Judge blocks Kentucky's Medicaid work requirement

Updated at 7:10 p.m. ET

A federal judge's ruling Friday invalidated the CMS' approval of a Medicaid waiver that would have let Kentucky impose work requirements and other tough new conditions for eligibility on beneficiaries. The decision, while dealing a blow to the Trump administration's strategy for revamping and shrinking Medicaid, left the door open for legal clearance for a more carefully developed model.

U.S. District Judge James Boasberg in Washington, D.C., an Obama administration appointee, held in Stewart v. Azar that the HHS secretary's approval of the waiver failed to take into account the primary objective of the Medicaid statute, which he said is to furnish medical assistance. The judge sent the waiver back to the CMS for further review.

"The secretary must adequately consider the effect of any demonstration project on the state's ability to help provide medical coverage," Boasberg wrote in his 80-page decision. "He never did so here."

The U.S. Department of Justice is likely to request a stay of Boasberg's ruling to allow the five-year demonstration to take effect July 1 as scheduled, and to appeal the decision to the U.S. Court of Appeals for the District of Columbia Circuit.

At a time when the Trump administration is rolling back the Affordable Care Act through a variety of administrative actions, Friday's ruling was a rare bright moment for ACA supporters. The federal government has never previously permitted states to impose work requirements as a condition of Medicaid eligibility.

Legal observers believe the case eventually could reach the U.S. Supreme Court, which, by that time, will have at least one new member named by President Donald Trump. The president said Friday that he intends to name his nominee to replace retiring Justice Anthony Kennedy by July 9. Senate Majority Leader Mitch McConnell (R-Ky.) has indicated that he wants to move quickly to fill the seat.

"A staunch conservative may be more receptive to the kinds of changes the Trump administration is making to Medicaid than a progressive justice," said Nicholas Bagley, a University of Michigan law professor.

CMS Administrator Seema Verma called the ruling "disappointing" but said her agency "is conferring with the Department of Justice to chart a path forward. In the meantime, we will continue to support innovative, state-driven policies that are designed to advance the objectives of the Medicaid program by improving health outcomes for thousands of low-income Americans."

Kentucky's Republican governor, Matt Bevin, pushed hard for the waiver and warned that if it were challenged in court, he would end the state's expansion of Medicaid under the Affordable Care Act. That expansion, launched by his Democratic predecessor, has expanded coverage to nearly 500,000 low-income adults and helped cut the state's uninsured rate by nearly half.

"While we disagree with the Court's ruling, we look forward to working with CMS to quickly resolve the single issue raised by the court so that we can move forward with Kentucky Health," said Adam Meier, the state's secretary of Health and Family Services. "Without prompt implementation of Kentucky Health, we will have no choice but to make significant benefit reductions."

The Kentucky Hospital Association, which supported the waiver in order to protect the Medicaid expansion, disagreed with Boasberg's finding that HHS' approval of the waiver was arbitrary and capricious. "The association found the waiver process to be engaging, thorough and evidence-based," said Wes Butler, outside counsel for the hospital association. "Kentucky hospitals remain committed to working with state and federal Medicaid agencies to consider program innovations."

Outside of Kentucky, many hospital and provider groups oppose a Medicaid work requirement, fearing coverage losses, a jump in uncompensated care, and disruption of care for people with chronic conditions.

Jane Perkins, lead attorney for the three advocacy groups that brought the lawsuit on behalf of 16 Kentucky Medicaid beneficiaries, said the court put the Trump administration on notice that if it wants to implement a Section 1115 Medicaid experiment, it must follow the purpose of Medicaid, which is to provide coverage, not cut it. Kentucky projected that 95,000 people would leave Medicaid over five years due to the waiver, though outside groups estimated the number would be far larger.

Now, Perkins and her colleagues are considering filing lawsuits challenging similar Medicaid work requirement waivers in Arkansas, Indiana and New Hampshire. Those state waivers were not part of the Kentucky case and will move forward unless explicitly challenged and overturned in court. Those demonstrations were approved after the CMS in January invited states to submit such proposals. Arkansas' work requirement took effect June 1. Arizona, Maine, Mississippi, Michigan, Utah and Wisconsin have waivers awaiting approval from the CMS.

The Kentucky waiver program requires that starting in July, beneficiaries who are not disabled have to complete 80 hours per month of employment or other community engagement activities to maintain their Medicaid eligibility. That applies to both the traditional Medicaid population and the expansion population. All beneficiaries will have to regularly document their compliance or prove that they qualify for an exemption.

The CMS and the Bevin administration argue that requiring people to work or participate in other community engagement activities will improve their health and help shift them into commercial health insurance.

The waiver also establishes premium payments, cost-sharing, and a lockout for failure to pay, ends retrospective eligibility, and eliminates medical transportation that isn't for emergencies.

Under Kentucky's demonstration, premiums will range from $1 a month for people with little or no income and up to $37.50 a month for people at 138% of the federal poverty level. Those above the poverty line who fail to pay will be locked out of coverage for six months and must pay past-due premiums to regain coverage. Those below the poverty line who don't pay will have their reward accounts for receiving vision and dental benefits docked.

Boasberg's ruling knocked out all provisions of the Kentucky Health model except an enhanced new program for substance abuse treatment under Medicaid.

There currently are more than 1 million Kentuckians on Medicaid.

A Kaiser Family Foundation report estimated that as many as 4 million Americans would lose coverage if similar work and community-engagement rules were adopted nationwide.

The Justice Department argued that the HHS secretary's discretion in granting Medicaid Section 1115 waivers is not reviewable by the courts if the secretary makes the judgment that a demonstration project supports the Medicaid statute's objectives.

But Boasberg wrote that while the secretary is given significant deference in approving pilot projects, "his discretion does not insulate him entirely from judicial review. Such review reveals that the secretary never adequately considered whether Kentucky Health would in fact help the state furnish medical assistance to its citizens, a central objective of Medicaid. This signal omission renders his determination arbitrary and capricious."

The ruling, however, leaves room for the work requirement waiver in Kentucky to ultimately move forward. If the decision is upheld on appeal, the CMS likely would have to work with Kentucky to recraft its waiver proposal, the state would have to open a new public comment period, and the CMS would have to go through a fresh approval process.

"There's no sweeping pronouncement that you can never have a work requirement," said Sara Rosenbaum, a professor of health law and policy at George Washington University, who opposes the Kentucky waiver. "But the court is very clear that when the ecretary exercises Section 1115 authority, the secretary must show with evidence how the demonstration will advance the core purpose of Medicaid, which is to insure people."

But James Blumstein, a Vanderbilt University law professor, found Boasberg's opinion unpersuasive. "I thought the point of an experiment is to find out what happens," he said. "But the court worries that the agency has not considered the outcomes, which is something that occurs once the experiment develops the evidence."

Despite the caveats, Friday's ruling was cheered by ACA supporters, who see Medicaid work requirements as political camouflage for the Trump administration and GOP state leaders to slash the number of people receiving Medicaid and roll back the ACA's coverage expansion.

"Striking down Medicaid work requirements on the legal merits is a big roadblock in the way of instituting such requirements, not only in Kentucky but in any red states that are thinking of moving forward," the University of Michigan's Bagley said.