Last week, Texas filed a lawsuit against the federal government — again. This time, over a regulation that forces states to pay an Obamacare tax on Medicaid managed-care plans. If states refuse, they could lose their Medicaid funding. Sound familiar?
The complaint, which Kansas and Louisiana also joined, reveals how progressive regulatory schemes such as the Affordable Care Act (ACA), in order to accomplish their goals, eventually wind up coercing state governments and in some cases imbuing private entities with legislative powers. In this case, the Obama administration finds itself in the awkward position of levying a federal tax on state Medicaid programs designed to provide health care to the poor and disabled. If states refuse to pay up, a substantial amount of their budgets would be in jeopardy.
We’ve been here before. In 2012, the Supreme Court called this sort of thing “economic dragooning” that leaves states no choice but to pay. In NFIB v. Sebelius, the issue was Medicaid expansion. If states didn’t expand their programs as mandated by the ACA, they would lose all Medicaid funds. Chief Justice John Roberts called this a “gun to the head” — it amounted to unconstitutional coercion that violated the principle of federalism. That was a big deal, because no previous Court had ever delineated the limits of conditional federal funding to the states, otherwise known as “cooperative federalism.” Twenty-five years before the NFIB decision, the Court ruled in South Dakota v. Dole that conditions on federal funds — in that case, withholding some federal highway funds from states that didn’t maintain the federal drinking age of 21 — were allowed so long as they met a five-point rule, one of which was that the conditions not be coercive.
Thanks to the Court’s ruling against Sebelius in NFIB, Texas and 19 others states have thus far resisted the now-optional Medicaid expansion under Obamacare. But there’s more than one way the ACA can coerce states. Many critical observers have noted that the ACA relies on federal bureaucrats to make up the law as they go along; one might therefore not be surprised to find out that these federal bureaucracies are farming out some of their decisions to private organizations. Those decisions, we now know, are costing state taxpayers billions of dollars and holding hostage huge portions of states’ budgets.
Here’s what happened. Bureaucrats in the Center for Medicare and Medicaid Services (CMS), the agency that regulates Medicaid, allowed a private organization, the Actuarial Standards Board, to decide that a new Obamacare health-insurance-provider fee should apply to some Medicaid managed-care plans. To understand why this might be a problem, one has to understand something about the unpleasant complexity of the Medicaid program.
Most states, including Texas, contract with private managed-care organizations to cover much of their Medicaid and Children’s Health Insurance Program (CHIP) populations. CMS relies on standards created by the Actuarial Standards Board to ensure that rates for these managed-care plans are actuarially sound. In order for an actuary to certify that a rate is sound, the rate must comply with those standards (if not, the plan isn’t eligible for Medicaid or CHIP). And guess what one of those standards is? The rate must include the health-insurance-provider fee established under Obamacare.
It’s bad enough that CMS farmed out its decision-making to a private, unaccountable organization, although one could chalk that up to the New Deal’s inevitable regulatory logic. The larger problem is that because Medicaid is jointly funded by state and federal tax dollars, the decision to impose this new fee means that unless states cover their portion of the cost, the federal government can decertify those Medicaid managed-care plans and thus legally withhold federal Medicaid funds from those states. Huge portions of states’ budgets are at risk: in Texas, $17 billion for 2015 alone; in Kansas, about 11 percent of the entire budget; in Louisiana, 22 percent.
You can see where this is going. Faced with an offer they couldn’t refuse, states paid up. In 2013, Texans forked over $84.6 million in state taxes to cover the cost of the health-insurance-provider fee for Medicaid and CHIP managed-care plans. According to the current lawsuit, Texas lawmakers appropriated nearly a quarter of a billion dollars to cover these fees for the upcoming biennium. The state of Louisiana paid out more that $31 million last year for these fees. Kansas paid almost $33 million. In other words, Obamacare’s health-insurance-provider fee amounts to a federal tax on state governments — one that will allow the feds to collect between $13 and $15 billion from states over the next decade.
It all adds up to a hopeless knot of problems. Texas, Louisiana, and Kansas claim that the fee is coercive for the same reason that Medicaid expansion was coercive: If they don’t do exactly as CMS orders them to do, they could lose a substantial portion of their budgets. The argument of these three states is even more relevant than they realize. The truth is that the entire Medicaid program is coercive, because cooperative federalism is itself coercive by nature. States now have about 600 sources of conditional federal funds in their budgets that account for roughly 30 percent of total state spending. State lawmakers have little choice but to adopt federal policies attached to these funds. That, of course, is the entire purpose of providing the funds in the first place. Cooperative federalism is nothing more than an indirect way for federal regulators to commandeer state governments and impose federal policy preferences — even if, and perhaps especially if, they clash with those of state constituents.
For a long time, this worked really well. Before NFIB, conditions on federal funds had never been found to be coercive, no matter how draconian they were. Now we know there’s a limit, but we still don’t know the threshold beyond which courts will consider the conditions coercive. In NFIB, the Supreme Court said that “the threatened loss of over 10 percent of a State’s overall budget” amounted to coercion. So is 10 percent of a state’s budget the threshold? No one knows. Thanks to Texas, we might soon have a better idea.
John Daniel Davidson is director of the Center for Health Care Policy at the Texas Public Policy Foundation.