Kentucky Medicaid Waiver Blocked by Federal Courts

It has not been a good week for states that want to try innovative Medicaid waivers.  First, CMS shot down Massachusetts’ attempt to re-structure the 25-year old Medicaid prescription drug rebate program to achieve additional savings on the cost of prescription drugs.  And then on Friday, the United States District Court for the District of Columbia effectively blocked Kentucky’s attempt to impose “community engagement” requirements on some Medicaid recipients.  In a blistering decision, the court slammed CMS for approving the Kentucky program.  Because of statements that Kentucky’s governor has made, the court’s decision leaves some Kentucky Medicaid beneficiaries in a state of limbo.

First, a bit of history.  Recall that when President Obama signed the Affordable Care Act in March of 2010, the law required states to expand Medicaid to cover childless adults and parents with income up to 133% of the federal poverty level.  After the Supreme Court held, in a 7 – 2 decision in NFIB v. Sebelius that forcing the states to expand Medicaid was unconstitutional, the expansion became optional.  To date, 32 states have expanded Medicaid (Virginia and Maine are about to join the list, but the expansion has not gone into effect in those states yet).

Kentucky was one of the states that adopted the expansion.  However, after Governor Matt Bevin took office upon winning the 2014 election, he announced that he wanted to change the terms of the expansion.  In particular, Governor Bevin declared that his state’s Medicaid program would make the expansion contingent on expansion enrollees satisfying a work requirement in order to maintain coverage.  The state also proposed to make some other structural changes to the Medicaid program including cost sharing for some enrollees, penalties for inappropriate emergency department utilization, and the introduction of modified health savings accounts to fund the new cost sharing.  We’ve written about the Kentucky waiver here and here.

Many of the changes that Governor Bevin sought to make were inconsistent with the existing structure of Medicaid.  For example, section 1902(a)(10)(A) of the Social Security Act lists out the minimum requirements at the federal level to qualify for Medicaid.  It’s long, and it contains two clauses and 31(!!) subclauses, but if you take the time to read it all, the one word you will not see is “work.”  Therefore, the state of Kentucky sought a waiver from CMS to impose the community engagement requirements and the other changes.

As we have discussed before, as recently as this week, a state is able to obtain a waiver from Medicaid’s normal operating rules.  The Social Security Act allows the Secretary of HHS to grant a waiver of “any of the requirements” of section 1902 of the Medicaid program as long as doing so will “promote the objectives” of Medicaid.  And although the Obama Administration always felt that a work requirement in Medicaid did not promote the program’s objectives, the Trump Administration has adopted an alternative interpretation and announced that community engagement requirements of the type Kentucky proposed could qualify for a waiver.

On the face of it, that’s all well and fine.  Administrations come and administrations go, and it is certainly the case that political officials of different political parties have different views about the role of social welfare programs such as Medicaid.  So when a new President takes office, priorities change and that’s what happened here.

But in our Constitutional system of government, decisions don’t get made in a vacuum.  The courts can always review decisions made by the Congress and by the Executive branch.  Shortly after HHS approved the Kentucky waiver, a group of Medicaid beneficiaries and social welfare organizations such as the National Health Law Program asked a federal court for exactly such a review in Stewart v. Azar.

To those of us who write for this blog (health care nerds all of us), we thought this case posed a really interesting legal question.  The Medicaid statute vests all waiver decisions in the Secretary of HHS, and the Secretary can approve a waiver if, in his or her judgment, the waiver would promote the objectives of the Medicaid program.  So on the one hand, the Secretary’s “judgment” is paramount.  Can a court second-guess that judgment?

The court’s answer in Stewart v. Azar?  Without a doubt.  “[The Secretary’s] discretion does not insulate him entirely from judicial review.  Such review reveals that the Secretary never adequately considered whether [the Kentucky program] would in fact help the state furnish medical assistance to its citizens, a central objective of Medicaid.”

The lens with which the court reviewed the waiver decision is a federal statute called the Administrative Procedure Act.  That law requires a court to set aside any action by an Executive Branch agency that is “arbitrary, capricious … or otherwise not in accordance with law.”  And according to the court, that is exactly what happened here.

The court concluded that HHS failed to even consider a central objective of the Medicaid program:  to make health coverage available to Medicaid beneficiaries.  How, the court asks, could the Secretary decide that the Kentucky waiver “promote[d] the objectives” of Medicaid when the Secretary ignored that crucial objective?  And by failing to do so, the agency acted in an arbitrary and capricious way.

In response, the court vacated the approval of the Kentucky waiver.  Accordingly, it cannot go into effect.  What happens next is anyone’s guess.  Will HHS appeal the decision to the DC Circuit?  Will HHS seek a stay of the court’s order?  Will Kentucky now file a state plan amendment to eliminate the Medicaid expansion entirely?  Whatever happens next, the expansion Medicaid beneficiaries in Kentucky are in a state of limbo.

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