National Federation of Independent Business v. Sebelius


Congress passed The Patient Protection and Affordable Care Act (PPACA) – known as Obamacare.  The law requires individual citizens not covered by a corporate plan, Medicare, Medicaid, or a government sponsored plan to buy into a federally approved plan or face a penalty imposed by the federal government.  The law creates a health insurance exchange at each state level, where individual consumers and corporations offering healthcare can compare their rates with other plans and potentially purchase such plans, with a government subsidy in certain cases.  Low income individuals and families at a particular rate of poverty may purchase within these exchanges and receive such a subsidy if they purchase within the exchange.  The law also establishes minimum standards for health insurance policies.


(1) Whether Congressional law that requires states to choose between complying with the Patient Protection and Affordable Care Act or loss of federal funding for Medicaid is constitutionally valid; and

(2) Whether, Congressional law requiring all citizens to obtain health insurance or pay a penalty is unconstitutional


(1) Yes, this provision violates the 10th amendment through the provision that withdraws all Medicaid funding unless the state adheres to the parameters of the Act’s Medicaid expansion program.  The court stated that while such a mechanism is unconstitutional, the correct solution for the court is to redact such a penalty, thereby giving states a choice as to whether they want to create the exchange without the threat of Medicaid funding being lost.  The court held that the grant withholding provision was unconstitutionally coercive.  He wrote that the threat of withdraw of 10% of funds which make up a state’s budget represents a “gun to head” scenario for states.

(2) No.  The Act is not justified under the commerce clause.  The court has never permitted congress to use its power to regulate interstate commerce so as to mandate the purchase of a particular product.  He noted that in order for congress to “regulate” interstate commerce, there must be something to regulate.  The Act creates commerce, essentially, by regulating inactivity into activity; it summons or creates commerce.

The court looks at the “tax” and used the “substance and application” test to determine whether it met the parameters necessary to fall under the taxing and spending clause.  Finding that it did meet such a definition, recognizing that the fine is imposed by the IRS and levied on individual taxpayers through their income taxes.  Moreover, the fine is collected by the Treasury and produces revenue for the government.  The individual mandate is much more a tax than a penalty, according to the court.  The court interpreted a “penalty” to mean a fine imposed on unlawful conduct.  Because the individual mandate leaves consumers with a rational choice between fine or payment, it can hardly be seen as a “penalty.”  As an aside, the court also held that it was not a direct tax imposed equally on all individuals and therefore needn’t be struck down due to “lack of apportionment” among the states.

The court held that the notion of taxing “inactivity” is a legitimate power of Congress.  This did not create a limitless taxing power, according to the court, because the court would not support such a tax that was so severe as to be “putative.”  The attendant law was not “putative,” as it gave citizens a reasonable and rational choice between activity or inactivity.  The court did not clarify at what point a tax on inactivity becomes “putative” as opposed to remaining a “rational choice.”

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