On June 30, 2023, the United States District Court for the Eastern District of Texas (the Court) granted the State of Texas’ preliminary injunction motion, enjoining CMS from implementing and enforcing its Informational Bulletin, dated February 17, 2023, (the Bulletin) on the use of healthcare-related taxes to fund the non-federal portion of Medicaid payments while litigation between Texas and CMS related to the legality of the Bulletin (the Lawsuit) remains ongoing.
State Medicaid programs are funded by both the federal government and each individual state. States may fund their share of Medicaid payments by assessing taxes on healthcare-related items, services, or providers but only if the tax is broad-based and contains no hold harmless provision. 42 U.S.C. § 1396b(w)(1)(A)(iii). A hold harmless provision exists if “[t]he [s]tate or other unit of government imposing the tax provides (directly or indirectly) for any payment, offset, or waiver that guarantees to hold taxpayers harmless for any portion of the costs of the tax.” § 1396b(w)(4)(C)(i).
On February 17, 2023, CMS issued the Bulletin, clarifying its position that healthcare-related tax program arrangements that contain hold harmless arrangements involving the taxpaying providers redistributing Medicaid payments to ensure that all taxpaying providers receive at least a portion of their tax costs back are impermissible in violation of the Social Security Act and implementing hold harmless regulations. The Bulletin also states that CMS would reduce a state’s medical assistance expenditures by the amount of healthcare-related tax collections that include these types of arrangements. A copy of the Bulletin can be found here.
Texas, which uses healthcare-related taxes to fund the non-federal portion of Medicaid payments, filed the Lawsuit on April 5, 2023, in the Eastern District of Texas against CMS and HHS, seeking to invalidate the Bulletin on grounds that the Bulletin exceeds CMS’s statutory and regulatory authority, did not go through notice and comment rulemaking required under the Administrative Procedure Act, and is arbitrary and capricious.
After finding that Texas has standing in the Lawsuit, the Court granted Texas’s motion for preliminary injunction, concluding that Texas is likely to succeed in its claim that the Bulletin exceeds CMS’s statutory and regulatory authority. The Court reasoned that the Bulletin improperly expands the definition of the “hold-harmless provision” beyond what is contemplated in the statute at 42 U.S.C. § 1396b(w)(4)(C)(i) and implementing regulations to include guarantees by private parties in private agreements. The Court reasoned that while the statute includes a “tight grammatical link” between the government and the guarantee being provided, the Bulletin states that CMS will disallow funds where private providers guarantee to hold one another harmless by entering into agreements to redistribute Medicaid payments to ensure that taxpayers receive at least a portion of their tax payments back. The Court found that CMS exceeded its statutory authority by including these private arrangements in the definition of the “hold-harmless provision” in the Bulletin.
The Court also held that Texas had sufficiently demonstrated that it would face substantial threat of irreparable injury if the motion was not granted due to the large compliance costs that Texas would have incurred to comply with the Bulletin, which would not be recoverable at a later date since CMS is immune from monetary damages.
While the Lawsuit remains ongoing, the Court’s decision on the preliminary injunction is a setback on CMS’s recent efforts to expand the definition of hold harmless arrangements and to invalidate certain healthcare-related taxes. Also, the Court’s granting of Texas’ preliminary injunction is an indication of Texas’ likelihood to succeed on the merits in the Lawsuit and preserves the status quo on hold harmless arrangements while the Lawsuit is pending.
The Court’s order granting Texas’s preliminary injunction motion can be read here.
