On February 14, 2020, the United States Court of Appeals for the District of Columbia Circuit issued its decision in Gresham et al. v. Azar et al., Case No. 19-5094, a case challenging HHS’s Medicaid waiver that allowed Arkansas to impose mandatory work requirements in its state Medicaid program. The three-judge panel affirmed the district court ruling striking down the HHS Secretary’s waiver as inconsistent with the explicit statutory goals of the Medicaid program.

Arkansas, through its private qualified health plans, expanded its Medicaid coverage consistent with the Affordable Care Act effective January 1, 2014. In 2016, the state introduced its first version of the “Arkansas Works” program, which encouraged Medicaid enrollees to seek employment by offering voluntary referrals to the state Department of Workforce Services. In 2017, Arkansas sought an amended waiver from the Secretary to cover several new requirements under the Arkansas Works program, including, among other changes, a requirement that beneficiaries aged 19-49 “work or engage in specified educational, job training, or job search activities for at least 80 hours per month” and document those activities. Under this new version of the program, beneficiaries who failed to meet those requirements for any three months during a given plan year would be disenrolled and would not be eligible to re-enroll until the next plan year. Under Arkansas’ work requirements approved by the Secretary, more than 18,000 Arkansas residents lost Medicaid coverage.

Under 42 U.S.C. § 1315(a), the HHS Secretary has the power to waive Medicaid’s minimum coverage requirements imposed on state Medicaid plans only in connection with an “experimental, pilot, or demonstration project” if “in the judgment of the Secretary, [the project] is likely to assist in promoting the objectives” of Medicaid. The Secretary approved most of the new Arkansas Works program requirements, including the new work requirements, in a 2018 waiver letter that was the focus of the D.C. Circuit’s opinion.

In his letter, the Secretary found that the Arkansas Works program, as approved, would “assist in promoting the objectives of Medicaid” by “improving health outcomes,” “address[ing] behavioral and social factors that influence health outcomes,” and “incentiviz[ing] beneficiaries to engage in their own health care and achieve better health outcomes.” Specifically, the Secretary’s letter stated that the new Arkansas Works requirements would promote the objectives of the Medicaid statute by encouraging beneficiaries to work or to participate in other “community engagement activities” that are “correlated with improved health and wellness.”

In August 2018, after the new work requirements took effect for beneficiaries aged 30 to 49, ten Arkansas residents filed suit in district court seeking declaratory and injunctive relief against the Secretary. On March 27, 2019, the district court entered judgment vacating the Secretary’s approval of Arkansas’ new work requirements, finding them inconsistent with the text of the Medicaid appropriations provision indicating that the objective of Medicaid was to “furnish . . . medical assistance.” According to the district court, the Secretary’s reasoning that the work requirements were consistent with the objectives of Medicaid because the activities encouraged by the new requirements were correlated with better health outcomes was flawed, as the explicit purpose of Medicaid was to expand coverage of beneficiary healthcare costs, not to improve beneficiary health outcomes more generally. Because the Secretary failed to consider whether the work requirements would reduce Medicaid coverage despite his receipt of numerous comments on the matter, the Secretary’s waiver of coverage requirements was an arbitrary and capricious exercise of the discretion granted to him under the statute.

The Secretary appealed, arguing that the discretion granted to him under the Medicaid statute was unreviewable, and that his decision to grant the waiver was not arbitrary and capricious. The D.C. Circuit panel rejected the Secretary’s argument that his discretion to grant a waiver is unreviewable, noting that the Administrative Procedure Act’s (APA) exception to judicial review for actions committed to agency discretion is “very narrow” and bars review only where “there is no law to apply.” Because the Medicaid statute provides a legal standard for the Secretary’s decision whether to grant a waiver – specifically, that the waiver is “likely to assist in promoting the objectives of Medicaid” – the Secretary’s decision did not fall into the APA exception to judicial review.

The D.C. Circuit also rejected the Secretary’s second argument that his decision to grant the waiver was not arbitrary and capricious because it was “likely to assist in promoting the objectives of Medicaid” insofar as the Secretary found that the Arkansas Works program would promote better health outcomes for Medicaid beneficiaries. Here, the D.C. Circuit adopted much of the district court’s reasoning, finding first that the Medicaid provision articulating the reasons underlying the appropriations of funds for the Medicaid program controls the Secretary’s discretion in granting waivers under 42 U.S.C. § 1315(a). This provision, 42 U.S.C. § 1396-1, describes the purpose of Medicaid as “to furnish (1) medical assistance on behalf of [beneficiaries],” and a separate provision defines “medical assistance” as “payment of part or all of the cost of the following care and services or the care and services themselves.” 42 U.S.C. § 1396d(a). In reading these provisions, the D.C. Circuit noted that other federal appeals courts, including the First, Third, Sixth, and Ninth Circuit Courts of Appeals, as well as the Supreme Court, have characterized the purpose of the Medicaid program as “provid[ing] joint federal and state funding of medical care for individuals who cannot afford to pay their own medical costs.”

While the Secretary’s letter acknowledged the possibility of coverage loss under the Arkansas Works program, the D.C. Circuit found that its treatment of the issue amounted to “[n]odding to concerns raised by commenters only to dismiss them in a conclusory manner” and thus did not bear the “hallmark of reasoned decisionmaking” on that issue. The Secretary’s letter did contain analysis of the how the program “would assist in promoting” better health outcomes, but the D.C. Circuit found that analysis to be insufficient because it was aimed at “an entirely different set of objectives than the one we hold is the principal objective of Medicaid,” i.e., providing coverage. Accordingly, because the Secretary’s analysis disregarded the primary purpose of the Medicaid statute, his decision to waive coverage requirements in approving Arkansas’ imposition of the work requirements was an arbitrary and capricious exercise of agency discretion.

To view a copy of the decision, click here.