A federal court ruled Monday that a key part of the health-care overhaul violates the Constitution, dealing the first legal setback to the Obama administration’s signature legislative accomplishment.
U.S. District Judge Henry E. Hudson said the law’s requirement that most Americans carry insurance or pay a penalty “exceeds the constitutional boundaries of congressional power.”
The 42-page ruling doesn’t mean states or the federal government must stop implementing the law. But it is expected to give ammunition to a broad Republican assault against the overhaul, which includes efforts in Congress to chip away at it.
Requiring Americans to buy insurance “would invite unbridled exercise of federal police powers,” wrote Judge Hudson, a George W. Bush appointee in the Eastern District of Virginia. “At its core, this dispute is not simply about regulating the business of insurance—or crafting a scheme of universal health insurance coverage—it’s about an individual’s right to choose to participate.”
The Obama administration said it was confident higher courts would rule the law constitutional, and said it was weighing an appeal. “Challenges like this are nothing new,” White House Press Secretary Robert Gibbs told reporters Monday. “I don’t think the decision today and how he decided it was a surprise to anybody here.”
The lawsuit, brought by Virginia Republican Attorney General Ken Cuccinelli, is the first court ruling against the law since President Barack Obama signed it in March. More than 20 federal lawsuits have been filed against the overhaul, and judges in two of those cases ruled in favor of the Obama administration. The battle is expected to end up at the Supreme Court, though probably not until the 2011-12 term at the earliest.
Judge Hudson didn’t grant the plaintiffs their request for an immediate nationwide injunction against the entire law or against the requirement that most Americans carry insurance. That requirement, known as the individual mandate, begins in 2014.
“We’ve won the first round of this particular fight, but we know there are others to come,” Mr. Cuccinelli said. “This lawsuit is not about health care. It’s about liberty.”
Administration officials portrayed the ruling as an attack on one of the law’s most popular provisions, the ban on insurers denying coverage to people with pre-existing health conditions. That piece of the law cannot work unless coupled with a requirement that nearly all Americans carry insurance, they said.
For opponents of the health overhaul, Monday’s ruling is a victory in an attack on both legal and political fronts that Republicans believe could help them take back the White House in 2012. Public skepticism about the health law, particularly among older voters, helped Republicans achieve significant gains in the midterm elections.
One part of the ruling was good news for supporters of the law. Judge Hudson found the majority of the law could be “severed” from the individual mandate. That effectively protects critical parts of the law—including tax credits to help lower earners buy coverage and an expansion of the Medicaid federal-state insurance program for the poor.
In court papers, the Obama administration argued that Congress’s constitutional authority to regulate interstate commerce and other clauses gave it the power to require Americans to carry insurance. Since all Americans at some point get health-care services, it said, the rule is simply a way of regulating how consumers pay for their care.
But Judge Hudson found that was too broad an interpretation of the Commerce Clause, arguing that “the same reasoning could apply to transportation, housing, or nutritional decisions.” He added that Congress lacked pre cedent for “regulation of a person’s decision not to purchase a product, notwithstanding its effect on interstate commerce or role in a global regulatory scheme.”
Judge Hudson also shot back at the administration’s argument that federal taxation powers give it the right to levy the penalty on those who forgo insurance, noting that the administration had avoided using the unpopular word “tax” during the law’s debate—only to employ it later for legal reasons.
The penalty, eventually topping out at $2,085 a year for families lacking insurance, is expected to raise $4 billion a year for a law that costs $938 billion over a decade. The judge concluded the penalty “lacks a bona fide intention to raise revenue.”
The ruling presented a striking contrast to a decision on the same issue by another Virginia federal district judge, Norman Moon, just two weeks ago.
Judge Moon’s opinion put the individual mandate in the context of the law’s broader overhaul, writing that the law removes “many barriers to insurance coverage,” encourages small businesses to provide coverage and creates insurance exchanges where people can comparison-shop for plans.
Only then did Judge Moon reach the coverage mandate, concluding that those who choose to forgo buying insurance “are making an economic decision to try to pay for health care services later, out of pocket, rather than now.”
Judge Hudson, by contrast, zeroed in quickly on the penalty for those who refuse to buy coverage. He said his ruling applied only to the part of the law that establishes the individual mandate, and any directly dependent provisions that refer to that part. Exactly what that applies to is unclear.
Mr. Cuccinelli said the ruling, if upheld, would nullify the pre-existing condition requirement, and the rule that insurers must charge all consumers similar prices. Those two provisions, which are popular in polls, begin in 2014. The Obama administration previously has agreed these pieces couldn’t stand without the individual mandate.
Mr. Cuccinelli said he believed the ruling also applied to the provision that allows children to stay on their parents’ insurance policy until they turn 26 years old, which went into effect this year. Administration officials said they were still assessing whether that provision, which is also popular, or others would be tied to this ruling.
The ruling plays into the political battle on Capitol Hill. Judge Hudson is a Republican appointee who made his name as a conservative federal prosecutor in northern Virginia crusading against pornography and pursuing big defense-procurement cases. The two judges who ruled in favor of the Obama administration were appointed by President Bill Clinton, a Democrat.
Liberals have complained about the fact that Judge Hudson is an investor in a political-consulting firm that has done work for Republicans including Mr. Cuccinelli and former Alaska Gov. Sarah Palin. The judge’s financial-disclosure forms for 2009 show that he received between $5,001 and $15,000 in dividends that year from the firm, Campaign Solutions Inc.
Mr. Cuccinelli’s campaign paid $8,852 to Campaign Solutions in 2009 and 2010, according to the Virginia Public Access Project, a nonpartisan campaign-finance website. Campaign Solutions and Judge Hudson couldn’t immediately be reached for comment Monday, but Campaign Solutions has said that the judge was a passive investor who wasn’t involved with the firm’s day-to-day operations. Mr. Cuccinelli stopped using the firm when he found out the judge was a shareholder, a Cuccinelli spokesman said.
Republicans in Congress cheered the ruling, saying it bolsters their plan to pass a repeal bill in the House once they take control of it next year. While that measure is expected to die in the Senate, congressional Republicans do have the leverage to chip away at funding for the law and are expected to win some Democratic votes for peeling back unpopular provisions of it.
The health overhaul is designed to expand insurance to 32 million Americans. Without the requirement to carry insurance, the Obama administration predicts, the law would leave an additional 16 million Americans uninsured.
Insurers had backed a strong requirement that individuals carry coverage, since it hands them millions of new members and prevents people from waiting until they get sick to buy a policy. Guaranteeing that people can get coverage regardless of their health “would cause significant disruption and skyrocketing costs unless all Americans have coverage,” said Robert Zirkelbach, a spokesman for America’s Health Insurance Plans, an industry trade group.
States and companies in the health industry say they are forging ahead with implementing the law, and Monday’s decision is unlikely to change those plans. Spokesman Matthew Wiggin of insurer Aetna Inc. said that pending the legal appeals, “we intend to remain compliant” with the health-care law.
The president and other defenders of the health law have noted that most states already require drivers to carry auto insurance. However, Judge Hudson found that requiring them to carry health insurance was different, because consumers could chose whether to own a car, while the health law gives them no way to opt out of carrying health insurance.