Health Reform WK-EDGE Section 9010 of the ACA, HHS’s Certification Rule both constitutional
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Tuesday, August 11, 2020

Section 9010 of the ACA, HHS’s Certification Rule both constitutional

By Jeffrey H. Brochin, J.D.

HHS did not violate the non-delegation doctrine when it promulgated the Certification Rule because the authority granted to the Actuarial Standards Board merely prescribed the conditions necessary to receive federal Provider Fee funds.

The Fifth Circuit has affirmed in part and reversed in part the rulings of the trial court in a case involving states’ challenges to HHS’s Certification Rule and to section 9010 of the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148). The requirement of "actuarial soundness" did not create any new obligation or legal consequence, and actuarially sound capitation rates have consistently required that all reasonable, appropriate, and attainable costs be covered by rates. Additionally, section 9010 of the ACA did not violate the Spending Clause nor the Tenth Amendment doctrine of intergovernmental tax immunity (State of Texas v. RettigJuly 31, 2020, Haynes, C.).

Medicaid MCO model. Under the widely used managed-care organization (MCO) model of Medicaid reimbursement, the state pays a third-party health insurer, the MCO, a monthly premium (capitation rate) for each Medicaid beneficiary the MCO covers, and the state then may receive reimbursement from the federal government for some percentage of the capitation rate so long as the underlying MCO contract is "actuarially sound." HHS recognized that its definition of actuarial soundness—based on the cost of services under a fee-for-service model—was untenable, and it therefore promulgated a final rule under which capitation rates had to satisfy three requirements in order to be actuarially sound, including that the rates had to have been developed in accordance with generally accepted actuarial principles and practices, and had to satisfy the Certification Rule, meaning that they met the requirements of actuaries who met the qualification standards established by the American Academy of Actuaries and who followed the practice standards established by the Actuarial Standards Board (the Board).

Changes under the ACA. In 2010, Congress enacted the ACA which made two changes to the regulatory scheme requiring states that requested Medicaid reimbursements for their MCO contracts to provide actuarially sound capitation rates. One of the changes imposed a new federal health-insurance provider tax (Provider Fee) on MCOs, and, the other change amended the Medicaid Act to expressly require that capitation rates included in state-MCO contracts be actuarially sound. What remained unchanged was that actuarially sound capitation rates required accounting for all reasonable, appropriate, and attainable costs. Therefore, when the IRS began collecting the Provider Fee from covered entities in 2014, states with MCO contracts were required to account for the Provider Fee to meet the actuarial soundness requirement of the Medicaid Act.

‘Outsourcing’ to the Board. In 2015 the Board Medicaid defined capitation rates as actuarially sound if they "provide for all reasonable, appropriate, and attainable costs." Therefore, in order for states to receive federal reimbursement under the managed-care model, their MCO contracts needed to be approved by HHS as actuarially sound, and to be so, the capitation rate had to account for all costs MCOs bore when providing care to Medicaid beneficiaries, and states had to account for the Provider Fee in their capitation rate to satisfy HHS’s actuarial-soundness requirement. A group of states sued the IRS, and the trial court found that the Certification Rule violated the nondelegation doctrine (but otherwise complied with the APA), And that Section 9010 of the ACA did not violate the Spending Clause or the Tenth Amendment. Both parties filed their appeals.

No violation of non-delegation doctrine. The appeals court began its review by noting that a federal agency may not abdicate its statutory duties by delegating them to a private entity; however, delegation to private entities is lawful if the entities function subordinately to the federal agency and the federal agency has authority and surveillance over their activities. Therefore, the issue was one of whether HHS retained final reviewing authority over state-MCO contracts when it required that the contract be certified by an actuary who followed the practice standards established by the Board. The Appeals court answered that question in the affirmative, finding that HHS’s delegation of certain actuarial soundness requirements to the Board did not divest HHS of its final reviewing authority, and that HHS retained the ultimate authority to approve a state’s contract with MCOs. Accordingly, the appeals court ruled that HHS did not unlawfully delegate to a third party its authority to approve state-MCO contracts.

Section 9010 ACA claims. The states raised two constitutional challenges against Section 9010: that it violated the Spending Clause, and the Tenth Amendment doctrine of intergovernmental tax immunity. Although the states argued that the Provider Fee, as applied to them, functioned as a condition on spending and thereby implicated the Spending Clause, the appeals court held that the Provider Fee was a constitutional tax that fully resolved the states’ Spending Clause claim and did not impose a condition on spending.

As to the implication of the Tenth Amendment on the Provider Fee, the ap[peals court ruled that although a constitutional tax properly enacted through Congress’s taxing power is generally not subject to other constitutional provisions, the Tenth Amendment doctrine of intergovernmental tax immunity imposes two limitations when the federal government imposes an indirect tax, like Section 9010, on states: First, the tax must not discriminate against states or those with whom they deal, and, second, the "legal incidence" of the tax may not fall on the states. The appeals court held that Section 9010 of the ACA satisfies both requirements, and therefore was not unconstitutional.

The case is No. 18-10545.

Attorneys: Kyle Douglas Hawkins, Office of the Attorney General, for State of Texas, State of Kansas, State of Louisiana and State of Indiana. Alisa Beth Klein, U.S. Department of Justice, for Charles P. Rettig, United States Department of Health and Human Services and United States Internal Revenue Service.

Companies: State of Texas; State of Kansas; State of Louisiana; State of Indiana; United States Department of Health and Human Services; United States Internal Revenue Service

Cases: CaseDecisions AgencyNews ManagedCareNews LouisianaNews MississippiNews TexasNews NewsFeedv

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