Here We Go Again: Another ACA Legal Challenge of Questionable Merit Commentary
Here We Go Again: Another ACA Legal Challenge of Questionable Merit
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JURIST Guest Columnist Robert Field of the Drexel University Kline School of Law discusses the controversy surrounding the latest challenges to the Affordable Care Act …

The barrage of lawsuits challenging the Affordable Care Act (ACA) shows no signs of abating, even in the wake of two major US Supreme Court decisions upholding key aspects of the law. The latest suit [PDF], filed on October 22 by three states, targets a minor aspect of the ACA’s legislative scheme, but it could produce another thorn in the side of the law’s implementation. The plaintiffs see yet another constitutional infirmity with Obamacare, while supporters of the law see a politically motivation stunt.

The three states, Texas, Kansas and Louisiana, seek to invalidate an ACA fee on insurance companies as it applies to managed care plans that administer benefits under Medicaid and the Children’s Health Insurance Program (CHIP). The fee, known as the Health Insurance Provider fee, takes the form of a 1.5 percent tax on all health insurance premiums across the country to help offset the law’s cost. It applies not only to premiums paid by employers and individuals for coverage under private plans but also to capitation payments made by states to managed care plans that administer coverage under Medicaid and CHIP. Nonprofit plans that primarily serve low-income, elderly and disabled beneficiaries are exempt. The Actuarial Standards Board (ASB), a private organization that sets standards for actuarial accounting in the insurance industry, has determined that states must account for the fee in the capitation payments as a matter of sound actuarial practice.

The plaintiffs assert several grounds for challenging the fee and reimbursement rule based on the Constitution and on the Administrative Procedures Act (APA). The constitutional claims are that the fee creates a new requirement for Medicaid programs for which the states did not receive proper notice, that it unconstitutionally coerces and taxes them, and that relying on the ASB to rule on reimbursement of the fee represents an unconstitutional delegation of authority to a private entity. The statutory claim is that the federal government failed to follow the APA’s procedural requirements in implementing the reimbursement rule.

The constitutional claim concerning notice is of particular interest because it seeks to build on the growing body of ACA jurisprudence. In NFIB v. Sebelius [PDF], the Supreme Court ruled that states must have the option of rejecting the ACA’s Medicaid expansion because it represents a new condition on the receipt of federal matching funds that they did not agree to, and did not have notice of, when they chose to participate in the program. The states argue that the ACA fee similarly imposes a new condition on receipt of federal Medicaid and CHIP matching funds for which “clear notice” was not provided.

The prospect of losing substantial federal funding for refusing to reimburse managed care plans for the fee, the states contend, leaves them with no realistic choice but to pay. In NFIB, the court found that putting states in this position concerning new Medicaid conditions amounts to coercion. In announcing the lawsuit, Texas Attorney General Ken Paxton likened it to placing a “gun to the head” of the states, an analogy the court had used in striking down the mandatory nature of the Medicaid expansion.

To reach the “gun to the head” conclusion, the plaintiffs’ argument builds on several steps. First, although the ACA imposes the fee, it is silent as to whether states must reimburse insurance companies for the cost. That determination was made by the ASB, which concluded that capitation rates that fail to account for the fee would not be actuarially sound. Capitation rates must be actuarially sound to be eligible for federal matching funds. The Centers for Medicare & Medicaid Services (CMS), which must approve the rates, has accepted the ASB determination, and in doing so, has effectively delegated rulemaking authority to a private organization, the plaintiffs claim. This circumvents the APA’s requirement for notice and comment before a regulation can be issued. Therefore, states must either pay capitation rates that have been calculated in an unlawful manner or risk losing substantial federal funds.

Based on this analysis, the plaintiffs ask the court to strike down the fee as it applies to Medicaid and CHIP managed care plans and to order the federal government to refund amounts they have already paid on account of it. They claim these amounts are substantial, totaling $85 million for Texas, $32 million for Louisiana and $33 million for Kansas in 2013.

When subjected to scrutiny, several weak links in this chain of argument are evident. First, reference to standards issued by private organizations in federal rules is hardly unusual. Private standards are routinely incorporated into regulations in numerous contexts. Examples include workplace safety rules [PDF] issued by the Occupational Safety and Health Administration and food safety rules issued by the Food and Drug Administration.

Nor is it unusual for regulatory bodies to rely on standards issued by the ASB. Certifications for small employer health plans that are required by several states must comply with an ASB standard [PDF] issued in 1996 for actuarial review. Another ASB standard [PDF] issued in 1997 and revised in 2011 prescribes guidelines for legally required actuarial assessments of the liabilities and assets of health insurance companies. The CMS regulation [PDF] at issue in the lawsuit calls for Medicaid capitation rates to be certified as “actuarially sound” by actuaries who meet the ASB’s qualifications and follow the ASB’s Actuarial Standard of Practice (ASOP) number 49 [PDF], issued in 2015. This reliance on an ASB standard is entirely consistent with the other instances in which regulations have incorporated references to rules developed by private organizations.

Moreover, ASOP 49 was not issued in a vacuum. Consistent with customary ASB practice, a proposed version was published in December 2013 with a request for comments. Several comments [PDF] were submitted, but none addressed the standard’s application to the ACA fee. Apparently, the plaintiffs did not feel the issue was important enough to raise their concerns when it first arose and a forum was available that was particularly well suited to consider their input. Their timing raises questions about their motives.

Similarly, CMS’s development of the regulation permitted ample opportunity for notice and comment in accordance with the APA. The rule was first issued [PDF] as a final regulation in 2002, with the reference to ASB standards. It followed publication of a prior version [PDF] in 2001 that included a request for comments. The plaintiffs complied with it for 14 years before bringing their suit. They chose to object only when the politically charged ACA became involved.

Moreover, the ACA fee changed none of the basic mechanics for calculating Medicaid capitation rates. Those rates have always accounted for the cost to insurers of state and federal taxes, such as payroll and income taxes, and of taxes on insurance premiums, such one that the state of Texas, itself, levies. The cost of those taxes can change over time, and new ones are often added. When federal or state governments change or add taxes, no legal principle requires notice to states of possible consequences for Medicaid managed care arrangements. The ACA is no different in this regard.

The plaintiffs’ next line of argument is that the ACA fee as it applies to Medicaid managed care amounts to an unconstitutional tax imposed by the federal government on the states, since they serve as the ultimate source of payment. Once again, there is no reason to see the ACA fee as any different from other taxes and fees that are accounted for in capitation rates, and the plaintiffs have challenged none of them. It can be more accurately characterized as a pass-through of insurers’ administrative expenses, which are part of their cost of doing business. This has always been factored into Medicaid capitation rates.

Where does this leave the “gun to the head” analogy of which Paxton spoke? It is left without much of a bang. State Medicaid costs have always been subject to change as medical costs and other expenses fluctuate. When states began using private managed care plans to administer their programs, they accepted the plans’ administrative expenses as a new source of fluctuation. The ACA fee adds nothing novel to this cost equation.

Perhaps more importantly, states do have a realistic choice with regard to the fee. They can choose to provide Medicaid benefits through a traditional fee-for-service arrangement rather than through managed care. Managed care is an option for state Medicaid programs that came into widespread use in the 1990s. According to the complaint, Texas uses the option to provide benefits to 87 percent of its Medicaid population. For Louisiana, the figure is 43 percent, and for Kansas, it is 94 percent. To avoid the fee, the states need not suffer the loss of millions of dollars in federal matching funds. They can alter the manner in which they have chosen to administer their programs.

Paxton is known for suing the federal government. He brought 34 other suits prior to this one, so far winning only six. Nevertheless, he saw no need to challenge federal regulations that rely on ASB standards for setting Medicaid capitation rates until the ACA was involved. Political, rather than legal, considerations certainly seem to be at work.

Although this case seems particularly weak, the jurisprudence of the ACA has seen many unexpected developments since the first cases were brought in 2010. The suit was filed in federal court in Wichita Falls, Texas, where it will be heard by Judge, Reed O’Connor, a George W. Bust appointee, who has ruled against federal regulations several times. There is no telling what surprises it may hold.

Robert I. Field is professor of law at the Drexel University Kline School of Law and professor of health management and policy at the Dornsife School of Public Health at Drexel University. He is the author of two books on health law and policy: Mother of Invention: How the Government Created ‘Free-Market’ Health Care and Health Care Regulation in America: Complexity, Confrontation and Compromise. He also writes and edits the Health Cents blog for the Philadelphia Inquirer.

Suggested Citation:Robert Field Here We Go Again: Another ACA Legal Challenge of Questionable Merit, JURIST – Academic Commentary, December 12, 2015, http://jurist.org/forum/2015/Robert-Field-ACA-challenge.php.


This article was prepared for publication by Cassandra Baubie, an Assistant Editor for JURIST Commentary. Please direct any questions or comments to her at commentary@jurist.org

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