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From Health Law Daily, August 27, 2015

Assessment on hospitals to fund Medicaid expansion not a tax

By Patricia K. Ruiz, J.D.

An assessment applied to hospitals under Arizona’s Medicaid expansion statute is not an unconstitutional tax, the Superior Court of Arizona determined. State legislators argued that the alleged tax did not receive the two-thirds supermajority required under the state constitution. However, the court held that the assessment was not a tax, as it was imposed by an administrative agency (and not the state legislature), it was imposed voluntarily on entities choosing to conduct business as hospitals, and it is expended for the benefit of the parties upon whom the assessment is imposed (Biggs v. Brewer, August 26, 2015, Gerlach, D.).

Background. House Bill (HB) 2010, which increased the number of low-income individuals eligible for health insurance benefits under the Arizona Health Care Cost Containment System (AHCCCS), became law in 2013. HB 2010, Arizona’s Medicare expansion plan under the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148), gave AHCCCS authority to require most Arizona hospitals to pay into a dedicated account established to assist with funding benefits under the plan, while prohibiting the hospitals from passing the expense down to patients directly or indirectly.

Facial challenge to HB 2010. Thirty-six members of the Arizona legislature, who all voted against HB 2010, filed suit against Thomas Betlach, the director of AHCCCS, arguing that the hospital payments are an unconstitutional tax, as it failed to receive the two-thirds supermajority required by the state constitution. They argued that “no circumstances exist under which the challenged statute would be found valid.” In a facial challenge to a law, the burden of proof falls on the state to show that the statute infringes upon a constitutional guarantee or violates a constitutional principle. Betlach argued in response that the payments are not a tax but an assessment that qualifies for an exception to the two-thirds supermajority requirement recognized by the state constitution.

Is the assessment a tax? Whether an assessment should be categorized as a tax or a fee is determined by examining: (1) the entity that imposes the assessment; (2) the parties upon whom the assessment is imposed; and (3) whether the assessment is expended for general public purposes or used for the regulation or benefit of the parties upon whom the assessment is imposed.

The director of AHCCCS determines which hospitals must pay the tax. The court cited precedent stating that an assessment imposed directly by the legislature is more likely to be a tax than an assessment imposed by an administrative agency. The court further rejected the argument that the assessment is a tax because it is required and not voluntary, as the court states hospitals have a choice of whether not to conduct business as a hospital. it is required and not voluntary, as the court statIn choosing to conduct business as a hospital, an entity voluntarily decides to comply with the legally imposed regulations and fees associated with doing so. Finally, the court determined that the record establishes as a matter of undisputed fact that the assessment operates in a way that secures a benefit for the hospital, as it goes toward making up the difference between the additional costs of HB 2010 and the amount of federal funding the state receives under the ACA. Thus, the court determined that the assessment collected under HB 2010 is not a tax.

Exceptions. Finding that the assessment does not qualify as a tax does not end the inquiry, the court stated. A finding that the assessment failed to receive two-thirds support from both houses of the legislature may still be unconstitutional unless the assessment falls under an exception, which states that an assessment must be: (1) authorized by statute; (2) not prescribed by formula, amount, or limit; and (3) set by a state officer or agency. The court found that HB 2010 satisfied all of these requirements, as HB 2010 authorized the assessment, the amount as affected by federal requirements, and there was no dispute that the amount of the assessment is set by anyone other than the AHCCCS director.

The case is No. CV 2013-011699.

Attorneys: Christina M. Sandefur, Goldwater Institute's Scharf-Norton Center for Andy Biggs. Douglas C. Northup (Fennemore Craig, PC) for Janice K. Brewer.

MainStory: TopStory CaseDecisions CMSNews HealthReformNews MedicaidNews ArizonaNews

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