Texas v. United States, No. 18-10545 (5th CIr. July 31, 2020) (Barksdale, Haynes, Willett)

Several states sued the United States challenging the constitutionality Section 9010 of the Affordable Care Act and raising constitutional and statutory challenges to HHS's "Certification Rule." Regarding the Certification Rule, they claimed that the rule violated the nondelegation doctrine and that HHS violated the APA on multiple grounds in promulgating it. Regarding Section 9010, they claimed that the statute violated the Spending Clause of the U.S. Constitution and the doctrine of intergovernmental tax immunity under the Tenth Amendment. Both parties moved for summary judgment. In addition to challenging the States' claims on the merits, the United States argued that the States lacked Article III standing for their claims and that their APA claims were time-barred.

The district court granted both parties’ motions in part. It held that the States had standing and that their APA claims were not barred by the six-year statute of limitations. On the merits, the district court determined that the Certification Rule violated the nondelegation doctrine but complied with the APA. It rejected the States' constitutional challenges to the statute.

Regarding remedies, the district court set aside the Certification Rule and granted the States equitable disgorgement under the APA, resulting in a final judgment against the United States for more than $479 million. Both parties timely appealed.

Regulatory and Procedural Background

The following background is a condensed version of the similar discussion in the panel opinion. Mistakes, of course, are mine.

The Certification Rule

Medicaid is joint Federal-State program for providing financial assistance to individuals with low incomes to enable them to receive medical care. See Medicaid Program; Medicaid Managed Care: New Provisions, 67 Fed. Reg. 40,989, 40,989 (June 14, 2002). The federal government “provid[es] matching funds to State agencies to pay for a portion of the costs of providing health care to Medicaid beneficiaries.” Id.

States have two options for providing care to Medicaid beneficiaries: a “fee-for-service” model and a "managed-care model." Id. Under the fee-for-service model, a doctor who treats a Medicaid beneficiary submits a reimbursement request to the state Medicaid agency. Id. The state pays the bill after confirming the individual’s eligibility and need for service. See id. Then the state seeks reimbursement from the federal government for a percentage of the cost. See 42 U.S.C. § 1396b(a).

Under the more widely used managed-care model, the state pays a third-party health insurer (“managed-care organization” or “MCO”) a monthly premium (the “capitation rate”) for each Medicaid beneficiary the MCO covers, and the MCO provides care to the beneficiary. 67 Fed. Reg. at 40,989. States may receive reimbursement from the federal government for some percentage of the capitation rate so long as the underlying MCO contract is “actuarially sound.” See 42 U.S.C. § 1396b(m)(2)(A)(iii).

As states began moving away from the fee-for-service model, HHS's definition of “actuarial soundness," which was based on the cost of services under a fee-for-service model, became unworkable. See 67 Fed. Reg. at 41,000 (stating that “there [was] an increasing number of States that lack[ed] recent [fee-for-service] data to use for rate setting”). It thus promulgated a final rule redefining “actuarial soundness” in 2002. Id. at 41,079-80.

Under this new rule, capitation rates must satisfy three requirements to be actuarially sound:

  1. They must “[h]ave been developed in accordance with generally accepted actuarial principles and practices,” 42 C.F.R. § 438.6(c)(1)(i)(A) (2002), which requires accounting for all reasonable, appropriate, and attainable costs;
  2. They must be “appropriate for the populations to be covered, and the services to be furnished under the contract.” Id. § 438.6(c)(1)(i)(B); and
  3. They must satisfy the Certification Rule, meaning they must “[h]ave been certified, as meeting the requirements of this [provision], 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 [(the “Board”)].” Id. § 438.6(c)(1)(i)(C).

As you may have gathered from that overview, the "Certification Rule" at issue here is 42 C.F.R. § 438.6(c)(1)(i)(C), the certification component of the actuarial soundness definition.

Section 9010 of the ACA

The ACA made two changes to the regulatory scheme requiring states that requested Medicaid reimbursements for their MCO contracts to provide actuarially sound capitation rates. First, Congress imposed a new cost on certain MCOs: a federal health-insurance provider tax (the “Provider Fee”). See PPACA § 9010, 124 Stat. at 865, amended by PPACA § 10905, 124 Stat. at 1017, amended by HCERA § 1406, 124 Stat. at 1066. This Provider Fee must be paid annually by covered entities—“any entity which provides health insurance for any United States health risk,” excluding governmental entities. Id. § 9010(c)(1), (c)(2)(B), 124 Stat. at 866. Second, Congress amended the Medicaid Act to expressly require that capitation rates included in state-MCO contracts be actuarially sound. Id. § 2501(c)(1)(C), 124 Stat. at 308; 42 U.S.C. § 1396b(m)(2)(A)(xiii) (“[C]apitation rates . . . shall be based on actual cost experience related to rebates and subject to the Federal regulations requiring actuarially sound rates[.]”).

In 2015, the Board, an independent organization that sets appropriate standards for actuarial practices in the United States, published Actuarial Standard of Practice 49: Medicaid Managed Care Capitation Rate Development and Certification (“ASOP 49”). ACTUARIAL STANDARDS BD., ACTUARIAL STANDARD OF PRACTICE NO. 49: MEDICAID MANAGED CARE CAPITATION RATE DEVELOPMENT AND CERTIFICATION (2015) [hereinafter ASOP 49]. ASOP 49 provides “guidance for actuaries preparing, reviewing, or giving advice on capitation rates for Medicaid programs, including those certified in accordance with 42 CFR 438.6(c).” Id. at iv. Medicaid capitation rates are actuarially sound if they “provide for all reasonable, appropriate, and attainable costs,” which “include . . . government-mandated assessments, fees, and taxes.” Id. at 2.

In summary, for states to receive federal reimbursement under the managed-care model, their MCO contracts must be approved by HHS as actuarially sound. See 42 U.S.C. § 1396b(m)(2)(A)(iii); 42 C.F.R. § 438.6(c)(1)(i). To be actuarially sound, the capitation rate must account for all costs MCOs bear when providing care to Medicaid beneficiaries. See 2002 Final Rule, 67 Fed. Reg. at 41,000. When Congress enacted the ACA in 2010, the amount of money states paid MCOs as part of their capitation rate changed: In contracts with MCOs subject to the Provider Fee, states must account for the Provider Fee in their capitation rate to satisfy HHS’s actuarial-soundness requirement. ASOP 49 states that the “costs” include government-mandated taxes. ASOP 49 at 2.

The Fifth Circuit's Rulings

Statute of Limitations

After explaining that the States had standing to bring their claims, the Court held it lacked jurisdiction to address their APA claims because they were barred by the applicable six-year statute of limitations. 28 U.S.C. § 2401. Those of you who read my recent post on American Stewards of Liberty v. Department of the Interior, available here, will recall that the Court dealt addressed the six-year statute of limitations applicable to APA claims in that case as well. For those who need a refresher, though, I provide the basics again here.

In cases against the federal government, including those against federal agencies, “the United States is immune from suit unless it consents, and the terms of its consent circumscribe our jurisdiction.” Dunn-McCampbell Royalty Interest, Inc. v. Nat'l Park Serv., 112 F.3d 1283, 1287 (5th Cir. 1997). The APA allows “a[ny] person ... adversely affected or aggrieved by agency action” to obtain judicial review. 5 U.S.C. § 702. Courts have held this provision waives sovereign immunity specifically for challenges to final agency decisions. See, e.g., Dunn-McCampbell, 112 F.3d at 1287. To fall within this waiver, however, a challenge must be brought within six years of the final agency action allegedly causing a plaintiff’s injury.  That limitation derives not from the APA itself, which contains no statute of limitation, but instead from general six-year statute of limitation for civil suits against the U.S. that applies to APA claims. See 28 U.S.C. § 2401(a).

As a result, to challenge an original agency action adopting a regulation like HHS's 2002 Certification Rule, the States had to sue within six years of the publication of the rule. Because HHS published the Certification Rule more than 13 years before the States filed their complaint, their claims were well outside the six-year limitations window.

There is an exception, however. In the Dunn-McCampbell case mentioned above, the Fifth Circuit held that a plaintiff who misses this window may still obtain review of the regulation by suing within six years of a later direct, final agency action applying the regulation to the particular plaintiff. 112 F.3d at 1287. An agency’s action is direct and final when two criteria are satisfied. “First, the action must mark the ‘consummation’ of the agency’s decisionmaking process.” Bennett v. Spear, 520 U.S. 154, 177-78 (1997) (citation omitted). “[S]econd, the action must be one by which rights or obligations have been determined, or from which legal consequences will flow.” Id. at 178 (quotation omitted). These rights, obligations, or legal consequences must be new. Nat’l Pork Producers Council v. U.S. E.P.A., 635 F.3d 738, 756 (5th Cir. 2011).

The district court concluded that HHS took three “direct, final agency actions” in 2015 against the States and that those actions triggered a new six-year statute of limitations period. But the Fifth Circuit disagreed, holding "none of these actions were direct and final."

The first was a 2015 letter HHS sent to the Texas Medicaid Director approving Texas’s amended MCO contract, which included Provider Fees in the capitation rates for additional groups of Medicaid beneficiaries. Id. The Fifth Circuit explained the letter "does not show that HHS was issuing a new ruling requiring Texas to include Provider Fees in its capitation rates." In addition, "Texas paid costs associated with Provider Fees for the 2013 calendar year even though the 2015 letter applied only from May 1, 2015 to August 31, 2015." That meant "even before the letter, Texas accounted for the Provider Fee in its capitation rates," and as a result, "[t]he letter did not mark a change to Texas’s obligation under the Certification Rule."

The second supposedly "direct, final agency action" the district court relied on was "the government’s collection of the Provider Fee through the States’ 2015 capitation rate constituted direct, final agency action." But, the Fifth Circuit reiterated, "the IRS does not collect the Provider Fee directly from states," meaning "[t]he government’s decision to collect from MCOs is not a 'direct . . . action involving the [States].'" (quoting Dunn-McCampbell, 112 F.3d at 1287).

Third, the district court stated that a 2015 HHS guidance document "obligated the States to include the cost of the Provider Fee in their capitation rate calculations in 2015." "Once again," the Fifth Circuit explained, "the guidance document did not create any new obligations or consequences; it restated that for capitation rates to be actuarially sound, they had to be consistent with ASOPs, including ASOP 49." But because "this requirement has existed since HHS promulgated the Certification Rule," the Court reasoned, "[t]he publication of ASOP 49 in 2015 did not create any new obligation or legal consequence either."

In short, "[a]ctuarially sound capitation rates have consistently required that all reasonable, appropriate, and attainable costs be covered by rates; this includes all taxes, fees, and assessments." Concluding that "HHS took no direct, final agency action in 2015 to create a new obligation," the panel "reverse[d] the district court’s judgment on the States’ APA claims and dismiss those claims as time barred."

Nondelegation Doctrine

The district court held that the Certification Rule unlawfully vested in the Board and its actuaries--a group of private actors--the legislative power to set rules on actuarial soundness and to veto executive action that doesn't comply with its rules. The Fifth Circuit disagreed. While a federal agency may not "abdicate its statutory duties" by delegating them to private entities, the Court explained, delegation to private entities is lawful if the federal agency "retain[s] final reviewing authority" over the decisions made. (quoting Sierra Club v. Lynn, 502 F.2d 43, 59 (5th Cir. 1974) and Sunshine Anthracite Coal Co. v. Adkins, 310 U.S. 381, 399 (1940)). In this case, "HHS's delegation of certain actuarial soundness requirements to the Board did not divest HHS of its final reviewing authority." Accordingly, the Court held, "HHS did not unlawfully delegate to a third party its authority to approve state-MCO contracts."

Section 9010 Claims

As mentioned earlier, the States raised constitutional challenges to Section 9010 under the Spending Clause and the Tenth Amendment. Because these are constitutional law issues and this is an administrative law blog, I'm going to go through the Court's reasoning on these issues very quickly. If you want the details, you'll have to consult the panel opinion.

Spending Clause. The States argued that, as applied to them, Section 9010's Provider Fee functions as a condition on spending and thus implicates the Spending Clause. The United States argued that Section 9010 is instead a constitutional tax that Congress imposed via the Taxing Power. The Fifth Circuit agreed with the United States and held the Provider Fee is a constitutional tax that fully resolves the States’ Spending Clause claim and does not impose a condition on spending.

Tenth Amendment. The Tenth Amendment doctrine of intergovernmental tax immunity imposes two limitations when the federal government imposes an indirect tax, like Section 9010's Provider Fee, on states. First, the tax must not discriminate against states or those with whom they deal. And Second, the "legal incidence" of the tax may not fall on states. The Fifth Circuit held that Section 9010 satisfies both requirements.

On the first prong, the Court explained:

And the second:

Equitable Disgorgement

Because the Fifth Circuit held Section 9010 and the Certification rule were lawful, there was no basis for the district court's $480 million equitable disgorgement award. Accordingly the Court vacated that award without addressing the validity of such a remedy in this context.

Texas v. United States, No. 18-10545 (5th Cir. July 31, 2020)
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