Stewart v Azar and the Purpose of Medicaid: Work as a Condition of Enrollment

On June 29, 2018, a federal district court found that the US Department of Health and Human Services (HHS) did not properly approve Kentucky’s application for a controversial Medicaid waiver, the first to require work as a condition of eligibility. ¹ Because HHS’s approval was vacated, Kentucky’s Medicaid program was required to continue as if no waiver existed, but 3 other states had already received HHS approval to proceed with work requirements. This article provides context for understanding the relevance of work requirements to implementation of Medicaid expansion under the Patient Protection and Affordable Care Act (hereinafter, Affordable Care Act), ² discusses the district court’s decision, and considers what may come next.

Medicaid and the Affordable Care Act

In the United States, health insurance coverage is the gateway to medical care, but the question of which persons should have assistance in paying for care has long been contentious. Since 1965, Congress has offered states Medicaid funding to “furnish medical assistance” to the so-called “deserving poor”—the elderly, blind, disabled, and families with dependent children. ³ Categorization of the poor into deserving and undeserving traces back to the Poor Laws of Elizabethan England, which shaped colonial governmental assistance, carried over into early federal and state welfare laws, and later became part of Medicaid. ⁴ Like many long-standing federal laws, Medicaid has been amended over time, often by expanding eligibility. For example, eligibility was expanded to pregnant women in 1984, and childless, nonelderly adults became eligible in 2010 under the Affordable Care Act.

By the time of the 2008 presidential election, the high rate of uninsurance was a dominant issue, as the percentage of persons who obtained employer-sponsored health insurance had been decreasing since the late 1980s, and persons employed in low-wage, hourly, and part-time jobs were unlikely to be offered health insurance as an employment benefit. ^{5 -7} When Congress drafted the Affordable Care Act to provide universal insurance coverage, emphasis was placed on finding ways within the existing framework of private and public health insurance to cover populations that had no insurance. Small-group and nongroup health insurance became available through newly created health insurance exchanges, with tax credits provided to persons who earned 100% to 400% of the federal poverty level (FPL). For persons with lower incomes, Medicaid eligibility was expanded to cover childless, nonelderly adults earning up to 138% of the FPL.

This plan was changed by the Supreme Court’s 2012 decision in NFIB v Sebelius, which called the Medicaid expansion different “in kind” from the Medicaid program that existed before the Affordable Care Act and effectively rendered state implementation of Medicaid expansion optional. ⁸ States have been negotiating with HHS to expand Medicaid through waivers, which the Secretary of HHS has authority to approve if a state’s application offers an “experimental, pilot or demonstration project likely to assist in promoting the objectives” of Medicaid under Section 1115 of the Social Security Act (“1115”). ⁵ Demonstration projects typically seek to improve coverage, costs, and access to or delivery of care and are supposed to be budget neutral. Section 10201 of the Affordable Care Act instructed HHS to create a process by which the public can comment on proposed waivers; accordingly, states must hold a notice and comment period before submitting a waiver request, and HHS provides a federal notice and comment period once the proposal is submitted and before it is approved. ⁹

During the Obama administration, HHS approved 1115 waivers for states that wanted to expand Medicaid with their own twist, such as Minnesota’s expanding eligibility beyond the Affordable Care Act’s baseline income level, or Arkansas’s placement of the expansion population into private insurance offered on its health insurance exchange. States such as Indiana submitted Medicaid expansion waiver applications that included requests to require work for the newly eligible population. Consistent with previous administrations, HHS denied these requests and stressed that Medicaid cannot lawfully impose work requirements but that states could create voluntary job placement programs. States such as Indiana and Pennsylvania proceeded with Medicaid expansion even after these elements of their waiver applications were denied.

On January 11, 2018, after efforts to “repeal and replace” the Affordable Care Act failed to garner enough votes to pass Congress, the Centers for Medicare & Medicaid Services (CMS) issued a new policy that encouraged state proposals to “improve Medicaid enrollee health and well-being through incentivizing work and community engagement.” ¹⁰ Proponents of this new policy maintain that such rules will benefit the expansion population and help to keep Medicaid costs down. CMS reasoned that people who work will be able to lift themselves out of poverty, leave Medicaid enrollment for private health insurance, lead healthier lives, and have improved health and well-being because they work. CMS warned states that vulnerable populations such as pregnant women (traditionally considered deserving poor) should not be subject to work requirements.

Work requirements for Medicaid beneficiaries generate opposition for many reasons. In part, they are controversial because the Affordable Care Act was meant to cover everyone, regardless of historic “deserving” status. Opponents also cite evidence from other programs with work requirements that indicates Medicaid beneficiaries will be disenrolled if they cannot find or maintain employment, and disenrollment will decrease access to health care; as such, persons who are disenrolled will be less healthy than persons who have insurance coverage and, therefore, will be less able to find or keep a job. ¹¹ Persons who are disenrolled, whether they find work, were already working, or cannot find work, are not likely to become covered by private insurance because low-wage and part-time jobs do not usually provide health insurance as an employment benefit. ¹² In addition, opponents predict that work requirements will reach beyond the population to which they are intended to apply. For example, work requirements in other social programs demonstrated that new paperwork generates enrollment barriers even for those who comply, because they may not have the time, knowledge, or means to report. In addition, studies predating the Affordable Care Act show that uninsurance has a spillover effect on the children of the uninsured, because they are less likely than children of insured parents to be enrolled in Medicaid (when they are eligible) if their parents are uninsured. ¹³

Opposition exists as well because use of the phrase able-bodied has a long and controversial history that reveals a deep-rooted urge to restrict governmental assistance for certain populations. For example, certain senators ¹⁴ would not support the 1935 Social Security Act for fear that it would pay “able-bodied Negroes to sit around in idleness,” which led to the exclusion of agricultural and domestic workers from Social Security benefits at the program’s inception. ¹⁵ Desire to be tough on the poor has not demonstrably improved the health of the poor, and low-quality work may decrease health, yet ideas such as work requirements repeatedly arise. ¹⁶

The Stewart v Azar Decision

HHS approved Kentucky’s waiver application 1 day after issuing the new policy. Kentucky had expanded Medicaid under the terms of the Affordable Care Act in 2014, but in 2016, after a new governor took office, Kentucky submitted a waiver application seeking to transform the state’s Medicaid expansion into “KY HEALTH” (“Helping to Engage and Achieve Long Term Health”). Governor Matt Bevin stated that Medicaid was not for those he called “able bodied,” ¹⁷ and Kentucky’s waiver included provisions such as work requirements with mandatory reporting; limits on retroactive eligibility for new beneficiaries; monthly premiums, the nonpayment of which can lead to disenrollment; and limits on nonemergency transportation. CMS Administrator Seema Verma designed Kentucky’s waiver while she was a private consultant and so recused herself from the review of the application.

On January 24, 2018, 15 plaintiffs sued HHS claiming that approval of Kentucky’s waiver was unlawful. Kentucky’s waiver was to begin rolling out on July 1; on June 29, Judge James E. Boasberg issued an opinion in Stewart v Azar that vacated approval of KY HEALTH and halted implementation of the waiver. The court set aside HHS’s approval because it did not meet the standards of the federal law governing administrative agencies’ actions, called the Administrative Procedure Act. Under the Administrative Procedure Act, to evaluate whether an agency acted within its statutory authority, a court must determine if the agency’s action is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” ¹ The phrase “arbitrary and capricious” means that an agency has

entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of the agency expertise. ¹

In other words, courts defer to agencies’ interpretation of laws they are charged with administering unless an agency’s decision does not indicate a reasoned course of action.

To determine whether HHS acted lawfully under the Administrative Procedure Act, the district court looked to the language of the statutes in question, the Medicaid Act, and Section 1115, because a demonstration project under 1115 must promote Medicaid’s objective. The court determined that the law of Medicaid enables states to “furnish medical assistance,” which is defined as “‘payment of part or all of the cost’ of medical ‘care and services’ for a defined set of individuals.” ² The court reasoned that this language shows that Medicaid provides medical care to the poor, including the expansion population added by the Affordable Care Act, and payment for that care is central to the core purpose of the Medicaid Act.

In addition, the court found that the HHS Secretary did not evaluate whether Kentucky’s waiver would help to provide coverage for beneficiaries, even though many comments at both the state and federal levels predicted coverage losses. The court noted that the record included Kentucky’s estimate that 95 000 beneficiaries would be disenrolled, but the Secretary did not address that loss in approving the waiver. The court also found that the goal of moving beneficiaries to private insurance coverage through work was not evaluated by the Secretary and was not rational in the context of community engagement, because volunteer work does not offer employment benefits.

In short, the court did not engage with the policy questions argued by the parties, relying on legal grounds to vacate the waiver approval because of arbitrary and capricious action by HHS in approving Kentucky’s application.

Work Requirements and Medicaid Expansion Going Forward

In the wake of its setback in the Kentucky case, HHS moved to address the deficiencies found by the court. On July 19, 2018, HHS opened a 30-day notice and comment period on Kentucky’s waiver application, reasoning that the new policy announcing the possibility of work requirements and the approval of Kentucky’s waiver were too close in time and that a new public comment period would satisfy the court. ¹⁸ By the time Judge Boasberg ruled in Stewart v Azar, HHS had already approved Kentucky-style waivers in 3 states (Indiana, New Hampshire, and Arkansas), and 7 more states were considering or had submitted applications for waivers that allowed work requirements. That number had increased to 10 by early September 2018. Much is riding on the resolution of Kentucky’s case.

In the meantime, Arkansas’s waiver rolled out on June 1, 2018, and offers early data on disenrollment under new Medicaid work requirements. Arkansas’s first monthly report showed that 7464 beneficiaries did not meet reporting requirements for proof of work and that 445 persons did; Arkansas beneficiaries will be disenrolled until the next calendar year if they do not report work for 3 months out of a year. Failure to report does not necessarily mean failure to work, but tracking the difference is a challenge. Arkansas disenrolled 4353 beneficiaries in September 2018 because of noncompliance with its work requirements; 27% of beneficiaries subject to work requirements did not report at all at that point. ¹⁹

Of the states that have 1115 waiver applications under way, some states have expanded, some states have not expanded, and some states will expand only if their waiver applications with work requirements are approved. HHS will have questions to face in each circumstance. If a state already expanded, the holding in Stewart v Azar indicates that predicted disenrollment should be a factor for HHS’s evaluation of whether a proposed demonstration project aligns with Medicaid’s goal of “furnish[ing] medical assistance.” Likewise, if a state has not expanded and does not plan to expand, a similar analysis applies, because beneficiaries enrolled in Medicaid would stand to lose coverage when they are legally eligible, which has not been permissible under the Medicaid Act. By law, Medicaid covers the able-bodied. An additional consideration in nonexpansion states is that the income level at which nonelderly adults are covered by Medicaid are low, and any work is likely to render such beneficiaries ineligible for Medicaid because their income will disqualify them, thereby increasing the potential for disenrollment.

If work requirements are a political tradeoff that facilitates Medicaid expansion under the Affordable Care Act, the suggested calculus of gains and losses in coverage seems slightly trickier. More persons could gain coverage if a state expands, closing the coverage gap for many low-income persons in the state but not for all of the newly eligible population. This is where Medicaid’s legal purpose was important: the law’s goal of providing medical assistance seems to be contradicted by a policy that prevents coverage and, thus, access to care. Judge Boasberg held that coverage means payment, which not only ensures that care will be delivered but also protects against financial risk.

An additional sticking point not addressed by the district court is the claim that work makes people healthy, which is inconsistent with existing studies. ^{17,20 -23} The literature indicates that people who are healthier are better able to find and keep jobs than those who are less healthy. ¹⁶ In addition, surveys in 2 states indicate that Medicaid coverage makes it easier for beneficiaries to find jobs than if they had no insurance coverage. ^24,25 This means, in addition to the barriers to enrollment created by working and reporting requirements, persons who are disenrolled from Medicaid may become even less likely than those who remain enrolled to be able to find and keep work. If persons who lose their jobs may be less healthy than those who remain employed to begin with, disenrollment sets them up for even worse health. A different court could evaluate the policy reasoning that work makes people healthy and come to the same conclusion as Judge Boasberg did—that HHS acted in violation of the Administrative Procedure Act, even if it facilitates expansion coverage for some, because others who are eligible will have a decline in access to care and, thus, a decline in health. On August 14, 2018, a new lawsuit challenged the legality of Arkansas’s waiver in Gresham v Azar in the same federal district court as Stewart v Azar. ²⁶

The court in Stewart v Azar held that the goal of Medicaid is to provide care. If that analysis holds, waiver provisions that add barriers to care and negatively affect Medicaid-eligible populations’ health may be hard for HHS to justify under the Administrative Procedure Act, although KY HEALTH was reapproved as this article went to press. Stay tuned as this story unfolds.