Health Care Ruling Casts Doubts on Billions in State-Federal Funding

Attorney Paul Clement arguing before the court in an artist's rendering. (AP/Dana Verkouteren)

In striking down the federal health care law's mandatory Medicaid expansion, the U.S. Supreme Court's ruling last month limited a key component of the federal government's power over the states for the first time in decades, unsettling state-federal relations for years to come.

With the new limit in place, worries that countless other programs, regulations and mandates that impose federal requirements on states could face a similar fate are now beginning to reverberate around the country.

The court's ruling found there are limits to Congress' ability to attach conditions to funds it sends to states, the first curtailing of Congress' so-called spending power since before the New Deal in the 1930s. That power has become a common tool in a wide range of program areas from education funding and environmental regulation to welfare and anti-discrimination policies.

The significance was apparent during oral arguments, as Justice Sonia Sotomayor questioned former George W. Bush administration Solicitor General Paul Clement, who represented the 26 states fighting the Medicaid expansion.

“My greatest fear, Mr. Clement, with your argument is the following: The bigger the problem, the more resources [the government] needs,” Sotomayor explained. “We're going to tie the hands of the federal government.”

“I don't see where to draw that line,” she added.

That line — the point at which the conditions Congress attaches to funding become so onerous as to be unconstitutionally coercive — is at the heart of both the Medicaid decision and a burgeoning debate that could have far-reaching implications for state-federal programs and the broader concept of federalism in America.

Already, challenges are lining up. One filed earlier this year, brought against environmental regulations by Texas and other states, relies on the same argument upheld by the court in the health care case. The Medicaid ruling would seem to only strengthen that reasoning.

But while the exact repercussions remain uncertain, it's clear the Medicaid decision represents a potential seismic shift in state-federal relations.

“It's enough at the core of state-federal relationships, and so many programs, that its significance is, just for that reason, huge,” says Gillian Metzger, vice dean of Columbia Law School. “The lack of clarity only makes it that much more complicated.”

Precedent and spending power

Complaints regarding Congress' power over states have a long history. The Social Security Act's move to establish state unemployment funds was challenged in the 1930s as unconstitutional. The most famous example of the ongoing debate over states' rights is South Dakota v. Dole, a 1986 decision that found Congress could attach highway funds to states' setting a 21-year-old drinking age.

Those cases relied on many of the same arguments presented in the Medicaid challenge. But while they identified some limit to Congress' control over funding, neither was found to have exceeded it.

At the same time, though, the Supreme Court was also chipping away at other congressional powers, such as the U.S. Constitution's Commerce Clause, which gives Congress the power to regulate interstate commerce. Particularly under former Chief Justice William Rehnquist, rulings forced Congress to rely more on tying its power over states to funding requirements for certain programs. That made a decision to limit this trend more likely, court experts say.

“People thought, if the court was really serious about restraining federal power, it would have to go [there],” says Samuel Bagenstos, a University of Michigan law professor who studies constitutional law.

But spending power was left untouched. Nothing was deemed coercive, and some wondered if the court would ever say Congress had gone too far.

And then came the Medicaid expansion. Designed to drastically increase the size of the state-federal health care program for the poor, the health care law assumed nearly 20 million people would enroll in Medicaid in the first decade. Washington would pick up 90 percent of the cost, but states balked, in part, because their current funding was tied to the expansion.

Congress had finally crossed the line. In his opinion, Chief Justice John Roberts called the expansion “coercive,” “economic dragooning” and a “gun to the head” of states. “Whatever that line may be,” he wrote, “this statute is surely beyond it.”

The ruling and implications

The court's finding, while not providing a litmus test for future challenges, relied on a few characteristics that provide a roadmap for future battles.

In striking the expansion, Roberts mentioned Medicaid's immense cost (hundreds of billions of dollars annually), the significant change the expansion would bring to the program and how much the states could lose as particularly coercive. The Medicaid expansion, for example, represents such a significant growth that Roberts chose to treat it as a new program. That meant Congress couldn't tie existing Medicaid dollars to the expansion, he ruled.

That, in particular, has experts saying education could be the next beachhead. Federal education dollars represent the second-largest subsidy to state budgets after Medicaid.

“The one that comes immediately to mind is federal aid to education,” Bagenstos says. “At various points, Congress makes very substantial changes to the programs and formulas in providing aid.”

One of those changes was No Child Left Behind, which imposed a new regime of conditions, benchmarks and academic standards on states. Some states sued, while others received waivers. If passed today, it's uncertain that the law — or another initiative, mandatory pre-K — would survive a challenge.

Another area in doubt is the slew of federal anti-discrimination laws that govern state agencies. In accepting just $1 in federal money, states must abide by those laws, an all-or-nothing mandate that could now be questioned.

But perhaps the most likely challenge is over environmental regulations, particularly the Clean Air Act. One tool Washington has to force states to uphold certain regulations is to threaten highway funds. The U.S. Environmental Protection Agency's  leveling sanctions is rare — just 14 times between 1990 and 1997, according to a Congressional report. But in the same period, EPA threatened sanctions 855 times.

In this scenario, some argue, the funding isn't so large as to be coercive, but rather only loosely related to environmental regulations, which change due to administrative or scientific alterations. Over the years, the court has said conditions need to be related to the funds to be upheld. Those funds are also often tied to ongoing construction, meaning the state might not be able to refuse the dollars — a key component of the coercion argument in the health care case.

Under Supreme Court precedent and the Medicaid decision, states could have a reasonable claim against the sanctions, says Jonathan H. Adler, a professor at the Case Western Reserve law school. That could leave the EPA without a key enforcement mechanism.

“My impression,” Adler says, “is that the Clean Air Act is closer to or further across that [coercion] line than some of these other cases.”

The lawsuit brought by Texas and other states in the Washington D.C. Circuit Court of Appeals is already questioning EPA's authority on those grounds. Shortly after the health care ruling, attorneys — some of whom were also involved in that challenge — wrote a letter to the court contending the health care decision strengthened their case. Oral arguments are expected this fall.

A new dynamic

It could be years before full legal impact of the Medicaid decision is known, as most expect many lawsuits to be filed across the country in response.

“It's certainly a new weapon,” says Jim Tierney, a former Maine attorney general and director of the National State Attorneys General Program at Columbia Law School. “Will attorneys general be aware of this? Yes.”

But the decision will certainly alter the relationship between states and Washington. It could make Congress think twice before enacting new, large federal programs, for example. When it comes to executive branch waivers, which the Obama administration has generously distributed, particularly in education, states will now more credibly be able to threaten a lawsuit. Before the Medicaid ruling, it was assumed states would lose challenges over conditional spending. Now, that assumption has been turned on its head.

“The federal government might win those lawsuits,” the University of Michigan's Bagenstos says. “But I suspect a lot of the time, they're going to figure it's safer to just give the state what it wants.”

It's that reality that's left experts unable to overstate the importance of the decision. Even if no other challenge is found to meet the Medicaid suit's standard of coercion, the Supreme Court's new check on Congress' power has historic implications.

“If the court had addressed the Medicaid issue by itself,” Bagenstos says, “the Medicaid holding would be understood to be a blockbuster.”

The ultimate reach, though, will hinge on whether the ruling's an anomaly, thanks to Medicaid's unusual characteristics. Or, as some hope, other laws are stuck down in its wake.

Clement, the former solicitor general, says even he's unsure how that will play out. But he says he was conscious of the peculiarities of his case as he formed his arguments.

“We emphasized the uniqueness,” he says. “Our pitch was: If there are going to be limits, and you said there are, you really need to either apply them here or say we were just kidding.”

With that limit now identified, judges are left to sort through the lawsuits. But those looking to pare back Washington now have something they spent decades striving for: Supreme Court precedent on their side.

“It's in the nature of the development of the law over time that the court starts by putting its toe in the water,” Clement says. “What we now have is a decision that got the toe in the water. But you'd need a crystal ball to predict whether over time the toe in the water leads to a couple limbs.”

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