Can Tennessee cut TennCare or quit Medicaid if Congress reduces federal funding?

Subject

Opinion No. 12-106, Permissibility of Modifications to the TennCare Program, November 26, 2012

Plain-English summary

Senator McNally asked three connected questions about TennCare in the aftermath of National Federation of Independent Business v. Sebelius (NFIB), the U.S. Supreme Court decision on the Affordable Care Act.

Question 1: Can Congress decrease federal Medicaid funding to TennCare?

Yes. Medicaid funding is a creation of Congress, set by formula in statute (the federal medical assistance percentage or "FMAP" under 42 U.S.C. § 1396d(b)). Congress has plenary authority under the Appropriations Clause (Art. I, § 9, cl. 7). One legislature cannot bind future legislatures (Reichelderfer v. Quinn). Both the majority and dissent in NFIB acknowledged that future Congresses may change Medicaid funding terms. The AG saw no constitutional limit on Congress's authority to reduce the federal share of Medicaid expenditures, either via the FMAP formula or by disallowing federal match for provider-tax revenues.

A reduction in federal Medicaid funding wouldn't easily trigger NFIB's coercion analysis. NFIB focused on Congress threatening to withdraw all existing Medicaid funding from states that refused to implement the new ACA Medicaid expansion; the Court found that threat coercive. A funding reduction is different. If anything, a large reduction in federal share gives states more options to leave the program, not fewer; the coercive element of "no real choice but to acquiesce" disappears.

Question 2(a): Can Tennessee cut TennCare benefits in response?

Yes, with limits. With any necessary approval from the federal Centers for Medicare and Medicaid Services (CMS), Tennessee can change optional Medicaid benefits, reduce provider reimbursement rates, or increase cost sharing. None of those moves runs into the ACA's "maintenance of effort" (MOE) requirement.

But the MOE requirement at 42 U.S.C. § 1396a(gg)(1) bars Tennessee, until the Secretary of HHS determines the state's new health insurance Exchange is fully operational, from adopting "eligibility standards, methodologies, or procedures" more restrictive than those in effect on March 23, 2010. For children up to age 19, the MOE freeze extends through September 30, 2019 (§ 1396a(gg)(2)). Violating MOE risks losing all federal Medicaid funding under 42 U.S.C. § 1396c.

The AG noted significant constitutional doubt about MOE after NFIB. The State of Maine had recently challenged the MOE in Mayhew v. Sebelius, and the First Circuit denied Maine's petition. The AG treated whether MOE survives NFIB's coercion analysis as an unresolved question, and advised that until it is definitively resolved, Tennessee cannot adopt eligibility standards more restrictive than those in effect on March 23, 2010 without risking loss of all federal Medicaid funding.

Question 2(b): Can Tennessee just quit Medicaid?

Yes. Medicaid is voluntary (NFIB, 132 S.Ct. at 2581; Harris v. McRae). No state has done it, but no legal impediment exists. Tennessee has even codified a statement that "participation in the TennCare program, or its successor programs, is not an entitlement" (Tenn. Code Ann. § 71-5-102(b)(1)).

Termination details matter. TennCare operates under a Section 1115 waiver approved by CMS (42 U.S.C. § 1315), expiring June 30, 2013. The MOE doesn't force states to renew their 1115 waivers; if Tennessee lets its waiver expire and chooses not to renew, no MOE violation. But terminating the waiver mid-term in a way that produces more restrictive eligibility standards would violate MOE.

Question 3: Does any of this change if Tennessee switches from waiver to a traditional Medicaid state plan?

No. The federal matching formula is the same whether Tennessee operates under a Section 1115 waiver or a State plan. The MOE requirement applies to both ("under the State plan or under any waiver" per § 1396a(a)(74), § 1396a(gg)(1)). The state's ability to exit Medicaid entirely is the same. The only practical difference is that the timing of a waiver termination versus an end-of-waiver-period non-renewal can matter for MOE compliance.

Currency note

This opinion was issued in 2012. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Background and statutory framework

Medicaid's federal-state architecture

Medicaid (created in 1965 as Title XIX of the Social Security Act, 42 U.S.C. §§ 1396 to 1396W-5) is a joint financing partnership. The federal government and participating states share the cost of covered health care for needy persons (§ 1396b). The FMAP formula (§ 1396d(b)) sets the federal share based on per-capita income, with a statutory minimum of 50% and a maximum of 83%. Specific services and populations have separately specified federal shares. States have flexibility about state-share sources; provider taxes are permitted within federal limits (42 C.F.R. §§ 433.51, 433.68).

The Secretary of HHS can withhold federal Medicaid funding for state non-compliance under 42 U.S.C. § 1396c. That section was the enforcement hammer the Supreme Court constrained in NFIB.

NFIB's coercion analysis

NFIB struck down, as too coercive under the Spending Clause, the ACA's threat to terminate all existing Medicaid funding from states that refused to implement the new Medicaid expansion (covering non-pregnant individuals under 65 with incomes below 133% of federal poverty, at 42 U.S.C. § 1396a(a)(10)(A)(i)(VIII)). As the opinion puts it, the threatened loss of all existing federal Medicaid funding "exceeds Congress' spending power by impermissibly coercing states." The Court fashioned a narrow remedy: the Secretary can't withhold existing Medicaid funding to compel expansion adoption. The expansion itself wasn't struck down; states can opt in.

The NFIB analysis turned on two factors: (1) a transformational change in the program ("a shift in kind, not merely degree") and (2) the threatened loss of all existing federal funding, which represents a huge slice of state budgets.

The MOE requirement's history

The original "maintenance of effort" mechanism wasn't ACA; it was the 2009 American Recovery and Reinvestment Act (ARRA), Pub. L. 111-5. Under ARRA, states could obtain temporary enhanced FMAP by maintaining their July 1, 2008 eligibility standards through December 31, 2010 (later extended to June 30, 2011). The penalty for non-compliance: losing the enhanced FMAP, not all federal Medicaid funding.

The ACA's MOE (§ 1396a(gg)(1)) goes further. It conditions ALL federal Medicaid funding on a state maintaining its March 23, 2010 eligibility standards until the new health insurance exchanges become fully operational. For children up to 19, the freeze extends to September 30, 2019. Exception at § 1396a(gg)(3): between January 1, 2011 and December 31, 2013, states with certified budget deficits can be exempted for adults above 133% of poverty.

The MOE allows changes that aren't "eligibility standards, methodologies, or procedures": optional benefit cuts, provider reimbursement reductions, cost-sharing increases (HHS guidance).

Why MOE survival under NFIB is uncertain

NFIB's two factors: transformational change + all-funding threat. The MOE has the "all-funding threat" but arguably lacks "transformational change" since it just preserves existing standards. On the other hand, the ACA MOE makes mandatory what was voluntary under ARRA: a state had to opt in to the ARRA enhanced FMAP to be MOE-bound; under ACA, MOE is a condition of any federal Medicaid funding. That's a sharpening of the obligation, but not on the same scale as the entire ACA expansion to a new eligibility class.

The State of Maine tested this in Mayhew v. Sebelius. The First Circuit denied Maine's petition. The opinion notes the question isn't definitively resolved.

How TennCare operates: the Section 1115 waiver

TennCare is a Section 1115 demonstration project authorized by 42 U.S.C. § 1315(a)(1). The waiver lets Tennessee operate TennCare with terms that don't comply with all of 42 U.S.C. § 1396a, in exchange for federal participation in the program. The current waiver runs through June 30, 2013. Waivers don't change the underlying federal matching formula (the FMAP formula at § 1396d(b) isn't waivable by the HHS Secretary).

Voluntary participation

NFIB and Harris v. McRae confirm Medicaid is voluntary. No state has left. Tennessee's own legislature has codified the principle: "participation in the TennCare program, or its successor programs, is not an entitlement and is conditional upon, among other things, specific appropriations for the program" (Tenn. Code Ann. § 71-5-102(b)(1)).

Why federal-state choices on commandeering matter

Federal grant conditions are scrutinized under the Spending Clause (NFIB) and the anti-commandeering doctrine (New York v. United States; Printz v. United States). Congress can't directly command states to regulate; it can condition federal funds on state regulation, but with limits. South Dakota v. Dole (upholding conditioning 5% of federal highway funds on a 21-year-old drinking age as "relatively mild encouragement") sets the high-water mark for permissible conditional grants. NFIB drew a new line at "no real choice but to acquiesce" coercion.

Common questions

Did Tennessee end up changing TennCare in light of this opinion?
The opinion lays out legal possibilities, not policy commitments. Tennessee's actual TennCare decisions in subsequent years depend on legislative and executive choices, federal regulatory developments, and litigation outcomes.

What is the 'maintenance of effort' freeze on eligibility standards?
Eligibility "standards, methodologies, or procedures" that determine who qualifies. Optional benefits and reimbursement rates aren't covered. Cost-sharing increases generally aren't either. The MOE specifically targets WHO gets coverage, not WHAT coverage is.

If Tennessee left Medicaid entirely, what would happen to current beneficiaries?
The opinion doesn't address transition logistics. Practically, leaving Medicaid would require the state to either replace the program with state-only funding, or transition beneficiaries out of public coverage. The footnote reminds readers that the U.S. Constitution doesn't guarantee a right to government-funded health care.

Does NFIB's coercion analysis ever apply outside Medicaid?
NFIB was a Spending Clause case. Its analysis (transformational change + threatened loss of all existing funding) applies in principle to any federal grant condition. But the facts that made NFIB extreme (Medicaid's enormous share of state budgets, the ACA expansion's scope) are unusual. Most federal grant conditions don't approach that level of leverage.

Citations

Statutes and constitutional provisions:

• 42 U.S.C. §§ 1396 to 1396W-5 (Medicaid generally)
• 42 U.S.C. § 1304 (right to "alter, amend, or repeal" Social Security Act provisions)
• 42 U.S.C. § 1315(a)(1) (Section 1115 waiver authority)
• 42 U.S.C. § 1396a(a)(10)(A)(i), (ii) (mandatory and optional eligibility categories)
• 42 U.S.C. § 1396a(a)(10)(A)(i)(VIII) (ACA expansion group)
• 42 U.S.C. § 1396a(a)(74) (MOE applies to waivers)
• 42 U.S.C. § 1396a(gg)(1), (2), (3) (maintenance of effort)
• 42 U.S.C. § 1396a(k)(1) (ACA expansion benefit package)
• 42 U.S.C. § 1396b, § 1396c (federal Medicaid funding and enforcement)
• 42 U.S.C. § 1396d(b), § 1396d(y) (FMAP formula; enhanced FMAP for expansion)
• 42 U.S.C. § 18031(b) (state insurance exchanges)
• 42 C.F.R. §§ 433.51, 433.68 (state share, provider taxes)
• 45 C.F.R. § 155.20; 26 C.F.R. § 1.36B-1(k) (Exchange definitions)
• Tenn. Code Ann. § 71-5-102(b)(1) (TennCare not an entitlement)
• Pub. L. 111-148 (PPACA); Pub. L. 111-152 (HCERA); Pub. L. 111-5 (ARRA); Pub. L. 111-226
• U.S. Const. art. I, § 8, cl. 1 (Spending Clause)
• U.S. Const. art. I, § 9, cl. 7 (Appropriations Clause)

Cases:

• National Federation of Independent Business v. Sebelius, 132 S.Ct. 2566 (2012)
• Harris v. McRae, 448 U.S. 297 (1980)
• New York v. United States, 505 U.S. 144 (1992)
• Printz v. United States, 521 U.S. 898 (1997)
• South Dakota v. Dole, 483 U.S. 203 (1987)
• Reichelderfer v. Quinn, 287 U.S. 315 (1932)
• St. Thomas Hospital v. Sebelius, 705 F. Supp. 2d 905 (M.D. Tenn. 2010)
• Mayhew v. Sebelius, No. 12-2059, 2012 WL 4762101 (1st Cir. Sept. 13, 2012)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2012/op12-106.pdf

Original opinion text

Full opinion text is preserved verbatim below; see the linked PDF or landing page above for the authoritative version.

S T A T E O F T E N N E S S E E
OFFICE OF THE
ATTORNEY GENERAL
PO BOX 20207
NASHVILLE, TENNESSEE 37202

November 26, 2012

Opinion No. 12-106

Permissibility of Modifications to the TennCare Program

QUESTIONS

1. Under National Federation of Independent Business v. Sebelius, __ U.S. __, 132 S.Ct. 2566 (2012), or other federal law or precedent, can the federal government decrease the federal financial participation in the Medicaid program currently provided to the TennCare program either through a decrease in the rate of such participation or by disallowing a federal match for revenues derived from a provider tax?

2. If the answer to Question 1 is yes, then can the State of Tennessee either (a) reduce benefits or eligibility for the TennCare program in order to respond to the financial exigencies created by such decreases or disallowances or (b) terminate its participation in the Medicaid program in order to respond to the financial exigencies created by such decreases or disallowances?

3. Does the answer to any of the above questions change if the State of Tennessee ceases to operate the TennCare program under its existing federal waivers and returns to operating the program under a Medicaid state plan (traditional Medicaid)?

OPINIONS

1. Yes. Congress has the authority under federal law to reduce the federal government's financial participation in the TennCare program and such a reduction would not appear to raise constitutional concerns.

2(a). With any necessary approval of the United States Department of Health and Human Services' Centers for Medicare and Medicaid Services (CMS), Tennessee may make certain changes to the TennCare program, such as a reduction of optional benefits. But for a specified period of time Tennessee's ability to put in place more restrictive eligibility standards, methodologies, or procedures is limited by the Affordable Care Act's "maintenance of effort" requirement.

2(b). State participation in the Medicaid program is voluntary, and there is no legal impediment that would preclude the State of Tennessee from taking action to terminate its participation in that program.

3. No.

ANALYSIS

In March 2010, Congress passed the Patient Protection and Affordable Care Act, Pub. L. 111-148, as amended by the Health Care and Education Reconciliation Act of 2010, Pub. L. 111-152, together referred to as the Affordable Care Act ("ACA"). Subsequently litigation was commenced in several federal courts by parties alleging that ACA was partially or completely void on various constitutional grounds. Ultimately these issues were presented for argument before the United States Supreme Court, and on June 28, 2012, the Court issued its decision in National Federation of Independent Business v. Sebelius ("NFIB"), __ U.S. __, 132 S.Ct. 2566 (2012), resolving constitutional challenges to two key provisions of the ACA. Relevant to your questions, one of those provisions requires the states to expand their Medicaid programs to cover non-pregnant individuals under the age of 65 with incomes below 133 percent of the federal poverty level, 42 U.S.C. § 1396a(a)(10)(A)(i)(VIII), or risk losing all existing federal Medicaid funding that they receive under the current Medicaid program. Addressing Congress' power under the Constitution's Spending Clause, in the context of the limits on Congress' ability to impose conditions on the grant of federal funds to the states, the Supreme Court found that the threatened loss of all existing federal Medicaid funding exceeds Congress' spending power by impermissibly coercing states into complying with the ACA Medicaid expansion. The new Medicaid expansion was not itself invalidated. Rather, the Court fashioned a limited remedy for the unconstitutional threat of the loss of all federal Medicaid funds, effectively rendering the ACA Medicaid expansion optional for the states: Medicaid funding cannot be withheld from the existing Medicaid programs of states that decline to implement the new expansion. Id. at 2607. All other provisions of the ACA were left standing by the NFIB decision. Id. at 2607-08. Nonetheless open questions remain about the potential application of NFIB's analysis to other Medicaid provisions of the ACA and its implications for the management of existing Medicaid programs.

1. The Medicaid program is a joint financing partnership in which the federal government and participating states share the costs of providing covered health care services to persons meeting Medicaid eligibility requirements. See generally 42 U.S.C. § 1396b. The federal medical assistance percentage ("FMAP") rate that the United States Department of Health and Human Services ("HHS") uses in determining the amount of federal matching funds for most state Medicaid service expenditures is determined by a formula set in statute, 42 U.S.C. § 1396d(b), and varies by state. This formula "compares each state's per capita income, and provides higher reimbursement to states with lower incomes (with a statutory maximum of 83%) and lower reimbursement to states with higher incomes (with a statutory minimum of 50%)." The federal share for certain services, certain populations, and Medicaid administrative costs is not determined using the FMAP formula and is instead specified separately under federal law. In addition, a number of exceptions have been added by federal legislation over the years, such as temporary FMAP increases for state fiscal relief and higher federal shares of reimbursement for certain services. States have discretion as to the sources of the state share of Medicaid program costs, and current law allows states to use revenue from provider taxes to help make up the state share of Medicaid, subject to federal rules. See 42 C.F.R. §§ 433.51 and 433.68.

Because the level of federal financial participation in the Medicaid program is the creation of Congress, that level is subject to change through Congressional action. Congress, through the Appropriations Clause of the Constitution, U.S. Const., art. I, § 9, cl. 7, is vested with exclusive power over the federal purse. The existence of the power of successive Congresses to modify federal legislation and to appropriate funds as they see fit has long been recognized. See Reichelderfer v. Quinn, 287 U.S. 315, 318 (1932) ("[T]he will of a particular Congress . . . does not impose itself upon those to follow in succeeding years.") That power was acknowledged, with respect to potential changes in levels of federal funding of the Medicaid program, by the United States Supreme Court in NFIB. In responding to Justice Ginsburg's observation that state Medicaid spending is projected to increase only minimally after the Medicaid expansion provided for in the ACA, Chief Justice Roberts criticized that argument as "assum[ing] that the Federal Government will continue to fund the expansion at the current statutorily specified levels." NFIB, 132 S.Ct. at 2605 n.12. Similarly, the dissenting Justices noted that "these costs may increase in the future because of the very real possibility that the Federal Government will change funding terms and reduce the percentage of funds it will cover." Id. at 2666 (dissenting). Clearly, then, the Court recognized that the potential exists for a future reduction in federal financial participation in the Medicaid program.

The Court's analysis of the ACA's mandated Medicaid expansion began with the "basic principle that the 'Federal Government may not compel the States to enact or administer a federal regulatory program.'" Id. at 2601 (quoting New York v. United States, 505 U.S. 144, 188 (1992)). See, e.g., Printz v. United States, 521 U.S. 898 (1997). This restriction on federal authority exists "whether Congress directly commands a State to regulate" or "indirectly coerces a State to adopt a federal regulatory system as its own." NFIB, 132 S.Ct. at 2602. Nevertheless, Congress, pursuant to its Spending Clause power, may secure state compliance with federal objectives by conditioning a grant of federal funds on the states' taking certain action that "encourages" a state to regulate in a particular way. Id. at 2601-02. NFIB recognized that limits exist "on Congress' power under the Spending Clause to secure compliance with federal objectives." Id. at 2602.

Two points appear to have been key to NFIB's analysis. First, the Court viewed the ACA's required Medicaid expansion as going beyond modifications and adjustments to Medicaid that Congress was unquestionably entitled to make under 42 U.S.C. § 1304. Rather, the Medicaid expansion "accomplished a shift in kind, not merely degree," resulting in a transformation of Medicaid into "a new health care program." NFIB, 132 S.Ct. at 2606. Second, that transformational change was coupled with the coercive effect of the threatened loss of all existing federal Medicaid funding, which accounted for over 20 percent of the average state's total budget. Id. at 2604.

Assuming this type of analysis would be triggered by a legal challenge to a congressional decrease in federal financial participation in the Medicaid program, it does not appear that such a challenge would be likely to succeed. See South Dakota v. Dole, 483 U.S. 203, 211-12 (1987).

2(a). Tennessee's ability to make changes to the TennCare program is limited by the ACA's "maintenance of effort" (MOE) requirement at 42 U.S.C. § 1396a(gg)(1), which provides that, with certain exceptions, as a condition of receiving any federal Medicaid funding, during the period beginning March 23, 2010 and ending on the date on which the Secretary of HHS determines that a state's new health insurance Exchange under the ACA is fully operational, a state must maintain "eligibility standards, methodologies, or procedures" that are no more restrictive than those in effect on March 23, 2010. For children on Medicaid up to age 19 the ACA MOE requirement continues through September 30, 2019. 42 U.S.C. § 1396a(gg)(2).

The MOE provision does not prohibit states (with any necessary CMS approval) from cutting Medicaid in ways that do not constitute more restrictive eligibility standards, methodologies, or procedures, such as by changing optional benefits, reducing provider reimbursement rates, or increasing cost sharing. The question is whether NFIB invalidates the MOE requirement. The State of Maine challenged the MOE in Mayhew v. Sebelius; the First Circuit denied Maine's petition. No definitive resolution has been reached. Until the question of MOE's constitutionality after NFIB is definitively resolved, Tennessee cannot adopt eligibility standards more restrictive than those in effect on March 23, 2010, without risking loss of all federal Medicaid funding.

2(b). State participation in Medicaid is voluntary. NFIB, 132 S.Ct. at 2581; Harris v. McRae, 448 U.S. 297, 301 (1980). No state has ceased participation, but no legal impediment precludes Tennessee from terminating its participation.

TennCare operates under a Section 1115 waiver authorized by 42 U.S.C. § 1315. See St. Thomas Hospital v. Sebelius, 705 F. Supp. 2d 905, 908-09 (M.D. Tenn. 2010). The current waiver runs through June 30, 2013. The MOE does not require a state to renew its waiver. Choosing not to renew at the end of the waiver period does not constitute an MOE violation. Terminating before the expiration in a way that produces more restrictive eligibility standards would violate MOE.

3. The federal matching formula is the same whether Tennessee operates under a Section 1115 waiver or a State plan. The MOE applies to both ("under the State plan or under any waiver" per 42 U.S.C. § 1396a(a)(74), § 1396a(gg)(1)). The ability to terminate Medicaid participation entirely doesn't depend on waiver vs. State plan. However, the timing of a waiver termination can affect MOE compliance.

ROBERT E. COOPER, JR.
Attorney General and Reporter

WILLIAM E. YOUNG
Solicitor General

LINDA A. ROSS
Deputy Attorney General

Requested by:
The Honorable Randy McNally
Senator
307 War Memorial Building
Nashville, Tennessee 37243-2005