By Robert B. Barnett Jr., J.D.
The Fifth Circuit reversed the lower court ruling that HHS had violated the nondelegation rule, ruling instead that HHS had placed reasonable conditions on certification.
Claims by six states, that a section of the ACA and an HHS administrative rule involving actuarial soundness in Medicaid capitation rates were unconstitutional, have failed after the Fifth Circuit completely rejected the states’ claims and has reversed a lower court’s award of $479 million in disgorgement from the federal government. The Fifth Circuit ruled that HHS’s Certification Rule did not violate the nondelegation doctrine and that Section 9010 of the ACA’s Provider Fee was a tax that violated neither the Spending Clause nor the Tenth Amendment. It also ruled that the states’ Administrative Procedure Act claims were time-barred (Texas v. Rettig, February 12, 2021, Haynes, C.).
Background. A Medicaid regulatory scheme requires that states using the managed-care model for Medicaid reimbursement demand their contracts with managed care organizations (MCOs) provide actuarially sound capitation rates. The ACA made two changes to it, which involved Section 9010. First, Congress imposed a new health insurance provider tax on certain MCOs, which must be paid annually by covered entities. Second, Congress amended the Medicaid Act to require that capitation rates included in state MCO contracts be actuarially sound. As a result, when the IRS began collecting the Provider Fee from covered entities, states with MCO contracts were required to account for the Provider Fee to meet the actuarial soundness requirement of the Medicaid Act.
In 2002, HHS promulgated a final rule on actuarial soundness requiring that capitation rates satisfy three requirements: (1) the rates had to be developed in accord with generally accepted actuarial principles; (2) the rates had to be appropriate for the population covered; and (3) the rates had to satisfy the Certification Rule, which meant that they met the qualification standards established by the American Academy of Actuaries’ Actuarial Standards Board.
The six states—Texas, Kansas, Louisiana, Indiana, Wisconsin, and Nebraska—sued the United States, alleging that the Certification Rule and Section 9010 were unconstitutional. As for the Certification Rule, the states alleged that: (1) the U.S. violated the nondelegation doctrine from Article I, section 1, by delegating responsibility for the qualification standards to the Board; and (2) HHS violated the Administrative Procedure Act (APA) on multiple grounds. As for Section 9010, the states argued that the statute violated the Spending Clause and the doctrine of intergovernmental immunity under the Tenth Amendment.
Both parties moved for summary judgment, which the district court granted in part. It held that the states had standing and that their APA claims were not barred by the six-year statute of limitations. It held that the Certification Rule violated the nondelegation doctrine but that it otherwise complied with the APA. On Section 9010, it ruled that Congress violated neither the Spending Clause nor the Tenth Amendment. As a result of the Certification Rule violating the nondelegation doctrine, the district court set aside the Certification Rule, and it ordered the U.S. to disgorge $479 million to the states. Both parties appealed.
Standing. The Fifth Circuit agreed with the lower court that the states had Article III standing to bring their claims. They suffered injury in fact by having to pay millions of dollars in provider fees despite the ACA’s explicit exemption for governmental entities.
Statute of limitations. The Fifth Circuit, however, disagreed with the lower court on the statute of limitations question. The Certification Rule was issued 13 years ago. Unless the states could demonstrate some act occurring since then that would restart the running of the six years, the claim was time-barred. Because the states could not, the Fifth Circuit ruled that any APA-related claims were barred by the statute of limitations.
Nondelegation. Turning to the merits of the Certification Rule claim, the Fifth Circuit concluded that HHS did not violate the nondelegation rule. The rule prevents a federal agency from abdicating its statutory duties by delegating them to a private entity. HHS’s incorporation of the Board’s practice standards, however, were reasonable conditions placed on the Certification Rule rather than "subdelegations of authority." Even if HHS subdelegated authority to a private entity, the subdelegation would not have been unlawful because HHS maintained final reviewing authority. An illegal subdelegation would have occurred only if HHS had delegated certain actuarial soundness requirements to the Board, which it did not do. As a result, no nondelegation constitutional violations occurred.
Section 9010. The states argued that Section 9010 violated both the Spending Clause and the Tenth Amendment doctrine of intergovernmental tax immunity. As for the Spending Clause, the Fifth Circuit ruled that the Spending Clause concerns did not apply because the Section 9010 Provider Fee was a constitutionally permissible tax that Congress imposed under its taxing power.
As for the Tenth Amendment argument, the Fifth Circuit acknowledged that the Tenth Amendment places two limitations on the federal government when it imposed an indirect tax: (1) it cannot discriminate against states; and (2) the "legal incidence" cannot fall on the states. The Fifth Circuit first ruled that the Provider Fee was nondiscriminatory because it was imposed on "any entity which provides health insurance." The fee is imposed neither on states nor only those MCOs that deal with states. As a result, no Tenth Amendment unlawful discrimination had occurred. The states’ argument that the Provider Fee placed a burden on them was misplaced because the discrimination question asks only who Congress targets, not who bears the economic burden.
As for legal incidence, the Fifth Circuit said that the states had again misunderstood the term, and for similar reasons. Legal incidence is determined by the statute’s clear wording. For example, in sales taxes, the legal incidence is on the purchaser who has to pay them because the statute expressly provides for it. Because Congress expressly excluded the states from the Provider Fee, it cannot be said that the legal incidence is on the states. The fact that the economic burden may fall on the states was not the equivalent of saying that the legal incidence fell on them. The question in not who as a practical matter pays the tax. As a result, the Fifth Circuit ruled that Section 9010 violated neither the Spending Clause nor the Tenth Amendment.
The Fifth Circuit, therefore, affirmed the lower court ruling that the states had standing. It reversed the ruling that the APA claims were not time-barred, and it dismissed those claims for lack of jurisdiction. On the merits, it affirmed the district court’s ruling that Section 9010 violated neither the Spending Clause nor the Tenth Amendment. It, however, reversed the district court’s judgment that the Certification Rule violated the nondelegation doctrine, and it rendered judgment in favor of the U.S. Finally, it vacated the disgorgement ruling because nothing was left to remedy.
The case is No. 18-10545.
Attorneys: Lanora Christine Pettit, Office of the Attorney General, for State of Texas, State of Kansas and State of Louisiana. Alisa Beth Klein, U.S. Department of Justice, for Charles P. Rettig.
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