Socking It to (Some of) the States

Kimberly Strassel’s column in today’s WSJ details several provisions of the Baucus health care reform bill outline that give special treatment to certain states to reduce the impact of health care reform.

A central feature of the Baucus bill is the vast expansion of state Medicaid programs. This is necessary, we are told, to cover more of the nation’s uninsured. The provision has angered governors, since the federal government will cover only part of the expansion and stick fiscally strapped states with an additional $37 billion in costs. The “states, with our financial challenges right now, are not in a position to accept additional Medicaid responsibilities,” griped Democratic Ohio Gov. Ted Strickland.

Poor Mr. Strickland. If only he lived in . . . Nevada! Senate Majority Leader Harry Reid, who is worried about losing his seat next year, worked out a deal by which the federal government will pay all of his home state’s additional Medicaid expenses for the next five years. Under the majority leader’s very special formula, only three other states—Oregon, Rhode Island and Michigan—qualify for this perk, on the grounds, as Mr. Reid put it recently on the Senate floor, that they “are suffering more than most.” . . . .

As an Ohio resident, this is one more reason to be concerned about the bill.  But wait, there’s more, including a differential threshold for the 40 percent tax on “luxury” health care plans.

Special treatment of politically important interests is nothing new.  It’s business as usual in Washington, D.C.  Nonetheless, these provisions are worth watching.  If health care reform forces states to assume $30-billion-plus in additional Medicaid expenses, it could exacerbate tensions between the states and Washington, D.C., and could even produce some interesting constitutional litigation.

The federal government cannot force states, as states, to participate in federal programs.  It can, however, make them offers they can’t refuse, by offering substantial financial support and then imposing various requirements on the receipt of federal funds.  At some point, however, the cost isn’t worth the candle, and a state may be tempted to walk away.  Given the fiscal mess so many states are in already, this sort of reform could push one or more states over the edge, prompting a decision to forgo relevant federal funding and abandon federal Medicaid responsibilities.  This is an unlikely scenario — I would expect some sort of “fix” to emerge in Washington, D.C. before it reached this point — but it looks increasingly possible.  Query: Were a state to walk away from Medicaid, how would the federal government respond? And would litigation ensue?

Another, less extreme and therefore more likely, scenario would be for a state to challenge the conditions that are imposed upon the states in either the health care reform bill or subsequent implementing regulations.  Under South Dakota v. Dole, any conditions imposed upon the receipt of fedeal funding must be clear and unambiguous.  The federal government may not impose additional conditions after the fact, nor may federal agencies interpret amgbiguous statutory language so as to alter or increase recipient state obligations.

There are at least two reasons why litigation in this area seems possible, if not likely.  First, this has been the limitation on conditional spending federal courts have been most willing to enforce.  (See, e.g., Pontiac City School District v. Spellings (6th Cir., 2008), a challenge to requirements under the No Child Left Behind Act reheard en banc last December.)  Second, given the amount of money at stake, states may be particularly sensitive to federal alteration of Medicaid program requirements during the implementation of any reforms.

The bottom line is that it will be worth watching how health care reform legislation affects the states.  This will have political consequences, to be sure, but it could also set the stage for some interesting legal conflicts.