Texas, Louisiana and Kansas filed a lawsuit against the federal government Thursday accusing it of forcing states to pay an unconstitutional tax to help fund the Affordable Care Act.
The lawsuit alleges that the law's excise tax on insurers is unconstitutional because it effectively forces states to cover the cost or risk losing Medicaid funding when it's imposed on the companies that hold contracts for Medicaid managed care.
Managed care companies had to start paying the fee last year. This year, the American Academy of Actuaries adopted a standard calling for capitation rates in managed care organization agreements to be high enough to recover the amount of that tax from their states. If the rates are deemed inadequate, states could wind up losing federal matching funds for the Medicaid plans.
“By functionally requiring that the plaintiff states reimburse managed care organizations for payment of tax liabilities, the United States has imposed those taxes on the states,” according to the lawsuit.
A Justice Department spokesman declined to comment on the lawsuit Thursday afternoon.
A victory for the states in the suit could cost the ACA billions of dollars, according to Josh Blackman, an associate professor at South Texas College of Law who informally consulted with Texas before it filed the lawsuit.
But Tim Jost, a law professor at Washington and Lee University who is a proponent of the healthcare law, said previous lawsuits challenging the ACA's individual mandate and insurance premium subsidies posed more serious threats.
“We're talking about a hit … but it's nothing like King v. Burwell or NFIB v. Burwell,” Jost said, referring to the two major attacks on the ACA that made it to the Supreme Court. In King, the justices upheld premium subsidies, and in NFIB, the justices upheld the individual mandate but said states didn't have to expand Medicaid under the law.
Blackman said the lawsuit will test the reach of the Supreme Court's reasoning in the Medicaid part of the NFIB opinion. The justices said that threatening to pull states' Medicaid funding unless they expand Medicaid amounts to coercion. Texas and the other states joining the new suit claim the same type of coercion is at play.
“This threat to cut Medicaid funding to Texans unless the state continues to pay hundreds of millions in taxes to Washington amounts to the very 'gun to the head' the Supreme Court warned about in earlier rulings on Obamacare,” Texas Attorney General Ken Paxton said in a statement. “This represents yet another huge overstep of authority for this administration, which once again has demonstrated their willingness to circumvent the Constitution in order to achieve their policy goals.”
The states also argue that the U.S. Constitution requires that state officials clearly understand the conditions they're agreeing to when they accepts federal dollars, and the ACA doesn't address whether states have to pay for the law or risk losing Medicaid money.
They also allege that the tax is unconstitutional because it delegated duties of Congress to a private entity, the American Academy of Actuaries. And they say the new regulation amounts to a tax on the states, in violation of the constitutional doctrine prohibiting taxation of a sovereign state.