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A Closer Look at the Medicaid Holding in NFIB v Sebelius: Key Implementation Questions

Posted on July 3, 2012 | Comment (1)

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Implementation Briefs
Key Developments

By Sara Rosenbaum


In NFIB v Sebelius[1] the United States Supreme Court upheld the constitutionality of the Patient Protection and Affordable Care Act (ACA or the Act). At the same time, the decision adds a new dimension to the implementation of §2001(a) of the Act, which establishes expanded Medicaid eligibility for certain low-income people. This Implementation Brief begins with a discussion of exactly what the Court held in its Medicaid ruling. It then discusses the significance of the majority conclusion, as well as the key implementation questions that arise in the wake of this opinion.

The Court’s Medicaid Ruling

Three separate opinions need to be considered in order to fully understand what ultimately became the majority ruling: the opinion of Chief Justice Roberts and Justices Breyer and Kagan, whose ultimate holding limiting the HHS Secretary’s enforcement powers was joined by Justices Ginsburg and Sotomayor; the dissent written by Justices Scalia, Kennedy, Alito, and Thomas; and the concurring opinion written by Justice Ginsburg and joined by Justice Sotomayor.

All three opinions focus on one particular aspect of the ACA’s numerous Medicaid amendments, namely, the establishment of a new mandatory categorically needy eligibility group under ACA §2001(a). This group consists of:

all persons who are under age 65, not pregnant, not entitled to, or enrolled for benefits under Part A of Title XVIII [Medicare], and are not previously described [elsewhere in Medicaid’s mandatory categorically needy eligibility categories], and whose income does not exceed 133 percent of the federal poverty line . . .”

For this population, enhanced federal funding is available under the law, beginning at 100 percent federal financial participation (FFP) in 2014 and declining to 90 percent FFP in 2020 and thereafter. It was this expansion group, covered by the special federal funding provisions, that was the subject of all three Medicaid opinions; other aspects of the Medicaid amendments contained in §2001, as well as additional Medicaid amendments contained in other sections of the ACA (e.g., primary care payment increases, coverage of former foster care children, modified income eligibility standards, the requirement to offer premium assistance, enrollment simplification) did not figure into any of the three analyses and were not discussed. Indeed, the Chief Justice referred to the expansion group explicitly as the focus of his opinion. (C. J. Roberts, Slip Op. p. 10). Likewise, both Justice Ginsburg and the dissent, in their opinions, refer to the “Medicaid expansion” using the same term as that used by the Chief Justice. (Ginsburg, Slip. Op. p. 40; Dissent, Slip. Op. p. 44-45, noting that its analysis concerns the Medicaid expansion group for which 100 percent federal financial participation is available.)

The Dissent

The dissenters took the view that the Medicaid expansion itself amounts to an unconstitutional coercion: “Seven Members of the Court agree that the Medicaid Expansion, as enacted by Congress, is unconstitutional.” (Dissent, Slip. Op. p. 46). As a result the dissenters would have invalidated the Medicaid expansion in its entirety. (Dissent, Slip Op. p. 47). The dissent based its conclusion on three central considerations. First, the Medicaid expansion was coupled with no “backup scheme” for states that fail to implement the expansion (Dissent Slip. Op. p. 43), underscoring that Congress never imagined that states could do anything other than adopt the expansion. Second, the size of state dependency on Medicaid meant that the expansion was coercive, given the consequence to any state of failing to adopt the expansion. (Dissent, Slip Op. pp. 39-40). Third, the dissenters concluded that states could not have anticipated the transformation of Medicaid as a result of the amendments, from a program covering limited classes of needy persons into one covering virtually all nonelderly low-income individuals. Because Spending Clause programs are “in the nature of a contract,” transformational changes made without advance notice violated the Court’s fundamental rule that State conformance with new program requirements must be voluntary and knowing.

Thus, for the dissenters, the transformative nature of the expansion, the sheer size of the potential penalty for non-compliance, and the absence of fair warning meant that the entire expansion should be invalidated as coercive. For the dissent, simply preventing the Secretary from withholding all Medicaid funding from states that failed to implement the expansion was not an option, because to alter enforceability would have the effect of making the expansion optional. To make the expansion “optional despite the ACA’s structure and design ‘would be to make a new law, not to enforce an old one’” (Dissent, Slip Op. p. 47).

The Ginsburg concurrence

By contrast, Justice Ginsburg viewed the Medicaid expansion as the latest in a long line of expansions beginning soon after the law’s enactment. “Expansion has been a characteristic of the Medicaid program.” (Ginsburg, Slip Op. p. 41). As such, Justice Ginsburg concluded, the Medicaid eligibility expansion simply added a new requirement to existing law with respect to both eligibility and coverage, and built on decades of prior provisions expanding Medicaid. In her view, whether to amend existing law or enact a new law is a decision within Congress’s power to make under the Spending Clause and it is not for the Court to determine when an expansion is so transformative that it is no longer part of an existing program of federal aid. Furthermore, Justice Ginsburg noted that the Social Security Act contains “express statutory warning” that Congress may change the requirements states must meet: “Congress is simply requiring States to do what States have long been required to do to receive Medicaid funding: comply with the conditions Congress prescribes for participation.” (Ginsburg Slip. Op. p. 46). Furthermore, Justice Ginsburg rejected the assertion that the expansion came as a surprise and would result in massive new state financial responsibilities (Ginsburg Slip Op. p. 43).

But, as Justice Ginsburg pointed out, “a majority of the Court . . . buys the argument that prospective withholding of funds formerly available exceeds Congress’s spending power.” As a result, she acquiesced in the Chief Justice’s decision that the appropriate remedy was not to strike the expansion, as the dissenters would have done, but instead to bar the government from withholding federal funding from states’ existing programs as a means of enforcing compliance with the “new” program. Underscoring the limited nature of the remedy to which she agreed, Justice Ginsburg observed:

The Court does not strike down any provision of the ACA. It prohibits only the “application” of the Secretary’s authority to withhold Medicaid funds from States that decline to conform their Medicaid plans to the ACA’s requirements.

(Ginsburg, Slip. Op. pp. 60-61).

The Chief Justice’s opinion

The Chief Justice’s ruling represents a pragmatic strategy to save the Medicaid expansion (which the dissent would not have done) while sparing States from the normal Medicaid enforcement remedy (withholding all federal Medicaid funding) that otherwise apply in the case of state non-compliance with mandatory program requirements. In so doing, the Chief Justice reaffirmed the power of Congress to set minimum limits on state participation in federal Spending Clause programs, while at the same time, constraining the Secretary’s remedial powers, a result that flows from the fact that, in his view, “[t]he Medicaid expansion . . . accomplishes a shift in kind, not merely degree” (C.J. Roberts Slip Op. p. 53):

The original program was designed to cover medical services for four particular categories of the needy: the disabled, the blind, the elderly, and needy families with children. Previous amendments to Medicaid eligibility merely altered and expanded the boundaries of these categories. Under the Affordable Care Act, Medicaid is transformed into a program to meet the health care needs of the entire nonelderly population with income below 133 percent of the federal poverty level. It is no longer a program to care for the neediest among us, but rather an element of a comprehensive national plan to provide universal health insurance coverage.

(C. J. Roberts, Slip Op. pp. 53-54). This degree of transformation effectively amounted to “surprising participating states with post-acceptance or retroactive conditions” (C. J. Roberts, Slip. Op. p. 54): “A state could hardly anticipate that Congress’s reservation of the right to ‘alter’ or ‘amend’ the Medicaid program included the power to transform it so dramatically.” (C. J. Roberts, Slip. Op. p. 54).

Because of the fundamental transformation brought about by the reforms and the lack of knowledge on the part of states that acceptance of such a transformation ultimately would become a condition of overall program participation, Chief Justice Roberts fashioned a remedy recommended by the Justice Department in its case brief. Under this remedy, the Administration is prohibited from withholding all Medicaid funding from states that fail to implement the Medicaid expansion.

In adopting this remedy, the Chief Justice preserved the Medicaid expansion itself. He also reaffirmed the power of the federal government to set the terms of federal spending and requiring States to comply with these terms. At the same time, his decision places limits (with important future implications) on when the federal government can use the remedy of withholding all federal funds under a spending clause program when a state fails to comply with what is considered an unanticipated and transformative amendment to an existing program, effectively creating a new program:

Nothing in our opinion precludes Congress from offering funds under the Affordable Care Act to expand the availability of health care, and requiring that States accepting such funds comply with the conditions on their use. What Congress is not free to do is to penalize States that choose not to participate in that new program by taking away their existing Medicaid funding. Section 1396c gives the Secretary of Health and Human services the authority to do just that. . . . In light of the Court’s holding, the Secretary cannot apply Section 1396c to withdraw existing Medicaid funds for failure to comply with the requirements set out in the expansion.

(C. J. Roberts Slip. Op. p. 55)

This limitation on enforcement powers “fully remedies the constitutional violation we have identified” (C.J. Roberts, Slip Op. p. 56). Furthermore, Chief Justice Roberts emphasized that his decision did not

affect the constitutional application of §1396c to the existing Medicaid program. Nor does it affect the Secretary’s ability to withdraw funds provided under the Affordable Care Act if a state that has chosen to participate in the expansion fails to comply with the requirements of that Act.

(C.J. Roberts, Slip. Op. p. 56). In his decision, the Chief Justice also emphasized that the Court was not rewriting the Medicaid expansion as the dissent had indicated, but merely was barring the Secretary from withholding all federal funds from states that do not comply with the expansion. In this regard, 42 U.S.C. §1396c could not be applied “to withdraw existing Medicaid funds from States that decline to comply with the expansion.”

Key Implementation Issues

How far does the Court’s decision reach? This more in-depth exploration of the decision suggests that its focus is on the power the federal government to withhold existing federal Medicaid funding in order to assure state compliance with the terms of the Medicaid expansion found at §2001(a) of the ACA. It appears that it is the Medicaid expansion amendment that the Court has effectively cordoned off as different in “kind,” not just “degree”, and thus shielded from a federal sanction involving the withholding of current Medicaid funding under 42 U.S.C. §1396c for state failure to comply. Nothing in his opinion suggests that the Chief Justice was concerned with other Medicaid requirements contained in the ACA, such as the maintenance of effort (MOE) requirement, coverage requirements related to former foster care children, or requirements related to income evaluation methodologies or enrollment simplification. The issue for the Chief Justice – and indeed for the concurrence and dissent – appears to be whether the HHS Secretary can withhold existing program funding in order to achieve state compliance with a requirement that is not merely different in degree, but in kind.

That said, ACA §2001 is a lengthy section containing numerous subsections. Section 2001:

  • defines the new mandatory coverage group (§2001(a));
  • defines the level of coverage to which the new coverage group is entitled;
  • describes the enhanced federal contribution levels that will be paid to states for medical assistance provided to newly eligible individuals;
  • provides for “equitable support” for certain states that previously had expanded coverage to members of the newly eligible population;
  • creates a new optional categorically needy Medicaid coverage group consisting of individuals described in the mandatory coverage group while allowing states to cover individuals in this group on an earlier phased-in basis but at normal federal funding levels;
  • establishes a maintenance of effort (MOE) requirement; and
  • defines “benchmark benefits” for purposes of describing the minimum coverage to which newly eligible people.

The question becomes whether the Court’s holding extends to other aspects of the ACA Medicaid amendments. In this regard, the Secretary of HHS will need to make a number of important determinations:

  • Do the Court’s limitations on her enforcement powers apply only to the 2014 eligibility expansion group for which 100% FFP is available, or does the opinion also limit her enforcement powers over other §2001 matters such as the MOE requirement? The MOE requirement would appear to clearly affect existing categories of eligible people, not the expansion group, and the Court’s assertion that it was not altering the existing program would appear to mean that its decision has no impact on the Secretary’s powers to enforce compliance with §2001’s MOE provisions.
  • Does the ruling affect her power to enforce any other section of the ACA Medicaid amendments that establish additional program requirements such as the primary care payment increase, coverage of former foster care children, revision of the income eligibility, and enrollment simplification?
  • Does the Court’s opinion alter her ability to enforce the terms of the expansion — by granting or withholding expansion funding alone — in states that do not comply with its terms? For example, can the Secretary withhold expansion funding if, in expanding coverage, a state does not comply with the terms of the expansion (i.e., fails to cover all individuals within the new coverage group; fails to extend benchmark coverage to the group; fails to assure that the benchmark coverage contains all of the essential health benefits to which the new coverage group is entitled)?
  • What is the scope of the Secretary’s remedial power in the event that a state adopts the expansion but fails to comply with its terms? Can she withhold up to 100% of the funds payable? Might she withhold a smaller percentage or seek alternative remedies?
  • Once a state adopts coverage of the expansion group, does the group become part of the state’s existing program for purposes of ongoing oversight and enforcement remedies? That is, if a state’s plan administration with respect to the expansion group is found to be inconsistent with federal requirements, does the Secretary have full enforcement powers under §1396c or enforcement powers only in relation to withholding funding from the expansion group?
  • Does the Court’s limitation on the Secretary’s remedial powers in relation to the expansion group affect any other aspect of state Medicaid administration duties or the rights of beneficiaries within the expansion group? The Court stressed that it was not rewriting federal Medicaid law, only limiting the Secretary’s enforcement powers. Do individuals within the expansion group retain all protections that apply to applicants and beneficiaries? Does their coverage remain an enforceable legal entitlement? Must states determine their eligibility promptly and furnish medical assistance with reasonable promptness? Must a state administer benchmark coverage arrangements for the expansion population in conformity with the same federal requirements that apply to other populations covered under the benchmark plan provision of the Medicaid program? Must states comply with the normal state plan amendment process in adding coverage for the expansion population? Do newly eligible individuals maintain their legal right to coverage? Does the ruling affect their right to enforce their legal entitlement to medical assistance?

Does the Secretary have the power or discretion to give states added flexibility where the eligibility expansion group is concerned? The eligibility expansion group whose coverage commences on January 1, 2014 (and for whom 100% FFP is available) is described in the ACA in precise terms: individuals who are under 65, not pregnant, not entitled to or enrolled in Medicare, and are not otherwise described as a mandatory categorically needy coverage group, and whose income falls within the Act’s financial eligibility parameters. The Court repeatedly stressed, over the objection of the dissent, that its decision on the remedial aspects of Medicaid enforcement did not in any way alter the terms of the statute itself or Congressional powers to define the expansion group and hold states to the conditions laid out in the description of the group. The Court also stressed that its decision did not change the terms of the existing program.

That said, a separate question becomes whether under the Secretary’s legal authority to administer Medicaid, as well as in light of the remainder of the ACA and the budget assumptions that underlie it, she has the power and discretion to modify the terms of the new expansion category to accommodate states that, for example, desire to extend eligibility only to certain subcategories of newly eligible people (e.g., people under 100% or 75% of the federal poverty level). Several considerations bear on the answer to this question:

  • The state option to expand coverage prior to 2014 speaks expressly in terms of reasonable sub-categories of eligible individual. By contrast, the 2014 eligibility expansion group to which 100% FFP is attached does not. Presumably this is because Congress, in exchange for 100% FFP, wanted the entire group described in 42 U.S.C. §1396a(a)(10(A)(i)(VIII) to be covered as of January 1, 2014. Indeed, as the dissent pointed out in its opinion, the remainder of the law – and the budget assumptions on which it was based — depends on the existence of Medicaid eligibility up to 133% FPL (at least prior to 2017, when states are given broader powers to innovate). While the Exchange provisions of the law enable premium support to commence at 100% FPL, the Medicaid eligibility expansion provision itself uses 133% FPL as its threshold. Furthermore, the Basic Health Program, which many states are considering as a means of reducing churning among coverage markets for low income people, limits the federal contribution to persons with incomes between 133% and 200% FPL. Based on these considerations, the Secretary may conclude that neither the federal Medicaid statute nor the ACA as a whole gives her the power to modify the 2014 eligibility expansion group to allow states to cover only certain sub-categories as a state option.
  • The Secretary also has authority under §1115 of the Social Security Act to undertake demonstrations and as part of this authority, has the power to waive provisions of the Medicaid statute relating to eligibility. She might use this power to modify the terms of the 2014 Medicaid eligibility coverage group in order to enable states to partially implement the terms of the expansion group. However, in order to use her authority under §1115 the Secretary must determine that the demonstration promotes the objectives of Title XIX (Medicaid). It is not clear that a demonstration that allows states to cover fewer than all persons described in the expanded eligibility group is consistent with Medicaid’s objectives, given the fact that the demonstration presumably either would entirely exclude low-income people from coverage or allow them to secure coverage, but only by paying premiums and cost-sharing for Exchange plans, thereby potentially further limiting their income. Thus, the Secretary will need to decide what types of demonstrations involving coverage at less than the full 2014 expanded eligibility level might be consistent with Medicaid objectives.

[1] The decision joins together two separate cases: NFIB v Sebelius and Department of Health and Human Services v Florida. The cases will be jointly referred to as NFIB v Sebelius.
The decision joins together two separate cases: NFIB v Sebelius and Department of Health and Human Services v Florida. The cases will be jointly referred to as NFIB v Sebelius.
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