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Supreme Court Considers Healthcare Law - Day Three - The Spending Clause Issue

Publisher: Day Pitney Alert
March 28, 2012
Day Pitney Author(s) J. Bruce Boisture

This is a dispatch prepared by Day Pitney's Bruce Boisture, who attended today's Supreme Court session concerning the constitutionality of key provisions of the Patient Protection and Affordable Care Act.

The U.S. Supreme Court today held the third of three days of hearings to consider the constitutionality of two key provisions of the Patient Protection and Affordable Care Act ("ACA"). In its afternoon session, it considered whether the conditions Congress attached to the ACA Medicaid-eligibility extension violate the limitations on Congress' powers under the spending clause of Article I of the Constitution.[1]

Overview -- the spending clause issue

Beginning in 2014, the ACA extends Medicaid coverage to able-bodied single adults without dependents. Although Medicaid is a state-administered program, the federal government will bear nearly the entire cost of Medicaid benefits for these newly eligible recipients, as well as most of the associated administrative costs. The resulting costs to the states are variously estimated at $20 billion to $40 billion over the next 10 years. States must implement this eligibility expansion (and other related program changes) or lose their eligibility for all federal Medicaid payments. Under the ACA, however, Medicaid remains a cooperative federal-state partnership, with states free to elect not to participate.

Congressional spending power is rooted in the general welfare clause of the Constitution, found in Article I, Section 8, Clause 1:

    The Congress shall have the Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States[.]

The constitutional authority of Congress to enact the Medicaid program is generally thought to trace to the general welfare clause.

The states argue the ACA's Medicaid-eligibility expansion is an unconstitutionally coercive use of congressional spending power. They point to several features of the ACA provision in this regard. First, whereas previously Medicaid covered only a portion of those individuals with incomes below the coverage ceiling and left to the states the decision of whether to include others, now all such individuals are Medicaid-eligible. Resulting coverage and administrative expenses will be significant, particularly if one takes into account the effect of the minimum-coverage provision in boosting Medicaid participation by eligible individuals. Second, ACA-mandated "maintenance of effort" requirements will lock in current state eligibility and benefit levels, on pain of loss of all Medicaid funding. Third, and most important,

    Unlike in many of its early amendments to Medicaid, Congress did not separate the new coverage requirements and the new funding from the rest of the program and give States the option of continuing to participate in Medicaid while declining to undertake the expansion. If it had, States could have meaningfully assessed whether the newly available funds justified undertaking the onerous new obligations that the Act envisions. Congress instead made the new terms a condition of continued participation in Medicaid, thereby threatening each State with the loss of all federal Medicaid funds -- for most States, more than a billion dollars a year -- unless it adopts the Act's substantial expansion of State obligations under the program.[2]

This is an "offer," the states contend, that they cannot afford to refuse, despite the high costs to them of participation in the eligibility expansion. Medicaid accounts for more than 40 percent of all federal funds dispersed to the states, which receive more than $250 billion in federal Medicaid payments each year. Most states receive at least $1 billion each year and a third of the states more than $5 billion. The "option" of dropping out of the federal Medicaid program and providing this benefit through local taxation and spending is unrealistic, the states argue, because of the high level of continuing federal taxation to support the Medicaid program in all the other states.

Two earlier Supreme Court decisions have seemed to indicate that Congress would exceed its broad powers under the spending clause if it were to attach "coercive" conditions to federal payments offered to the states in support of state-administered programs.[3] The states argue that such a limitation is essential to federalism: Without it, Congress could use the power of the federal fisc to subordinate the states entirely in a progressive-tax-like inversion of the free-rider problem. A state can ill afford to opt out of federally funded programs that continue to be paid for by its citizens through their federal taxes and separately tax them for equivalent but more congenial local programs. Because the spending clause does not limit Congress to spending in support of its direct constitutional grants of legislative authority, moreover, only a noncoercion principle can prevent Congress from forcing the states to legislate at the will of Congress and outside the range of legislative action that has been assigned to Congress in the Constitution.

The federal government's reply begins with the observation that Congress' spending power includes the power to fix the terms on which it will disburse funds to the states, as Congress has done in ACA's eligibility expansion. Such eligibility expansions, it notes, are not without precedent. It also points out that most of the cost of the eligibility expansion will be borne by the federal government, so that the projected increase in cost to the states is less than one percent of their current Medicaid spending. It concludes with the observation that participation by each state in the Medicaid program remains entirely voluntary and with this final swipe at the position taken by the States:

    [The States] do not dispute that they are free, as a matter of law, to turn down federal Medicaid funds if they view program conditions as sufficiently contrary to their interests. They contend, however, that the "sheer size" of federal Medicaid grants means they have no practical ability to turn the money down. On their theory of coercion, the greater the federal government's willingness to contribute funds to defray the costs of covering needy individuals (including costs of optional coverage that States chose to add to their Medicaid programs), the less say Congress has in defining the features of its spending programs.[4]

Today's oral argument

Taking the unusual step of extending the time previously allotted for oral argument, the Court this afternoon gave extended consideration to the constitutionality of the ACA's Medicaid-eligibility expansion. The discussion with counsel focused on two major questions, as framed at the outset by Paul D. Clement, appearing on behalf of the states:

  • Is the ACA's Medicaid-eligibility expansion "coercive" vis-à-vis the states?
  • If it is, does it matter under the spending clause of Article I of the Constitution?

Mr. Clement argued that the eligibility expansion is coercive because states that refuse to implement it will lose all of their Medicaid funding. Congress instead, he suggested, should be restricted to tying only the federal funding for the eligibility expansion to state participation in the expansion. Justice Kagan questioned this, suggesting that such conditions are common in federal-state cooperative programs funded by the federal government. Justice Sotomayor asked whether it was simply local political concerns -- not wanting to face the voters if they withdrew from Medicaid -- that made state officials view the federal conditions as coercive. Would the eligibility-expansion still be unconstitutional, Justice Kagan asked, if the federal government paid for all of the states' costs associated with it?

Yes, replied Mr. Clement, advancing his second reason to find this provision coercive. The federal money is raised through taxes on the states' citizens, and as the federal taxes increase, the ability of the states to levy taxes diminishes. It follows, he suggested, that a state cannot afford to withdraw from Medicaid and tax its own citizens to pay for comparable state healthcare programs while they are still paying federal taxes to fund Medicaid in all of the other states. Justice Sotomayor asked in response: Does this mean the bigger the problem, the less the ability of the federal government to condition how the states spend the money it gives to address the problem? The overall skepticism of the Court on this point was perhaps summed up in Chief Justice Roberts' comment that perhaps all of this is simply indicative of the states' own compromise of their sovereignty ever since the New Deal by taking more and more federal money to fund state programs. (Mr. Clement might have replied, but did not, that the problem might also be said to stem from the Court's decision that congressional spending power is not restricted to spending to accomplish its enumerated (and limited) powers, which freed it of constitutional limitations vis-à-vis the states, an argument cogently advanced in his brief.)

Justice Breyer asked Mr. Clement what section of the ACA provides that a state not participating in the Medicaid eligibility expansion will lose all of its federal Medicaid funding. After Mr. Clement hemmed and hawed for a moment, Justice Breyer said that he had the section in front of him, that it dated from 1965, not the ACA, and that it simply gave the Secretary of Health and Human Services discretion to withhold federal funds in connection with a state's noncompliance with Medicaid requirements. Obtaining Mr. Clement's agreement that it was indeed the statutory section to which he had referred, Justice Breyer observed that the statute does not compel that all funding be denied, and that discretion might be exercised to withhold only the funding associated with the noncompliance. He also suggested that ordinary rules of administrative procedure would constrain the Secretary's discretion, essentially preventing punitive overreaction to a state's refusal to participate in the eligibility expansion. He (and then Justice Kagan) pressed Mr. Clement to explain why other previous "mandatory" Medicaid eligibility expansions had not already rendered the Medicaid program unconstitutional, in light of the longstanding presence of this section in the law.

Mr. Clement replied that it is the mere "threat" of such a cutoff of all funding that coerces the states, even if the decision is left to the Secretary's discretion, and pointed to a letter once received by Arizona threatening such a complete cutoff. As to the earlier mandatory eligibility expansions, he said, they were not of the same magnitude as the one in the ACA. The Chief Justice asked whether the Court, in making its analysis, should assume that the Secretary's discretion would be used in this coercive fashion. Mr. Clement, recovering his stride, agreed, and suggested that unless the Court holds that this sort of coercive action is beyond the reach of the spending power, we will be left with a "mandatory federalism" that reduces the states to mere instruments of the federal government. To the contrary, responded Justice Kagan, the states may withdraw at any time. In the meantime, these federal programs are like gift certificates, she suggested: spend them as you like, but only in the store that the donor selects.

Solicitor General Donald B. Verrilli, Jr., appearing for the federal government, faced an immediate spate of questions from Chief Justice Roberts and Justice Scalia about statements in earlier Court cases indicating that there might be a "coerciveness" limitation on Congress' spending power vis-à-vis the states. There are limits, the Solicitor General observed, but they prohibit conditions that force basic changes in state governmental structure or that are nongermane to the funding program. He said that these two principles adequately resolve any legitimate concerns about congressional overreaching in its funding of state programs. This is true, the Solicitor General stated in response to a question from Justice Alito, even though the state's alternative to participation in the federal programs is to tax its citizens for local programs while they are still taxed to pay for comparable federal programs in other states.

Chief Justice Roberts asked if the Solicitor General could commit that the Secretary would not use her discretion to cut off all Medicaid funding if a state refused to participate in the eligibility expansion. The Solicitor General declined to do so, but reiterated that no such cutoff had ever occurred. Justice Kagan asked whether the Administrative Procedure Act would apply to limit the Secretary's discretion. The Solicitor General agreed that it would apply, and that considerations of germaneness articulated in earlier Court cases would also apply.

[1] For an overview of all of the issues under consideration by the Court in this case, please refer to our Alert published Monday, March 26, 2012.

[2] Petitioners' (States') Brief (Medicaid), Florida v. U.S. Dept. of Health and Human Services, Docket No. 11-400, at pp. 10-11.

[3] South Dakota v. Dole, 483 U.S. 203 (1987), and Steward Machine Co. v. Davis, 301 U.S. 548 (1937).

[4] Respondents' (Federal Government's) Brief (Medicaid), Florida, et al. v. U.S. Dept. of Health and Human Services, et al., Docket No. 11-400, at p. 17.