Thursday, July 15, 2010

State sovereignty and the insurance exchanges

Another sovereignty-related claim raised by the 20 states in the Florida lawsuit concerns the ACA’s provisions concerning the creation of so-called health insurance “exchanges.” ACA §1311(b) states that “[e]ach state shall, not later than January 1, 2014, establish an American Health Benefit Exchange” that facilitates the purchase of health insurance for individuals and small businesses, and that meets various criteria established in the Act itself and by regulations promulgated by the Secretary of HHS. Under ACA §1321(c), if a state elects not to create such an exchange (or if its exchange fails to meet the federal standards), “the Secretary shall (directly or through agreement with a not-for-profit entity) establish and operate such Exchange within the State and the Secretary shall take such actions as are necessary to implement such other requirements.”

The states contend that these provisions are unconstitutional because they require state governments “to carry out insurance mandates and establish intrastate insurance programs for federal purposes under threat of removing or significantly curtailing their long-held regulatory authority as to intrastate insurance.” Amended complaint ¶88. The requirement to create an exchange “commandeer[s] the Plaintiff States and their employees as agents of the federal government’s regulatory scheme at the States’ own cost.” Id. And the threat of supplanting state law with a federal exchange within the state “would displace State authority over a substantial segment of intrastate insurance regulation (e.g., licensing and regulation of intrastate insurers, plans, quality ratings, coordination with Medicaid and other State programs, and marketing) that the States have always possessed under the police powers provided in the Constitution.” Id. ¶44. Consequently, the ACA’s exchange provisions “interfere[] in the Plaintiff States’ sovereignty in violation of the Ninth and Tenth Amendments and the constitutional principles of federalism and dual sovereignty on which this Nation was founded.” Id. ¶88.

To the extent that the states are arguing that the ACA commands them to establish an exchange—I do not think they are making this claim, but some sentences in the complaint can be read that way—they are simply wrong factually. Section 1321(c) clarifies that if a state fails to establish a federally qualified exchange, the federal government will create the exchange itself. The states can participate in the program by creating their own exchange that meets federal requirements, or they can get out of the way. States may not like this choice, but they are not actually “commandeered” to regulate according to Congress’s instructions, as prohibited by New York v. United States, 505 U.S. 144 (1992), and Printz v. United States, 521 U.S. 898 (1997).

The relevant question, then, is whether it is constitutionally permissible for Congress to present the states with this sort of choice. And the answer, at least under current law, is clearly yes, at least as a general matter. This sort of an arrangement is often termed “cooperative federalism,” and it was expressly endorsed as a constitutionally permissible alternative to commandeering by the Court in New York. See also Hodel v. Virginia Surface Mining & Reclamation Ass'n, 452 U.S. 264 (1981) (upholding Congress's authority to create a similar cooperative federalism program). Specifically, the Court in New York wrote that there are

“a variety of methods, short of outright coercion, by which Congress may urge a State to adopt a legislative program consistent with federal interests. . . . [W]here Congress has the authority to regulate private activity under the Commerce Clause, we have recognized Congress’ power to offer States the choice of regulating that activity according to federal standards or having state law pre-empted by federal regulation. . . . If state residents would prefer their government to devote its attention and resources to problems other than those deemed important by Congress, they may choose to have the Federal Government, rather than the State, bear the expense of a federally mandated regulatory program, and they may continue to supplement that program to the extent state law is not pre-empted.” New York, 505 U.S. at 166–168.

Thus, the Tenth Amendment permits Congress, at least as a general matter, to present states with this sort of a choice: either regulate according to federal standards, or the federal government will regulate the matter itself. Indeed, this is how several federal programs currently operate, including the Clean Water Act, the Occupational Safety and Health Act of 1970, and the Resource Conservation and Recovery Act of 1976. See New York, 505 U.S. at 167–168.

But is there something about this particular choice—where one option is the federal government’s assuming regulatory authority over a subject (health insurance) that has historically been regulated by the states—that is constitutionally problematic? Again, under existing law, the answer is no.

The relevant question is whether Congress has the authority under its enumerated powers, as augmented by the Necessary and Proper Clause, to regulate the activity in question, regardless of whether that activity has been historically regulated by the states. And regulating the sale of health insurance (which is what the exchanges would do), even sales occurring wholly within one state, is plainly within Congress’s authority to regulate interstate commerce (as that power is defined by governing precedent). The activity of selling health insurance is “economic” or “commercial” in nature. As such, Congress can regulate that activity as one that “substantially affects interstate commerce.” See United States v. Lopez, 514 U.S. 549 (1995); United States v. Morrison, 529 U.S. 598 (2000); Gonzalez v. Raich, 545 U.S. 1 (2005). As a regulated activity, the sale of health insurance is qualitatively different from the possession of a gun in a school zone or the commission of an act of gender-motivated violence, neither of which could be described as “economic” or “commercial” in nature.

To be sure, the Court has suggested that whether the regulated activity concerns an area “in which states have historically been sovereign” could be relevant to defining the breadth of the commerce power at its edges. See Lopez, 514 U.S. at 564 (“Under the theories that the Government presents in support of §922(q), it is difficult to perceive any limitation on federal power, even in areas such as criminal law enforcement or education where States historically have been sovereign.”); Morrison, 529 U.S. at 618 (“The regulation and punishment of intrastate violence that is not directed at the instrumentalities, channels, or goods involved in interstate commerce has always been the province of the States.”). But in both of those cases, the regulated activities were not economic or commercial in nature. The Court’s decisions do not indicate that this fact is relevant when Congress is clearly regulating a commercial marketplace, as it is with the exchanges.

Because the regulation of the health insurance market through the creation of insurance exchanges is within Congress’s commerce power, the fact that the states’ “authority over a substantial segment of intrastate insurance regulation . . . that the States have always possessed under the police powers” would be displaced is immaterial. If Congress has the authority to regulate the activity, it can preempt state law to the extent it sees fit.

Would the Supreme Court be interested in revisiting any of these principles? The prospect seems remote.

The precise breadth of the commerce power remains controversial, so it is conceivable the Court could move that line slightly. (We will discuss this further as it pertains to the individual insurance mandate of ACA §1501.) But no Justice—other than perhaps Justice Thomas—seems inclined to hold that Congress lacks the authority to regulate a plainly economic or commercial activity, such as the sale of health insurance. And although there is often dispute about how far courts should go to infer a preemptive intent by Congress, here no inference is necessary. The intent to preempt, should a state fail to create its own exchange, is clear and explicit. And no Justice questions Congress’s authority to expressly preempt state law when acting within its enumerated powers.

In short, the states’ sovereignty-based challenge to the ACA’s insurance exchange provisions appears almost certain to fail.