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From Health Law Daily, August 8, 2016

Government may have unlawfully taxed states with a Medicaid fee

By Bryant Storm, J.D.

The Health Insurance Providers Fee (HIPF) may have, in effect, coercively forced the states of Texas, Indiana, Kansas, Louisiana, Nebraska, and Wisconsin to pay a tax to the federal government as a condition of continued participation in Medicaid, a district court held. The court denied several of the government’s attempts to dismiss the states’ lawsuit and held that the HIPF—a fee established under the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) to create revenue—may have unlawfully taxed state Medicaid programs through the managed care organizations (MCOs) they contract with (Texas v. U.S., August 4, 2016, O’Connor, R.).

HIPF. The Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) imposed the Health Insurance Providers Fee (HIPF) as a lump sum fee charged to for-profit health insurance providers. The portion that each health insurance provider must pay is based upon the ratio of the entity’s net premiums to all net premiums written for United States health risks. The HIPF was enacted by Congress to generate revenue from the windfall insurers were expected to receive by individuals enrolling in the ACA. The HIPF was $8 billion in 2014 and is expected to increase to $14.3 billion by 2018. The Consolidated Appropriations Act of 2016 (P.L. 114-113) put a one-year moratorium on the HIPF for 2017.

Actuarial soundness. The states complained that the ACA did not provide adequate notice that federal funding for Medicaid and CHIP MCOs was conditioned upon states reimbursing the full amount of the HIPF assessed against those MCOs. Additionally, because the ACA requires that states establish managed care capitation rates in an actuarially sound manner, the states alleged that they are in effect required to pay the HIPF to the for-profit MCOs or lose Medicaid funding for those contracts. The cost to the states is significant. For example, in 2013, Texas paid $84,637,710 to Medicaid and CHIP MCOs to cover costs associated with the HIPF. The states alleged that by effectively requiring states to pay the tax liabilities of MCOs, and conditioning Medicaid reimbursement upon payment of the HIPF, the U.S. government imposed a tax on the states.

Lawsuit. The states raised 10 claims seeking declaratory judgments and injunctions to establish the HIPF as an unlawful and unconstitutional tax and to prevent federal officials from collecting the HIPF. The states also sought a refund of the HIPF. The government moved to dismiss the claims on standing and jurisdictional grounds.

Standing. The government sought dismissal asserting that the states had no basis to challenge a congressional action directed, not against states, but against for-profit health insurers. The court agreed with the states’ counter argument that their injuries were sufficiently traceable to the HIPF requirements. The court rejected the government’s argument that the states could "take their business elsewhere" by providing Medicaid services through a different mechanism that did not require payment of the HIPF. The court noted that the states were given a "Hobson’s choice"—no real choice at all.

Jurisdiction. The government also argued that the court did not have subject matter jurisdiction over any of the states’ claims. Specifically, the government asserted that the court could not grant a refund of the HIPF or bar the collection of the HIPF. Additionally, the government argued that challenges to the actuarial-soundness requirements of the ACA and its regulations were time-barred.

Refund and bar. The court agreed with the government’s argument that the states had no constitutional right to challenge and receive a refund for a tax they did not pay. The court held that because the states only alleged they paid the full amount to the taxpayer against whom the tax was assessed, they had no direct right to a refund. Using a similar analysis, the court held that, to the extent the states characterized the HIPF as a fee and not a tax, the states could, however, seek a bar of the HIPF under the Anti-Injunction Act (AIA) (26 U.S.C. § 7421(a)) and the Declaratory Judgment Act (DJA) (28 U.S.C. § 2201).

Medicaid. The court agreed with the states’ argument that the HIPF requirement was coercive, noting that the states sufficiently plead that they were effectively forced to pay the HIPF as a condition of continued participation in Medicaid. The states also argued that the HIPF could not be construed as a legitimate exercise of Congress’ spending power because it was designed to generate revenue for health insurance subsidies for those that do not qualify for Medicaid, and, therefore, was not insufficiently related to Medicaid. The court agreed that the states sufficiently raised a claim that the HIPF is not "reasonably related" to Medicaid. Similarly, the court agreed with the states that the government insufficiently indicated an intention to condition the grant of federal Medicaid funds on states’ continued payment of the HIPF. The court also held that the states sufficiently plead that the implementation of the HIPF was arbitrary and capricious because of the way that MCO rates were forced to comply with the actuarial soundness requirements.

The case is No. 7:15-cv-00151-O.

Attorneys: Thomas A. Albright, Office of the Attorney General of Texas, for State of Texas. Julie Straus Harris, U.S. Department of Justice, for the United States.

MainStory: TopStory CaseDecisions CMSNews ManagedCareNews MedicaidNews MedicaidPaymentNews TexasNews

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