On July 31, 2020, a three-judge panel of the Fifth Circuit Court of Appeals reversed a ruling from Judge Reed O’Connor of the northern district of Texas. Judge O’Connor had held that the government owed six states about $479 million for the Affordable Care Act’s (ACA’s) health insurance tax as applied to Medicaid managed care entities from 2014 to 2016. The Fifth Circuit disagreed, holding that the states were not entitled to recoup these payments.
Reversal was expected given the conclusions reached by the district court. From here, the states—Texas, Indiana, Kansas, Louisiana, Nebraska, and Wisconsin—could ask for rehearing by the full panel of judges on the Fifth Circuit or appeal to the Supreme Court.
In 2002, the Department of Health and Human Services (HHS) issued a “certification rule” to address “actuarial soundness” for purposes of Medicaid managed care rates. Under the rule, Medicaid managed care capitation rates must be developed based on generally accepted actuarial principles and practices and certified by actuaries who meet Academy qualifications and follow practice standards set by the Actuarial Standards Board.
Section 9010 of the ACA imposed an annual health insurance tax on insurers, including Medicaid managed care entities. However, government entities, such as states, are exempt from Section 9010. The health insurance tax went into effect for 2014 and, while often delayed, was fully repealed by Congress beginning in 2021.
In 2015, the Actuarial Standards Board—an independent organization that develops practice standards for actuaries certified by the American Academy of Actuaries—adopted a new actuarial standard of practice (ASOP) for Medicaid managed care contracts. ASOP 49 directs Academy-certified actuaries to include an adjustment in Medicaid managed care rates to reflect the costs of any non-deductible assessments, fees, or taxes that must be paid out of capitation rates (such as the health insurance tax).
HHS issued a Medicaid managed care rate development guide in 2015 that included a reference to ASOP 49, and the certification rule was recodified in 2016. Without the adjustment for the health insurance tax, an actuary presumably could not certify a contract between a state and a Medicaid managed care organization. If states cannot obtain rates certified by an actuary, they could become ineligible for Medicaid funding. States began including the health insurance tax in their capitation rates.
A coalition of Republican attorneys general, led by Texas, challenged Section 9010 and parts of the certification rule. (The Fifth Circuit opinion notes some confusion about the challenged provisions, both because the district court incorrectly determined that the certification rule included multiple requirements and the states confused which HHS rule they were contesting.) The states argue that they were unlawfully required to pay the health insurance tax to managed care organizations, that HHS unlawfully delegated its certification power to the American Academy of Actuaries and the Actuarial Standards Board, and that the certification rule violates the Administrative Procedure Act (APA). They also argued that the health insurance tax is unconstitutional under the Spending Clause and the Tenth Amendment.
The government argued that the states did not have standing to challenge the certification rule, that their APA claims were time-barred, and that the states misunderstood the health insurance tax and certification rule. HHS’s embrace of the Actuarial Standards Board’s guidance in ASOP 49, which is applied via the certification rule, did not change the definition of actuarial soundness, it argues. Rather, HHS permissibly chose to incorporate the Board’s guidance on this issue.
In March 2018, Judge O’Connor upheld the constitutionality of the health insurance tax but invalidated parts of the HHS rule. He agreed with many of the states’ arguments regarding the certification rule and concluded that parts of the rule violated federal nondelegation doctrine by authorizing private entities—the American Academy of Actuaries and the Actuarial Standards Board—to “effectively rewrite the ACA.” The certification rule empowered the Board to establish “a controlling interpretation and definition of a legal condition to receiving Medicaid subsidies.” In reaching this conclusion, Judge O’Connor invoked nondelegation doctrine, which has rarely been used to strike down agency delegations to private entities (at least since 1936). He also found that specific provisions of the rule were not entitled to deference and that HHS exceeded its statutory authority.
Under this ruling, the Internal Revenue Service (IRS) would have to repay what the plaintiff states paid their managed care entities to account for the health insurance tax from 2014 through 2016. Judge O’Connor rejected the states’ argument that they were entitled to a refund but decided they were entitled to “equitable disgorgement” of the amount paid in the health insurance tax. The HHS rule unlawfully required states to account for and pay the health insurance tax in their Medicaid managed care capitation rates. Because this accounting and payment was unlawful, the court reasoned, the IRS had to “disgorge” these funds to the states. The government owed the six plaintiff states about $479 million for the health insurance tax from 2014 to 2016.
Following a delay in the litigation, Judge O’Connor’s decision was appealed to the Fifth Circuit. Oral argument was held on June 1. The states also filed a separate lawsuit to recover the tax from 2018; that challenge was stayed pending the appeal.
On July 31, Judges Rhesa H. Barksdale, Catharina Haynes, and Don R. Willett of the Fifth Circuit reversed Judge O’Connor’s ruling on the certification rule, concluding that the health insurance tax and the certification rule are constitutional and lawful and that the states are not entitled to equitable disgorgement of the health insurance tax. The panel dismissed the states’ APA claims for lack of jurisdiction and affirmed Judge O’Connor’s ruling that the health insurance tax did not violate the Spending Clause of the Tenth Amendment. The decision was written by Judge Haynes.
Though many facts are in dispute, the states have standing to sue. The court does grapple with whether the states’ alleged injuries would be redressed by invalidation of the certification rule. The government had argued that these would not be redressed because states would still be required to account for the health insurance tax under a separate provision in federal law (that the states did not challenge). Even so, Judge Haynes writes, invalidation of the certification rule would remove one explicit requirement to pay the health insurance tax and provides grounds for standing. She also notes in a footnote that the states have standing to challenge the health insurance tax itself.
APA Statute Of Limitations
Although the states have standing to sue, their APA claims are time-barred. The APA requires civil actions against the government to be filed within six years after the “right of action first accrues.” A plaintiff can challenge a rule outside of this time period if it can claim that an agency exceeded its constitutional or statutory authority and there was some direct, final agency action that affected the plaintiff within six years of filing a lawsuit.
Though the certification rule was published in 2002—thirteen years before the states’ complaint—Judge O’Connor concluded that HHS took direct, final agency action in 2015, which triggered a new six-year statute of limitations period. The Fifth Circuit disagreed, finding that none of the three actions cited by Judge O’Connor were direct and final. Judge O’Connor had cited 1) HHS’s approval of Texas’s amended managed care contract in 2015, which included capitation rates that reflected the health insurance tax; 2) the government’s collection of the health insurance tax through the 2015 capitation rates; and 3) a Medicaid managed care guide issued by HHS in 2015.
None of these actions, the Fifth Circuit concludes, marked a change to Texas’s obligations under the certification rule that retriggered a new six-year period. Actuarially sound capitation rates, Judge Haynes writes, have consistently required that all reasonable, appropriate, and attainable costs—including all taxes, fees, and assessments—be covered by rates. As a result, the APA claims fall within the six-year statute of limitations, and those claims are dismissed as time-barred.
With the APA claims dismissed, the Fifth Circuit addresses only whether HHS unlawfully delegated authority to the Actuarial Standards Board in the certification rule. Reversing Judge O’Connor, the Fifth Circuit held that it did not. HHS retained final reviewing authority over state managed care contracts while requiring that the contract be certified by an actuary who follows the practice standards established by the Board. HHS has the ultimate authority to approve a state’s contract with Medicaid managed care entities, and certification is only a small part of the approval process. Because HHS retains this authority, it did not unlawfully delegate its authority to approve contracts to a third party.
The states had argued that the health insurance tax violates the Spending Clause and the Tenth Amendment doctrine of intergovernmental tax immunity. The Fifth Circuit rejects both arguments, concluding that the health insurance tax is constitutional.
The government had argued that the health insurance tax is imposed under Congress’s taxing power, rather than as a condition of Medicaid spending. The Fifth Circuit agrees, holding that the health insurance tax is a constitutional tax that does not impose a condition on spending. The court reached this conclusion by applying the functional test for determining whether a payment requirement is a tax rather than a penalty outlined by Chief Justice Roberts in National Federation of Independent Business v. Sebelius. The funding condition that the states take issue with, Judge Haynes writes, is the Medicaid Act (which is not contested here) rather than the health insurance tax.
On the Tenth Amendment, the Fifth Circuit concludes that the health insurance tax does not discriminate against states and its “legal incidence” does not fall on states. It is imposed on any entity that provides health insurance, which makes it nondiscriminatory, and its clear wording shows that Congress excluded states from paying the tax. Congress did not target states in adopting the health insurance tax, even if some states ultimately bear the economic burden of paying the tax.