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Analysis: Health care’s Medicaid expansion

This is one of a continuing series of articles the blog has been publishing in recent weeks, explaining more fully the new federal health care law, and the Supreme Court’s review of the constitutionality of key parts of the law.  This article deals with the Affordable Care Act’s expansion of eligibility, among the poor, for medical services under the federal-state Medicaid program.  That is one of the provisions of the Act that the Court has agreed to review, in response to constitutional challenges by 26 states.  (All articles in this special series on the ACA can be found here.)



If there is a surprise in the Supreme Court’s agreement to take on the constitutional controversy over the new federal health care law, it is the Court’s willingness to rule on Congress’s power to broadly expand the right of poor people to health care benefits under the federal-state program called “Medicaid.”   In that review, the Court will be considering a constitutional theory that it has examined closely twice — first in 1937, and then, a half-century later, in 1987 — but has never actually used in any case.  The aim of the theory is to put limits on Congress’s power to spend money on public programs.   Hardly a year in the Court’s life passes without some state trying to persuade the Justices to put that idea to work, but the Court has customarily shown no interest.  Now, the Justices are at least considering that very suggestion.

In the challenge by 26 states to Congress’s decision in the Affordable Care Act to expand Medicaid coverage — an expansion that the states claim will simply bust their budgets — the states are relying upon the so-called “coercion theory.”  This has to do with the conditions that Congress tells states they must meet in order to qualify for federal funds to help pay for a public program.   Over the years, states have argued that those conditions can be so onerous that they threaten the fiscal health of the states and thus their sovereignty, and thus upset the federal balance that is a central feature of the Constitution itself.

The argument goes by the name “coercion” because the states need the money so desperately, to pay for programs deemed indispensable to their citizens, that the states have no choice but to accept the conditions and take part in the program, no matter what the threat to their own budgets.   If ever applied in a real-world situation, the theory would be a potent limitation on what Congress can do under the Constitution’s Spending Clause.

But even if the theory were only applied to the conditions that Congress has newly imposed for state participation in the Medicaid program, that would affect a huge part of the annual flow of federal funds to state governments.  Medicaid is, in fact, the single largest program of federal financial grants, involving more than 40 percent of all grants each year to state governments.   The grants total somewhere above $251 billion a year and the program works out — on average — to about $1 billion annually for many of the states.  Federal funds, of course, do not cover the entire cost of Medicaid, so the states must spend from their own treasuries to make up the difference.  As eligibility of the poor to participate in Medicaid expands, state budgets will have to expand, too.

State governments thus have every incentive to try to fight off the Medicaid expansion in the Affordable Care Act, and it was one of their leading legal claims when they joined in a constitutional lawsuit in federal District Court in Pensacola, Fla., within minutes after President Obama signed the health bill into law in March of last year.   Just as they made claims that Congress did not have the power under the Commerce Clause to enact major parts of the Act, the states also contended that Congress did not have the power under the Spending Clause to “coerce” the states into putting up the added money for Medicaid patients’ care.

While many federal programs have traditionally been set up by Congress using its authority under the Commerce Clause, Congress has turned increasingly to relying upon the Spending Clause, especially in programs in which state governments act as partners with the federal government.   That is because the Supreme Court, in what was called the “federalism revolution” that ran from about 1992 to 2003, put strict new limits on how Congress could use its commerce power to force states to obey federal mandates.

The Constitution, by the way, does not actually use the word “spending” in laying out the legislative powers it gives to Congress.   But, since the very first enumerated power in Article I, Section 8, is to levy taxes, the implication is that the lawmakers can spend what the Treasury gathers in tax revenue.   After saying that Congress has taxing power, the provision does say — without elaboration — that Congress also has the power “to provide for….the general welfare of the United States.”

Congress customarily does not just hand out money to the states without strings attached.   Since Congress created the federal-state Medicaid partnership initially in 1965, there have always been conditions on states’ receipt of federal financial support to cover the health benefits of the needy.  States, for example, have to have in place Medicaid plans that assure certain kinds of medical benefits, but they also have the option to include some others that are not mandatory.

The ACA’s Medicaid expansion that is to go into effect in 2014 is of the mandatory variety.   And that is what the 26 states are challenging in their petition to the Supreme Court, having lost on their coercion theory both in the federal District Court in Florida and in the Eleventh Circuit Court, based in Atlanta.  Interestingly, both of those lower courts took the coercion argument quite seriously, but then wound up finding the argument unpersuasive.   “If anything can be said of the coercion doctrine in the Spending Clause context,” the Eleventh Circuit remarked, “it is that it is an amorphous one, honest in theory but complicated in application.”   Still, it added, “to stay that the coercion doctrine is not viable or does not exist is to ignore Supreme Court precedent, an exercise this Court will not do.”

The overall goal that Congress had in mind in passing the ACA was to lead the nation toward nearly universal health care, and the methods chosen were designed in the main to achieve a reduction of the total number of Americans who do not have health insurance.   Congress estimated that 50 million Americans are uninsured.  In the Medicaid expansion, Congress estimated that it would assure coverage for 9 million of those 50 million by the year 2014, 16 million by 2016, and 17 million by 2021.   States have argued that the numbers may actually grow larger that those estimates, because many individuals who previously had been eligible for Medicaid benefits did not choose to seek them, but will now do so under the ACA’s mandate that all Americans must have health insurance by 2014, or pay a financial penalty.

Beginning in 2014, the ACA will require each state taking part in Medicaid (all 50 do now) to provide in their plans for health care services for adults under age 65, if their income is no higher than 133 percent of the federal poverty level.  Previously, the states did not have to observe a baseline income level for eligibility, and many states chose not to provide Medicaid to adults who had no children, while providing coverage for adults who do have children at lower income levels.

In addition, a state plan must provide Medicaid to all children whose families’ earnings are no higher than 133 percent of the federal poverty level, even if the children are already covered by another federal health care program (CHIP, or Children’s Health Insurance Program).  Before this change, states were required to provide Medicaid to children under age 6 if the family income was no higher than 133 percent of the poverty level, and children ages 6 through 18 if the family income was no higher than 100 percent of the poverty level.

Further, states may not alter existing Medicaid eligibility levels for adults and children in effect as of March 23, 2010, until a state has put into operation a new “health exchange” — a kind of marketplace in which families can shop for health insurance at affordable rates.   Previously, states had the option of lowering or raising eligibility levels.  If the state previously had allowed eligibility to expand, as a voluntary matter, that eligibility is now to be locked in.

Another provision gives new coverage to children who are 25 years old or younger and who had been receiving Medicaid but would have lost it under age limits on foster care.  They will become newly eligible to go on receiving Medicaid, come 2014.

Finally, family doctors (“primary care” doctors) are to get an increase in Medicaid reimbursements.

The federal government must pay 100 percent of the added cost of these expanded coverage provisions for the years 2014, 2015, and 2016.  After 2016, the federal share will drop to 95 percent in 2017, 94 percent in 2018, 93 percent in 2019, and to 90 percent in 2020, leaving it at 90 percent thereafter, with the states thus obliged by then to pick up 10 percent of the added cost.  The federal share will not drop at any point below 90 percent (compared to a range at present between 50 and 83 percent).   The states also will have to pick up the tab for any administrative expenses they incur in carrying out the expanded eligibility.

The new law, reinforced by existing Medicaid law, seeks to induce the states to accept the new conditions.   For years, Medicaid law has had a provision threatening a cutoff of all federal payments to a state that fails to meet the new requirements, and the fund cutoff would last until the federal government became satisfied that a state would start complying in full.   Federal law, however, does give the U.S. Department of Health & Human Services some discretion about whether it will actually impose a total cutoff of funding to a state whose plan falls short.

After the states launched their attack on the Medicaid provisions, the Obama Administration urged courts to reject it, arguing among other points that the states had clearly been warned — by explicit terms in the Medicaid law — that Congress had reserved for itself the right to change the program as time went on.

The states’ lawyers foresaw a dire future for them as partners in the Medicaid program.  Either choice open to them — to stay in the program rather than risk losing all federal grants, or to opt out and have to find their own money to finance medical care for the poor — would eventually lead to collapse of the Medicaid benefits in each state, leaving the neediest with no assurances of access to care.

Thus, their reliance on the coercion theory forced the federal courts to consider whether that theory retained any vitality at all, given how little a role it has actually played in Supreme Court history.   The theory, though, does have a historic pedigree: the Supreme Court took it quite  seriously when it was first put forth, in the case of Steward Machine Co. v. Davis.  The was one of two decisions the Court announced on May 24, 1937, upholding one of the most important social “safety nets” that Congress passed in the wake of the Great Depression: the Social Security Act.  The Steward Machine ruling upheld Congress’s power under the Spending Clause to impose a tax on employers to pay for unemployment compensation.  (The other decision that day, Helvering v. Davis, upheld the system of pension benefits for the elderly.)

Those two decisions, of course, came at the very time that the Supreme Court was deeply skeptical — and sometimes, openly disapproving — of the broad expansions of federal authority that had been undertaken by the Franklin Roosevelt Administration to deal with the Depression’s devastating effects.   The Steward Machine decision, though, built upon a broad theory of taxing power, enunciated a year earlier by the Court in a ruling (United States v. Butler) that otherwise posed a major threat to the New Deal program as a whole.

In Steward Machine,  the Court, answering the company’s reliance on the coercion theory, commented that it could find nothing in the unemployment tax law suggesting “the exertion of a power akin to undue influence.”  Even assuming, it said, that “such a concept can ever be applied with fitness to the relations between state and nation,” it would not apply that assumption.  It would not attempt there, it added, to locate “the point at which pressure turns into compulsion, and ceases to be inducement.”

The theory did not make another appearance in a Supreme Court opinion for the next 50 years, when the state of South Dakota attempted to rely upon it in challenging Congress’s decision to withhold from states some of the federal funds they could get to build and maintain highways.  That threatened cutoff was an inducement to states to forbid anyone to buy intoxicating beverages before age 21 — based on the theory that young people cause a high percentage of accidents on the roads.   Quoting from the Steward Machine opinion, the Court said it had recognized “that in some circumstances the financial inducement offered by Congress might be so coercive as to pass the point at which ‘pressure turns into compulsion.'”

But it dismissed South Dakota’s claim as “more rhetoric than fact,” since the state was threatened with the loss of only 5 percent of the grant money for roads.   What Congress had done, it concluded, was offer “relatively mild encouragement to the states” to get them to keep underage drivers off the roads.

The 26 states’ attempt to put the theory to practical use, in an actual case growing out of the new health care law, got a respectful hearing — first from Senior U.S. District Judge Roger Vinson in Pensacola, and later from the Eleventh Circuit Court.   In fact, Judge Vinson, in a preliminary decision, found enough substance to the theory that he allowed the states to continue pressing it when the actual constitutionality of the Medicaid expansion came before him later.  While the courts’ reaction to the theory “does not provide much support” for the challengers’ argument, Vinson said in that initial ruling, “it does not preclude it either (at least not in this circuit).”   He added that “there is a line somewhere between mere pressure and impermissible coercion,” so the claim was at least “plausible.”

After hearing evidence and further argument on the point, Judge Vinson about three months later decided the issue.   He noted that the coercion theory was the exclusive argument the states were using against the Medicaid expansion.  Quoting from the Supreme Court’s Steward Machine opinion, he said that locating the point at which coercion had been shown would “plunge the law in endless difficulties.”   Saying he was joining all of the other federal courts on the point, Vinson said the states “cannot succeed” in their challenge.   He did quote favorably from a law review article asserting that “the states will be at the mercy of Congress so long as there are no meaningful limits on its spending power,” and he commented that the suggestion has been made that the Supreme Court reconsider that power.  Until then, he concluded, “the states have little recourse to remaining the very junior partner in this partnership.”

The 26 states persisted with the coercion theory in the Eleventh Circuit Court, again to no avail.   That court said there was only “limited case law” on the theory, noted that “the Supreme Court has never devised a test to apply it,” and took account of the fact that “no court has ever struck down a law such as this one as unduly coercive.”  Even so, it wound up accepting that the theory had some validity, borrowing from some of the Supreme Court’s more recent cases on state sovereignty and federalism theory.

It spelled out when the theory might actually work, saying “Congress cannot place restrictions so burdensome and threaten the loss of funds so great and important to the state’s integral function as a state — funds that the state has come to rely on heavily as part of its everyday service to its citizens — as to compel the state to participate in the ‘optional’ legislation.  This is the point where ‘pressure turns into compulsion.'”

Applying that understanding, the Circuit Court concluded that the ACA’s “expansion of Medicaid is not unduly coercive.”  It relied upon these facts: states had been warned from the outset that there would be conditions in the program, the government “will bear nearly all of the costs associated with the expansion,” the states have nearly four years of time to decide whether to remain in the program or opt out, the states retain their power to tax and raise revenue and “can create and fund programs of their own if they do not like Congress’s terms, and the federal HHS Department has discretion whether to withhold all or merely a part of funding from a state that does not meet the conditions while staying in the program.

“Where an entity has a real choice, there can be no coercion,” it said.

Moving on to the Supreme Court, the 26 states placed the Medicaid expansion challenge at the top of the list of questions they wanted the Court to answer.  The petition asked: “1. Does Congress exceed its enumerated powers and violate basic principles of federalism when it coerces states into accepting onerous conditions that it could not impose directly by threatening to withhold all federal funding under the single largest grant-in-aid program, or does the limitation on Congress’s spending power that this Court recognized in South Dakota v. Dole, 483 U.S. 203 (1987), no longer apply?”

The petition treated the coercion theory as a long-standing constitutional principle, arguing that “the Court has long recognized that a federal financial inducement can be so massive as to leave States with no choice but to accept it, no matter how destructive to their sovereignty the attached conditions may be. This case presents an ideal opportunity to reaffirm that principle, which has been largely ignored and even expressly rejected by multiple courts of appeals….The amounts at issue are staggering, the conditions attach to pre-existing pots of funding, not just new money, and the Act locks States into previously voluntary choices.”

The Obama Administration, in reply, sought to head off Supreme Court review, relying on the absence of a conflict among lower courts on the coercion theory, on the absence of any prior court ruling nullifying federal spending based upon that theory, and on the reasoning of the Eleventh Circuit when it found the theory wanting.  It suggested that, even if the theory were employed in this case, the states’ challenge on Medicaid would still fail.

The Court, on agreeing to hear the ACA case, chose carefully among the issues it had been asked to decide, and thus indicated that the Justices may well have thought that the states had shown that the stakes of the coercion theory were, in fact, higher in this case than in any prior test case taken to the Court.   When the Court hears oral argument on the ACA in late March, the Medicaid expansion will have an hour of its own argument time — on the afternoon of March 28.

Next:   Concluding this series, the next article will discuss the interplay between Supreme Court review of the ACA, government implementation of the
Act, and the political debate over health care.   It will appear on the blog later this week.

Recommended Citation: Lyle Denniston, Analysis: Health care’s Medicaid expansion, SCOTUSblog (Dec. 27, 2011, 12:28 AM),