State v. United States, Civil Action No. 7:15–cv–00151–O

• Decision Date: 05 March 2018
• Docket Number: Civil Action No. 7:15–cv–00151–O
• Citation: 300 F.Supp.3d 810
• Parties: State of TEXAS, et al., Plaintiffs, v. UNITED STATES of America, et al., Defendants.
• Court: U.S. District Court — Northern District of Texas

300 F.Supp.3d 810

State of TEXAS, et al., Plaintiffs,

v.UNITED STATES of America, et al., Defendants.

Civil Action No. 7:15–cv–00151–O

United States District Court, N.D. Texas, Wichita Falls Division.

Signed March 5, 2018

Thomas A. Albright, Andrew D. Leonie, Austin Nimocks, Michael Christopher Toth, Office of the Attorney General of Texas, Austin, TX, for Plaintiff.

Julie Straus Harris, US Dept of Justice Civil Div. Federal Programs Branch, Deepthy Kishore, Rohit Dwarka Nath, Michelle Bennett, Sheila Lieber, US Department of Justice, Washington, DC, for Defendant.

MEMORANDUM OPINION AND ORDER

Reed O'Connor, UNITED STATES DISTRICT JUDGE

This case is about the lawfulness of a tax in the Patient Protection and Affordable Care Act ("ACA") and of a regulation that the United States Department of Health and Human Services ("HHS") uses to implement it. The ACA imposed a tax on medical providers but exempted the states from paying it. Notwithstanding Congress's direction in the ACA, the HHS regulation effectively requires the states to pay this tax. Plaintiffs now challenge both the tax and the regulation. Because Plaintiffs have standing to challenge both, the Court must decide the legality of each.

The Court concludes that the challenged ACA tax is lawful, offending neither the structure nor substance of the Constitution. But the HHS regulation violates the non-delegation doctrine, delegating to a private entity the authority to decide who must pay this tax. Pursuant to that unlawful delegation, the private entity decreed that the states must pay this tax, contrary to Congress's express directive. HHS's unlawful delegation enabled a private entity to effectively rewrite the ACA, wrongfully forcing Plaintiffs to pay this tax. It is therefore the regulation—not the tax—that harms Plaintiffs. For the reasons that follow, the Court will GRANT in part Plaintiffs' claims challenging the regulation and declare the offending regulation "contrary to constitutional right, power, privilege, or immunity," and "in excess of statutory jurisdiction, authority, or limitations, or short of statutory right ...." 5 U.S.C. § 706(2)(B)–(C). The Court will DENY Plaintiffs' claims challenging the tax.¹

Accordingly, having considered the motions, related briefing, and applicable law, the Court finds that Plaintiffs' Motion for Summary Judgment (ECF No. 53) should be and is hereby GRANTED in part and DENIED in part ; and Defendants' Motion for Summary Judgment (ECF No. 62) should be and is hereby GRANTED in part and DENIED in part .²

I. BACKGROUND

Plaintiffs (alternatively, "Plaintiff States") are the States of Texas, Indiana, Kansas, Louisiana, Nebraska, and Wisconsin. Am. Compl. 1, ECF No. 19. Defendants are the United States of America (the "Government"); the United States Department of Health and Human Services; Alex Azar, in his official capacity as Secretary of HHS;³ the United States Internal Revenue Service (the "IRS"); and David Kautter, in his official capacity as Acting Commissioner of the IRS.⁴ Id. at 1–2. Plaintiffs allege that Defendants, in violation of the ACA, the Administrative Procedure Act (the "APA"), and the United States Constitution, require them to pay the ACA's Health Insurance Providers Fee (the "HIPF") to the managed care organizations (the "MCOs") who contract with them to service their Medicaid recipients. Id. at 3–19.

In the ACA, Congress expressly exempted states from paying the HIPF. ACA § 9010(c)(2)(B) (2010); see 26 C.F.R. § 57.2(b)(2)(ii)(B). This effectively changed in March of 2015, when the Actuarial Standards Board (the "ASB")—a private organization that sets practice standards for private actuaries certified by the American Academy of Actuaries (the "AAA")—enacted Actuarial Standard of Practice Number 49 ("ASOP 49").⁵ ASOP 49 forbids AAA actuaries from certifying any Medicaid contract between a state and an MCO unless the contract requires the state to pay the HIPF to the MCO. See ASOP 49 § 3.2.12(d).⁶ Without this AAA certification, the Centers for Medicare & Medicaid Services ("CMS")—a component of HHS—will not approve the MCO contract. See 42 C.F.R. § 438.6(c)(1)(i)(A)–(C) (2002) [hereinafter "the Certification Rule"].⁷ If CMS does not approve the contract, the state becomes ineligible for Medicaid funding. See 42 U.S.C. § 1396b(m)(2)(iii). The end result is that by delegating this certification power to the ASB, HHS effectively requires states to pay the HIPF—even though Congress exempted them from doing so—or risk losing Medicaid funds.⁸

The ACA, the HIPF, and the Certification Rule interact with several public health programs. The first of these programs actually began in 1965, when Congress enacted, and President Lyndon Johnson signed into law, the Medicaid program. See Social Security Amendments Act of 1965, Pub. L. 89–97, 79 Stat. 286 (1965). Medicaid subsidizes states to provide healthcare to low-income families; children; related caretakers of dependent children; pregnant women; people aged 65 years and older; and adults and children with disabilities. See 42 U.S.C. §§ 1396 – 1396w. To receive Medicaid subsidies, states must provide coverage to a federally mandated category of individuals according to a federally approved state plan. See 42 U.S.C. § 1396a ; 42 C.F.R. §§ 430.10 – 430.12. Plaintiffs participate in the program, providing Medicaid services and receiving Medicaid subsidies. See 79 Fed. Reg. 3385. Plaintiffs provide these services at substantial cost. See, e.g. , Pls.' App. 1168–74, ECF No. 54–1. For example, in 2015 Texas spent 28.6% of its budget on Medicaid, serving 4.06 million Texans—around one in seven members of its population.⁹ The other Plaintiff States likewise provide Medicaid to millions of their citizens at the cost of a considerable portion of their annual budgets. See Pls.' Br. Supp. Summ. J. 8 n.23–29, ECF No. 54 (citing data) [hereinafter "Pls.' Br."].¹⁰

When Plaintiffs first began implementing the Medicaid program, they primarily relied on fee-for-service providers ("FFSPs") to deliver Medicaid services. See Pls.' App. 120, 133, 291, 485, 1008, 1162–63, ECF No. 54–1. Over time, however, Plaintiffs discovered that managed care organizations were more efficient and less expensive. See, e.g., id. at 120. In a managed care arrangement, the state enters into a contract with an MCO, wherein the MCO agrees to deliver healthcare services to citizens of the state, and in exchange, the state pays the MCO a fixed monthly fee per covered individual, known as a "capitation rate." Id. at 1168.

In order to realize the benefits and savings of managed care, Plaintiffs began a long-term transition from FFSPs to MCOs. See id. at 120, 133, 291, 485, 1008, 1162–63. Texas began this transition in 1993. Id. at 1006. By the end of 2005, 40% of Texas's Medicaid beneficiaries received services through MCOs, and by 2012, that percentage reached 80%. Id. at 1007. When Plaintiffs filed this suit in 2015, Texas MCOs served around 87% of Texas's Medicaid population. Id. Texas anticipates that this year MCOs will serve 93% of its Medicaid population. Id. at 1007–08. Each Plaintiff now provides a substantial portion of their Medicaid services through MCOs. See id. at 120, 133, 291, 485, 1008, 1162–63.¹¹ Plaintiffs have saved hundreds of millions of dollars by transitioning to MCOs. See id. at 121, 133–34, 291–92, 493–94, 1010, 1163. In January 2015, HHS announced in a press release—titled "Better Care. Smarter Spending. Healthier People: Why It Matters"—that it too would transition to MCOs. Id. at 13–14.

In 1981, Congress passed, and President Ronald Reagan signed into law, legislation requiring MCO capitation rates to be "actuarially sound." Omnibus Budget Reconciliation Act of 1981, Pub. L. No. 97–35, 95 Stat. 357, 814 (1981) (codified at 42 U.S.C. § 1396b(m)(2)(A) (1981) ).¹² HHS did not interpret the meaning of "actuarially sound" until 2002, when it promulgated the Certification Rule. This rule defined "actuarially sound" in the following way:

(i) Actuarially sound capitation rates means capitation rates that—

(A) Have been developed in accordance with generally accepted actuarial principles and practices;

(B) Are appropriate for the populations to be covered, and the services to be furnished under the contract; and

(C) Have been certified, as meeting the requirements of this paragraph (c), by actuaries who meet the qualification standards established by the American Academy of Actuaries and follow the practice standards established by the Actuarial Standards Board.

See 42 C.F.R. § 438.6(c)(i)(A)–(C) (2002) (emphasis in original). Thus, under the Certification Rule, "actuarially sound capitation rates" are capitation rates certified by an AAA actuary who, following the ASB's practice standards, determines that the rate has "been developed in accordance with generally accepted actuarial principles and practices." Id.

The AAA is a private, membership-based professional organization that exists to set qualification, practice, and professional standards for credentialed actuaries.¹³ The AAA sets these standards through the ASB, another independent, private organization.¹⁴ The ASB establishes and improves standards of actuarial practice by enacting Actuarial Standards of Practice ("ASOPs") to identify what AAA actuaries should consider, document, and disclose when performing an actuarial assignment.¹⁵ In 2005, the AAA defined "actuarially sound" capitation rates as including inter alia state taxes—but not federal taxes.¹⁶ In 2013, the ASB enacted ASOP 1, explaining that "the phrase ‘actuarial soundness’ has different meanings in different contexts ...."¹⁷

In 2010, Congress passed, and President Barack Obama signed into law, the ACA. The Patient Protection and Affordable Care Act, Pub. L. 111–148, 124 Stat. 119–1025 (2010). The ACA requires health insurance providers who are "covered entities" to pay the HIPF to the IRS. See ACA § 9010. A covered entity must pay a portion of the HIPF proportionate to the...