota v. Dole. In Dole, the state of South Dakota challenged 23

U.S.C. § 158, which directed the Secretary of Transportation to withhold a

58
percentage of federal highway funds otherwise allocable to the states if states

failed to maintain a minimum drinking-age requirement of 21 years. 483 U.S. at

205, 107 S. Ct. at 2795. The Court noted that Congress may attach conditions on

the receipt of federal funds to meet certain policy objectives, including those that

Congress could not otherwise meet through direct regulation. Id. at 206–07, 107 S.

Ct. at 2795–96. After analyzing whether the minimum drinking-age condition met

the four restrictions on the Spending Clause discussed above, the Court noted,

“Our decisions have recognized that in some circumstances the financial

inducement offered by Congress might be so coercive as to pass the point at which

‘pressure turns into compulsion.’” Id. at 211, 107 S. Ct. at 2798 (quoting Steward

Mach., 301 U.S. at 590, 57 S. Ct. at 892). It further opined:

When we consider, for a moment, that all South Dakota would
lose if she adheres to her chosen course as to a suitable minimum
drinking age is 5% of the funds otherwise obtainable under specified
highway grant programs, the argument as to coercion is shown to be
more rhetoric than fact. . . .
Here Congress has offered relatively mild encouragement to the
States to enact higher minimum drinking ages than they would otherwise
choose. But the enactment of such laws remains the prerogative of the
States not merely in theory but in fact.

Id. (emphasis added). Thus, the Court once again recognized the coercion

doctrine, but found no violation.

The limited case law on the doctrine of coercion and the fact that the

59
Supreme Court has never devised a test to apply it has left many circuits with the

conclusion that the doctrine, twice recognized by the Supreme Court, is not a

viable defense to Spending Clause legislation. See, e.g., Pace v. Bogalusa City

Sch. Bd., 403 F.3d 272, 278 (5th Cir. 2005) (en banc) (“It goes without saying that,

because states have the independent power to lay and collect taxes, they retain the

ability to avoid the imposition of unwanted federal regulation simply by rejecting

federal funds.”); A.W. v. Jersey City Pub. Schs., 341 F.3d 234, 243–44 (3d Cir.

2003) (noting that the state’s freedom to tax makes it difficult to find a federal law

coercive, even when that law threatens to withhold all federal funding in a

particular area); Kansas v. United States, 214 F.3d 1196, 1201–02 (10th Cir. 2000)

(“The cursory statements in Steward Machine and Dole mark the extent of the

Supreme Court’s discussion of a coercion theory. The Court has never employed

the theory to invalidate a funding condition, and federal courts have been similarly

reluctant to use it.” (footnote omitted)); id. at 1202 (observing that the theory is

“unclear, suspect, and has little precedent to support its application”); California v.

United States, 104 F.3d 1086, 1092 (9th Cir. 1997) (noting in a Medicaid

expansion case that “to the extent that there is any viability left in the coercion

theory, it is not reflected in the facts of this record”); Nevada v. Skinner, 884 F.2d

445, 448 (9th Cir. 1989) (“The difficulty if not the impropriety of making judicial

60
judgments regarding a state’s financial capabilities renders the coercion theory

highly suspect as a method for resolving disputes between federal and state

governments.”); Oklahoma v. Schweiker, 655 F.2d 401, 414 (D.C. Cir. 1981)

(“The courts are not suited to evaluating whether the states are faced here with an

offer they cannot refuse or merely a hard choice. . . . We therefore follow the lead

of other courts that have explicitly declined to enter this thicket when similar

funding conditions have been at issue.”) (pre-Dole); N.H. Dep’t of Emp’t Sec. v.

Marshall, 616 F.2d 240, 246 (1st Cir. 1980) (“Petitioners argue, however, that this

option of the state to refuse to participate in the program is illusory, since the

severe financial consequences that would follow such refusal negate any real

choice. . . . We do not agree that the carrot has become a club because rewards for

conforming have increased. It is not the size of the stakes that controls, but the

rules of the game.”) (pre-Dole).

Even in those circuits that do recognize the coercion doctrine, it has had

little success. See West Virginia v. HHS, 289 F.3d at 290, 294–95 (rejecting a

coercion doctrine challenge to previous Medicaid Act amendments on the ground

that the Secretary may choose to withhold only some funds); Jim C. v. United

States, 235 F.3d 1079, 1081–82 (8th Cir. 2000) (en banc) (holding that loss of all

federal education funds, in that case amounting to 12% of the state’s education

61
budget, was “politically painful” but not coercive). Indeed, our review of the

relevant case law indicates that no court has ever struck down a law such as this

one as unduly coercive.

There are two cases in which the Supreme Court has struck down a statute

because it violated the Tenth Amendment’s prohibition on commandeering state

legislators and executive officials to perform the federal government’s work.

While not Spending Clause cases, these cases do give us an understanding of

when a law may be considered so coercive as to violate the Tenth Amendment. In

New York v. United States, the Court struck down as unduly coercive a portion of

the Low-Level Radioactive Waste Policy Amendments Act that required states to

“take title” to waste created within the state, noting that Congress has ample

opportunity to create incentives for states to act the way that Congress desires. 505

U.S. 144, 176–77, 112 S. Ct. 2408, 2428–29 (1992); see also Printz, 521 U.S. 898,

117 S. Ct. 2365 (holding, in accord with New York, that Congress cannot compel

states to enact or administer federal regulatory programs).64 It is clear from these

64
The Supreme Court has also briefly discussed coercion in another context. In Florida
Prepaid, the Court held that federal courts lack jurisdiction over a Lanham Act suit against a
state, despite a law purporting to abrogate the states’ sovereign immunity under the Lanham Act.
527 U.S. at 691, 119 S. Ct. at 2233. While the holding rested on Eleventh Amendment immunity
grounds, Justice Scalia noted: “[W]e think where the constitutionally guaranteed protection of
the States’ sovereign immunity is involved, the point of coercion is automatically passed—and
the voluntariness of waiver destroyed—when what is attached to the refusal to waive is the
exclusion of the State from otherwise lawful activity.” Id. at 687, 119 S. Ct. at 2231.
62
two cases that Congress cannot directly compel a state to act, nor can Congress

hinge the state’s right to regulate in an area that the state has a constitutional right

to regulate on the state’s participation in a federal program. Either act is clearly

unconstitutionally coercive.

If anything can be said of the coercion doctrine in the Spending Clause

context, however, it is that it is an amorphous one, honest in theory but

complicated in application. But this does not mean that we can cast aside our duty

to apply it; indeed, it is a mystery to us why so many of our sister circuits have

done so. To say that the coercion doctrine is not viable or does not exist is to

ignore Supreme Court precedent, an exercise this Court will not do. As the district

court noted, “The reluctance of some circuits to deal with this issue because of the

potential legal and factual complexities is not entitled to a great deal of weight,

because courts deal every day with the difficult complexities of applying

Constitutional principles set forth and defined by the Supreme Court.” Florida ex

rel. McCollum v. HHS, 716 F. Supp. 2d 1120, 1160 (N.D. Fla. 2010).65 If the

government is correct that Congress should be able to place any and all conditions

65
In Florida ex rel. McCollum v. HHS, 716 F. Supp. 2d 1120 (N.D. Fla. 2010), the district
court granted in part and denied in part the government’s motion to dismiss. In Florida ex rel.
Bondi v. HHS, No. 3:10-CV-91-RV/EMT, __ F. Supp. 2d __, 2011 WL 285683 (N.D. Fla. Jan.
31, 2011), the district court ruled that (1) the Medicaid expansion did not exceed Congress’s
Spending Clause powers and (2) the individual mandate is beyond Congress’s commerce powers
and is inseverable from the rest of the Act.
63
it wants on the money it gives to the states, then the Supreme Court must be the

one to say it.

For now, we find it a reasonable conclusion that Dole instructs that the

Tenth Amendment places certain limitations on congressional spending; namely,

that Congress cannot place restrictions so burdensome and threaten the loss of

funds so great and important to the state’s integral function as a state—funds that

the state has come to rely on heavily as part of its everyday service to its

citizens—as to compel the state to participate in the “optional” legislation. This is

the point where “‘pressure turns into compulsion.’” Dole, 483 U.S. at 211, 107 S.

Ct. at 2798 (quoting Steward Mach., 301 U.S. at 590, 57 S. Ct. at 892).

And so it is not without serious thought and some hesitation that we

conclude that the Act’s expansion of Medicaid is not unduly coercive under Dole

and Steward Machine. There are several factors, which, for us, are determinative.

First, the Medicaid-participating states were warned from the beginning of the

Medicaid program that Congress reserved the right to make changes to the

program. See 42 U.S.C. § 1304 (“The right to alter, amend, or repeal any provision

of this chapter is hereby reserved to the Congress.”); McRae, 448 U.S. at 301, 100

S. Ct. at 2680 (noting “[a]lthough participation in the Medicaid program is entirely

optional, once a State elects to participate, it must comply with the requirements”

64
that Congress sees fit to impose). Indeed, Congress has made numerous

amendments to the program since its inception in 1965. 42 U.S.C. § 1396a Note

(listing amendments).66 In each of these previous amendments, the states were

given the option to comply with the changes, or lose all or part of their funding. Id.

§ 1396c. None of these amendments has been struck down as unduly coercive.

Second, the federal government will bear nearly all of the costs associated

with the expansion. The states will only have to pay incidental administrative costs

associated with the expansion until 2016; after which, they will bear an increasing

percentage of the cost, capping at 10% in 2020.67 Id. § 1396d(y)(1). If states bear

little of the cost of expansion, the idea that states are being coerced into spending

66
The government discusses the various Medicaid expansions at length:
Congress has amended the Medicaid Act many times since its inception, and,
between 1966 and 2000, Medicaid enrollment increased from four million to 33
million recipients. Klemm, Medicaid Spending: A Brief History, 22 Health Care Fin.
Rev. 106 (Fall 2000). For example, in 1972, Congress required participating states
to extend Medicaid to recipients of Supplemental Security Income, thereby
significantly expanding Medicaid enrollment. Social Security Act Amendments of
1972, Pub. L. No. 92-603, 86 Stat. 1329 (1972). In 1989, Congress again expanded
enrollment by requiring states to extend Medicaid to pregnant women and children
under age six who meet certain income limits. Omnibus Budget Reconciliation Act
of 1989, Pub. L. No. 101-239, 103 Stat. 2106 (1989).
Government’s Reply Br. at 46–47.
67
At oral argument, the state plaintiffs expressed a concern that Medicaid costs would be
even larger because the individual mandate would greatly increase the number of persons in
Medicaid who are currently eligible but for one reason or another do not choose to participate.
This argument is not persuasive, however, as to whether the expansions themselves are coercive,
because the increase in enrollment would still occur if the mandate were upheld, even if the
Medicaid expansions were struck down.
65
money in an ever-growing program seems to us to be “more rhetoric than fact.”

Dole, 483 U.S. at 211, 107 S. Ct. at 2798.

Third, states have plenty of notice—nearly four years from the date the bill

was signed into law—to decide whether they will continue to participate in

Medicaid by adopting the expansions or not. This gives states the opportunity to

develop new budgets (indeed, Congress allocated the cost of the entire expansion

to the federal government initially, with the cost slowly shifting to the states over a

period of six years) to deal with the expansion, or to develop a replacement

program in their own states if they decide to do so. Fourth, like our sister circuits,

we cannot ignore the fact that the states have the power to tax and raise revenue,

and therefore can create and fund programs of their own if they do not like

Congress’s terms. See Pace, 403 F.3d at 278; Jersey City Pub. Schs., 341 F.3d at

243–44.

Finally, we note that while the state plaintiffs vociferously argue that states

who choose not to participate in the expansion will lose all of their Medicaid

funding, nothing in the Medicaid Act states that this is a foregone conclusion.

Indeed, the Medicaid Act provides HHS with the discretion to withhold all or

merely a portion of funding from a noncompliant state. 42 U.S.C. § 1396c; see

also West Virginia v. HHS, 289 F.3d at 291–92; Dole, 483 U.S. at 211, 107 S. Ct.

66
at 2798 (finding no coercion when “all South Dakota would lose if she adheres to

her chosen course as to a suitable minimum drinking age is 5% of the funds

otherwise obtainable under specified highway grant programs”).

Taken together, these factors convince us that the Medicaid-participating

states have a real choice—not just in theory but in fact—to participate in the Act’s

Medicaid expansion. See Dole, 483 U.S. at 211, 107 S. Ct. at 2798. Where an

entity has a real choice, there can be no coercion. See Steward Mach., 301 U.S. at

590, 57 S. Ct. at 892 (noting that in the absence of undue influence, “the law has

been guided by a robust common sense which assumes the freedom of the will as a

working hypothesis in the solution of its problems”).

Accordingly, the district court’s grant of summary judgment to the

government on the Medicaid expansion issue is affirmed.

We now turn to the constitutionality of the Act’s fourth component: the

individual mandate. We begin with the relevant constitutional clauses and

Supreme Court precedent.

IV. SUPREME COURT’S COMMERCE CLAUSE DECISIONS

Two constitutional provisions govern our analysis of whether Congress

acted within its commerce authority in enacting the individual mandate: the

Commerce Clause and the Necessary and Proper Clause. U.S. CONST. art. I, § 8,

67
cls. 3, 18.

Seven words in the Commerce Clause—“[t]o regulate Commerce . . . among

the several States,” id. art. I, § 8, cl. 3—have spawned a 200-year debate over the

permissible scope of this enumerated power. For many years, the Supreme Court

described Congress’s commerce power as regulating “traffic”—the “buying and

selling, or the interchange of commodities”—and “intercourse” among states,

including transportation. See Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1, 189–90

(1824). Under this early understanding of the Clause, Congress could not reach

commerce that was strictly internal to a state. See id. at 194–95 (“The enumeration

presupposes something not enumerated; and that something, if we regard the

language or the subject of the sentence, must be the exclusively internal commerce

of a State.”).

Ultimately, in recognition of a modern and integrated national economy and

society, the New Deal decisions of the Supreme Court charted an expansive

doctrinal path. See, e.g., United States v. Darby, 312 U.S. 100, 61 S. Ct. 451

(1941); NLRB v. Jones & Laughlin Steel Corp., 301 U.S. 1, 57 S. Ct. 615 (1937).

These Supreme Court decisions adopted a broad view of the Commerce Clause, in

tandem with the Necessary and Proper Clause, and permitted Congress to regulate

purely local, intrastate economic activities that substantially affect interstate

68
commerce. The “substantial effects” doctrine, along with the related “aggregation”

doctrine, expanded the reach of Congress’s commerce power exponentially.

Nonetheless, the Supreme Court has staunchly maintained that the commerce

power contains outer limits which are necessary to preserve the federal-state

balance in the Constitution.

We therefore review the principal Commerce Clause precedents that inform

our analysis of the difficult question before us. Although extensive, this survey is

necessary to understanding the rudiments of the Supreme Court’s existing

Commerce Clause doctrines that we, as an inferior Article III court, must apply.

A. Wickard v. Filburn

One of the early “substantial effects” decisions is Wickard v. Filburn, 317

U.S. 111, 63 S. Ct. 82 (1942), where the Supreme Court held that Congress’s

wheat production quotas were constitutional as applied to a plaintiff farmer’s

home-grown and home-consumed wheat. The Agricultural Adjustment Act of

1938 (“AAA”) sought to control the volume of wheat in interstate and foreign

commerce by placing acreage limits on farmers. Id. at 115, 63 S. Ct. at 84. This

scheme was intended to prevent wheat surpluses and shortages, attendant price

instability, and obstructions to commerce. Id.

Plaintiff Filburn operated a small farm raising wheat. Id. at 114, 63 S. Ct. at

69
84. Filburn sold some of this wheat crop, allocated a portion as feed for livestock

and poultry on his farm, used another portion as flour for home consumption, and

preserved the remainder for future seedings. Id. Although his AAA allotment was

only 11.1 acres, Filburn sowed and harvested 23 acres of wheat—11.9 excess

acres that the Supreme Court treated as home-consumed wheat.68 Id. at 114–15, 63

S. Ct. at 84. This violation subjected him to a penalty of 49 cents a bushel.69 Id.

Filburn sued, claiming that Congress’s acreage quotas on his home-consumed

wheat exceeded its commerce power because the regulated activities were local in

nature and their effects upon interstate commerce were “indirect.” Id. at 119, 63 S.

Ct. at 86.

The Supreme Court examined the factors of home-consumed wheat that

impinged on interstate commerce—factors which could potentially frustrate

Congress’s regulatory scheme if not controlled. The Court declared that home-

consumed wheat “constitutes the most variable factor in the disappearance of the

wheat crop,” since “[c]onsumption on the farm where grown appears to vary in an

amount greater than 20 per cent of average production.” Id. at 127, 63 S. Ct. at 90.

68
See also Gonzales v. Raich, 545 U.S. 1, 20, 125 S. Ct. 2195, 2207 (2005) (noting that
Wickard Court treated Filburn’s wheat as home-consumed, not part of commercial farming
operation).
69
These penalties were levied regardless of “whether any part of the wheat either within
or without the quota, is sold or intended to be sold.” Wickard, 317 U.S. at 119, 63 S. Ct. at 86.
70
Filburn’s home-consumed wheat therefore “compete[d]” with wheat sold in

commerce, since “it supplies a need of the man who grew it which would

otherwise be reflected by purchases in the open market.” Id. at 128, 63 S. Ct. at 91.

The Wickard Court recognized that “the power to regulate commerce

includes the power to regulate the prices at which commodities in that commerce

are dealt in and practices affecting such prices” and “it can hardly be denied that a

factor of such volume and variability as home-consumed wheat would have a

substantial influence on price and market conditions.” Id. at 128, 63 S. Ct. at

90–91. Therefore, the objectives of the AAA acreage quotas—“to increase the

market price of wheat and to that end to limit the volume thereof that could affect

the market”— constituted appropriate regulatory goals. Id.

Despite the fact that Congress’s commerce power “has been held to have

great latitude,” id. at 120, 63 S. Ct. at 86, the Supreme Court recognized the

novelty of its decision, remarking that “there is no decision of this Court that such

activities may be regulated where no part of the product is intended for interstate

commerce or intermingled with the subjects thereof.” Id. at 120, 63 S. Ct. at

86–87. However, the Wickard Court concluded that “even if [Filburn’s] activity be

local and though it may not be regarded as commerce, it may still, whatever its

nature, be reached by Congress if it exerts a substantial economic effect on

71
interstate commerce and this irrespective of whether such effect is what might at

some earlier time have been defined as ‘direct’ or ‘indirect.’” Id. at 125, 63 S. Ct.

at 89. The Court declared that “questions of the power of Congress are not to be

decided by reference to any formula which would give controlling force to

nomenclature such as ‘production’ and ‘indirect’ and foreclose consideration of

the actual effects of the activity in question upon interstate commerce.” Id. at 120,

63 S. Ct. at 87; see also id. at 123–24, 63 S. Ct. at 88 (stating that “the relevance

of the economic effects in the application of the Commerce Clause . . . has made

the mechanical application of legal formulas no longer feasible”).

Even though Filburn’s own contribution to wheat demand “may be trivial by

itself,” this was “not enough to remove him from the scope of federal regulation

where, as here, his contribution, taken together with that of many others similarly

situated, is far from trivial.” Id. at 127–28, 63 S. Ct. at 90. Since Filburn’s home-

grown wheat slackened demand for market-based wheat and placed downward

pressures on price, “Congress may properly have considered that wheat consumed

on the farm where grown if wholly outside the scheme of regulation would have a

substantial effect in defeating and obstructing its purpose to stimulate trade therein

at increased prices.” Id. at 128–29, 63 S. Ct. at 91.

The Supreme Court noted that restricting Filburn’s acreage could have the

72
effect of forcing Filburn to buy wheat in the market: “It is said, however, that this

Act, forcing some farmers into the market to buy what they could provide for

themselves, is an unfair promotion of the markets and prices of specializing wheat

growers.” Id. at 129, 63 S. Ct. at 91. Rejecting this, the Supreme Court stated, “It

is of the essence of regulation that it lays a restraining hand on the self-interest of

the regulated and that advantages from the regulation commonly fall to others.” Id.

B. United States v. South-Eastern Underwriters Association

Although not concerning the “substantial effects” doctrine, the 1944 case

United States v. South-Eastern Underwriters Association, 322 U.S. 533, 64 S. Ct.

1162 (1944), is important to our analysis, as it marked the Supreme Court’s first

recognition that the insurance business is commerce—and where it is conducted

across state borders, it constitutes interstate commerce capable of being regulated

by Congress.70 Id. at 553, 64 S. Ct. at 1173. The Supreme Court emphasized the

interstate character of insurance business practices, which resulted in a

70
Prior to 1944, the Supreme Court consistently upheld the power of the states to regulate
insurance. During those early years, Congress had not regulated insurance, but the states had. The
operative question concerned whether Congress’s power to regulate interstate commerce
deprived states of the power to regulate the insurance business themselves. Since Congress had
not sought to regulate insurance, an invalidation of the states’ statutes would entail that insurance
companies could operate without any regulation. The earlier Supreme Court decisions held that
insurance is not commerce, thereby skirting any constitutional problem arising from the
Constitution’s grant of power to Congress to regulate interstate commerce. See Paul v. Virginia,
75 U.S. (8 Wall.) 168 (1868); see also N.Y. Life Ins. Co. v. Deer Lodge Cnty., 231 U.S. 495, 34
S. Ct. 167 (1913); Hooper v. California, 155 U.S. 648, 15 S. Ct. 207 (1895).
73
“continuous and indivisible stream of intercourse among the states composed of

collections of premiums, payments of policy obligations, and the countless

documents and communications which are essential to the negotiation and

execution of policy contracts.” Id. at 541, 64 S. Ct. at 1167. The defendants’

insurance policies “covered not only all kinds of fixed local properties, but also

. . . movable goods of all types carried in interstate and foreign commerce by every

media of transportation.” Id. at 542, 64 S. Ct. at 1168.

The South-Eastern Underwriters Court rejected the notion that, if any

components of the insurance business constitute interstate commerce, the states

may not exercise regulatory control over the industry. Id. at 548, 64 S. Ct. at 1171.

Nevertheless, the Court pronounced that “[n]o commercial enterprise of any kind

which conducts its activities across state lines has been held to be wholly beyond

the regulatory power of Congress under the Commerce Clause. We cannot make

an exception of the business of insurance.” Id. at 553, 64 S. Ct. at 1173.

C. Heart of Atlanta Motel v. United States

In another landmark Commerce Clause case, Heart of Atlanta Motel v.

United States, 379 U.S. 241, 85 S. Ct. 348 (1964), the Supreme Court held that

Congress acted within its commerce authority in enacting Title II of the Civil

Rights Act of 1964, which prohibited discrimination in public accommodations.

74
The plaintiff owned and operated a 216-room motel whose guests were primarily

out-of-state visitors. Id. at 243, 85 S. Ct. at 350–51. The motel refused to rent

rooms to black patrons. Id. at 243, 85 S. Ct. at 351.

The Supreme Court detailed the “overwhelming evidence that

discrimination by hotels and motels impedes interstate travel.” Id. at 253, 85 S. Ct.

at 355. The Court noted that it had “long been settled” that transportation of

persons in interstate commerce is within Congress’s regulatory power, regardless

of “whether the transportation is commercial in character.” Id. at 256, 85 S. Ct. at

357. Additionally, Supreme Court precedents confirmed that “the power of

Congress to promote interstate commerce also includes the power to regulate the

local incidents thereof . . . which might have a substantial and harmful effect upon

that commerce.” Id. at 258, 85 S. Ct. at 358. Thus, “Congress may—as it

has—prohibit racial discrimination by motels serving travelers, however ‘local’

their operations may appear.” Id.

The Heart of Atlanta Motel Court acknowledged that “Congress could have

pursued other methods to eliminate the obstructions it found in interstate

commerce caused by racial discrimination,” but the means employed in removing

such obstructions are “within the sound and exclusive discretion of the Congress”

and are “subject only to one caveat—that the means chosen by it must be

75
reasonably adapted to the end permitted by the Constitution.” Id. at 261–62, 85 S.

Ct. at 360. The means chosen by Congress in Title II clearly met this standard.71

D. United States v. Lopez

For the next thirty years, the Supreme Court applied an expansive

interpretation of Congress’s commerce power and upheld a wide variety of

statutes. See, e.g., Preseault v. ICC, 494 U.S. 1, 110 S. Ct. 914 (1990) (upholding

statute amending National Trails System Act in facial challenge); Hodel v. Va.

Surface Mining & Reclamation Ass’n, 452 U.S. 264, 101 S. Ct. 2352 (1981)

(sustaining Surface Mining Control and Reclamation Act in facial challenge);

Perez v. United States, 402 U.S. 146, 91 S. Ct. 1357 (1971) (sustaining Title II of

Consumer Credit Protection Act in as-applied challenge); Maryland v. Wirtz, 392

U.S. 183, 88 S. Ct. 2017 (1968) (upholding validity of amendments to Fair Labor

Standards Act of 1938 in facial challenge), overruled on other grounds, Nat’l

League of Cities v. Usery, 426 U.S. 833, 96 S. Ct. 2465 (1976), overruled by

Garcia v. San Antonio Metro. Transit Auth., 469 U.S. 528, 105 S. Ct. 1005 (1985).

These cases reflect a practical need to allow federal regulation of a growing and

unified national economy.

71
In Katzenbach v. McClung, 379 U.S. 294, 85 S. Ct. 377 (1964), a companion case, the
Court also upheld Title II’s prohibition on discrimination in restaurants serving food to interstate
travelers or serving food that had moved in interstate commerce.
76
In 1995, the Supreme Court decided United States v. Lopez, 514 U.S. 549,

115 S. Ct. 1624 (1995), the first Supreme Court decision since the 1930s to rule

that Congress had exceeded its commerce power. Lopez concerned the Gun-Free

School Zones Act of 1990, which made it a federal offense “for any individual

knowingly to possess a firearm at a place that the individual knows, or has

reasonable cause to believe, is a school zone.” 18 U.S.C. § 922(q)(1)(A) (1993).

The defendant Alfonso Lopez, a twelfth-grade student, was convicted of carrying

a concealed handgun to his Texas school. Lopez, 514 U.S. at 551, 115 S. Ct. at

1626.

In a 5–4 opinion, the Lopez Court invalidated § 922(q). The Lopez Court

first observed that the Constitution created a federal government of enumerated,

delegated, and thus limited powers. Id. at 552, 115 S. Ct. at 1626. Although the

Supreme Court’s New Deal precedents expanded Congress’s comme

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/3048533. Public record. Not legal advice.