In the 4th circuit oral argument on the constitutionality of the individual mandate held on Wednesday, Judge Motz asked Solicitor General Neal Katyal whether Congress's power to "regulate" commerce among the several states presupposes that Congress is regulating an activity. (See Randy Barnett's report of the exchange here.)
Katyal said he needed a bit of time to think about it, but ultimately said two things: first, the individual mandate regulates activity in the entire health care market; and second, Congress can reach inactivity under the Necessary and Proper Clause. These are both appropriate answers.
However, let me add a third answer.
The power to regulate, as Chief Justice John Marshall said in Gibbons v. Ogden, is "to prescribe the rule by which commerce is to be governed." That is to say, under the original meaning of the Constitution, "regulate" simply means "prescribe a rule for." (Samuel Johnson’s definition of "regulate," contemporaneous with the founding, is "to make regular or to adjust by a rule or a method.")
Thus, when it "regulates," Congress can prescribe rules that require people to do things as well as rules that require people not to do things.
We can see the same point by looking at Article IV, section 3, which gives Congress the power to "make all needful rules and regulations" in U.S. territories. Because Congress is the only government in the U.S. territories, its "regulations," like those of the states, must be able to compel people to do things as well as forbid them from acting. (If you respond that only "rules" can reach inactivity, remember that "regulate" means "prescribe a rule for.")
So the answer to Judge Motz's question is that there is nothing in the original meaning of the word "regulate" that prevents Congress from reaching inactivity. If there is a limit on Congress's power, it is not in the word "regulate;" rather it is that Congress's regulation must be of "commerce among the several states."
In creating a tax, Congress created a rule for economic decisionmaking: pay the tax or buy health insurance from a qualified plan.
But, Judge Motz might respond, doesn't our modern substantial effects jurisprudence assume that Congress may only regulate economic *activity* that has substantial effects on interstate commerce? No, it does not. Congress may reach economic decisionmaking that has substantial effects on interstate commerce because these substantial effects produce economic spillover effects in other states, or create collective action problems for other states. These substantial effects on interstate commerce create federal problems that require a federal solution. Congress has the power to solve these federal problems.
The distinction between activity and inactivity is orthogonal to this purpose. Spillover effects and collective action problems can be caused by people not doing things (e.g., not cleaning up pollution, not participating in risk pools) as well as by doing things.
In this case, the failure to purchase health insurance has substantial economic effects on interstate commerce in several ways: First, it increases the costs of uncompensated care at hospitals and emergency rooms, estimated (in 2008) to be some 43 billion dollars per year. That's a very substantial effect on commerce. Second, because of the nature of risk pooling arrangements, failure by some persons to purchase insurance raises the premiums paid by other persons who have health insurance; this, in turn, affects the interstate market for insurance, decisions by businesses about where to locate or relocate, because of the costs of insurance, and decisions by workers about where to travel and where to live. These effects are compounded by guaranteed issue rules (which prohibit denying people coverage because of preexisting conditions), because more people will simply wait until they get sick to purchase insurance, knowing they cannot be turned down.
In sum, because health insurance is a federal problem requiring a federal solution, Congress may reach both "activity" and "inactivity" under its powers to regulate "commerce among the several states" under the Commerce Clause. What Congress may not do under the Commerce Clause is explained in United States v. Lopez, in which the Court struck down a ban on the possession of guns near schools. In Lopez the Court did not think that the problem of guns near schools was a federal problem that required a federal solution. The presence of guns near schools did not cause significant spillover effects between states that individual states would find difficult to prevent. Nor did it create a collective action problem in which some states would not be willing to regulate guns near schools unless other states did so as well. That is why the Court Lopez argued that Gun Free School Zones Act "is not an essential part of a larger regulation of economic activity, in which the regulatory scheme could be undercut unless the intrastate activity were regulated."
If we focus on the purposes behind the commerce power, we will understand that the distinction between activity and inactivity has nothing to do with the real source of congressional power: the power to solve federal problems of interstate commerce-- in this case, the market for health care and health insurance--that require federal solutions.