Thoughts on the Medicaid Spending Clause Decision

While the 26 state plaintiffs ultimately lost the case challenging the constitutionality of the individual mandate, they partially prevailed on the other federalism case decided today: the challenge to provisions of the Affordable Care Act requiring states to massively expand Medicaid coverage or lose all of their federal Medicaid funds.

The Supreme Court ruled that the federal government may deny the states additional Medicaid funds if they refuse to comply with the coverage expansion requirement, but may not take away their preexisting Medicaid funds. In previous cases, such as South Dakota v. Dole (1987), which upheld the denial of 5% of federal highway funds to states that refused to raise their drinking age to 21, the Court ruled that federal grant conditions are might be unconstitutionally “coercive” if they put too much pressure on states. But this is the first time the Court has actually invalidated spending condition on that basis. Because states are so heavily dependent on federal Medicaid grants, Chief Justice John Roberts’ opinion for the Court reasons as follows:

[In South Dakota v. Dole], [w]e found that the inducement was not impermissibly coercive, because Congress was offering only “relatively mild encouragement to the States…” We observed that “all South Dakota would lose if she adheres to her chosen course as to a suitable minimum drinking age is 5%” of her highway funds. In fact, the federal funds at stake constituted less than half of one percent of South Dakota’s budget at the time. In consequence, “we conclude[d] that [the] encouragement to state action [was] a valid use of the spending power.” . Whether to accept the drinking age change “remain[ed] the prerogative of the States not merely in theory but in fact.”

In this case, the financial “inducement” Congress has chosen is much more than “relatively mild encouragement”—it is a gun to the head. Section 1396c of the Medicaid Act provides that if a State’s Medicaid plan does not comply with the Act’s requirements, the Secretary of Health and Human Services may declare that “further payments will not be made to the State.” A State that opts out of the Affordable Care Act’s expansion in health care coverage thus stands to lose not merely “a relatively small percentage” of its existing Medicaid funding, but all of it… Medicaid spending accounts for over 20 percent of the average State’s total budget, with federal funds covering 50 to 83 percent of those costs.

Six other justices agreed that this condition is unconstitutional, including liberals Stephen Breyer and Elena Kagan. Justice Breyer’s vote is particularly surprising, since he has been the the intellectual leader of the liberal wing of the Court in arguing that federalism limitations on congressional power should be left to the political process rather than enforced by the Court.

Unfortunately, Chief Justice Roberts gave little indication as to how punitive a funding condition must be before it becomes “coercive.” As he puts it, “We have no need to fix a line…. It is enough for today that wherever that line may be, this statute is surely beyond it.” The question of where the line is will likely to be the subject of much future litigation, as co-blogger Jonathan Adler explains here:

The Court’s decision on the Medicaid expansion dramatically reduces the pressure for states to accept this part of the PPACA. It will also limit the federal government’s ability to direct state implementation in other areas by threatening the withdrawal of federal funds. Given the frequency with which Congress uses the power of the purse to induce state cooperation, new rounds of litigation on the spending clause are sure to follow. Dole upheld a threat to withhold five percent of federal highway funds if states refused to adopt a 21-years-old drinking age. But will courts uphold a threat from the Environmental Protection Agency to shut off the lion’s share of highway funds should states not adopt sufficiently stringent pollution controls on local businesses? Perhaps not.

Regardless, the Medicaid case has now established the first potentially significant limit on Congress’ Spending Clause power in 75 years. Just how significant it turns out to be remains to be seen. It could be that it will apply only to extreme cases, where many states stand to lose 10 to 15 percent of their total budget, as was true here. But perhaps a smaller, yet still substantial, figure will be enough. We shall see.

I previously wrote about the Medicaid case here and in this March post where I explained both my doubts about the “coercion” standard, and why I nonetheless believe the states deserved to win this case.