ObamaCare in the Supreme Court

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No. 4, March 2011

Recent district court decisions have fueled speculation over what the Supreme Court will do about ObamaCare if and when one of the challenges to the law's "individual mandate" arrives on the justices' doorstep. Largely unnoticed amidst the agitation, though, cases that will have profound effects on ObamaCare's future are already pending before the Court. They involve enormous amounts of money, and they have powerful implications for the implementation of the criminally misnamed "Affordable Care Act." The justices will get these cases right, to good effect.

Key points in this Outlook:

  • Pending court cases, largely unnoticed in the commotion over the constitutionality of ObamaCare's "individual mandate," will have potent effects on the contours of the Patient Protection and Affordable Care Act.
  • While the administration and its supporters have powerful incentives to expand and entrench ObamaCare by means of third-party litigation, the Supreme Court's well-established jurisprudence will block that strategy.
  • The Supreme Court's interventions will help both to forestall a litigation-driven expansion of ObamaCare and to preserve political accountability for its impending failure.

You'll Be Comin' Down

Highly publicized lawsuits by the Commonwealth of Virginia and by a coalition of states and private parties have raised powerful challenges to a provision contained in the Patient Protection and Affordable Care Act (PPACA, better known as ObamaCare) that requires private citizens to purchase health insurance or else pay a penalty or tax starting in 2014. The central question is whether the Constitution's Commerce Clause, coupled with the Necessary and Proper Clause, permits the federal government to compel a private transaction (the purchase of health insurance). The prompt, forceful articulation of this question, in public and in the courts, is a sign of political health--a free country's paraphrase of Monty Python: "We aren't dead yet."

Even if the mandate were invalidated, however, some of the operative and truly destructive parts of ObamaCare would almost certainly remain unaffected.[1] Among them is a stupendous expansion of Medicaid--an open-ended entitlement program under which the federal government pays upwards of two-thirds of whatever expenditures states choose to devote to eligible recipients and services. This portion of ObamaCare is of a piece with the individual mandate in its general orientation toward wholesale socialization. Like the mandate, its fate will occupy the federal courts. Unlike the mandate, it has already reached the Supreme Court.

Litigation over Medicaid reimbursement rates or drug pricing is not the stuff of grand constitutional argument. Its appeal is limited to professionals, partisans, and pedants who obsess over section 1396a(a)(30)(A), volume 42, of the US Code; regulations issued thereunder; and the finer points of federal jurisdiction and causes of action arising (or not) under either. It is worth paying attention to, though. In politics, P. J. O'Rourke's law holds: the money always goes to the last person who manages to stay awake. No federal law embodies this principle more perfectly, and infuriatingly, than the PPACA. Despite its inordinate length and kitchen-sink quality, the act effectively commits the entire health care system to the largely unguided care of the Department of Health and Human Services (HHS) and a gaggle of boards and commissions that we have never heard of, and hopefully never will.

The Supreme Court's past decisions promise to block the most nefarious abuses of discretion that the administration and its outside cohorts may be contemplating.

Happily, the Supreme Court's past decisions promise to block the most nefarious abuses of discretion that the administration and its outside cohorts may be contemplating. The mandate question is close, and the Court's precedents on the scope of enumerated powers leave the answer in doubt. Pending Medicaid cases, in contrast, confront central components of ObamaCare with the Court's robust, well-established, statutory--but constitutionally grounded--federalism jurisprudence. The case law presents no impediment to Medicaid's recent legislative expansion. However, it poses a formidable obstacle to the efforts of welfare rights organizations and provider groups to further expand federal entitlements by means of private litigation--and to any administrative effort to aid and abet that strategy. By all indications, the Court will make its jurisprudence stick.

Downtown Train

ObamaCare mandates a substantial expansion of Medicaid. Beginning in 2014, states must extend coverage to every citizen with an income of up to 133 percent--under a later-enacted reconciliation bill, 138 percent--of the federal poverty line. This provision will sweep upwards of 16 million new recipients into Medicaid. Initially, the federal government will pay states the full cost of the new recipients' services; in later years, the reimbursement rate is scheduled to decline to 90 percent. Current reimbursement rates, determined by the Federal Medical Assistance Percentage (FMAP), are much lower.

The rational strategy for states would be to reduce their current Medicaid-eligible populations and, come 2014, to declare them the feds' fiscal responsibility. To block that maneuver, the PPACA imposes a "Maintenance of Effort" (MOE) requirement, effective with the enactment of the statute, forbidding states from reducing eligibility from current levels (which vary widely from state to state). A similar MOE has been in effect over the past few years; it was imposed in connection with a temporary upward adjustment of the FMAP that will expire this coming July.

MOE requirements generally extend to state "eligibility requirements, methodologies, or procedures"--but not to the reimbursement rates that states must pay to private providers. Thus, beleaguered states have attempted to curb Medicaid expenses by squeezing the providers. Medicaid, however, also mandates a complex set of services and policies. For example, reimbursement rates must be "consistent with high-quality medical care" and "sufficient to enlist enough providers" to keep Medicaid services generally available. The interpretation of those murky requirements is committed to the secretary of HHS, Kathleen Sebelius. She may enforce the mandates through various means, up to and including a withholding of funds for noncompliant states, and there is an administrative process to resolve disputes between the states and HHS.

The question that has occupied the courts for well over three decades is whether private parties--either Medicaid claimants, mobilized and represented by welfare rights groups, or provider groups--may enforce the federal requirements against the states. Since the mid-1980s, the Supreme Court's consistent and unequivocal answer has been no. In several rulings over the past years, however, the Ninth Circuit Court of Appeals finagled a way--pioneered by the National Senior Citizens Law Center, a highly professional and effective advocacy group--to conclude the opposite. In 2008, the California legislature authorized a 10 percent cut in private providers' Medicaid reimbursement rates, soon replaced with more modest measures. The providers persuaded the Ninth Circuit to invalidate the laws, principally on the theory that they were "preempted" by the federal Medicaid statute. In January, the Supreme Court granted the state's request for a review of those decisions. The justices will reverse.

No Retreat, No Surrender

The plaintiffs' case has a superficial plausibility: Medicaid requires generally available, high-quality care, and when state reductions in reimbursement may compromise that federally mandated objective, one could say that they are preempted--no? No. The argument is both contrived and, moreover, a brazen end run around the Supreme Court's unwavering jurisprudence.

The Constitution's Supremacy Clause provides that federal law trumps--"preempts"--all contravening state law. A regulated party (such as a business) may raise preemption as a defense against a state law that arguably conflicts with federal law: that defense, or an equivalent lawsuit invoking the courts' "federal question" jurisdiction, arises under or "by virtue of" the Supremacy Clause.[2] All that is common ground. However, it has nothing to do with Medicaid. While some justices have occasionally burbled about Medicaid's "preemptive" effect, Medicaid is a spending statute, not a Supremacy Clause statute. As the Supreme Court put it, spending statutes are "in the nature of a contract" between the feds and the states.[3] Such statutes do not regulate private parties at all. The force of Medicaid's mandates extends no further than to the participating states, and it flows entirely from their acceptance of federal funds; but for that acceptance, California could pay, or not pay, its medical providers whatever it wishes, so far as the feds are concerned. It is one thing, then, for a regulated party to invoke a preemption defense against a state law that is prohibited--"preempted" in the true and accepted sense of that term--by federal law. It is an entirely different proposition for third parties to crank up a free-floating "preemption" action that seeks to enforce, for their own benefit, the federal government's supposed contractual rights against state and local governments.[4]

Medicaid's self-declared beneficiaries came close to enshrining that proposition into law in the heady 1970s, when the Brennan Court suggested that virtually every federal funding condition "implied" a corresponding private right to sue state and local governments. When conservative justices blocked that path, a formidable trump dropped from William Brennan's bottomless sleeve: statutory requirements, the Court declared in Maine v. Thibotout (1980), could be enforced by private parties under "Section 1983," a theretofore little-used, Reconstruction-era provision that authorizes private suits over state deprivations of the "rights, privileges, or immunities secured by the Constitution and [federal] laws." The decision produced an explosion of statutory entitlement litigation, with the usual purpose of creating, by judicial fiat, rights and entitlements that Congress had never thought of. Medicaid proved a particularly fertile field of litigation; private enforcement suits put entire states under judicially administered consent decrees.

The Rehnquist Court and later the Roberts Court, however, pushed back against this tide in case after case. While the Court has never found the requisite five votes to simply overrule Thibotout, it has come very close to barring substantially all 1983 challenges under spending statutes. The rule of Gonzaga v. Doe (2002) is that Section 1983 will provide a cause of action only if the underlying statute unmistakably expresses Congress's intent to create such a right.[5] Exceedingly few Medicaid provisions, and none of the ones here at issue, satisfy that standard.

Precisely for want of an implied right or Section 1983 claim, the plaintiffs and the Ninth Circuit judges in the pending cases resorted to the preposterous "preemption" claim. The justices' response will be Victorian: we are not amused.

I Wanna Be Sedated

The controversy over public versus private enforcement and the conflict between the advocacy community's demands and the Supreme Court's well-established case law are also playing out in another Medicaid/ObamaCare arena: the pricing of pharmaceuticals. To distill a convoluted statutory scheme to its essence, Medicaid and related statutes seek to control the prices drug manufacturers may charge certain participating entities, such as local hospitals. Consistent with an overall policy to pretend markets exist where the government has wiped them out, the scheme does not regulate prices directly but rather asks pharmaceutical firms to enter into "contracts" with the secretary of HHS. (Drug companies that fail to sign up are excluded from the Medicaid system.) The standard-form contracts directly import stringent, highly complex statutory and regulatory requirements regarding the price calculations. Here, as in the reimbursement context, the statute entrusts enforcement to HHS, and there is an administrative process--greatly enhanced by the PPACA--to resolve disputes among providers, suppliers, and government agencies. And, here as there, questions arise over the private, third-party enforcement of the federal scheme.

In Astra USA v. County of Santa Clara, argued before the Supreme Court in January 2011 (a day after the cert grants in the reimbursement cases), public health care providers demanded reimbursement for alleged overcharges by drug companies, supposedly in contravention of federal law. Everyone, including the plaintiff class, acknowledges that there is no private statutory right of action to enforce the federal pricing rules on the suppliers. However, the plaintiffs argue that the federal purchasing contracts are really intended to benefit them, and therefore enforceable by them under a federal common law of contract--even if the statutory law imported into the contracts says just the opposite.

In the contract end run around the Supreme Court's anti-entitlement jurisprudence, as in the Supremacy Clause maneuver, the same cast of characters shows up: the National Senior Citizens Law Center, agitating and winning, here as in the reimbursement cases, in a Ninth Circuit that will lend what little is left of its prestige to long-rejected, Brennan-era propositions. In oral argument before the Supreme Court, not even Kellogg Huber's formidable David Frederick, counsel of choice for every liberal cause in the Supreme Court, could sell any justice on this one. Reversal is a foregone conclusion.

It's Magic

The impending Supreme Court reversals in the reimbursement and pricing cases, while salutary and important, are only one move in a war of attrition against claimants who never take no for an answer. ObamaCare has raised the stakes in this battle over inches, and the administration has sent distressing signals over its intentions. While paying lip service to the precedents, it will seek to evade them whenever possible.

In the reimbursement cases, the government opposed the petition for certiorari. Its brief, submitted at the Supreme Court's request, notes that the Court's decisions are open to conflicting interpretations and that the appellate courts have been all over the place--and then still insists that a cert grant would be premature. HHS, the government says, has "committed" to a rule-making process on the Medicaid provision, and the outcome of that process "may affect the appropriate analysis" under the Supremacy Clause and Section 1983. And in oral argument in Astra USA, the solicitor general, while siding with the drug companies, volunteered that the secretary could sua sponte declare the contracts enforceable by third parties.

Secretary Sebelius has potent incentives to implement the PPACA through administrative witchcraft.

While one should not read too much into litigants' tactics in individual cases, a bigger mistake is to expect anything but the worst of this administration. It carefully reserves the secretary's presumed authority to create, by administrative fiat, enforceable third-party rights that the statutes withhold. (How else, for example, could the secretary's reimbursement rule making possibly affect the "appropriate analysis" under the Supremacy Clause or Section 1983?) This collides headlong with the Supreme Court's jurisprudence: agencies, Justice Antonin Scalia has insisted in a case directly on point, "may play the sorcerer's apprentice but not the sorcerer himself."[6] Secretary Sebelius, however, has potent bureaucratic and political incentives to implement the PPACA through administrative witchcraft. In fact, she may have no other choice.

The Congress that enacted the PPACA papered over its unresolved problems by providing that the secretary "shall" or "may" do any one of a thousand things. HHS cannot possibly handle more than a few of them. (It has already fallen behind on a large number of rule makings and has met other deadlines only by issuing "interim final rules" without full notice and comment.) Moreover, HHS now operates under the watchful eyes of Republican House committees--yet under the demands of, and in ideological communion with, a political constituency that deems the PPACA a platform for full-scale health care socialization by stealth. The most viable and coherent agenda for HHS is to entrust the PPACA's implementation to its litigating lampreys and the Ninth Circuit. Let the Supreme Court block the present maneuvers: this crowd will be back. It will take a very determined judiciary to beat back a resourceful advocacy community and a conniving administration.

Beautiful Reward

It may be hard to mobilize sustained attention to ObamaCare's statutory nuances. Libertarians insist that the entire scheme is an affront to a free society: who cares what goes on within it? Economists observe that the politically directed payment streams into, within, and out of the system will never remotely approximate the pricing patterns or efficiencies that would emerge in a more consumer-directed health care system, and that high levels of waste and fraud are a given: what could courts possibly do about that? Good questions. Still, the Supreme Court's jurisprudence on ObamaCare's private-enforcement aspects merits two rousing cheers.

The "stakeholders" in the in-the-weeds cases hold only one stake--to expand the system (while blaming some fourth party, such as drug companies, for the exorbitant costs). They can afford to roll the dice on far-out legal theories because they can afford to lose time and again; in the end, all that matters is the one case they win. Meanwhile, no one can and will sue for a smaller system. HHS and even the state bureaucracies that now and then litigate Medicaid cases are interested only in the distribution of costs and economic rents within the system, not in checking the system as a whole. After all, they run it. And the constituency with a stake in limiting and disciplining the system, called taxpayers, is not at the table when the deals are cut and the cases are litigated. ObamaCare has enough self-inflating tendencies without the added boost of one-directional litigation. The justices understand this, and they will prohibit the inflation.

More importantly perhaps, the pending cases converge with the mandate litigation on the central point of constitutionalism and constitutional law: know your agents, control them, and demand accountability. The PPACA's architects assured us that one-sixth of the American economy can be run out of HHS headquarters, with the states' "cooperation"; and the lawyered-up constituencies that are now asking the courts to "improve" on the legislative deal vocally supported the bargain at the time. Let them try to make it work within the constitutional boundaries, and without convenient excuses for the coming train wreck.

Michael S. Greve ([email protected]) is the John G. Searle Scholar at AEI. He borrows his subtitles from the Boss and, occasionally, the Ramones. His book The Upside-Down Constitution (Harvard University Press) will appear this fall.

Miriel Thomas assisted in the preparation of this Outlook.

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1. The Florida district court's recent holding that the mandate is "unseverable" from the rest of the PPACA, even if it were to be sustained by the higher courts, would have only a limited impact where, as with the programs discussed in this Outlook, the act "merely" expands or amends preexisting statutes. Even wholesale invalidation of the act would leave the underlying statutes intact.

2. Shaw v. Delta Airlines Inc., 463 U.S. 85, 96 n.14 (1983); and Verizon Md. Inc. v. Public Serv. Comm'n, 535 U.S. 635, 642-43 (2002). See also Free Enterprise Fund v. Public Co. Accounting Oversight Board, 130 S. Ct. 3138 (2010).

3. Pennhurst v. Halderman, 451 U.S. 1, 17 (1981).

4. For a lucid discussion of this point, see Wilderness Society v. Kane County, 581 F.3d 1198, 1233-34 (10th Cir. 2009) (Judge McConnell, dissenting); reversed en banc on other grounds, 2011 WL 79487 (CA 10 (Utah)).

5. For a review of this jurisprudence, see my earlier AEI Outlooks: "The Supreme Court Term That Was and the One That Will Be," AEI Federalist Outlook (July 2002), www.aei.org/outlook/15849; and "Federalism, Yes. Activism, No," AEI Federalist Outlook (July 2001), www.aei.org/outlook/15851.

6. Alexander v. Sandoval, 532 U.S. 275, 291 (2001).

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