Arizona High Court Mulls Medicaid Expansion Legality

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By Brenna Goth

Maintaining funding for Medicaid expansion in Arizona could depend on whether the Arizona Supreme Court finds a fee imposed on hospitals is really a tax.

The question is at the heart of oral arguments heard by a panel of judges Oct. 26 in a lawsuit launched by dozens of former and current lawmakers. They are suing the state’s Medicaid agency, called the Arizona Health Care Cost Containment System (AHCCCS), over a levy hospitals pay to fund health-care coverage for low-income adults ( Biggs v. Betlach, Ariz., No. CV-17-0130-PR, oral arguments 10/26/17 ).

The court will decide whether the Arizona Legislature had the authority to approve that fee under state law, based on the number of votes it received. At stake is hundreds of millions of dollars collected each year to fund Medicaid for roughly 400,000 people.

Attorneys for the Goldwater Institute, a conservative think tank representing the lawmakers, say the lawsuit is about voter-approved constraints on the Legislature, and not Medicaid expansion itself. But other groups watching the case warn the state’s health-care system will suffer without the funding.

Lower courts have upheld the hospital fee. The Arizona Supreme Court did not give a timeline for a decision.

Is Hospital Levy a Tax?

Oral arguments focused on how Arizona decided to pay for Medicaid expansion in 2013. Although state voters approved funding the program for childless adults at or below the federal poverty line more than a decade beforehand, the state later froze that money during a budget crisis.

A majority of the Legislature thereafter decided to restore the funding and expand Medicaid eligibility through charging hospitals based on patient discharges. The fees are expect to bring in $290 million in the 2018 fiscal year, according to the AHCCCS.

That fee is a tax and unconstitutional under state law, Christina Sandefur, attorney for the Goldwater Institute, told the court. Arizona voters approved a provision decades ago requiring the Legislature to pass new taxes with a two-thirds supermajority.

But the AHCCCS argued the levy is an assessment, rather than a tax, that did not require approval by a supermajority. Timothy Berg, an attorney with Fennemore Craig who argued on behalf of the AHCCCS director, said voters weren’t concerned with fees imposed on a small, regulated group when they approved the taxing requirement, he said.

“That is not what the people were afraid of,” he said.

Hospital Groups Support Fee

Judges said they were considering the intent of voters in what constitutes a tax. But some raised the potential consequences of overturning Medicaid funding.

Several health-care industry groups have argued in favor of the fee. The Arizona Hospital and Healthcare Association filed an amicus brief outlining the economic impact of losing Medicaid coverage.

Hospitals benefit from the drop in uncompensated care, it said, and the decreases “would come to a sudden halt and quickly regress.”

The Health System Alliance of Arizona also thinks the levy is legal, Executive Director Jennifer Carusetta told Bloomberg Law in an email. The funding supports vulnerable patients who would otherwise frequent emergency rooms, she said.

“This threatens the very fabric of the healthcare delivery system that our entire state relies upon,” Carusetta said.

But the Legislature could still find a way to fund Medicaid expansion if the fee is found unconstitutional, Sandefur told Bloomberg Law. It may be difficult, but that’s what voters wanted, she said.

“They didn’t want it to be easy to impose these new taxes,” Sandefur said.

Other States Could Consider Arizona Case

Arizona’s issues differ from those in other state-level Medicaid expansion challenges, Mark Regan, legal director of the Disability Law Center of Alaska, told Bloomberg Law. Regan began tracking the cases when the center filed an amicus brief in an Alaska lawsuit.

The common question in a handful of cases including in Kentucky and Ohio is who had the authority to expand Medicaid, Regan said. Arizona’s consideration involves the legality of the financing scheme.

Arizona’s case, though, could have implications for states that haven’t expanded Medicaid but are considering it, Regan said. They may watch how the court interprets a provider fee as a way to fund it.

“It’s possible (a decision in this case) will have some influence in other places,” he said.

National tax watchdog groups have also weighed in on the lawsuit in an attempt to influence how the court interprets voter intent.

The Pacific Legal Foundation filed briefs in the case and said the court should define taxes broadly. The organization looks at restrictions on legislatures to raise taxes across the country, attorney Jeff McCoy told Bloomberg Law.

In Arizona, there’s little case law on the disputed provision, McCoy said. The foundation has seen the consequences of muddled distinctions in other states, he said.

“It’s hard to tell where that exact line is,” McCoy said.

To contact the reporter on this story: Brenna Goth in Phoenix at bgoth@bna.com

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