Texas v. United States

• Decision Date: 04 August 2016
• Docket Number: Civil Action No. 7:15-cv-00151-O
• Parties: STATE OF TEXAS et al., Plaintiffs, v. UNITED STATES OF AMERICA et al., Defendants.
• Court: U.S. District Court — Northern District of Texas

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 FOR THE NORTHERN DISTRICT OF TEXAS WICHITA FALLS DIVISION

August 4, 2016

MEMORANDUM OPINION AND ORDER

Before the Court are Defendants' Motion to Dismiss Plaintiffs' Amended Complaint and Brief in Support (ECF Nos. 26-27), filed April 1, 2016; Plaintiff States' Response to Defendants' Motion to Dismiss (ECF No. 29), filed April 25, 2016; and Defendants' Reply Brief in Support of Defendants' Motion to Dismiss Plaintiffs' Amended Complaint (ECF No. 32), filed May 18, 2016.

Having considered the motion, related briefing, and applicable law, the Court finds that Defendants' Motion should be and is hereby GRANTED in part and DENIED in part.

I. BACKGROUND

This case arises from Defendants' alleged mandate that Plaintiffs (alternatively, the "Plaintiff States") annually pay to managed care organizations ("MCOs") the full multi-million dollar Health Insurance Providers Fee ("HIPF") the Patient Protection and Affordable Care Act ("ACA") imposes on MCOs. Am. Compl. ¶ 6, ECF No. 19. The following factual recitation is primarily taken from Plaintiffs' Amended Complaint. See generally id. Plaintiffs are the States of Texas, Indiana, Kansas, Louisiana, Nebraska, and Wisconsin. Id. at 1. Defendants are the United States of America (hereinafter "the Government"), Sylvia Burwell ("Burwell"), in her official capacity as Secretary of Health and Human Services ("HHS"), the United States Internal Revenue Service (the "IRS"), and John Koskinen ("Koskinen"), in his official capacity as Commissioner of Internal Revenue. Id. at 1-2. The Court provides factual background on each relevant program or agency action below as set out in Plaintiffs' Amended Complaint. See generally id.

A. Medicaid Program

The United States Congress created the Medicaid program in 1965. See Social Security Amendments Act of 1965, Pub. L. 89-97, 79 Stat. 286 (1965); Id. ¶ 7. Federal and state governments jointly fund Medicaid, which provides healthcare to low-income families, children, related caretakers of dependent children, pregnant women, people age 65 and older, and adults and children with disabilities. Am. Compl. ¶¶ 7, 9, ECF No. 19 (citing 42 U.S.C. §§ 1396-1396w). To participate in Medicaid, states provide coverage to a federally mandated category of individuals according to a federally approved state plan. Am. Compl. ¶ 8, ECF No. 19. All 50 states participate in the Medicaid program, and all Plaintiff States have participated in Medicaid since shortly after its creation. Id. ¶¶ 8-9. States may not limit the number of eligible people who can enroll. Id. ¶ 9.

The Plaintiff States spend a significant amount of money providing healthcare through the Medicaid program. Id. ¶ 10. For instance, Texas provides Medicaid services to around one in seven of Texas's total population, or 3.7 million of 26.4 million Texans, and Medicaid spending accounts for approximately 26% of Texas's total budget in fiscal year 2013 (and 28% of Texas's 2015 budget). Id. The remaining Plaintiffs also serve millions of individuals in their states and spend a considerable portion of their respective states' annual budgets on Medicaid. See id.

B. Children's Health Insurance Program ("CHIP")

The United States Congress created CHIP in 1997. Id. ¶ 11 (citing Balanced Budget Act of1997, Pub. L. 105-33, 111 Stat. 251). Federal and state governments jointly fund CHIP, which provides healthcare to uninsured children who do not qualify for Medicaid, but whose families cannot afford private insurance. Am. Compl. ¶¶ 11-12, ECF No. 19 (citing 42 U.S.C. § 1397aa). CHIP provides basic primary healthcare and other medically necessary services, such as dental care, to children, and certain services to pregnant women. Id. CHIP services are typically delivered by MCOs selected by the states through a competitive bidding process. Id. All of the Plaintiff States participate in CHIP. Id.

Providing healthcare through CHIP is a significant function of the Plaintiff States' governments. Id. ¶ 13. For example, as of June 2015, 333,000 Texas children were enrolled in CHIP. Id. The remaining Plaintiff States similarly report having tens or hundreds of thousands of children and pregnant women who rely on CHIP services. See id.

C. Plaintiff States' Use of MCOs to Participate in Medicaid and CHIP

Plaintiff States provide a significant portion of Medicaid and CHIP healthcare services through managed care arrangements. In a managed care arrangement, states enter into contracts with MCOs, whereby the organizations agree to deliver healthcare services in exchange for a fixed monthly payment, known as a "capitation payment" or "capitation rate." Id. ¶ 15. For example, in Texas, MCOs provided Medicaid services to around 87% of Texas's Medicaid population in fiscal year 2015, and payments to MCOs for Medicaid services totaled over $16 billion, which constitutes 17% of Texas's budget. Id. ¶ 16. The remaining Plaintiff States also provide Medicaid services to a large portion of their respective Medicaid populations, with payments to MCOs totaling a significant amount of each Plaintiff State's budget. Id. In addition, MCOs provide the majority of healthcare services to children in the Plaintiff States' CHIP programs. Id. ¶ 17. For instance, inTexas, MCOs provide all CHIP services, accounting for about one percent (1%) of Texas's budget in fiscal year 2015. Id. The remaining Plaintiff States also utilize MCOs for the majority of their CHIP services.

D. Health Insurance Providers Fee ("HIPF")

In 2010, the United States passed the ACA. Id. ¶ 18 (citing Pub. L. 111-148, 124 Stat. 119-1025 (Mar. 23, 2010)). One portion of the ACA imposed the HIPF on all covered health insurance providers for "United States health risks," defined as "the health risk of any individual who is" a United States citizen, a resident of the United States, or located in the United States. Am. Compl. ¶ 18, ECF No. 19 (citing Pub. L. 111-148, Stat. 865-66); Defs.' Br. Supp. Mot. 4, ECF No. 27 (quoting § 9010(d) of the ACA). The HIPF is imposed as a lump sum on all covered health insurance providers collectively; however, the portion each entity must pay is based on the ratio of the entity's net premiums to all net premiums written for United States health risks. Defs.' Br. Supp. Mot. 5, ECF No. 27 (quoting § 9010(b)(1) of the ACA); see also Am. Compl. ¶ 19, ECF No. 19. Congress enacted the HIPF in order to generate revenue from the expected windfall insurers would receive by individuals enrolling in the ACA. Am. Compl. ¶ 18, ECF No. 19.

The HIPF totaled $8 billion in 2014, and is projected to increase to a total of $14.3 billion by 2018. Id. ¶ 19. On December 18, 2015, Congress passed, and the President signed into law, a temporary, one-year moratorium on the HIPF for 2017. Id. (citing Consolidated Appropriations Act, 2016, Pub. L. No. 114-133, 129 Stat. 2242, 3037-38 (2015)). However, after 2017, the HIPF is scheduled to continue to increase. Am. Compl. ¶ 19, ECF No. 19.

Plaintiffs allege that the ACA does not provide clear notice to states that continuing to receive federal funding for Medicaid and CHIP MCOs is conditioned upon states reimbursing thefull of amount of the HIPF assessed against the MCOs. Id. ¶ 21. Plaintiffs may avoid the HIPF, however, by contracting with certain nonprofit MCOs. Nonprofit MCOs that receive more than 80% of their gross revenues from government programs serving low-income, elderly, and disabled populations are exempt from paying the HIPF. Id. ¶ 22. In addition, nonprofit MCOs not qualifying for this exclusion can deduct 50% of their premium revenue from the fee calculation. Id. Plaintiffs, however, contract with for-profit MCOs. Id. They allege that contracting only with exempt MCOs is impossible because of: (1) the relative scarcity of such nonprofit organizations; and (2) that several currently exempt MCOs do not desire to contract with Plaintiffs. Id. For example, Texas currently contracts with all nonprofit Medicaid MCOs in Texas who desire to contract with Texas. Id. However, the nonprofit MCOs are not able to serve all of the eligible population, requiring Texas to contract with for-profit MCOs, and thus incur substantial liability under the HIPF. Id.

E. The Role of the American Academy of Actuaries (the "Academy") in the ACA

Title 42 U.S.C. § 1396b(m) requires that the negotiated capitation rates between states and MCOs be "actuarially sound." Id. ¶ 25. To be deemed "actuarially sound" for purposes of Medicaid and CHIP, federal regulations require an actuary's certification that, under the standards established by the Academy, capitation rates are sufficient to cover the insurance providers' expected costs and insurance risks for the coming year. Id. ¶ 26.

The Academy is a private, membership-based professional organization. Id. ¶ 27. The Academy sets qualification, practice, and professional standards for credentialed actuaries. Id. ¶ 28. To set these standards, the Academy created and works with an independent, private organization known as the Actuarial Standards Board ("ASB"). Id. ¶ 29. The ASB establishes and improves standards of actuarial practice. Id. ¶ 30. These Actuarial Standards of Practice ("ASOPs") identifywhat the actuary should consider, document, and disclose when performing an actuarial assignment. Id. In March 2015, the ASB adopted ASOP 49, which sets actuarially sound capitation rates for MCO agreements. Id. ¶ 31. ASOP 49 requires capitation rates that recover from states the full amount MCOs are taxed. Id. ¶ 32. ASOP 49 further requires that, if such taxes are not deductible as expenses for corporate income tax purposes, as is the case for the HIPF, the rate must be adjusted to compensate for additional tax liability. Id. ¶ 33.

Generally, if a capitation rate for a managed care agreement does not comply with ASOP 49, an actuary will be unable to...