Six State AGs Bring Affordable Care Act Lawsuit

On February 25, 2016, Indiana AG Greg Zoeller became the sixth AG, along with those of Texas, Wisconsin, Kansas, Louisiana, and Nebraska, to join in a lawsuit challenging the implementation of the Health Insurance Providers Fee, as part of the Affordable Care Act. The state AGs argue that portions of the Fee, which is directed to certain health insurance providers, will be paid by states, which they allege violates the Constitution and several federal laws. According to Texas AG Ken Paxton, the Fee is an “unconstitutional Obamacare tax.”

The Fee is assessed on certain health insurance providers. Non-profit providers that receive more than 80 percent of their gross revenues from federal government programs targeting low-income, elderly, or disabled populations are exempt from the Fee. 26 C.F.R. § 57.2(b)(2)(iii).

Many states, including the plaintiff states, employ a managed-care model to provide Medicaid services, under which the state pays a flat monthly fee per individual to a managed-care organization to provide for that individual’s healthcare, called a “capitation payment.” The federal Medicaid program allows such arrangements, but requires that capitation payments by states be “actuarially sound.” 42 U.S.C. § 1396(m)(2)(A). In particular, managed-care contracts must be certified by an actuary using standards established by the Actuarial Standards Board, a non-governmental trade organization. The ASB in March 2015 established guidance on how actuaries should evaluate managed-care contracts, which instructed that capitation payment rates must account for taxes and fees for which the managed-care providers are liable.

Thus, the states argue, they will have to pay higher capitation rates because those rates, in order to be “actuarially sound,” must account for the Fee. Many managed-care organizations used in the Medicaid programs of the plaintiff states are for-profit and thus subject to the Fee. The AGs argue this subjects the states to coercion of the sort held unconstitutional in NFIB v. Sebelius, 132 S. Ct. 2566 (2012), in that the states must pay the Fee, through higher rates, in order to continue participating in the Medicaid program.

The United States, in moving to dismiss, argued that future higher capitation rates due to the Fee were too speculative to confer standing on the states, and that the states could avoid higher rates either through negotiation or by entering contracts with non-profit insurers that are exempt from the Fee. The United States also pointed to Supreme Court precedents holding that taxes collected from private parties contracting with a state government were constitutional even if some or all of that tax burden fell upon that state government.

Legal intricacies aside, the lawsuit, like state AG lawsuits against the Clean Power Plan, illustrate the important role that state AGs play in the implementation (or not) of large, ambitious federal initiatives.