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Date: 01-05-2022
Case Style:
STATE OF TEXAS; STATE OF KANSAS; STATE OF LOUISIANA; STATE
OF INDIANA; STATE OF WISCONSIN; STATE OF NEBRASKA v. CHARLES P. RETTIG, in his Official Capacity as Commissioner of Internal
Revenue; UNITED STATES OF AMERICA
Case Number: 18-10545
Judge: Catharina Haynes
Court:
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
On appeal from The United States District Court
for the Northern District of Texas
Plaintiff's Attorney: STATE OF TEXAS; STATE OF KANSAS; STATE OF LOUISIANA; STATE
OF INDIANA; STATE OF WISCONSIN; STATE OF NEBRASKA Attorney’s Offices
Defendant's Attorney: United States Attorney’s Office
Description:
New Orleans, LA - Health and Human Services lawyer represented Plaintiffs - Appellees Cross-Appellants with constitutional challenges to Section 9010 of the Affordable Care Acstitutionalt (the “ACA”) and statutory and constitutional challenges toa U.S. Department of Health and Human Services (“HHS”) administrative rule (the “Certification Rule”).
I. Background
A. Regulatory Background
In 1965, the Medicaid Act1 “established the Medicaid program as a joint
Federal and State program for providing financial assistance to individuals
with low incomes to enable them to receive medical care.” See Medicaid
Program; Medicaid Managed Care: New Provisions, 67 Fed. Reg. 40,989,
40,989 (June 14, 2002) [hereinafter “2002 Final Rule”]. The federal
1 42 U.S.C. §§ 1396–1396w-5.cente>
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government “provid[es] matching funds to State agencies to pay for a portion
of the costs of providing health care to Medicaid beneficiaries.”2 Id.
States have two options for providing care to Medicaid beneficiaries: a
“fee-for-service” model and a managed-care model. Id. Under the fee-forservice model, a doctor who treats a Medicaid beneficiary submits a
reimbursement request to the state Medicaid agency. Id. The state pays the
bill after confirming the individual’s eligibility and need for service. See id.
Then the state seeks reimbursement from the federal government for a
percentage of the cost. See 42 U.S.C. § 1396b(a).
Under the more widely used managed-care model, the state pays a thirdparty health insurer (“managed-care organization” or “MCO”) a monthly
premium (the “capitation rate”) for each Medicaid beneficiary the MCO covers,
and the MCO provides care to the beneficiary. 2002 Final Rule, 67 Fed. Reg.
at 40,989. States may receive reimbursement from the federal government for
some percentage of the capitation rate so long as the underlying MCO contract
is “actuarially sound.” See 42 U.S.C. § 1396b(m)(2)(A)(iii).
As states began moving away from the fee-for-service model, HHS
recognized that its definition of “actuarial soundness”—based on the cost of
services under a fee-for-service model—was untenable. See 2002 Final Rule,
67 Fed. Reg. at 41,000 (stating that “there [was] an increasing number of
States that lack[ed] recent [fee-for-service] data to use for rate setting”). It
thus promulgated a final rule redefining “actuarial soundness” in 2002. Id. at
41,079–80 (redefining “actuarial soundness”). Under this new rule, capitation
rates must satisfy three requirements to be actuarially sound. First, the rates
must “[h]ave been developed in accordance with generally accepted actuarial
2 Medicaid beneficiaries are those “individuals eligible for and receiving Medicaid
benefits.” 2002 Final Rule, 67 Fed. Reg. at 40,989.
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principles and practices,” 42 C.F.R. § 438.6(c)(1)(i)(A) (2002),3 which, as
explained by the actuarial office within HHS that reviews state-MCO
contracts, requires accounting for all reasonable, appropriate, and attainable
costs. Second, the rates must be “appropriate for the populations to be covered,
and the services to be furnished under the contract.” Id. § 438.6(c)(1)(i)(B).
Third, the rates must satisfy the Certification Rule;4 that is, they must “[h]ave
been certified, as meeting the requirements of this [provision], by actuaries
who meet the qualification standards established by the American Academy of
Actuaries and follow the practice standards established by the Actuarial
Standards Board [(the “Board”)].” Id. § 438.6(c)(1)(i)(C).
In 2010, Congress enacted the ACA, comprised by the Patient Protection
and Affordable Care Act (“PPACA”), Pub. L. No. 111-148, 124 Stat. 119 (2010),
and the Health Care and Education Reconciliation Act of 2010 (“HCERA”),
Pub. L. No. 111-152, 124 Stat. 1029 (2010). The ACA made two changes to the
regulatory scheme requiring states that requested Medicaid reimbursements
for their MCO contracts to provide actuarially sound capitation rates. First,
Congress imposed a new cost on certain MCOs: a federal health-insurance
3 In 2016, HHS recodified the actuarial soundness requirements and the Certification
Rule in 42 C.F.R. §§ 438.2, 438.4(a). Because the States challenge the 2002 version of the
Certification Rule, which was in effect in 2015, and because the definitions relevant to the
States’ claims are unchanged, we follow the district court and the parties in discussing this
version of the regulation.
4 The Certification Rule at issue here is solely 42 C.F.R. § 438.6(c)(1)(i)(C), the
certification component of the actuarial soundness definition. The States’ operative
complaint and motion for summary judgment objected to only that subsection. They made
no mention of the other requirements. Moreover, in a motion for leave to file a second
amended complaint, the States specified that the Certification Rule defined actuarial
soundness as meeting the actuarial standards set by a private association of actuaries.
We clarify this point because the district court incorrectly determined that the
Certification Rule at issue encompassed all three requirements. See Texas v. United States
(Texas I), 300 F. Supp. 3d 810, 822 (N.D. Tex. 2018). On appeal, the States also seem to have
confused which HHS regulation they were contesting, first referring to only subsection
(c)(1)(i)(C) but later lumping in subsection (A) as well.
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provider tax (the “Provider Fee”). See PPACA § 9010, 124 Stat. at 865,
amended by PPACA § 10905, 124 Stat. at 1017, amended by HCERA § 1406,
124 Stat. at 1066.5 This Provider Fee must be paid annually by covered
entities—“any entity which provides health insurance for any United States
health risk,” excluding governmental entities.6 Id. § 9010(c)(1), (c)(2)(B), 124
Stat. at 866. Second, Congress amended the Medicaid Act to expressly require
that capitation rates included in state-MCO contracts be actuarially sound. Id.
§ 2501(c)(1)(C), 124 Stat. at 308; 42 U.S.C. § 1396b(m)(2)(A)(xiii) (“[C]apitation
rates . . . shall be based on actual cost experience related to rebates and subject
to the Federal regulations requiring actuarially sound rates[.]”). What
remained unchanged was that actuarially sound capitation rates required
accounting for all reasonable, appropriate, and attainable costs. Thus, when
the Internal Revenue Service (the “IRS”) began collecting the Provider Fee
from covered entities in 2014, see PPACA § 9010(a), 124 Stat. at 865, states
with MCO contracts were required to account for the Provider Fee to meet the
actuarial soundness requirement of the Medicaid Act, see 42 U.S.C.
§ 1396b(m)(2)(A)(iii).
In 2015, the Board, an independent organization that sets appropriate
standards for actuarial practices in the United States, published Actuarial
Standard of Practice 49: Medicaid Managed Care Capitation Rate Development
and Certification (“ASOP 49”). ACTUARIAL STANDARDS BD., ACTUARIAL
STANDARD OF PRACTICE NO. 49: MEDICAID MANAGED CARE CAPITATION RATE
DEVELOPMENT AND CERTIFICATION (2015) [hereinafter ASOP 49]. ASOP 49
5 Section 9010 has not been codified in the United States Code and thus does not exist
in one consolidated location.
6 There is an exclusion for governmental entities, “except to the extent such an entity
provides health insurance coverage through the community health insurance option under
section 1323.” PPACA § 9010(c)(2)(B), 124 Stat. at 866. However, this exception is not
relevant here.
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provides “guidance for actuaries preparing, reviewing, or giving advice on
capitation rates for Medicaid programs, including those certified in accordance
with 42 CFR 438.6(c).” Id. at iv. Medicaid capitation rates are actuarially
sound if they “provide for all reasonable, appropriate, and attainable costs,”
which “include . . . government-mandated assessments, fees, and taxes.” Id. at
2.
In summary, for states to receive federal reimbursement under the
managed-care model, their MCO contracts must be approved by HHS as
actuarially sound. See 42 U.S.C. § 1396b(m)(2)(A)(iii); 42 C.F.R.
§ 438.6(c)(1)(i). To be actuarially sound, the capitation rate must account for
all costs MCOs bear when providing care to Medicaid beneficiaries. See 2002
Final Rule, 67 Fed. Reg. at 41,000. When Congress enacted the ACA in 2010,
the amount of money states paid MCOs as part of their capitation rate
changed: In contracts with MCOs subject to the Provider Fee, states must
account for the Provider Fee in their capitation rate to satisfy HHS’s actuarialsoundness requirement. ASOP 49 states that the “costs” include governmentmandated taxes. ASOP 49 at 2.
B. Procedural Background
The States sued the United States, claiming that the Certification Rule
and Section 9010 were unconstitutional and/or unlawful. See Texas v. United
States (Texas I), 300 F. Supp. 3d 810, 820 (N.D. Tex. 2018). Regarding the
Certification Rule, they claimed that the rule violated the nondelegation
doctrine from Article I, section 1, of the U.S. Constitution and that HHS
violated the APA on multiple grounds. See id. at 826. Regarding Section 9010,
they claimed that the statute violated the Spending Clause of the U.S.
Constitution and the doctrine of intergovernmental tax immunity under the
Tenth Amendment. See id. at 826, 854.
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Both parties moved for summary judgment. See id. at 826. The United
States argued that the States lacked Article III standing for their claims, the
States’ APA claims were time-barred, and the States’ arguments failed on the
merits. See id. The district court granted both parties’ motions in part. Id. at
821. It held that the States had standing and that their APA claims were not
barred by the six-year statute of limitations. Id. at 834, 840. On the merits of
the States’ Certification Rule claims, the district court held that the rule
violated the nondelegation doctrine but otherwise complied with the APA. Id.
at 848, 850–851. On the merits of the States’ Section 9010 claims, the district
court held that Congress did not violate the Spending Clause or the Tenth
Amendment. Id. at 854, 856.
The district court thus set aside the Certification Rule. Id. at 856–57. It
then granted the States equitable disgorgement of their Provider Fee
payments under the APA, resulting in a final judgment against the United
States for more than $479 million. See Texas v. United States, 336 F. Supp. 3d
664, 675 (N.D. Tex. 2018). Both parties timely appealed.
II. Standard of Review
We review a district court’s grant of summary judgment de novo.
Amerisure Ins. Co. v. Navigators Ins. Co., 611 F.3d 299, 304 (5th Cir. 2010).
“On cross-motions for summary judgment, we review each party’s motion
independently, viewing the evidence and inferences in the light most favorable
to the nonmoving party.” Id. (citation omitted). Summary judgment is proper
when “there is no genuine dispute as to any material fact and the movant is
entitled to judgment as a matter of law.” FED. R. CIV. P. 56(a).
III. Discussion
The parties contest the constitutionality and lawfulness of the
Certification Rule and the constitutionality of Section 9010. We hold that both
the Certification Rule and Section 9010 are constitutional and lawful; as a
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result, there can be no equitable disgorgement, regardless of whether such a
remedy would be otherwise appropriate. We address each issue in turn.
A. The Certification Rule Claims
The States’ challenge to the Certification Rule is based upon a sequence
of events they allege is impermissible. Through the Certification Rule, HHS
gave authority to the Board to promulgate binding rules through Actuarial
Standards of Practice (“ASOPs”). Before it published ASOP 49 in 2015, the
Board provided only a nonbinding “practice note” that permitted, but did not
require, actuaries to consider fourteen separate factors in assessing expected
MCO revenues and expenses under contracts with state Medicaid agencies,
including any “state-mandated assessment and taxes.” MEDICAID RATE
CERTIFICATION WORK GROUP, ACTUARIAL STANDARDS BD., ACTUARIAL
CERTIFICATION OF RATES FOR MEDICAID MANAGED CARE PROGRAMS 8–9 (2005).
According to the States, ASOP 49 introduced the requirement that actuarially
sound capitation rates account for government-mandated taxes.7 The States
thus contend that the Certification Rule unlawfully delegates to the Board the
task of formulating, and making binding decisions about the applicability of,
rules governing States’ access to Medicaid funds. The States further argue
that HHS’s incorporation of ASOP 49 in the Certification Rule violated the
APA in two respects: (1) the rule exceeded HHS’s statutory authority, and
(2) HHS adopted the rule without notice and comment.
The United States contends that we lack jurisdiction because the States
lack standing to challenge the Certification Rule and because their APA claims
were barred by the statute’s six-year statute of limitations. On the merits, the
United States argues that the States’ Certification Rule challenges are
7 This is an incorrect statement of the facts. HHS’s Office of the Actuary stated that
actuarially sound capitation rates have consistently required that all reasonable appropriate,
and attainable costs be covered by rates which includes all taxes, fees, and assessments.
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premised on a misunderstanding of Section 9010 and the Certification Rule. It
claims that the Board did not change the definition of actuarial soundness, but
instead HHS permissibly chose to incorporate the Board’s guidance on the
subject.
Thus, at issue here are two jurisdictional questions: whether the States
have standing and, if so, whether their APA claims are time-barred. If we have
jurisdiction, we must next address the parties’ merits claims: whether the
Certification Rule violates the nondelegation doctrine, and whether HHS
violated the APA. We hold that the States have standing for their Certification
Rule claims but that their APA claims are time-barred which, in this context,
is a jurisdictional issue. We therefore address the merits of only the States’
nondelegation argument and hold that the Certification Rule is constitutional.
1. Standing
To satisfy Article III’s standing requirement, plaintiffs must
demonstrate (1) an injury that is (2) fairly traceable to the defendant’s
allegedly unlawful conduct and that is (3) likely to be redressed by the
requested relief. Lujan v. Defs. of Wildlife, 504 U.S. 555, 560–61 (1992). “The
party invoking federal jurisdiction bears the burden of establishing these
elements.” Id. at 561 (citations omitted). At the summary judgment stage,
plaintiffs “must set forth by affidavit or other evidence specific facts, which
. . . will be taken to be true,” to support each element. Id. (internal quotation
marks and citation omitted). If one plaintiff has standing for a claim, then
Article III is satisfied as to all plaintiffs. Rumsfeld v. Forum for Acad. &
Institutional Rights, Inc., 547 U.S. 47, 52 n.2 (2006) (citations omitted). We
review standing issues de novo. Nat’l Rifle Ass’n of Am., Inc. v. McCraw, 719
F.3d 338, 343 (5th Cir. 2013) (citation omitted).
Accepting their factual allegations, summarized above, as true, we hold
that the States satisfy the three requirements for standing. First, the States
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alleged a particular injury in fact: having to pay millions of dollars in Provider
Fees despite the ACA’s explicit exemption for governmental entities. Second,
the States’ injury is arguably traceable to the Certification Rule. They contend
that before the Board published ASOP 49, which is applied to the States via
the Certification Rule, actuaries were advised that their capitation rate
analysis must comport with state and federal law and that before Congress
enacted the ACA, federal taxes were minor and not separately considered.
ASOP 49, the States say, required them to pay the Provider Fee as part of their
actuarially sound capitation rates. Though the facts underlying this argument
of how the capitation rates worked under the Certification Rule before and
after ASOP 49 are contested, we assume the States’ view of the facts to be true
for purposes of standing. See Lujan, 504 U.S. at 561. The attacks on ASOP
49, which have been applied to the States through the Certification Rule, are
the core of this argument. Third, the States have alleged that their injury is
likely to be redressed by invalidating the Certification Rule. They allege that
before ASOP 49’s adoption and application to the States via the Certification
Rule, states still had the legal option to exclude the Provider Fee from
capitation rates in their contracts with MCOs. Thus, they argue that in the
rule’s absence, states could not lose Medicaid funding for refusing to pay the
Provider Fee “by virtue of that rule.” See Larson v. Valente, 456 U.S. 228, 242
(1982) (holding that setting aside an allegedly unlawful statutory provision
that compels plaintiffs to register and report redresses the plaintiffs’ alleged
injury of registering and reporting because, even though the plaintiffs could be
compelled to register and report through another statutory provision, they will
no longer be compelled to do so under the statutory provision at issue). Were
we to rule in their favor, the Certification Rule would be invalidated and ASOP
49’s explicit requirement to pay the Provider Fee would be removed.
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The United States counters that the States’ injury would not be
redressed by invalidating the Certification Rule because States are required to
account for the Provider Fee under 42 U.S.C. § 1396b(m)(2)(A)(iii). Indeed, as
the United States notes, the States were still required to account for the
Provider Fee under § 1396b after the district court invalidated the
Certification Rule. Notably, the States don’t challenge § 1396b here.8
However true the United States’s argument may be, the invalidation of
the Certification Rule (and thereby, the removal of requiring compliance with
ASOP 49) nonetheless would remove one explicit requirement to pay the
Provider Fee. To be sure, the States may still be required to pay the Provider
Fee under § 1396b, but this statutory injury is not complained of here. Barrett
Comput. Servs., Inc. v. PDA, Inc., 884 F.2d 214, 218 (5th Cir. 1989) (‘[S]tanding
concerns the right of a party to bring a particular suit.” (emphasis added)).
Here, the States allege they were directly forced to pay the Provider Fee per
ASOP 49 and the Certification Rule. Larson, 456 U.S. at 242–43 (finding
standing when appellants contested a “rule [that] was the sole basis for” the
“discrete injury” that “gave rise to the present suit”). As such, the States attack
an injury caused by the Certification Rule. Therefore, though the States may
still have to pay the Provider Fee under § 1396b, success here will nonetheless
remove one of two legal barriers to defeating this obligation—in other words,
the States will no longer “be required to [pay the Provider Fee] by virtue of
[ASOP 49 and the Certification Rule].” Id. at 242. Taking the States’ factual
allegations to be true, see Lujan, 504 U.S. at 561, we conclude that the States
have alleged that the injury complained of in this case is redressable with a
8 The States have filed a second lawsuit, this time claiming that § 1396b(m)(2)(A)(iii)
is being improperly interpreted and seeking to enjoin the IRS from collecting the Provider
Fee from them. Complaint at 15, Texas v. United States (Texas II), No. 4:18-CV-00779 (N.D.
Tex. Sept. 20, 2018), ECF No. 1.
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favorable decision. In sum, we hold that the States have standing to raise their
Certification Rule claims. (Again, focusing solely on whether, assuming the
facts in the States’ favor, there is a traceable, redressable injury in fact.)
2. Statute of Limitations
However, we lack jurisdiction to address the States’ APA claims because
they are time-barred. APA challenges are governed by 28 U.S.C. § 2401(a),
which provides that “every civil action commenced against the United States
shall be barred unless the complaint is filed within six years after the right of
action first accrues.” The United States enjoys sovereign immunity unless it
consents to suit, “and the terms of its consent circumscribe our jurisdiction.”
Dunn-McCampbell Royalty Interest, Inc. v. Nat’l Park Serv., 112 F.3d 1283,
1287 (5th Cir. 1997) (citation omitted). “The applicable statute of limitations
is one such term of consent,” so, unlike the ordinary world of statutes of
limitations, here the failure to sue the United States within the limitations
period deprives us of jurisdiction. Id.
HHS published the Certification Rule in 2002, thirteen years before the
States filed their complaint. See 2002 Final Rule, 67 Fed. Reg. at 40,989.
However, a plaintiff may “challenge . . . a regulation after the limitations
period has expired” if the claim is that the “agency exceeded its constitutional
or statutory authority. To sustain such a challenge, the claimant must show
some direct, final agency action involving the particular plaintiff within six
years of filing suit.” Dunn-McCampbell, 112 F.3d at 1287. An agency’s action
is direct and final when two criteria are satisfied. “First, the action must mark
the ‘consummation’ of the agency’s decisionmaking process.” Bennett v. Spear,
520 U.S. 154, 177–78 (1997) (citation omitted). “[S]econd, the action must be
one by which rights or obligations have been determined, or from which legal
consequences will flow.” Id. at 178 (quotation omitted). These rights,
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obligations, or legal consequences must be new. Nat’l Pork Producers Council
v. U.S. E.P.A., 635 F.3d 738, 756 (5th Cir. 2011).
The district court concluded that HHS took three “direct, final agency
actions” in 2015 against the States and that those actions triggered a new sixyear statute of limitations period. Texas I, 300 F. Supp. 3d at 839 (citation
omitted). But, as the United States argues, none of these actions were direct
and final.
First, the district court pointed to a 2015 letter sent by HHS to the Texas
Medicaid Director approving Texas’s amended MCO contract, which included
Provider Fees in the capitation rates for additional groups of Medicaid
beneficiaries. Id. This letter does not show that HHS was issuing a new ruling
requiring Texas to include Provider Fees in its capitation rates. Further, Texas
paid costs associated with Provider Fees for the 2013 calendar year even
though the 2015 letter applied only from May 1, 2015 to August 31, 2015.
Thus, even before the letter, Texas accounted for the Provider Fee in its
capitation rates. The letter did not mark a change to Texas’s obligation under
the Certification Rule.
Second, the district court stated that the government’s collection of the
Provider Fee through the States’ 2015 capitation rate constituted direct, final
agency action. Id. But, as explained above, the IRS does not collect the
Provider Fee directly from states. The government’s decision to collect from
MCOs is not a “direct . . . action involving the [States].” See Dunn-McCampbell,
112 F.3d at 1287. As such, this argument does not support the district court’s
conclusion.
Third, the district court stated that HHS’s 2015 guidance document “for
use in setting [capitation] rates . . . for any managed care program subject to
the actuarial soundness requirements” obligated the States to include the cost
of the Provider Fee in their capitation rate calculations in 2015. Texas I, 300
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F. Supp. 3d at 839–40 (citation omitted). Once again, the guidance document
did not create any new obligations or consequences; it restated that for
capitation rates to be actuarially sound, they had to be consistent with ASOPs,
including ASOP 49. But this requirement has existed since HHS promulgated
the Certification Rule. See 2002 Final Rule, 67 Fed. Reg. at 41,097 (requiring
that capitation rates be “certified . . . by actuaries who . . . follow the practice
standards established by the Actuarial Standards Board”). The publication of
ASOP 49 in 2015 did not create any new obligation or legal consequence either.
Actuarially sound capitation rates have consistently required that all
reasonable, appropriate, and attainable costs be covered by rates; this includes
all taxes, fees, and assessments.
We conclude that HHS took no direct, final agency action in 2015 to
create a new obligation. The States identified no other such action that
occurred after 2009 (when the six-year statute of limitations expired). We thus
reverse the district court’s judgment on the States’ APA claims and dismiss
those claims as time barred.
3. Nondelegation Doctrine
Because we lack jurisdiction over the States’ APA claims, the only claim
we address on the merits is whether HHS unlawfully delegated authority to
the Board when it promulgated the Certification Rule. The United States
argues that the Certification Rule was not an unlawful delegation because
HHS simply “prescribed the conditions” necessary to receive federal funds. See
Currin v. Wallace, 306 U.S. 1, 16 (1939) (brackets omitted). The States
disagree, arguing that the Certification Rule impermissibly gave the Board
and its actuaries—private actors—a discretionary veto over HHS’s approval of
States’ Medicaid contracts, as well as the power to define the content of a
federal law as it applies to someone else. The district court held that the
Certification Rule unlawfully vested in the Board and its actuaries the
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legislative power to set rules on actuarial soundness and to veto executive
action that does not comply with such rules. Texas I, 300 F. Supp. 3d at 843–
48. We hold that it did not.
A federal agency may not “abdicate its statutory duties” by delegating
them to a private entity. See Sierra Club v. Lynn, 502 F.2d 43, 59 (5th Cir.
1974). But an agency does not improperly subdelegate its authority when it
“reasonabl[y] condition[s]” federal approval on an outside party’s
determination of some issue; such conditions only amount to legitimate
requests for input. See, e.g., U.S. Telecom Ass’n v. FCC, 359 F.3d 554, 566–67
(D.C. Cir. 2004). Therefore, the primary inquiry here is whether HHS’s
requirements—that state-MCO contracts be certified by a qualified actuary
and that the Board’s practice standards be followed—were reasonable
conditions for approving the contracts. See id. at 567.
A condition is reasonable if there is “a reasonable connection between
the outside entity’s decision and the federal agency’s determination.” Id. By
way of example, the Third Circuit has upheld a U.S. Department of Homeland
Security’s (“DHS’s”) regulation requiring H-2B visa employers to first obtain a
temporary labor certification from the U.S. Department of Labor (“DOL”). La.
Forestry Ass’n v. Sec’y U.S. Dep’t of Labor, 745 F.3d 653, 672–73 (3d Cir. 2014).
In so doing, the Third Circuit observed that there was a reasonable connection
in DHS conditioning an H-2B visa on a certification from DOL: Congress
charged DHS with admitting aliens into the United States to perform
temporary work that cannot be performed by unemployed persons in this
country, id. at 672 (citing 8 U.S.C. §§ 1101(a)(15)(H)(ii)(b), 1184(c)(1)), and
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DOL could help in that analysis by bringing to bear its “institutional expertise
in labor and employment matters,” La Forestry Ass’n, 745 F.3d at 673.9
The Certification Rule’s conditions for actuarial soundness, like the DHS
conditions addressed by the Third Circuit,10 are reasonable. Congress requires
capitation rates to be actuarially sound, as defined by HHS. See 42 U.S.C.
§ 1396b(m)(2)(A)(xiii). HHS imposed the Certification Rule as a condition for
actuarial soundness. 42 C.F.R. § 438.6(c)(1)(i)(C). Certification by a qualified
actuary who applies the Board’s standards is reasonably connected to ensuring
actuarially sound rates because the Board and a qualified actuary have
institutional expertise in actuarial principles and practices. Indeed, HHS
simply incorporated the Board’s actuarial standards into its Certification Rule,
a common and accepted practice by federal agencies. See Am. Soc’y for Testing
& Materials v. Public.Resource.Org, Inc., 896 F.3d 437, 442 (D.C. Cir. 2018)
(noting that federal agencies have incorporated by reference over 1,200
standards established by private organizations);11 Amerada Hess Pipeline
Corp. v. F.E.R.C., 117 F.3d 596, 601 (D.C. Cir. 1997) (holding that a federal
9 The Tenth Circuit, in an unpublished opinion, held opposite to the Third Circuit and
concluded that DHS subdelegated authority to DOL. G.H. Daniels III & Assocs., Inc. v. Perez,
626 F. App’x 205, 211 (10th Cir. 2015). It determined that DOL’s certification was not a
condition for granting agency approval because DOL has the final say when it denies a
certification. Id. But that is the nature of conditions: any condition, if not satisfied, prevents
federal approval. By the Tenth Circuit’s logic, it seems that every third-party condition for
granting federal agency approval is a subdelegation. That result is impossible to square with
the very existence of a condition analysis. See U.S. Telecom, 359 F.3d at 565–68. The Third
Circuit’s reasoning is therefore more persuasive.
10 Although the Certification Rule differs from the DHS condition in Louisiana
Forestry insofar as the Certification Rule incorporates the standards of and requires approval
by private entities, this private/public distinction is not relevant to our analysis. See U.S.
Telecom, 359 F.3d at 566 (rejecting the argument that the “limitations on an administrative
agency’s power to subdelegate might be less stringent if the delegee is a sovereign entity
rather than a private group”). Louisiana Forestry therefore remains on-point and instructive.
11 Therefore, accepting the States’ argument would jeopardize over a thousand
regulations promulgated by federal agencies.
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agency did not abdicate its authority by adopting generally accepted
accounting principles, noting that it would be anomalous to accord agency
deference when an agency invented standards but not when an agency’s
expertise led the agency to incorporate standards endorsed by experts in the
field). Thus, as the United States remarked, “HHS could achieve exactly the
same result by promulgating regulations that adopted the substance of the . . .
Board’s standards.” Accordingly, we hold that the Certification Rule’s
actuarial certification requirement and incorporation of the Board’s practice
standards are reasonable conditions, not subdelegations of authority.
But, even assuming arguendo that HHS subdelegated authority to
private entities, such subdelegations were not unlawful. Agencies may
subdelegate to private entities so long as the entities “function subordinately
to” the federal agency and the federal agency “has authority and surveillance
over [their] activities.” Sunshine Anthracite Coal Co. v. Adkins, 310 U.S. 381,
399 (1940);12 cf. Lynn, 502 F.2d at 59 (holding that total delegation or “rubber
stamping” is impermissible). An agency retains final reviewing authority if it
“independently perform[s] its reviewing, analytical and judgmental functions.”
Lynn, 502 F.2d at 59. We have therefore held, for instance, that a federal
agency’s requirement that depreciation expenses reflect “state regulator
approved depreciation rates” was not an unlawful subdelegation because the
agency “exercised its role when it initially reviewed and accepted the . . .
12 See also R.H. Johnson & Co. v. SEC, 198 F.2d 690, 695 (2d Cir. 1952) (holding that
an agency did not unconstitutionally subdelegate powers to a private entity because the
agency retained power to approve or disapprove rules and to review disciplinary actions);
Nat’l Park & Conservation Ass’n v. Stanton, 54 F. Supp. 2d 7, 19 (D.D.C. 1999) (“Delegations
by federal agencies to private parties are, however, valid so long as the federal agency or
official retains final reviewing authority.” (citations omitted)).
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incorporati[on] [of] the state agencies’ depreciation rates.”13 La. Pub. Serv.
Comm’n v. F.E.R.C., 761 F.3d 540, 551–52 (5th Cir. 2014). The D.C. Circuit
has even come to similar results with respect to approvals hinging on the work
of private actuarial entities like those at issue in this case. Tabor v. Joint Bd.
for Enrollment of Actuaries, 566 F.2d 705, 708 & n.5 (D.C. Cir. 1977) (holding
that an agency may subdelegate certain components of actuary certification for
administering federal pension plans to a private agency because the
certification process was “superintended by the [agency] in every respect,”
insofar as the agency ultimately certified each actuary).14
Here, HHS’s subdelegation of certain actuarial soundness requirements
to the Board did not divest HHS of its final reviewing authority. HHS
“reviewed and accepted” the Board’s standards. See La. Pub. Serv. Comm’n,
761 F.3d at 552; accord 2002 Final Rule, 67 Fed. Reg. at 40,998. Further, HHS
has the ultimate authority to approve a state’s contract with MCOs;
certification is a small part of the approval process. To obtain HHS approval
of its capitation rate for reimbursement purposes, a state sends its MCO
13 We also noted that the federal agency would “continue to exercise oversight of the
state rates in a Section 206 complaint proceeding,” which provides that any entity that wants
to change the depreciation rates may seek modification with the agency through a Section
206 filing. La. Pub. Serv. Comm’n, 761 F.3d at 552. States retain a similar recourse here:
any state dissatisfied with the Board’s practice standards can petition HHS for “amendment[]
or repeal” of the Certification Rule’s requirement that the Board’s practice standards be
followed. See 5 U.S.C. § 553(e).
14 Applying similar reasoning, the D.C. Circuit also upheld an agency regulation that
permitted nonprofit organizations to stage political candidacy debates so long as they “use[d]
pre-established objective criteria to determine which candidates may participate in a debate.”
Perot v. FEC, 97 F.3d 553, 556, 559–60 (D.C. Cir. 1996) (per curiam) (quoting 11 C.F.R.
§ 110.13). Although the agency gave private entities “the latitude to choose their own
‘objective criteria,’” such private entities acted at their peril if they did not first secure an
agency advisory opinion that their criteria were satisfactory. Perot, 97 F.3d at 560. The court
thus determined that “[t]he authority to determine what the term ‘objective criteria’ means
rest[ed] with the agency” and held that the agency did not unconstitutionally subdelegate
legislative authority. Id.
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contract to the appropriate HHS Regional Office. If the state provides all
required documentation, the Office of the Actuary (“OACT”), an office within
HHS, will begin its actuarial review. OACT reviews the contract by looking at
all of the assumptions, data, and methodology in the rate certification to ensure
the certification is consistent with actuarial principles and methods. If OACT
determines that the capitation rates are actuarially sound, it will write a memo
confirming this conclusion and send the contract to HHS’s Center for Medicaid
and CHIP (Children’s Health Insurance Program) Services15 for final review.
The Center will then review the rate certification and OACT’s memo and
approve the contract if it finds no issues. The contract approval process is
closely “superintended by [HHS] in every respect.” See Tabor, 566 F.2d at 708
n.5. Therefore, even assuming arguendo that HHS subdelegated certain
actuarial soundness requirements to third parties, we hold that HHS’s
subdelegations were lawful.
B. Section 9010 Claims16
The States raise two constitutional challenges against Section 9010.
They claim that it violates the Spending Clause and the Tenth Amendment
doctrine of intergovernmental tax immunity. We address each claim in turn
and hold that Section 9010 does not violate either constitutional provision.
15 The Center for Medicaid and CHIP Services is the component of HHS that is
“responsible for the various components of policy development and operations for Medicaid,
[CHIP], and the Basic Health Program . . . .” See Organization, CTRS. FOR MEDICARE &
MEDICAID SERVS., http://www.medicaid.gov/about-us/organization/index.html (last visited
July 17, 2020). In that regard, the Center oversees state-MCO contract approvals.
16 While the United States does not contest standing on this, we note that the States
have standing for their Provider Fee claims. See Adarand Constructors, Inc. v. Mineta, 534
U.S. 103, 110 (2001) (per curiam) (citation omitted) (holding that courts must examine
standing sua sponte if it has erroneously been assumed below). The States allege that they
were injured when they were forced to pay the Provider Fee. This injury is traceable to the
United States’s allegedly unlawful conduct of enforcing Section 9010 after Congress imposed
the Provider Fee as part of the ACA. See PPACA § 9010(a), 124 Stat. at 865. Invalidating
the Provider Fee would thus redress the States’ claimed injury.
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1. Spending Clause
The parties contest whether the Spending Clause applies to Section 9010
at all. The United States argues that Section 9010 is instead a constitutional
tax that Congress imposed under its taxing power, which fully resolves the
Spending Clause claim. The States argue that the Provider Fee, as applied to
them, functions as a condition on spending and thus implicates the Spending
Clause. We hold that the Provider Fee is a constitutional tax that fully resolves
the States’ Spending Clause claim and does not impose a condition on
spending.
For a payment requirement to qualify as a tax, it must “produce[] at least
some revenue for the Government.” Nat’l Fed’n of Indep. Bus. v. Sebelius
(NFIB), 567 U.S. 519, 564 (2012). In addition, the Supreme Court has
identified three factors to be considered in determining whether a payment
requirement is a tax rather than a penalty: (1) whether the tax is enforced by
the IRS; (2) whether the tax “impose[s] an exceedingly heavy burden”; and
(3) whether the tax has a scienter requirement, which is typical of a penalty.
Id. at 565–66. The Provider Fee produces revenue for the United States and
satisfies at least two of the three factors.17 The Provider Fee is enforced by the
IRS, see 26 C.F.R. § 57.8, and applies to any covered entity regardless of
scienter, PPACA § 9010(a), 124 Stat. at 865. Indeed, several Supreme Court
justices have noted that the Provider Fee is a tax. See NFIB, 567 U.S. at 694,
698 (Scalia, Kennedy, Thomas & Alito, JJ., dissenting) (identifying Section
9010 as an “excise tax”). So have the parties.
17 The record does not indicate what percentage of a covered entity’s net revenue is
allocated to paying the Provider Fee. Thus, we cannot evaluate whether the Provider Fee
“impose[s] an exceedingly heavy burden,” see NFIB, 567 U.S. at 565, but the absence of such
evidence does not support the States’ argument.
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Section 9010’s constitutionality as a legitimate tax fully resolves the
States’ Spending Clause claim. See id. at 561, 563 (holding that even though
the ACA’s individual mandate was unconstitutional under the Commerce
Clause, it would uphold the mandate if it were constitutional under the taxing
clause). Although the States argue that Section 9010 imposes a condition on
their Medicaid funding, we conclude that it does not. See PPACA § 9010(a),
124 Stat. at 865. The specific Medicaid funding condition that the States
contest is in the Medicaid Act. 42 U.S.C. § 1396b(m)(2)(A)(iii) (requiring that
for states to receive Medicaid reimbursement, their expenditures “for
payment . . . under a prepaid capitation basis . . . for services provided by any
entity . . . [must be] made on an actuarially sound basis”). The States do not
contest the constitutionality of this section,18 and they thus do not have a
Spending Clause claim. In sum, we hold that the Provider Fee is a
constitutional tax that does not violate the Spending Clause.
2. Tenth Amendment—Intergovernmental Tax Immunity
Although a constitutional tax properly enacted through Congress’s
taxing power is generally not subject to other constitutional provisions, the
Tenth Amendment doctrine of intergovernmental tax immunity imposes two
limitations when the federal government imposes an indirect tax, like Section
9010, on states. See South Carolina v. Baker, 485 U.S. 505, 523 (1988).19 First,
the tax must not discriminate against states or those with whom they deal. Id.
18 Indeed, they conceded as much at oral argument.
19 A tax is imposed directly on states only “when the levy falls on the [states
themselves], or on an agency or instrumentality so closely connected to” the states that the
agency or instrumentality cannot be viewed as separate from the states. Baker, 485 U.S. at
523 (internal quotation marks and citation omitted). MCOs are not so closely connected to
the states that they cannot be viewed as separate from them. See PPACA § 9010(c)(1), 124
Stat. at 866 (defining a “covered entity” as “any entity which provides health insurance for
any United States health risk”).
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Second, the “legal incidence” of the tax may not fall on states. United States v.
Fresno Cty., 429 U.S. 452, 459 (1977). We hold that Section 9010 satisfies both
requirements.
a. Discrimination Against Entities
The Provider Fee is nondiscriminatory because it is imposed on “any
entity which provides health insurance,” subject to certain non-state-based
exclusions. PPACA § 9010(c), 124 Stat. at 866. It does not impose the Provider
Fee on only states, nor on only those MCOs that deal with states. Thus, there
is no unlawful discrimination, meaning MCOs contracting with states may
impose “part or all of the financial burden” of the Provider Fee on the States.
See Baker, 485 U.S. at 521 (citations omitted).
The States make two arguments on this point, both of which are
misplaced. First, the States argue that the Provider Fee discriminates against
them because states are the only entities that run Medicaid programs and are
the only government entities that stand to lose their exemption under Section
9010(c)(2)(B) as a result of the actuarial-soundness requirement. But the
discrimination inquiry asks who Congress targets, not who ultimately bears
the economic burden of paying the tax. See id. (stating that the Supreme Court
has “completely foreclosed any claim that the nondiscriminatory imposition of
costs on private entities that pass them on to States . . . unconstitutionally
burdens state . . . functions”); Washington v. United States, 460 U.S. 536, 543–
44 (1983) (holding that the discrimination analysis does not consider whether
the tax burden would necessarily shift to state actors).
Second, the States argue that the Provider Fee discriminates against
them because the fee has a disproportionate economic impact on them. They
claim that because their contracts with MCOs have historically low profit
margins, the MCOs pass the entire economic burden of the Provider Fee on to
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the states. They thus argue that states shoulder a harsher economic burden
than other MCOs, which could afford to pay a portion of the Provider Fee.
Washington, which the States cite as support, holds that whether an
unfair economic burden is discriminatory depends on “the whole tax structure
of the state.” 460 U.S. at 545 (citation omitted). In that case, the Supreme
Court held that the state’s tax did not single out contractors who worked for
the United States for discriminatory treatment because the “tax on federal
contractors [was] part of the same [tax] structure, and imposed at the same
rate, as the tax on the transactions of private landowners and contractors.” Id.
Here, the Provider Fee is similarly imposed at the same rate for all entities, so
there is no unfair economic burden. See PPACA § 9010(b)(1), 124 Stat. at 865.
We thus hold that the Provider Fee is nondiscriminatory.
b. Legal Incidence
We also hold that the legal incidence of the Provider Fee does not fall on
states. Legal incidence is determined by the “clear wording of the statute,” not
“by who is responsible for payment to the state of the exaction.” United States
v. State Tax Comm’n of Miss., 421 U.S. 599, 607–08 (1975) (cleaned up). For
example, a state tax statute that directs each vendor in the state to “add to the
sales price and [to] collect from the purchaser the full amount of the tax
imposed” is a statute that “imposes the legal incidence of the tax upon the
purchaser” because the text of the statute indisputably provides that the tax
“must be passed on to the purchaser.” First Agric. Nat’l Bank of Berkshire Cty.
v. State Tax Comm’n, 392 U.S. 339, 347 (1968) (citations omitted).
Here, as the States concede, Congress did not intend to tax States
because the statute’s “clear wording” shows that Congress clearly and
expressly excluded states from the Provider Fee. See PPACA § 9010(c)(2)(B),
124 Stat. at 866; accord State Tax Comm’n of Miss., 421 U.S. at 607. It is also
clear and “indisputable” that Section 9010 “by its terms” does not pass on the
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Provider Fee to states. See First Agric. Nat’l Bank, 392 U.S. at 347. Thus, the
legal incidence of the Provider Fee does not fall on states.
The States misunderstand the meaning of legal incidence. They argue
that the legal incidence falls on them because all of the economic burden of the
Provider Fee is charged to the States. But, as stated above, the question is not
who practically bears the responsibility for paying the tax. See State Tax
Comm’n of Miss., 421 U.S. at 607–08; see also Baker, 485 U.S. at 521 (citations
omitted) (upholding a nondiscriminatory tax collected from private parties as
constitutional “even though . . . all of the financial burden f[ell] on the other
government”). The States also argue that because the legal consequence of not
paying the Provider Fee falls on them, so too does its legal incidence; if they do
not pay the Provider Fee, then they lose Medicaid funding. Assuming
arguendo that the States’ interpretation of healthcare law is correct, the
Supreme Court explicitly held that legal incidence is not defined as “the legally
enforceable, unavoidable liability for nonpayment of [a] tax.” State Tax
Comm’n of Miss., 421 U.S. at 607 (citation omitted).
In sum, we conclude that the Provider Fee does not discriminate against
states or those with whom they deal because it is imposed on any entity that
provides health insurance (with certain exclusions). We also conclude that the
legal incidence of the Provider Fee does not fall on the states because Congress
expressly excluded states from paying the fee. Accordingly, we hold that
Section 9010 does not violate the Tenth Amendment doctrine of
intergovernmental tax immunity.
Outcome: For the foregoing reasons, we AFFIRM the district court’s ruling that the
States had standing. But we REVERSE the district court’s ruling that the
States’ APA claims were not time-barred and DISMISS the States’ APA claims
for lack of jurisdiction. On the merits, we AFFIRM the district court’s
judgment that Section 9010 does not violate the Spending Clause or the Tenth
Amendment, but we REVERSE the district court’s judgment that the
Certification Rule violates the nondelegation doctrine and RENDER judgment
in favor of the United States. We thus VACATE the district court’s grant of
equitable disgorgement,20 as there is nothing to remedy.
Plaintiff's Experts:
Defendant's Experts:
Comments: