The Future of Healthcare Reform in the United States

The Future of Healthcare Reform in the United States

The Future of Healthcare Reform in the United States

EDITED BY ANUP MALANI & MICHAEL H. SCHILL

The University of Chicago Press

Chicago and London

Anup Malani is the Lee and Brena Freeman Professor at the University of Chicago Law School and professor at the Pritzker School of Medicine. Michael H. Schill is dean of and the Harry N. Wyatt Professor of Law at the University of Chicago Law School.

Chapter 4, Essential Health Benefits and the Affordable Care Act: Law and Process, by Nicholas Bagley and Helen Levy originally appeared in Journal of Health Politics, Policy and Law, vol. 39, no. 2, pp. 441–465. Copyright, 2014, Duke University Press. All rights reserved. Republished by permission of the copyright holder, Duke University Press. www.dukeupress.edu.

The University of Chicago Press, Chicago 60637

The University of Chicago Press, Ltd., London

© 2015 by The University of Chicago

All rights reserved. Published 2015.

Printed in the United States of America

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ISBN-13: 978-0-226-25495-1 (cloth)

ISBN-13: 978-0-226-25500-2 (e-book)

DOI: 10.7208/chicago/9780226255002.001.0001

Library of Congress Cataloging-in-Publication Data

The future of healthcare reform in the United States / [edited by] Anup Malani and Michael H. Schill.

pages cm

Includes bibliographical references and index.

ISBN 978-0-226-25495-1 (cloth : alk. paper) — ISBN 978-0-226-25500-2 (ebook)

1. United States. Patient Protection and Affordable Care Act. 2. National health insurance—Law and legislation—United States. 3. Medical care—Law and legislation—United States. 4. Health care reform—United States. I. Malani, Anup, editor. II. Schill, Michael H., editor.

KF3605.A328201A2 2015

362.1'0425—dc23

2015001692

♾ This paper meets the requirements of ANSI/NISO Z39.48-1992 (Permanence of Paper).

Contents

Introduction

Michael H. Schill and Anup Malani

PART 1. ACA and the Law

CHAPTER 1. Postmortem on NFIB v. Sebelius: Early Reflections on the Decision That Kept the ACA Alive

Carter G. Phillips and Stephanie P. Hales

CHAPTER 2. Federalism, Liberty, and Risk in NFIB v. Sebelius

Aziz Z. Huq

CHAPTER 3. The Future of Healthcare Reform Remains in Federal Court

Jonathan H. Adler

CHAPTER 4. Essential Health Benefits and the Affordable Care Act: Law and Process

Nicholas Bagley and Helen Levy

PART 2. ACA and the Federal Budget

CHAPTER 5. The Fiscal Consequences of the Affordable Care Act

Charles Blahous

CHAPTER 6. Estimating the Impact of the Demand for Consumer-Driven Health Plans Following the 2012 Supreme Court Decision of the Constitutionality of the Patient Protection and Affordable Care Act

Stephen T. Parente

PART 3. ACA and Healthcare Delivery

CHAPTER 7. After the ACA: Freeing the Market for Healthcare

John H. Cochrane

CHAPTER 8. Obamacare and the Theory of the Firm

Einer Elhauge

CHAPTER 9. Can Federal Provider Payment Reform Produce Better, More Affordable Healthcare?

Meredith B. Rosenthal

PART 4. Healthcare Costs, Innovation, and ACA

CHAPTER 10. The Role of Technology in Expenditure Growth in Healthcare

Amitabh Chandra and Jonathan Holmes

CHAPTER 11. Economic Issues Associated with Incorporating Cost-Effectiveness Analysis into Public Coverage Decisions in the United States

Anupam B. Jena and Tomas J. Philipson

CHAPTER 12. The Complex Relationship between Healthcare Reform and Innovation

Darius Lakdawalla, Anup Malani, and Julian Reif

PART 5. ACA and Health Insurance Markets

CHAPTER 13. The Affordable Care Act and Commercial Health Insurance Markets: Fixing What’s Broken?

James B. Rebitzer

CHAPTER 14. A Cautionary Warning on Healthcare Exchanges: A Plea for Deregulation

Richard A. Epstein

List of Contributors

Index

Introduction

In 2010 President Barack Obama signed perhaps the most important piece of social welfare legislation since the New Deal—the Patient Protection and Affordable Care Act (henceforth Affordable Care Act, or ACA). This overhaul of the nation’s healthcare system aims to extend health insurance coverage to low-income groups by expanding Medicaid. In addition, individuals and families with modest incomes—up to 400 percent of the poverty level—who do not qualify for Medicaid or receive employer-provided insurance will be entitled to tax benefits that will subsidize their insurance premiums. The ACA raises funds to pay for this expansion through a combination of reductions in Medicare and Medicaid provider reimbursements and premiums and various taxes on medical providers and insurers. In order to maintain stable insurance markets without adverse selection the ACA most famously includes the individual mandate, which requires most people to purchase health insurance through their employers or on new exchanges. Although it was not the sole health reform of the new millennium—it came on the heels of the implementation of Medicare Part D, which provided drug coverage for seniors in Medicare, in 2006—it is much larger in scope.

The ACA has engendered tremendous controversy, which was reflected in its enactment by a sharply divided Congress. Shortly after it was signed into law, it was challenged in court. In 2012, the United States Supreme Court took up the question of whether the individual mandate violated Article I of the Constitution and whether the Medicaid expansion impermissibly coerced the states. That summer, in National Federation of Independent Business (NFIB) v. Sebelius, it upheld the individual mandate while circumscribing the expansion of Medicaid.

The University of Chicago Law School and Medical School jointly convened a conference on healthcare reform months after NFIB was decided. Our goal was to bring together an interdisciplinary group of experts in Hyde Park—economists, lawyers, healthcare professionals—to discuss the meaning of the case, its impact on the implementation of the ACA, and more generally the question of healthcare reform. This volume is the product of that discussion.

Legal Challenges to the ACA

The first part of this volume focuses on legal challenges to the ACA. Although much of the statute was upheld, the Supreme Court’s decision shapes the contours of the law’s implementation.

Our very first chapter sets the stage for what follows. Carter Phillips, one of the nation’s most eminent Supreme Court litigators, and his colleague Stephanie Hales discuss the NFIB decision and what it means for the ACA. In upholding the individual mandate as an exercise of the tax power rather than the commerce power, the Court not only surprised most observers, but unsettled future jurisprudence on the relationship between federal power and the states. Similarly, its decision that Congress could not condition the receipt of all Medicaid subsidies on states agreeing to expand Medicaid wiped away years of precedent and contributes to a patchwork quilt of Medicaid coverage and rules throughout the nation. The authors speculate on how NFIB will complicate the implementation of healthcare reform over the next decade or two.

The second chapter, by Aziz Huq, a constitutional law professor at the University of Chicago Law School, puts the NFIB decision in a jurisprudential context. Huq examines the relationship between the decision and notions of federalism. He concludes that despite the decision’s being viewed by many people as a decision about federalism (the appropriate relationship between the national government and state legislatures), federalism actually explains very little of the decision. Instead, Huq believes that the decision actually mediates the tension between risk spreading and individual liberty. He looks at each of the key aspects of the case and concludes that the decision reflects an early-twentieth-century ideology of managing social risk that combines laissez-faire instincts and gendered understandings of welfare.

Jonathan Adler’s chapter looks to the future and the possibility of additional litigation on healthcare reform. Adler, an administrative and constitutional law professor at Case Western Reserve University, examines potential litigation over implementation of the ACA. An important theme of the chapter is that because of size of the statute, the speed with which it was passed, and the process that led to that passage (which did not include a conference committee), there are many parts that are either ambiguous or subject to legal challenge. Among these are the payment of federal tax subsidies to families in states that do not set up healthcare exchanges, the requirement that employer plans (except in certain limited circumstances) include coverage for contraception, and the unique administrative process for controlling the costs of Medicare. In addition, Adler speculates that if the charge assessed on individuals and families that do not purchase insurance is set too high, we might see another round of challenges to the individual mandate provision on the ground that it is not truly a tax as contemplated by Justice Roberts, but is actually a penalty.

The final chapter of our first part on the law of healthcare reform focuses its attention not on constitutional challenges to the ACA but instead on potential claims that its implementation by the Department of Health and Human Services (HHS) violated principles of administrative law. While HHS followed formal notice-and-comment procedures for most provisions of the ACA, it adopted a more informal subregulatory guidance approach with respect to what constitutes essential health benefits of private insurance plans sold through the individual and small-group marketplace. Rather than publishing a formal rule in the Federal Register, HHS placed a bulletin on its website. According to Bagley and Levy, given the broad discretion contained in the law, this promulgation of rules is unlikely to be found to violate the law—nor should it. Indeed, according to the authors, the more informal method of administrative rule promulgation may have resulted in a process that was even more open and amenable to public scrutiny than the more typical, formal process used by federal agencies.

Fiscal Consequences of the ACA

The second part of this volume examines the fiscal consequences of the ACA. In light of recurrent federal budget deficits and the seeming inability of Congress and the president to achieve a long-lasting solution to the problem, a significant issue in the debate over the ACA is how much it will cost in terms of additional government spending and how much it will save in terms of reduced payments, particularly in the Medicare program.

The first chapter in this part, by Charles Blahous, a senior research fellow at George Mason University’s Mercatus Center and a public trustee for the Social Security and Medicare programs, paints a pessimistic picture of the costs of the program. According to Blahous, when the ACA was under consideration by members of Congress, the Congressional Budget Office (CBO) provided analyses that appeared to show that its passage would reduce future federal deficits. To obtain this result, the CBO assumed that if Congress did not pass the ACA it would go on funding the Medicare program at current levels, projected into the future. Blahous believes that this assumption is not appropriate and greatly understates the relative cost of the new law. Instead, he suggests that the ACA will add between $320 billion and $520 billion to federal deficits over the next decade. If the objective were to improve the nation’s fiscal balance, Congress would need to repeal two-thirds of the federal subsidies planned for participants in the new health insurance exchanges.

The second chapter follows the thread on healthcare cost growth, but from an economic rather than an accounting perspective. Stephen Parente, a professor at the University of Minnesota’s Carlson School of Management, focuses his analysis on the demand for consumer-driven health plans (CDHP) (i.e., plans with high deductibles and savings accounts to help cover the cost of deductibles). Such plans have been promoted because, among other things, they may encourage beneficiaries to be more price conscious, and thus drive down healthcare expenditures or at least rationalize them from an economic perspective. Parente reports on a simulation that examines how the ACA, which seeks to reduce rather than increase consumer susceptibility or sensitivity—depending on your perspective—to healthcare prices, might affect consumer demand for CDHPs and thereby private and federal healthcare cost growth. The simulation also considers the effect of the NFIB decision, which gives states greater leeway to opt out of the ACA’s Medicaid expansion. He finds, unsurprisingly, that it will lead to fewer covered persons and contribute to lower federal cost.

The Economic Merits of the ACA

The third part of this volume steps back from the immediate legal and fiscal issues surrounding the ACA and examines the normative case for and against it. John Cochrane, a distinguished service professor of finance at the University of Chicago Booth School of Business, writes a highly critical chapter that argues that the ACA will make an already inefficient market for healthcare in the United States even worse. Cochrane posits that both the supply and the demand for healthcare are skewed by government programs and regulation. A more rational and economically efficient system would, among other things, increase supply (by reducing regulations that deter new entry) and reduce demand (by making consumers sensitive to the marginal cost of additional treatment). Despite his strong defense of free-market principles, Cochrane understands that a pure libertarian system of healthcare provisions would be politically infeasible in the United States. He suggests that to the extent we want people of modest incomes to consume more healthcare, we should provide them with vouchers and healthcare savings accounts.

The chapter that follows Cochrane’s contribution takes a much more optimistic view of the ACA. Einer Elhauge, a professor of healthcare and antitrust law at Harvard University, examines the inefficiencies that result from the fragmented structure of healthcare production in the United States. Many of the reasons for this fragmentation are rooted in federal laws governing Medicare and antitrust, and state laws on hospital structure and torts. Elhauge suggests that elements of the ACA, especially its encouragement of vertical integration of medical service providers through so-called Accountable Care Organizations, may improve the quality and lower the cost of healthcare in the United States. He also points to ways in which the ACA institutionalizes innovation and provides incentives for cost saving as further drivers for integration.

As Elhauge notes, the ACA incentivizes healthcare providers to create Accountable Care Organizations to improve production efficiency with the use of a global payment that allows such organizations to capture a share of the cost savings that they achieve for Medicare. In the next chapter Meredith Rosenthal, a professor at the Harvard School of Public Health, picks up the thread of payment reform and examines the Accountable Care Organization model and other payment reforms, some of which are also included in the ACA. Rosenthal uses the history of Medicare reimbursement policies and the literature on provider payment policy to determine whether manipulation of the manner and conditions upon which physicians and hospitals are reimbursed for providing care, including pay-for-performance schemes, can improve the efficiency of medical care. Although the historical and empirical record on reimbursement incentives is mixed, Rosenthal concludes that the ACA makes some meaningful changes and is sanguine about its prospects for improving healthcare production.

Technology and the Future of Healthcare Reform

The penultimate part of this volume turns its gaze away from the ACA and the present and focuses on healthcare technology, such as pharmaceuticals, and the future. Technology plays a central role in healthcare debates. On the one hand, it is considered an important contributor to longevity, which has enormous economic value (Murphy & Topel 2006). Yet technology is also considered an important driver of healthcare cost growth (Newhouse 1992; Chandra and Skinner 2012). Both supporters and critics of the ACA have to come to terms with such medical technology. Supporters must understand that the ACA, through its coverage expansion, has increased the number of people with access to medical technology, for good or ill. Critics, who have complained that the ACA does not do enough to address cost growth, must consider the role and value of technology in their criticisms.

The first chapter on technology, by Amitabh Chandra, a professor at Harvard’s Kennedy School of Government, and Jonathan Holmes, also from Harvard, examines the cost effectiveness of various technologies and divides them into three categories. They suggest that policy makers and healthcare providers may want to create market-based ways to reduce the use of interventions that have very little value in terms of adding to life expectancy and increase the use of those that do. A key insight is that some technologies might be quite cost effective for certain populations or stages of illness but wasteful for others. This makes it complicated to evaluate technologies in the abstract. Importantly, Chandra and Holmes offer policy options to help tame the inefficient use of technology, including allowing insurance companies to reimburse technologies based on how and when they are used, and to reward outcomes rather than treatment.

One of the policy proposals that Chandra and Holmes discuss is cost-effectiveness analysis (CEA), which monetizes the incremental health benefits of technology and compares them to the cost of those technologies. The chapter by Anupam Jenna and Tomas Philipson, professors at Harvard and the University of Chicago, respectively, discusses two pitfalls associated with CEA as it is currently performed. First, they argue that the cost of technology—the social resources required to create the technology and (re)produce it—is very difficult to estimate. The price that companies set for their technology is not the same as the social cost, because price is endogenous; companies set it with the aim of maximizing profits or at least reimbursement after the technology is created. Cost effectiveness should not, but often does, confuse price with cost. Second, cost-effectiveness thresholds set by government are in effect price controls, which can stifle innovation. When a government sets a threshold cost-effectiveness amount (e.g., $100,000 per life year saved) above which it will not approve reimbursement for a technology, companies will respond by trying to price their technology as close to that threshold as possible, to ensure approval and maximize reimbursement given approval. As a result, the cost-effectiveness threshold functions as a price control, not as an objective determination of how much a technology costs society.

The final chapter in this part shifts readers’ attention from the pitfalls of valuing technology to the complex relationship between health insurance expansions, such as those in the ACA, and new medical technologies. Authored by Darius Lakdawalla, Anup Malani, and Julian Reif, professors at the University of Southern California, the University of Chicago, and the University of Illinois, respectively, this chapter makes three basic points. First, health insurance may both drive and hinder innovation—drive it because it increases demand for medical care and hinder it because it offers individuals an option to obtain care outside of medical trials, which reduces enrollment in such trials. Second, health insurance reduces the welfare costs of using patents to encourage medical innovation. Health insurance copayments lower the per-unit price of a drug so that it is closer to the marginal cost of the drug; at the same time, health insurance can offer the maker of a patented drug a price that is much higher than the marginal cost of the drug, so as to induce innovation. Third, medical innovation may actually be a substitute for health insurance from the perspective of a risk-averse person without access to full indemnity insurance. Empirical work by the authors in fact suggests that the welfare gains from risk reduction due to innovation may be large relative to the welfare gains from risk reduction due to health insurance (Lakdawalla et al. 2013).

Healthcare Exchanges

The final part of this volume turns our attention back to the ACA, but focuses not on insurance and access to technology but on the marketplace for insurance, specifically the new health-insurance exchanges. The ACA provides for the creation of state or federal marketplaces for certain individuals to purchase health insurance. For individuals or households with incomes under 400 percent of the federal poverty level and without Medicaid coverage or employer-sponsored health insurance, the ACA also provides subsidies to reduce the price of health insurance premiums and out-of-pocket payments. The idea behind the marketplace is that it will simplify the purchase of health insurance, which can be a complicated product, and can be a platform used to implement certain health insurance regulations.

The last two chapters debate the merits of the ACA’s exchanges. James Rebitzer, a professor of management economics and public policy at Boston University, observes that there are significant search frictions when individuals shop for health insurance contracts. These frictions can stem from the bounded rationality (or cognitive costs) of participants or from standard transaction costs that are intensified by the complexity of health insurance. Rebitzer finds evidence for search frictions from the fact that markets for employers who purchase insurance exhibit much greater turnover than markets for self-insurance. Rebitzer concludes that the ACA may reduce frictions and thereby promote efficiency by simplifying and standardizing products, and by reducing adverse selection.

In the final chapter of the book, Richard Epstein, a law professor at NYU and the University of Chicago, takes issue with Rebitzer’s position that search frictions might justify the ACA’s requirements for insurance exchanges. Epstein is particularly concerned that the ACA’s definition of essential health benefits will forestall innovation and force expensive plans on individuals who would prefer cheaper plans with less coverage. He also warns that the ACA’s cross-subsidy characteristics will exacerbate problems of adverse selection, and that its assurance of coverage will intensify moral hazard and lead to fewer precautions taken by at least part of the insured population.

Any casual observer of the American political scene would be hard pressed not to recognize the incredibly charged environment in which healthcare reform exists. Party-line votes in Congress, challenges in court, and constant criticisms of the implementation of the ACA are commonplace. Perhaps this should not be surprising. Healthcare is bound up with life itself; the life of one’s loved ones and oneself. Even without killing, a catastrophic illness can wipe out a person’s financial resources and change that person’s life forever. Into this deeply significant and emotional environment, discussions of healthcare reform also directly implicate many of the most sensitive ideological cleavages in our society—ranging from the role of markets in distributing vital goods and services, to the liberty to make one’s choices free of government interference, to the relationship among different levels of government, on the one hand, and between government and the individual, on the other.

In this book, we have attempted and hopefully succeeded in shedding some light on a set of key issues that inform current healthcare policy in the United States, the recent healthcare reform legislation, and future avenues of reform. We have no doubt excluded many important research topics and perspectives, the relevance of which may well become even more apparent as the ACA is implemented. It is our fervent belief that while the application of economic and legal analysis to these questions is not the only framework for analyzing this extraordinarily important subject, it is a fruitful one that will help pave the way to new and better interventions to promote social welfare.

References

Chandra, Amitabh and Jonathan Skinner. 2012. Technology Growth and Expenditure Growth in Health Care. Journal of Economic Literature. 50(3):645–80.

Lakdawalla, Darius N., Anup Malani, and Julian Reif. 2013. The Insurance Value of Medical Innovation. University of Chicago Department of Economics Working Paper. Accessed October 30, 2014. https://economics.uchicago.edu/workshops/Malani%20-%20The%20Insurance%20Value%20of%20Medical%20Innovation.CURRENT.pdf.

Murphy, Kevin M., and Robert H. Topel. 2006. The Value of Health and Longevity. Journal of Political Economy. 114(5): 871–904.

Newhouse, Joseph P. 1992. Medical Care Costs: How Much Welfare Loss? Journal of Economic Perspectives, 6(3): 3–21.

Part I

ACA and the Law

Chapter One

Postmortem on NFIB v. Sebelius

Early Reflections on the Decision That Kept the ACA Alive

Carter G. Phillips and Stephanie P. Hales

Introduction

But for one vote by one Justice of the Supreme Court, there would be no reason for any discussion of healthcare under the Affordable Care Act (ACA). Chief Justice Roberts’s surprising opinion not only gives life to this symposium, but along with the other opinions by the various Justices serves as a useful context for beginning the process of looking to the future. This essay thus discusses the U.S. Supreme Court’s decision in National Federation of Independent Business v. Sebelius¹ and its implications going forward.

That the Supreme Court’s decision upholding the ACA bears on The Future of Health Care Reform in the United States is beyond doubt. Less clear at this time, however, are the precise form and contours of this impact—both in the particular space of healthcare reform and in the broader realm of Supreme Court jurisprudence addressing the scope of congressional power. But being lawyers, a lack of clarity begins our discussion rather than ends it.

Indeed, this discussion was originally pitched to us as a postmortem, which is a somewhat strange way to think about an opinion that as of the date of this conference (October 12, 2012) had been public for less than four months, and as such was decidedly not dead. Even as of this writing, the yet-recent decision is very much alive. And thanks to it, so is the ACA. Thus, this essay is more a general analysis of the decision than a postmortem in the literal sense.

We begin with an overview of the decision, featuring three main opinions with a host of unexpected and in many ways remarkable elements. We then discuss the three primary doctrinal areas of the Court’s decision: (1) its analysis of ACA’s individual mandate under the Commerce Clause, (2) its approval of the individual mandate under Congress’s taxing authority, and (3) its ruling on ACA’s Medicaid expansion provisions. Although a relatively short period of time has passed since the decision was announced, it paved the way for continued ACA implementation, which has proceeded along aggressive timelines (particularly following the reelection of President Obama in November). Thus, while appreciating that these implementation efforts are ongoing and in flux, and that additional challenges to the ACA continue to wind their way through the courts, we discuss not only what the Court held and our thoughts on why it did so, but also a few observations on how the Court’s decision appears to be affecting (or not) ACA implementation to date.

The decision’s impact beyond the realm of healthcare reform likewise remains to be seen. Throughout the decision, the Court draws a number of distinctions that we imagine only lawyers can love, many of which center on—but do not clearly define the boundaries of—the concept of coercion: At what point does an act of Congress become too coercive, either with respect to individuals or to the states, to withstand constitutional scrutiny? In many ways, the Justices’ opinions in NFIB v. Sebelius raise far more questions on this issue than they answer, planting seeds for continued constitutional litigation over where to draw lines.

Did Anyone Predict This?

Many people expected that the ACA would survive the Court’s review (although we suspect that just as many felt certain it would not after the oral argument). But did anyone predict the constellation of elements in the decision that culminated in that result? Probably not.

First, the Justices split into three main opinions, including an opinion written by Chief Justice Roberts only for himself.

Second, the Chief Justice’s opinion was joined in certain places by the four liberals, in the opinion authored by Justice Ginsburg,² and not at all by the four dissenting conservatives;³ although they clearly agreed with some portions of the Chief Justice’s analysis, remarkably, the four conservatives never even mentioned his opinion in their dissent.

Third, the dissent coauthored by the four conservatives has no individually named author. This is an extraordinary step that is exceedingly rare. Perhaps even more provocatively, and as noted, this dissent with no individually named author never mentions, let alone addresses, the analysis in the Chief Justice’s opinion. Even Justice Ginsburg, at various times—both when she joined with it and when she did not—at least acknowledged and did business with aspects of the Chief Justice’s opinion, as is customary in separate opinions written by individual members of the Court on their own behalf or for one or more other Justices. She also dealt with the four conservatives’ dissenting analysis (and notably, they dealt in some places with hers).

Fourth, the Chief Justice was a swing vote, and further, was the lone swing vote; Justice Kennedy, the usual swing-vote suspect, obviously chose not to join the Chief on any point.

Fifth, the individual mandate was upheld—but not on Commerce Clause grounds.

Sixth, the Chief Justice included an in-depth opinion analyzing the individual mandate under the Commerce Clause, even though that issue was upheld under Congress’s taxing power, which made it completely unnecessary to address the Commerce Clause issue.

Seventh, the Court held both that the individual mandate penalty is not a tax (jurisdictionally speaking) and is a tax (constitutionally speaking). This, of course, is a distinction only a lawyer can love.

Eighth, the Medicaid expansion ruling was in many ways a sleeper issue that few people paid much attention to prior to the Court’s ruling; yet it produced an unprecedented result, in that the Court found (7 to 2, no less) unconstitutional coercion by Congress in connection with financial incentives provided to states under Spending Clause legislation designed to encourage the states to adopt certain programs. Although precious few people predicted this result, and perhaps no one predicted the nuanced outcome of rendering the Medicaid expansion optional for states while not striking down those provisions altogether—and, further, preserving every other aspect of the ACA—this ruling could have significant implications for cooperative federalism moving forward, both within and outside of the healthcare industry. Then again, perhaps it will not, as discussed further below. Time alone will tell.

The balance of this essay addresses, briefly, the elements of the decision, how it came out, and the impact it may have moving forward for healthcare policy and in other contexts. Particularly for conversations about structural healthcare reform going forward, it is important to understand the metes and bounds of the Court’s decision, and in some ways to try to figure out how it will play out in practice and how long it will survive. To be sure, challenges to the ACA remain ongoing,⁴ but as its implementation plunges forward in the meantime, with NFIB v. Sebelius in place as the law of the land, the decision is a crucial one for policymakers and constitutional advocates to assess and understand.

The Commerce Clause: Constitutional Avoidance of the Broccoli Horrible

A. Context for the Individual Mandate

A central feature of the ACA, and certainly the headlining issue in NFIB v. Sebelius, is the individual mandate (or as the statute calls it, the individual responsibility requirement to maintain minimum essential coverage⁵). This provision requires that everyone—with certain exceptions,⁶ but virtually everyone—must buy healthcare insurance, or else pay what is called a penalty, although the assessment is codified in the Internal Revenue Code. The question is: can Congress impose that requirement in the context of an economy that is about one-fifth driven by healthcare costs⁷ and under circumstances in which we think everybody would concede that the system, if not broken, is certainly not functioning as efficiently as we might hope that it could?

Faced with those circumstances, Congress took what many view as the extraordinary action to impose the individual mandate as part of a complex and intricate legislative package designed to fix—or at least begin to address—an extremely inefficient and, many would argue, dysfunctional healthcare system. To be sure, the individual mandate is just one component of the ACA, a statute that consists of two public laws⁸ consuming more than 950 pages in addition to subsequent amendments that have enacted further technical and substantive changes to its provisions. Congress, in other words, was attempting in the ACA to deal with countless parts of the healthcare system, and the result is a complicated, intertwined web of provisions addressing more issues than most can imagine. To name only a small sample, the ACA includes provisions increasing reimbursement for primary care providers in Medicaid; addressing fraud and abuse in government healthcare programs; creating and funding preventative healthcare services and programs; closing the Medicare Part D donut hole to increase seniors’ access to affordable prescription drugs; providing grants for minority health workers; amending the Fair Labor Standards Act to require a reasonable break time for nursing mothers; establishing new annual fees and excise taxes for health insurers, pharmaceutical manufacturers, and medical device manufacturers; and authorizing dozens of demonstration projects and other initiatives pertaining to healthcare payment and delivery reforms.

Within this context of trying to fix countless different moving parts, Congress also addressed (again through many provisions, including but certainly not limited to the individual mandate) the current functioning of the health insurance market, which renders coverage unattainable for a substantial proportion of the population due to financial constraints, preexisting conditions, or both. Congress did not seek a single payer solution, as some countries have implemented; instead, it sought to preserve the private market to the extent possible, including its feature that most Americans rely on employer-sponsored health insurance, particularly those under age sixty-five (i.e., those who do not qualify for Medicare, the country’s very popular single-payer healthcare system for the elderly and individuals with certain disabilities). In doing so, Congress considered the context and essentially said, Look, we need to have people in the health insurance market in order to make the system work; health insurance is meaningless if those who are sick are shut out of the market; further, the market cannot be sustained if those who are not sick choose to ‘opt out’ of the market until the point at which they do get sick. This was not a new idea, and indeed its origins came ideologically from the right, not the left.⁹

Congress clearly understood that its mandate decision would draw scrutiny, as it included comprehensive findings within the legislation as to this issue’s effect on the national economy and interstate commerce.¹⁰ In these findings, Congress stated that [t]he individual responsibility requirement provided for in [the ACA] is commercial and economic in nature, and substantially affects interstate commerce, as a result of the effects described in paragraph (2); paragraph (2) then sets forth, in eight subparagraphs, Congress’s explanation for why the individual mandate substantially affects interstate commerce.¹¹ As a further point, the legislation adds that [i]n United States v. South-Eastern Underwriters Association (322 U.S. 533 (1944)), the Supreme Court of the United States ruled that insurance is interstate commerce subject to Federal regulation.¹²

These provisions plainly are designed to justify the individual mandate as a valid exercise of the Commerce Clause under existing Supreme Court precedent.¹³ And, Congress added, the mandate would be enforced through what the legislation calls a penalty. In describing the consequence of noncompliance as a penalty and not a tax, Congress apparently was not anticipating the argument upon which the Court ultimately would uphold the individual mandate—Congress’s taxing authority. We address the tax issue further below. To stay with the Commerce Clause for the moment, however, the key question is: can Congress impose the individual mandate as a valid regulation of commercial and economic activity under Article I, Section 8, Clause 3 of the Constitution?

B. A Brief Overview of Commerce Clause History

As two students of constitutional law (or so we thought), we both learned from the Chief Justice’s decision that what we thought we knew about constitutional law perhaps is not as obvious as we had come to believe. In particular, we would have thought that under the Court’s decision in Wickard v. Filburn,¹⁴ decided more than sixty-five years before NFIB v. Sebelius and still on the books, there was no question that Congress had the authority to impose the individual mandate as codified—because, frankly, there are effectively no limits on what Congress can do so long as it is regulating economic activity.

In Wickard, a farmer, Roscoe Filburn, was growing wheat on his farm for his own family’s consumption. The U.S. government had established limits on wheat production as part of a scheme for controlling wheat supply and therefore prices during the Great Depression. Filburn was growing more wheat than the laws permitted and was ordered to destroy his crops and pay a fine, even though he was growing the excess wheat for his own consumption and had no intention of selling it. In other words, Filburn argued, his activity was neither interstate nor commerce. (He was inactive in the commercial wheat market.) The Court did not agree, finding instead that Filburn’s wheat-growing activities affected the amount of wheat he otherwise would buy on the open market, and thus were affecting interstate commerce. The issue, the Court held, was not whether the activity was local but rather whether the activity exerts a substantial economic effect on interstate commerce.

As an interesting sidelight to this, a scholar on Justice Robert H. Jackson—who wrote the opinion in Wickard for a unanimous Court—found a letter exchange between Justice Jackson and a Seventh Circuit judge.¹⁵ The judge had criticized Justice Jackson for his opinion in Wickard, stating that the decision provided no meaningful guidance to the lower courts or to litigants about how to proceed under the Commerce Clause. Justice Jackson reportedly wrote back and essentially said, Well, that is because I can’t conceive of any way to articulate any limits, and so I leave it basically to the good judgment of Congress to decide ultimately. And that is effectively what the Wickard opinion reflects—which at least through about the 1990s was the way that nearly everybody thought about Congress’s authority. You could (as many do) question the wisdom of what Congress had done, but so long as the action related to regulating economic activity in some way, it was not for the courts to decide