On July 24th, the Congressional Budget Office (CBO) and the staff of the Joint Committee on Taxation (JCT) released updated estimates that project the budgetary impact on the Affordable Care Act of the United States Supreme Court’s decision in NFIB v Sebelius. In NIFB, the Court ruled that the federal government could not remove all Medicaid funding from states that refuse to expand their Medicaid programs to all residents with incomes up to 133 percent of the federal poverty level, as provided for under the ACA. The Court’s ruling essentially bars the Secretary from enforcing the ACA Medicaid eligibility expansion in the same manner that other minimum Medicaid requirements are enforced.

The new CBO/JCT analysis seems to assume that states may also choose a middle ground of only partially implementing the ACA’s Medicaid expansion, As explored more fully below, there is nothing in the Court’s ruling or the text of the ACA that allows states to partially implement the expansion on their own or allows the Secretary of Health and Human Services to give states this flexibility outside the limitations of a formal demonstration program.

The CBO/JCT Analysis

In a nutshell, the CBO/JCT analysis concludes that the net impact of the Court’s ruling is a 3 million person drop in the number of children and adults who will gain coverage under the Act by 2022, as well as an $84 billion net reduction over the 2012-2022 time period in the cost of its insurance provisions. The estimated human impact of the Medicaid portion of the decision is considerable. The CBO/JCT estimate projects that 6 million children and adults will lose Medicaid coverage, while only one-third of those losing Medicaid coverage will have 2014 incomes high enough to meet the federal poverty eligibility threshold necessary to enroll in subsidized qualified health plans (QHPs) offered through state Exchanges, whether state-operated or federally administered on a state’s behalf.  (See Timothy Jost’s blog on the availability of tax premium credits in Exchanges.)

Those who do, of course, will end up with premium and cost-sharing exposure significantly higher (in relation to their poverty-level income) than Congress intended.

The Medicaid spending decline of some $289 billion over the 2012-2022 time period) is expected to “to more than offset the increase in costs” associated with expanded Exchange coverage.  The estimators anticipate that exchange coverage among the poor (which has an eligibility threshold of 100 percent of the federal poverty level) will rise in two types of situations.  The first is one in which the rise is attributable to a state’s total failure to adopt the 2014 Medicaid expansion altogether, thereby leaving its very poorest uninsured residents with nothing while leaving those with family incomes of 100 percent of poverty or greater eligible for Exchange enrollment for a fee.   The second involves states that, according to the CBO/JCT projection, will “work out” agreements with HHS to partially implement the 2014 mandatory Medicaid expansion, adopting coverage for children and adults with family incomes under 100 percent of the federal poverty level but not up to the 133 percent of poverty level (138 percent of poverty when an additional statutory disregard is are considered) specified in the 2014 expansion statute itself.

Two Key Questions In The Aftermath Of NFIB v Sebelius

This revised CBO/JCT estimate raises two key questions, which we explore in greater depth in a forthcoming article in the August issue of Health Affairs. First: Exactly what was the Court’s Medicaid decision in NFIB v Sebelius? Second: As a matter of law, how does this decision affect not only states’ choices regarding the Medicaid expansion but also — and equally importantly — the Secretary’s own implementation options? Medicaid may be a jointly administered program, but it operates under the constraints of a single federal law. As the parties — states and the federal government — try to figure out where matters should go from here and what the best negotiation position will be, they nonetheless are bound by the terms of the law. As a result, their flexibility to come up with combinations that might be new and interesting but that depart from the terms of the law is constrained.

A Two-fold Set Of Assumptions On The Part Of CBO And JCT

In this regard, the CBO/JCT estimate basically hinges on a two-fold set of assumptions.  First, the estimators appear to assume that the decision gives states flexibility not only over whether to implement the expansion at all, but also, to what extent.  That is, the estimators seem to assume that the decision somehow converts the mandate into an option and furthermore, that it creates a raft of new state implementation sub-options where the 2014 Medicaid expansion group is concerned, so that expansion can be partial rather than full (“In the wake of the Supreme Court’s decision, there are many questions about how the new state option for Medicaid will be administered”).

The second, (at least implicit) assumption on the part of the estimators is that the Secretary somehow has newfound powers as a result of the decision to convert a mandatory coverage group into a raft of state options governing not only the timing of state implementation (in a July 10 letter to Governors, Secretary Sebelius already has indicated that she does have this flexibility) but also the degree of implementation a state will choose (i.e., the question of reasonable subcategories of coverage). The estimators never explain the basis for this assumption; nor is there anything in the description of the 2014 mandatory expansion group as it stands both before and after NFIB v Sebelius that would suggest that such flexibility suddenly has appeared.

What The Court Actually Said

There is no doubt that the practical effect of the Court’s ruling is to permit states to forgo the 2014 mandatory coverage expansion altogether without suffering any of the consequences that potentially can arise when a state fails to implement a mandatory provision of federal Medicaid law (i.e., withholding of existing federal funding under 42 U.S. C. §1396c).  But the CBO/JCT partial implementation assumptions are open to serious legal questions; indeed, nothing in the Court’s ruling suggests that the Secretary has the power to rewrite the mandatory coverage group into a series of state options.

The judgment of the Court was not to alter any aspect of the 2014 Medicaid expansion statute itself; it decision simply narrowed the remedies available to the Secretary of HHS in its enforcement, by removing the full force of 42 U.S.C. §1396c from the Secretary’s armament.  This step, fashioned by Chief Justice Roberts with Justices Kagan and Breyer, and agreed to by Justices Ginsburg and Sotomayor) had the effect of averting the loss of the entire Medicaid expansion (the remedy sought by the dissent).  As the Chief Justice emphasized, this approach allowed the expansion to go forward as a “new program” while assuring that the constitutional problems that would arise were the expansion treated as part of the “existing program” could be rectified.

The Court’s novel approach – and one that shows the ability of courts to use the power of law to fashion innovative remedies – reflects the special constitutional circumstances that were determined to surround this particular exercise of Congress’s spending clause powers:  the “transformational” nature of the expansion in relation to prior Medicaid law; the potential loss of all federal Medicaid funding in the case of state non-implementation with such a transformational expansion; and the impact of such an ultimate federal penalty for non-compliance, given Medicaid’s size in relation to state budgets.  The judgment of the Court thus modified federal enforcement powers; it did not refashion the expansion itself.  Whatever its practical effect, the legal effect of the Court’s judgment is a far cry from making a mandate optional.

Questions For The Secretary In The Wake Of What The Court Said

In our view, the impact of the Court’s judgment simply is to limit HHS’s enforcement remedies in the case of the 2014 Medicaid expansion group; indeed, our view appears to align with that of Congressional Research Service staff Kathleen Swendimann and Evelyne Baumrucker, who released their own analysis after our forthcoming article went to bed, and which we therefore do not cite.  Furthermore, the Secretary’s July 10 Letter to the Governors reflects the same conclusion.  Like the CRS, the Secretary takes a narrow view of the judgment, setting aside any notion (as the Chief Justice himself did in responding to the dissent, which accused him of rewriting the law) that the judgment of the Court somehow converted a unified mandatory coverage group into a flexible state option. The 2014 expansion group for which enhanced federal funding is available remains intact; it consists of all nonelderly individuals with family incomes under 133 percent of the federal poverty level (138 percent with an additional statutory income disregard).  Early adopter states, that have moved to extend coverage to this group ahead of the mandatory 2014 date and in keeping with a separate ACA option, do have greater flexibility under the terms of the law, for which they receive normal federal contributions toward the cost of partial implementation. But partial implementation is not a feature of the 2014 expansion group itself.

Of course, the Secretary might use her §1115 powers to permit a partial expansion to go forth as a §1115 demonstration, with enhanced federal funding available as part of the demonstration budget.  She might, for example, structure demonstrations that “test” the impact of coupling a lower Medicaid expansion (i.e., up to 100 percent of the federal poverty level) with broader coverage through an Exchange, (beginning at 101 percent of the federal poverty level rather than 139 percent). But the Secretary’s § 1115 powers do not permit her to simply rewrite the Social Security Act to her or the states’ liking.  She has to be testing something, and there must be a formal evaluation. Special budgeting rules and other important procedural standards apply.

The limited nature of federal demonstration authority under § 1115 was most recently illustrated by Congressional reaction in some quarters to the Secretary’s proposal to use her §1115 authority to allow states to modify TANF’s work requirements.  In that instance, Member concerns have focused on whether the Secretary has the power to waive the work requirement at all under § 1115.  But similar concerns could be raised were the Secretary to use § 1115 simply as a tool for re-engineering the 2014 coverage group rather than as a mechanism to test and evaluate a modified approach to current law. This is particularly true since the shift of the poor from Medicaid to Exchanges is not without significant consequences, including significant premium exposure, and potentially narrower coverage. Simply put, there is some human risk involved here of the sort that raises the need to treat such a modification of the law as something to implement sparingly and study closely, as § 1115 envisions, especially under regulations released by HHS in 2011.

What’s Next?

Only time will tell, obviously.  The Secretary may conclude that the decision does, in fact, give her the power to construct a new state option under which enhanced federal funding flows to states that partially implement the 2014 ACA Medicaid expansion group, or she may be able to achieve this result by invoking her § 1115 demonstration powers. Whatever conclusion she reaches may be subject to further litigation.  But the bottom line is that the choices facing states and the Secretary may be far less flexible than the CBO/JCT staff analysis implies. The judgment of NFIB v Sebelius may allow a state to exclude its poorest residents entirely from coverage, to the ultimate detriment of life and health, as we have learned from a recent New England Journal of Medicine article by Benjamin Sommers, Katherine Baicker, and Arnold Epstein.  Whether the judgment permits the Secretary to permit the states to do implementation partway — and to thereby increase the financial burden of coverage on the poorest Americans, a burden from which Congress sought to shield them — is a matter that only the Secretary, and ultimately the courts, will decide.