JURIST Guest Columnists Joseph Marren, President and Chief Executive Officer of KStone Partners LLC, and Elizabeth Marren, a student at Fordham University School of Law, say that the Supreme Court's refusal to address the meaning of the Statement and Account Clause in its recent healthcare decision could lead to dire financial consequences...
n June 28, 2012, the Supreme Court resolved
[PDF] constitutional challenges to two provisions of the Patient Protection and Affordable Care Act of 2010
(ACA): the individual mandate and the Medicaid expansion. The individual mandate requires most Americans to maintain a "minimum essential" health insurance coverage, and for many this requires purchasing insurance. Those who do not comply must pay a penalty to the Internal Revenue Service (IRS). With respect to the individual mandate, the Court decided that while it is not a valid exercise of Congress's power under the Commerce Clause
and the Necessary and Proper Clause
, it may be upheld under Congress's Taxing Clause
power. This article is focused solely on the second provision resolved by the Court, the Medicaid expansion.
Seven members of the Supreme Court agreed that the Medicaid expansion in the ACA is unconstitutional. However, each of the opinions issued by the Court contain economic and political accountability analysis that is seriously flawed and incomplete. All of the justices ignored important facts associated with entitlement program spending and the federal government's financial results, and none of the justices addressed a directly applicable constitutional provision typically referred to as the Statement and Account Clause. Not surprisingly, the Court's remedy is clearly in error.
We will begin by summarizing certain facts highlighted by the justices, the Court's analysis and the remedy. The dissent (authored by Justices Antonin Scalia, Anthony Kennedy, Clarence Thomas and Samuel Alito) opined that "Medicaid has long been the largest federal program of grants to the States," and Justice Ruth Bader Ginsburg posited that, between 2005 and 2008, federal contributions toward the care of beneficiaries averaged 57% while state contributions averaged 43%. Chief Justice John Roberts asserted that, for the states:
Medicaid spending accounts for over 20 percent of the average State's total budget ... The Act increases federal funding to cover the States' costs in expanding Medicaid coverage. But if a State does not comply with the Act's new coverage requirements, it may lose not only the federal funding for those requirements, but all of its federal Medicaid funds ... We have repeatedly characterized ... Spending Clause legislation as 'much in the nature of a contract ... Congress may use its spending power to create incentives for States to act in accordance with federal policies. But when 'pressure turns into compulsion,' the legislation runs contrary to our system of federalism ... In this case, the financial 'inducement' Congress has chosen is much more than 'relatively mild encouragement' it is a gun to the head ... The threatened loss of over 10 percent of a State's overall budget ... is economic dragooning that leaves the States with no real option but to acquiesce in the Medicaid expansion.
Furthermore, Roberts declared that "[p]ermitting the Federal Government to force the States to implement a federal program would threaten the political accountability key to our federal system." Agreeing with the chief justice, the dissent stated that "[w]hen Congress compels the States to do its bidding, it blurs the lines of political accountability." By that, Ginsburg believes the Court means "voter confusion: citizens upset by unpopular government action ... may ascribe to state officials blame more appropriately laid at Congress' door." In its decision, the Court ruled that the constitutional violation and the political accountability issue are fully remedied by precluding the secretary of Health and Human Services from applying the ACA to withdraw existing Medicaid funds from the states for their failure to comply with the requirements set out in the expansion.
Let us review the key economic facts not discussed. First, since Medicaid's inception, the federal government has never reported its full costs in either the president's budget or the financial report of the US government ("financial report"). It published a $24 trillion estimate of the present value of the future net cost of the program for the first time in the 2010 financial report. This figure was based on savings assumptions associated with the ACA similar to those used to generate the $22.8 trillion Medicare figure published simultaneously. However, the assumptions were so unrealistic that the government published an alternate, and more realistic, scenario which indicated a cost of $35.2 trillion. No alternate figure was published for Medicaid. The only costs recorded by the federal government or any state for Medicaid are current year cash expenditures.
Second, since the state portion of Medicaid contributions averaged 43 percent of total expenditures, there is an additional $18 trillion present value obligation. Therefore, Medicaid in total is a $42 trillion program. No state records the full cost of its share of Medicaid costs in its financials.
The federal government's latest published estimate of the net present value cost of Medicare (alternate scenario) and Social Security is $46 trillion. When this amount is added to the unrealistically low Medicaid estimate, it yields a total off-balance sheet obligation of $70 trillion. The balance sheet in the 2011 financial report indicates that the federal government's net liability is $14.8 trillion. When the $70 trillion of off-balance sheet obligations is added, the total obligation rises to approximately $85 trillion. This obligation represents a multiple of 36 times total revenue of approximately $2.4 trillion for 2011. Also, the Federal Reserve's estimate [PDF] in June 2012 of the total net worth of households and non-profits is approximately $63 trillion. If the government confiscated this entire amount it could not cover its obligations.
The government knows that it cannot possibly fund its existing entitlement programs. In the 2011 financial report, the comptroller general stated that "the federal government continues to face an unsustainable fiscal path." The Citizen's Guide [PDF] to the 2011 financial report states that:
The Nation must bring social insurance expenses and resources into balance before the deficit and debt reach unprecedented heights. Delays will only increase the magnitude of the reforms needed and will place more of the burden on future generations.
It is hard to square these comments with Ginsburg's assertion that "there can be no objection to the ACA's expansion of Medicaid as an 'unfunded mandate.' Quite the contrary, the program is impressively well funded."
Currently, it is impossible to determine the truth about the government's financial results, as it maintains two sets of books which, both individually and in the aggregate, are grossly misleading. The most well-known is the president's budget, which is cash-based. Unfortunately, it has little to do with economic reality. Under budget accounting rules, outlays are recorded only when bills are paid. Americans know that real expense is incurred when one makes spending commitments. This is the reason why every publicly traded company is required to use accrual accounting. The little-known alternative is the financial report, which is seriously flawed as it does not consolidate numerous material government controlled entities and it does not include the full costs of the entitlement programs.
The simplest way to think about our government's recent financial results is to add up all the expenditures and revenues over the last decade and divide the total expenditures by total revenues. This produces a "dollar spent per dollar of revenue" figure which everyone that manages a household can understand. Using budget accounting, the federal government has spent $1.28 for every $1 of revenue it has received; per the financial reports, it has spent $1.38 for every $1 of revenue. A rough estimate of the truth including the full costs of the entitlement programs is that over the last decade over $4.00 has been spent for every $1 of revenue.
There are three other critical facts. The first is that the legislative and executive branches have a direct conflict of interest in not having expenditures reported correctly, for they were elected under promises to maintain or increase spending levels. Proper financial reporting would lead to spending cutbacks, tax increases and/or recriminations for overspending, all of which are likely to cause voter dissatisfaction and changes at the polls. The second is that the parties did not adequately represent the interests of the sovereign as a result of the aforementioned conflict. Finally, Medicaid has mandatory authorizing legislation. A distinctive feature of authorizing legislation for mandatory spending is that it provides agencies with the authority or requirement to spend money without first requiring committees to enact funding. This is critical in the context of accountability because current members of Congress can and do wash their hands [PDF] of any responsibility with respect to mandatory spending.
The Court's analysis is focused on the ACA's economic impact on the state's income statements as opposed to the financial results of both parties. In commercial joint ventures, it is typical for the parties to represent and warrant that they have the financial wherewithal to hold up their end of the bargain. These are often tied to audited financials. However, the states have no need for these because they can rely upon the Statement and Account Clause, which requires that "a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time."
According to Justice Joseph Story, the clause makes Congress's responsibility as guardian of the public treasure "complete and perfect" by requiring an account of receipts and expenditures "that the people may know what money is expended, for what purposes, and by what authority." James Madison thought that "this provision went farther than the constitution of any state in the union, or perhaps in the world."
The states cannot knowingly accept the full terms of the Medicaid contract if a fundamental assumption or condition on which they rely is materially in error. The ability of the federal government to provide financing is a key determinant whether a State wants to continue taking the money. The "official" statement and account is the combined statement of receipts, outlays and balances which is largely derived from the president's budget. Hence, federal financial reporting is coercive because it significantly overstates the ability to continue providing funding. The failure to so advise the states through the publication of a truthful and accurate statement and account renders acceptance of the "contract" null and void, for there could not be any meeting of the minds.
Madison was prescient with another remark: "A popular Government, without popular information, or the means of acquiring it, is but a Prologue to a Farce or a tragedy; or, perhaps both." If threatening to withdraw over 10 percent of a state's budget is a gun to the head, then what is underreporting expenditures by over two-thirds of total expenditures? Is it reasonable that those practical framers that drafted the Statement and Account Clause thought it appropriate for the government to be able to spend at a level three times the amount that it publicly reported?
Furthermore, when Medicaid's mandatory authorizing legislation is coupled with inadequate financial disclosure, political accountability disappears altogether. Voters have no idea what the level of expenditures are, and they cannot send the responsible representatives packing because they have retired years ago. Their current representatives' stance is that their hands are tied and they have nothing to do with mandatory spending.
Finally, the grossly inadequate disclosure violates several private rights granted to citizens by the US Constitution, including the right to financial information (not yet recognized by the Court but required by the Constitution), the right to vote, free speech and equal protection. This violation of private rights is important as the Court has previously struck down spending conditions in Legal Services Corporation v. Velasquez and American Civil Liberties Union v. Mineta on First Amendment grounds.
In its 1974 decision in US v. Richardson, the Court declined by a 5-4 majority to opine on the meaning of the Statement and Account Clause because the plaintiff lacked standing. Chief Justice Warren Burger's opinion included dictum that appears to have become the gospel for the Court to ignore the provision.
[I]t is clear that Congress has plenary power to exact any reporting and accounting it considers appropriate in the public interest ... Not controlling, but surely not unimportant, are nearly two centuries of acceptance of a reading of cl. 7 as vesting in Congress plenary power to spell out the details of precisely when and with what specificity Executive agencies must report the expenditure of appropriated funds and to exempt certain secret activities from comprehensive public reporting.
While these statements are clearly true as it relates to details associated with the nation's financial reports and most assuredly information related to national security matters, Congress has a constitutional obligation to report truthful and complete information with respect to total receipts and expenditures. The reference to "two centuries of acceptance" is hollow, for the government's finances have become exponentially more complex after the ratification of the Sixteenth Amendment
in 1913, which permits income taxes. Additionally, Medicare and Medicaid programs are less than 50 years old. Finally, while Congress enacted legislation
[PDF] in the 1950s requiring the executive branch to complete the president's budget using cost-based accrual accounting, the executive branch refused to comply with this legislation.
The dissenters in the case at hand correctly admonish their colleagues on the importance and benefits of structural protections. However, arguably, they failed to persuade them because of their flawed and incomplete analysis. Several quotes from Justice William Douglas' dissent in the Richardson case illuminate the issues missed:
The Framers of the Constitution deemed financial information essential if the electorate was to exercise any control over its representatives and meet their new responsibilities as citizens of the Republic ... From the history of the clause it is apparent that the Framers inserted it in the Constitution to give the public knowledge of the way public funds are expended ... The sovereign in this Nation is the People, not the bureaucracy. The statement of accounts of public expenditures goes to the heart of the problem of sovereignty. If taxpayers may not ask that rudimentary question, their sovereignty becomes an empty symbol and a secret bureaucracy is allowed to run our affairs.
Justice Lewis Powell, in his concurring opinion in Richardson
, stated that:
On the other hand, if the involvement of the taxing and spending power has some relevance, it requires no great leap in reasoning to conclude that the Statement and Account Clause, Art I sec. 9 cl. 7, on which respondent relies, is inextricably linked to that power. And that clause might well be seen as a "specific" limitation on congressional spending. Indeed, it could be viewed as the most democratic of limitations.
St. George Tucker's comments
are also instructive:
These provisions form a salutary check, not only upon the extravagance, and profusion, in which the executive department might otherwise indulge itself, and its adherents and dependents; but also against misappropriation, which a rapacious, ambitious or otherwise untruthful executive might be disposed to make.
The nation needs the Supreme Court most when the other two branches of government have clearly failed to fulfill their Constitutional duties. Unless the judiciary restores the rule of law the lack of proper financial reporting ensures that our electorate remains uninformed and that the nation will go off the proverbial "financial cliff" with the concomitant severe economic disruption and civil unrest. If the Supreme Court continues to refuse to address the meaning of the Statement and Account Clause, as was required in this case, it will get an opportunity in the not-too-distant future to contemplate the role that it played in aiding and abetting the largest fraud in history and resulting financial Armageddon.
Joseph Marren is the President and Chief Executive Officer of KStone Partners, an SEC-registered investment advisor that specializes in managing funds of hedge funds. Previously he was Head of Business Development in the mergers and acquisitions departments at several firms including Sagent Advisors, Citigroup, Credit-Suisse and DLJ. He is the author of two books on mergers and acquisitions, taught at New York University Stern School of Business and is a graduate of Fordham University School of Law.
Elizabeth Marren is a student at Fordham University School of Law in New York, New York. She graduated from the University of Notre Dame, where she majored in Political Science and minored in the Hesburgh Program for Public Policy.
Suggested citation: Joseph Marren & Elizabeth Marren, ACA Medicaid Decision is Judicial Malpractice, JURIST - Sidebar, Sept. 5, 2012, http://jurist.org/sidebar/2012/09/marren-marren-medicaid-malpractice.php
This article was prepared for publication by Stephen Krug, an associate editor for JURIST's professional commentary service. Please direct any questions or comments to him at email@example.com