Obamacare and the states: the constitutionality of Medicaid expansion

March 20, 2012 | By TIMOTHY SANDEFUR

In addition to the constitutionality of the Individual Mandate, the Supreme Court will also be considering the constitutionality of PPACA’s Medicaid expansion provisions. PLF filed a brief on this issue which you can read about here.

The Medicaid issue centers around the so-called “spending clause,” which says Congress can “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.”

Congress often requires states to do certain things, not by commanding it outright, but by giving the states money, on the condition that they comply with certain requirements. In theory, this is just a “voluntary” deal. But in reality, it’s hardly a real contract, because the states would lose so much money if they said no that they don’t have any real choice. After all, if a state refused, it would still have to ship off billions of dollars in tax money to Washington, D.C., and never see it again. Medicaid is one of these “contracts” in which the federal government gives grants to states on certain conditions. Now, PPACA has changed those conditions, and the states argue that this is unconstitutional.

In South Dakota v. Dole, the Supreme Court upheld a federal law that gave the state money for highways if the state changed the legal drinking age. But it acknowledged that there could be “some circumstances” in which “the financial inducement offered by Congress might be so coercive as to pass the point at which ‘pressure turns into compulsion.’” That certainly seems like the case here—considering that Medicaid makes up a huge portion of the states’ budgets (nearly 40 percent of all money that states receive from the federal government).

The PPACA requires every person to obtain health insurance (which they can do by signing up for Medicaid) while at the same time forcing states to expand Medicaid eligibility. If a state fails to comply with federal demands, it loses, not a fraction of its Medicaid money, but all of it. So essentially the Individual Mandate shifts people into the states’ Medicaid liability column, because the federal government knows states can’t really do anything about it. “Congress transformed Medicaid,” write the states in their brief, “from a program designed to provide insurance to certain discrete categories of the needy…into a mandatory program specifically designed to supply insurance to the low-income individuals forced to obtain coverage by the…individual mandate.” The various provisions in the PPACA make clear that Congress knew it could impose heavier burdens on the states, because states have no realistic choice about whether or not to comply.

The problem with the notion that states “consent” to conditions when taking federal grants, as Prof. Lynn Baker has written, is that, “should a state decline proffered federal funds because it finds a condition intolerable, it receives no rebate of any tax dollars that its residents have paid into the federal fisc. In these cases, the state (through its residents) contributes a proportional share of federal revenue only to receive less than a proportional share of federal spending. Thus, when the federal government offers the states money, it can be understood as simply offering to return the states’ money to them, often with unattractive conditions attached.”

In response, the Administration observes that no federal court has ever agreed with this “undue influence” kind of argument. These cases have all ruled that while the size of a federal grant may increase pressure on a state to comply, that doesn’t rise to the level of compulsion. And if courts start getting into the question of what kinds of federal demands are excessive under the Spending Clause, they would “inevitably be thrust into the role of arbiters of conflicting policy judgments.” Indeed, other states have accepted the PPACA’s Medicaid expansions without complaint. So the difference between states that are okay with them and states that aren’t is really a political difference of opinion that shouldn’t be a judicial decision. “[E]ach state must decide for itself whether the promotion of the general welfare would be best achieved by independent action, or instead by entering into a cooperative financial arrangement with” the federal government. And though Medicaid makes up a large portion of state budgets, it’s an old program, and states knew that these sorts of requirements were part of the deal. “Congress’s ability to make changes in any such program ‘is implicit in the institutional needs of the program.’” And while it’s true that states that refuse to comply will still have to send tax dollars to Washington, D.C., and never get them back—well, to summarize pages 42-46 of the Solicitor General’s brief: tough toenails.

What’s unique about the Spending Clause argument is how little solid precedent there is. While Dole and other cases have always acknowledged that there must be some limit to Congress’ power to make demands of states in exchange for the receipt of grants, no case has ever actually imposed such limits or explained what exactly those limits are. It’s kind of like Justice Holmes’ comment that when a restriction on property “goes too far” it becomes a taking. The states are certainly right that if anything can be excessive under Dole, it has to be this. But the Administration is right that there are now so many of these kinds of conditional-grant federal-state programs that if the Court starts trying to limit what kinds of demands the federal government can make, it’ll be bringing upon itself a crushing burden of future lawsuits challenging all sorts of conditions in all sorts of programs.

Michael Greve of the American Enterprise Institute has more on this issue here and here.

Update: David Bernstein makes a good point here.

Coming up next: Severability—does the PPACA rise and fall as a single statute?

Bottom line: Does the federal expansion of Medicaid eligibility, combined with a Mandate that will push a lot of people onto the states’ Medicaid rolls, go so far that the Medicaid “deal” between states and the federal government can no longer be called “voluntary”?

Arguments set for: Wednesday, March 28

What to listen for: Lots of discussion about what Dole really means.

What principle should the courts use in deciding what sort of federal demands go too far?

How can the Court rule in favor of the states without opening the door to lots of other lawsuits challenging federal grant programs?

Haven’t there been modifications to Medicaid requirements in the past that the states have been okay with?