Interesting. I would say the court's ruling is actually more narrow than had been reported, and is not obviously wrong (although I suspect I might decide the other way based on the scope of existing precedent). It is understandable why other courts would go the other way and find no problem. What is intriguing is the severability decision. Not clear precisely what does, and does not, survive the opinion. However, as the district court observed, the provision held unconstitutional doesn't have much impact until 2013.
Briefly, the court examined whether the Commerce Clause extends to the requirement to affirmatively buy insurance (Section 1501 of the Affordable Care Act (ACA)). The broadest statements of the Commerce Clause power permit regulation of non-economic activities (such as growing one's own wheat and eating it) that have a generalized impact on the stream of commerce. Here, the US argued that the decision not to buy insurance is, in essence, a decision to force others to pay for your health care at some future point. Further, as the "lynch pin" of a vast and integrated regulatory scheme clearly regulating commerce, this provision ought to be upheld as necessary to the regulation of a substantial portion of interstate commercial activity.
The Commonwealth of Virginia argued that this would be the first time that the Commerce Clause would extend to a decision not to engage in economic activity. The examples cited by the Government all involved prohibiting a voluntary act based its impact on interstate commerce (the decision to grow one's own wheat rather than buy it), or defined responsibilities based on economic activity (assigning superfund clean up liability to a subsequent property owner, even where the owner had no knowledge of the contamination, based on purchase of the land). While the decision NOT to engage in commercial activity by an individual clearly carries consequences to a broad field of economic activity, it is not itself a commercial activity and is therefore not reachable by the Commerce Clause. This remains true no matter how important such a feature is to a permissible regulatory scheme. If the matter is beyond the power of the Fed government, it cannot become OK simply by incorporating it as a critical component in an otherwise permissible legislative scheme.
I personally think the Federal Government has the stronger argument that the Supreme Court test focuses more on the nexus of economic activity rather than on the passive/active distinction, based on my reading of the relevant cases. But the Commonwealth's argument is certainly plausible. Indeed, I would rate it a fairly close call, based on the cases and my feeling that the Commerce Clause ought to have some limits.
In any event, the court sided with the Commonwealth on this argument. The Feds offered an alternative argument that the mandate was actually a tax and not a penalty for failure to comply with a regulatory requirement. The court rejected this alternative -- rightly in my opinion, although the cases cited are all from the Lochner period.
Then came the fun part: Is the relevant provision, Section 1501, "severable" from the rest of the Affordable Care Act. That is to say, whether Section 1501 is so essential that Congress would not have passed the remainder of the law had it known that Section 1501 was unconstitutional. This was the critical part. If Sec. 1501 was found not severable, then the entire law collapses. But if Section 1501 is severable, than only the requirement to purchase health insurance is unlawful and the rest stands.
Unsurprisingly, as the Commonwealth pointed out, the arguments of the Government in support of the constitutionality of the provision would weigh against severability. Happily, as the Court noted, the actual analysis rests on what Congress would have done, not on what the Government's lawyers argue in court. That this is the "lynch pin" that makes the plan economically viable (from the perspective of insurers) does not tell us whether Congress could have passed the Act anyway. The Court therefore relied on the traditional analysis that severability is always to be favored, and struck down only Section 1501 and those provisions that explicitly reference reliance on Section 1501. The Court also declined to stay the operation of the ACA. As the Court noted, all the other stuff -- such as creating the insurance exchanges -- is not impacted by 1501. The stuff relevant to 1501 does not kick in until 2013, which is plenty of time for an appeal to the 4th Circuit. Accordingly, the Court declined to stay operation of the statute pending appeal.
All in all, it is actually the worst result for states and insurance companies. They lose their big plum, but the rest of the Act is unaffected (at least by this case) and the states and insurance companies will need to continue to spend money to comply with the provisions of the Act that are effective now.
Personally, I hope the District Court decision is affirmed in all its delightful glory. We would then get back to the plan Obama ran on -- Hillarycare without the mandate. It would be no less than the ungrateful bastards in the insurance industry deserve.