California v. Texas (ACA case) Supreme Court Case Preview

Max Stearns

I delivered the following talk as part of the Supreme Court Preview at the University of Maryland Carey School of Law on October 7, 2020. For those who might wish to view it, this is a link to the actual webinar. Other speakers include my colleagues Professor Natalie Ram and Professor Richard Boldt. Professor Mark Graber moderated. My comments begin at 24.15.

Thank you, Professor Graber, for that kind introduction, Professors Boldt and Ram for joining this panel discussion, and to all of you attending this virtual event.

I’ll begin with an observation. California v. Texas is a singularly complex case. It involves an intricate statutory scheme, The Patient Protection and Affordable Care Act (also known as the ACA or Obamacare), as amended by the 2017 Tax Cuts and Jobs Act. The amendment followed the Supreme Court decision, National Federation of Independent Business (NFIB) v. Sebelius (2012) and, of course, the historic 2016 presidential election. I will first lay a foundation for the issues before the Supreme Court. I will then offer my reflections as to how those issues, and the case as a whole, should be resolved. I do not claim to predict how the case will be resolved, especially given the present uncertainty concerning the Supreme Court itself.

Let’s begin:

In 2010, Congress enacted the ACA, or Obamacare. The statute is over 900 pages long, and it possesses several intricate and interconnected features. These include (1) the individual mandate, also known as the shared responsibility payment; (2) a prohibition on insurance companies declining coverage or raising premiums for persons with preexisting conditions; (3) inducements to states significantly to expand the scope of Medicaid coverage; (4) incentives to states to provide public health insurance exchanges, and more. My remarks center on the constitutional issues. Professors Boldt and Ram have greater expertise on other aspects of this complex health care statute.

The most controversial aspect of the ACA was the individual mandate. The mandate required uninsured individuals to acquire qualifying coverage or pay a modest penalty. Since 2016, penalties have been assessed at $695 per adult, $347.50 per child, with a family maximum at the greater of $2,085 or 2.5 percent of household income, adjusted for inflation.

In an article coauthored with Professor Leslie Henry, titled "Commerce Games and the Individual Mandate," published in the Georgetown Law Journal, we explained that the ACA sought to replace what economists describe as a separating equilibrium with a pooling equilibrium. Two separate pools of insureds, those at low versus high risk, price the latter out of the market. Combining those pools lets low risk persons help those at high risk gain affordable coverage. The article explains how the separating dynamic arises at a micro-level, within states, and at a macro-level, among states, justifying, we argued, reliance on the commerce clause. The Supreme Court disagreed.

The problem is that the young and healthy can demonstrate their lower risk to insurers, securing attractive rates. Those with preexisting conditions cannot do so, and thus confront prohibitively high rates. With rare exceptions, were individual states to mandate coverage for persons with preexisting conditions, such uninsured individuals would flow into those states even as insurers would leave. This would replicate the separating equilibrium among states that states, and insurance companies, confronted individually. The ACA sought to resolve this nationally where such exit strategies are more costly.

The ACA scheme included the individual mandate to encourage the young and healthy, sometimes called “young invincibles,” to enter the insurance pool as an inducement to compel insurance companies to cover persons with preexisting conditions. Additional statutory features are designed to overcome, among other things, inevitable shortfalls in financing and coverage.

The ACA faced constitutional challenges on the assumption that the statute implicated the commerce clause. This culminated in the Supreme Court case, NFIB v. Sebelius, 567 U.S. 519 (2012). That landmark case proved a defining moment in Chief Justice Roberts’s stewardship of the Court.

Roberts wrote a controlling opinion, parts of which no one else joined. In an opinion mistakenly labeled “dissent,” the Court’s conservative wing embraced Roberts’s commerce clause analysis. Roberts ultimately determined that the ACA could not be sustained under the commerce clause based on his construction of the “economic activities” test. That relatively new test had been used to limit the scope of Congress’s permissible commerce clause powers. Roberts determined that although Congress could regulate “economic activity,” it could not force people into commerce by compelling the purchase of health insurance. But to the chagrin of his conservative judicial colleagues, Roberts wasn’t done. He then determined that although Congress did not caption the individual mandate a tax, the mandate could nonetheless be sustained as a tax due to several characteristics: administration by the IRS, processing with tax forms, and the prospect of raising some revenue.

Among Donald Trump’s central presidential campaign promises was to “Repeal and Replace Obamacare.” The replacement remains something of a mystery. And despite Republican control of both Houses of Congress during the first two years of Trump’s administration, attempts at repeal had failed. Instead, in the 2017 Tax Cuts and Jobs Act (TCJA), Congress eliminating the shared responsibility payment, setting it to 0. Uninsured persons face no penalty for failing to acquire a qualifying health insurance plan.

The eliminated shared responsibility payment triggered a new round of litigation, culminating in a Texas federal district court decision striking down the individual mandate and, based on a determination that the provision was not severable from the rest of the ACA, bringing down with it the entire statutory scheme.

A quick procedural note: Because the Department of Justice (DOJ) changed its position before the Fifth Circuit after the administration changed, California and other states intervened to defend the ACA. In addition, DOJ sought to avoid having the entire scheme struck down, focusing instead only on those provisions claimed to harm individuals and states.

The Fifth Circuit, like the district court, divided Texas v. United States, as the case was then captioned, into three issues:

(1) do individuals, for whom there is a nominal requirement to obtain insurance on threat of no penalty, and do states subject to theoretical compliance obligations in assisting those who perceive such an obligation despite the absence of a sanction, have standing to challenge the constitutionality of the individual mandate on the ground that a zero tax cannot be sustained as a tax?;

(2) assuming standing, does the reduction of the individual responsibility payment to 0 disallow sustaining that provision under the tax clause?; and

(3) assuming affirmative answers, can the shared responsibility payment be severed or must the entire ACA fall?

The Fifth Circuit affirmed the rulings on standing and declared the 0 payment an impermissible tax. The court remanded for a more finely grained severability analysis. Given the ACA’s complexity, the Fifth Circuit instructed the district court to give more attention to whether parts of the statute could be salvaged even with the individual mandate struck down. The Supreme Court’s grant of certiorari superseded the remand. So here we are.

I will now offer some brief reflections on the merits. If you are in the legal fiction part of library, now is the time to search out the section marked fantasy. Why? Although there are problems with the Fifth Circuit ruling on the other issues, let’s consider what might prove to be the critical question, severability. Severability analysis focuses on whether the enacting Congress would have embraced the larger statute had it known a problematic provision would be struck down. There is some dispute as to whether the relevant Congress for the inquiry is 2017, which the set the payment to 0, or 2010, which enacted the ACA. The 2017 inquiry is straightforward: We know that Congress didn’t intend to repeal the ACA because that’s not what it did. It merely set the payment to 0.

The courts below focused largely on the 2010 Congress, and in the ordinary course, that makes sense. Yet here it leads to a bizarre, indeed convoluted, inquiry: Would the 2010 Congress, which believed it was resting the individual mandate on the commerce clause, have thought that reducing the shared responsibility payment to 0 on the assumption it was not a regulation, but a tax, assuming it knew that the tax it hadn’t thought it was enacting would be rendered void if later set to 0, have thought that tax so intricately connected to the overall scheme that given all of this it would never have passed the ACA to begin with? As a professor of mine used to say, such hypotheticals are like asking “if you had a sister would she like cheese?” I do have a sister, and yes, she does, but more to the point, had the 2010 Congress known the individual mandate was unnecessary to encourage desired Obamacare enrollments, there’s little doubt it would have enacted the ACA even with the 0 penalty. The goal, after all, was to get people insured by enlarging the pool, not to collect revenue, rendering the whole tax analysis misguided.

Now standing. Standing is eminently nuanced and involves the conditions under which particular litigants can raise claims in federal court. In the 2013 Clapper v. Amnesty International USA case, Justice Alito, writing for a majority, elevated the injury prong of standing to demand it be “certainly impending.” In the 2016 Spokeo v. Robins case, Justice Alito demanded a justiciable injury be concrete, not theoretical, or what we might label psychological, for example feeling bound to buy insurance on the threat of no penalty. I would never claim that recent standing cases are a paragon of consistency, but I will say that the Supreme Court’s conservative wing might have made standing harder on themselves.

Finally, the merits. Could Congress enact a tax later adjusted downward to zero while still being a tax? Yes. Taxation is a constant exercise in calibration, from too high to too low to just right. It’s the Goldilocks rule. Do I think this is what Congress was doing? Of course not. But remember that we are now in the library’s legal fantasy section. And for that we have Chief Justice Roberts to thank.

I welcome your comments.