Medicaid update: Texas v. Brooks-LaSure

Some of the most consequential actions by judges are issued by courts late on Friday afternoons, especially before a long weekend. Friday, June 30, 2023 was no different in the Eastern District of Texas when Judge Jeremy Kernodle issued a Preliminary Injunction in favor of the state of Texas, enjoining the Centers for Medicare and Medicaid Services (CMS) from pursuing enforcement of guidance issued in a national Informational Bulletin.

The importance of the Informational Bulletin and its challenge by the state could jeopardize millions of dollars in Medicaid funding that providers rely on to fund services provided to Medicaid program patients, not only in Texas, but around the country. See State of Texas, et al., v. Chiquita Brooks-LaSure, et al, No. 6:2023cv00161 - Document 31 (E.D. Tex. 2023).

The lawsuit, which Texas filed immediately following the issuance of CMS's Informational Bulletin, issued February 17^th (Bulletin), sought to enjoin certain key provisions in the Bulletin that extends Medicaid's "hold harmless" prohibition to private agreements among providers.

In the Bulletin, CMS indicates that it "intends to inquire" about the arrangements and "reduce a state's medical assistance expenditures by the amount of healthcare related tax collections that include these [private] arrangements", i.e., reduce the state's Medicaid matching amounts, reducing the state's Medicaid dollars and those Medicaid dollars that are directed towards hospitals and physicians who provide services to Medicaid program patients.

For many years, most significantly following the passage of the Affordable Care Act (ACA) in 2010, states, whose legislatures have balked at expanding their Medicaid programs or who cannot afford to fully fund the state's share of the Medicaid match for the state's Medicaid population, have relied on an alternative statutory method to supplement the state's appropriated share of Medicaid: they have taxed "healthcare related items, services or providers" in accordance with the Medicaid statute's parameters that the tax is 1) broad based, and 2) contains no hold harmless provision.

This statute has been utilized by Medicaid programs around the country to supplement the state's share of Medicaid funding to help support paying for Medicaid services provided in hospitals and by physicians who see these patients regardless of their ability to pay for services.

The Texas legislature authorized certain hospital districts and counties to collect "mandatory" payments from hospitals to fund local provider participation funds (LPPF), which, in turn, could be used to fund intergovernmental transfers to the state to help pay for the nonfederal share of Medicaid matching funds. These taxes, which must be uniform, prohibit the LPPF funds from holding any healthcare institution harmless.

CMS has a history of questioning those arrangements created in Texas and around the country, however, CMS indicates it is "aware" of private redistribution arrangements and openly targets its Informational Bulletin to rid the program of these arrangements, citing CMS's belief that they violate the statutory prohibition.

In 2019, CMS proposed the Medicaid Fiscal Accountability Rule, which would have added significant requirements to Medicaid supplemental payment programs, like those targeted in the Bulletin. CMS withdrew the proposed rule after commenters, including state Medicaid programs and Medicaid providers, overwhelmingly expressed concerns about the proposed changes to the program. The Bulletin is CMS's most recent attempt to reach into these private redistribution arrangements seeking to prohibit these private arrangements as within the Medicaid program's purview.

The Texas case sought to disqualify the Bulletin based on classic Administrative Procedures Act (APA) principles, arguing that the Bulletin: 1) exceeds CMS' statutory and regulatory authority 2) did not go through notice-and-comment rulemaking and 3) is arbitrary and capricious.

In issuing the Preliminary Injunction against CMS, the Judge found that Texas is likely to succeed on the merits of its case because the Bulletin met all three standards. Additionally, the court held that irreparable harm could clearly occur because states would face potential disallowance if they failed to comply, but that states also had no control or necessarily explicit knowledge of private arrangements. Thus, states could face significant reductions in Medicaid funding as a result of something of which they arguably had no control.

This case is not over, nor is the concern about this funding mechanism, as CMS is poised to appeal the case to the 5th Circuit. Moreover, as long as states use alternatives to fund their Medicaid programs, outside the direct appropriations process, CMS will struggle with such funding mechanisms, as they have since before the issuance of statutory reforms in 1991. This is a tension that has long existed in the Medicaid program as CMS seeks to standardize Medicaid funding mechanisms.

Providers, however, who care for Medicaid program patients, remain in the middle of the state/federal divide. What they care about the most is stability in Medicaid program funding. Failure by CMS and the states to agree on such funding mechanisms makes hospitals and physicians in such states vulnerable to continued discord.