"Every word in a bill is subject for an argument in court," Justice Stephen Breyer recently observed, suggesting that the 2,400-page Affordable Care Act could keep the courts busy for a very long time. Constitutional challenges to the law are now under way, and the regulations being issued by three federal departments -- Health and Human Services, Labor, and Treasury -- are sure to be grist for more legal controversy.
But once the dust settles on the court challenges and the federal regulations, the action will be in the states, which will have the primary responsibility for implementing the law. And among the issues faced by the states, none will be more important than the design of health-insurance exchanges, which will play a key role in expanding coverage and bringing down its cost.
In writing their health-reform bills, the Senate and House took sharply different approaches to implementation. The House bill created a new federal Health Choices Administration responsible for enforcing the insurance reforms nationwide and for setting up a national insurance exchange to facilitate the marketing and regulation of insurance. The Senate bill, in contrast, relied on the states to enforce the insurance reforms and to run the exchanges. After Scott Brown won the January race for the open Senate seat from Massachusetts, the Democrats lost a filibuster-proof majority, and the House passed the Senate bill, which became the law of the land. The states won, though they do not yet seem to have realized it.
The Affordable Care Act offers the states the option of establishing insurance exchanges and enforcing the law's insurance reforms themselves. If a state elects not to do so, the U.S. Department of Health and Human Services will be responsible for establishing an exchange and enforcing the act within the state. The act explicitly preempts only state laws that "prevent the application" of the federal law; in other words, state insurance regulation remains largely in place.
Even though the reform law goes to great lengths to accommodate the states, some state governments have been quick to condemn it. Four state legislatures have adopted legislation to nullify the federal reforms, and four more have voted to put a nullification measure on the ballot this fall. Twenty state attorneys general, led by Florida's, have joined in a lawsuit challenging the constitutionality of the legislation, while Virginia's attorney general has filed a separate complaint claiming that his state's nullification statute preempts federal law.
Perhaps too much is being made of these state actions. Many of the attorneys general who have brought the cases are running for re-election or higher office and are obviously politically motivated. Twenty -- six state legislatures have defeated bills to nullify the Affordable Care Act, and in some states where the attorney general has brought a lawsuit, the governor has condemned it. In most, if not all, states, insurance commissioners are moving forward to carry out state responsibilities under the law. Nonetheless, the resistance to the law has to be taken seriously. The Obama administration not only has to defeat the legal challenges; it also has to turn the states from opponents to partners in achieving the goals of reform.
Disposing of the Constitutional Challenges
The most serious state challenge to the Affordable Care Act is the lawsuit challenging its constitutionality that Florida filed immediately after President Barack Obama signed the legislation. The Florida lawsuit claims, first, that the federal statute violates the 10th Amendment because it "commandeers" the states to enforce federal law. In fact, however, the Affordable Care Act consistently gives the states the option of implementing and enforcing its provisions themselves or allowing the federal government to do it. Supreme Court precedent expressly approves this approach.
The Florida lawsuit also claims that the statute imposes on the states greatly increased Medicaid costs. The act does dramatically expand the Medicaid program, but it calls for the federal government to finance 100 percent of the cost for newly eligible beneficiaries from 2014 to 2017, with the state's share rising slowly to 10 percent in 2020. States will also face higher costs as those already eligible for Medicaid sign up for the program in higher numbers than before because of the federal law's individual mandate. But the law will also relieve the burden of uncompensated care that many states now help cover. Moreover, states can opt out of the Medicaid program if they find its costs too burdensome.
What remains of the Florida complaint, therefore, is a challenge to the constitutionality of the Affordable Care Act's individual mandate. The act requires all American citizens and legal residents who are not otherwise covered by their employer or a public program to insure or pay a penalty. It exempts people if they have a religious objection to insurance, their household income falls below the income-tax filing limit (currently $18,700 for a couple), they are uninsured for less than 3 months, or they cannot find a basic insurance policy costing less than 8 percent of their income. The Florida and Virginia lawsuits claim that Congress has no authority to impose this requirement.
Article I of the Constitution grants Congress the power to regulate commerce among the several states. Since the 1940s, the Supreme Court has interpreted this power expansively to allow Congress to regulate any economic activity. In a couple of cases a decade ago, the Court held that the commerce clause is not unlimited in its reach and does not allow Congress to regulate activity that is not economic. Yet in recent cases, the Court has upheld the power of Congress to prohibit the cultivation of marijuana plants for personal medicinal use and to criminalize partial-birth abortions. Concurring in the marijuana case, Justice Antonin Scalia stated that Congress has the power to regulate economic activities within a state, or even non-economic activities, when "necessary and proper" to regulate interstate commerce.
The Affordable Care Act contains extensive findings explaining how the individual mandate affects commerce. The mandate, for example, is necessary to keep individuals from refusing to purchase affordable insurance and then shifting the costs of their care to others once they require expensive services. Congress has made the reasonable decision to ban pre-existing condition exclusions. But if individuals can simply wait until injury or illness strikes before purchasing that insurance, many people will do so, undermining the financial soundness of the insurance system.
Additionally, the Court has for decades upheld the power of Congress to tax behavior that lawmakers wish to discourage. The mandate provision imposes a tax and expressly provides that violating the mandate is not a crime. Taxing the refusal of individuals to purchase insurance is a proper exercise of the taxation power.
Conservative constitutional commentators claim that Congress has never before required Americans to involuntarily engage in economic transactions. This is not strictly true. The public accommodations provisions of the civil-rights laws compel persons to do business with people they would rather avoid. Likewise, the privatization of public services such as toll roads or prisons effectively requires Americans to receive private services involuntarily. But the current majority on the Supreme Court is not above abandoning long-established precedent to reach a desired political result, so it may buy the conservative arguments. Virginia's trial court brief discusses at length the 18th-century history of the commerce clause, appealing to right-wing judges who believe that constitutional interpretation has not changed in 200 years.
Assuming, however, the courts follow precedent and the mandate is found constitutional, the courts must dismiss the Florida case. The Virginia case falls as well. The Constitution's supremacy clause precludes states from nullifying federal law.
The federal courts are unlikely, however, to reach the merits of the state challenges. Under long-established and recently reaffirmed Supreme Court precedent, a state lacks standing to challenge the constitutionality of a federal law. Moreover, the mandate does not go into effect for four years, and a challenge to it now is premature.
These cases will probably be decided -- and dismissed -- by the district courts in the fall. If the cases are disposed of on jurisdictional grounds, the issue may reappear after 2015 when the IRS actually assesses the penalty against an individual and the tax assessment is appealed. But by then the law will be in place.
The New Structure of Insurance
The Affordable Care Act institutes a new regime of insurance regulation. Much of the responsibility for restructuring insurance markets will fall to the exchanges. Each state is supposed to establish exchanges for the individual and small-group markets or a combined exchange. Regional exchanges are also possible.
The exchanges are effectively organized markets that allow people to choose among plans offered by private insurers. Premium subsidy tax credits will only be available inside the exchanges, which should make them attractive to lower- and middle-income Americans. Before an insurer may market a plan through an exchange, the plan has to meet a host of requirements and the exchange must determine that making the plan available is in the interests of enrollees and employers. Although the exchanges cannot impose price controls, they must take into consideration excessive or unreasonable premium increases in determining whether to certify a plan.
Most of the extensive regulatory requirements that the Affordable Care Act imposes on insurers apply both inside and outside of the exchange. This should minimize the likelihood of exchanges suffering from adverse selection -- that is, a concentration of high-cost enrollees -- a problem that has plagued attempts to restructure insurance markets through earlier incarnations of exchanges such as purchasing cooperatives. All insurers in the small group and individual markets must cover a defined set of essential benefits, and all plans must meet rigorous disclosure requirements. Insurers will not be allowed to refuse applicants or vary premiums based on health status and must cover pre-existing conditions. The act creates reinsurance and risk-pooling programs to further discourage risk selection. These apply both inside and outside of the exchange. Whether states carry out these policies thoroughly and effectively will be a critical factor in determining whether the exchanges succeed.
The federal law requires insurers to spend a set minimum of their premium revenues on clinical services and to justify unreasonable premium increases. Insurers may not impose lifetime limits or unreasonable annual limits on benefits and must cover preventive benefits without cost-sharing. Although such provisions greatly expand federal regulation of insurance, they are garden-variety exercises of Congress' commerce and spending powers. The Court has recognized the power of Congress to regulate insurance since the 1940s. States can impose additional regulatory requirements beyond the federal law if they choose to do so.
To be sure, a particularly onerous or severe exercise of regulatory power might violate the Constitution's due-process or takings clauses. On those grounds, insurance companies have in recent years successfully challenged some state regulations -- for example, laws rolling back or freezing premiums or prohibiting insurers from exiting markets. As insurers face increasingly comprehensive regulation, a body of law may evolve recognizing an insurer's right to make a just and reasonable return like that currently claimed by public utilities.
Nevertheless, government retains considerable discretion in regulating a wide range of insurer behavior. Courts have repeatedly rejected constitutional challenges to state laws requiring insurance policies to cover particular services or requiring insurers to contribute to risk-redistribution pools. Once the individual mandate is sorted out, it is unlikely that the Affordable Care Act will face a serious constitutional challenge on any of its other provisions related to insurance.
The primary obstacles to the successful implementation of the Affordable Care Act will be political, not legal. If the Republicans take back the House or Senate this fall or in 2012, they may be able to impede if not totally block implementation. If the states refuse to cooperate, the program could become a largely federal program, dependent on federal resources and resolve. If President Obama is not elected to a second term, the program may find itself with an executive that is hostile or indifferent to it. Most important, if the public remains confused or ambivalent about the legislation, even the most committed government officials may be unable to carry it out. The struggle to turn opponents of health-care reform into partners has only just begun.
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