D.C. Circuit Holds the “Arkansas Works” Program—Operated under an HHS Medicaid Waiver—Is Arbitrary and Capricious Because It Was Inconsistent with Congress's Stated Purpose of Medicaid

Gresham v. Azar, ___ F.3d ___, 2020 WL 741278 (D.C. Cir. Feb. 14, 2020)

Originally Medicaid provided health care to four categories of people: (i) the disabled, (ii) the bling, (iii) the elderly, and (iv) needy families with dependent children.  Id. at *1.  In 2010, Congress expanded Medicaid to cover low-income people not previously covered.  The states had the choice of whether to expand Medicaid to this new category of people covered.  For those states that opt to cover low-income people not otherwise covered, they could deviate from those requirements if the Secretary of Health and Human Services (HHS) granted a waiver allowing the state to engage in “experimental, pilot, or demonstration projects.”  42 U.S.C. § 1315(a).  HHS is authorized to approve “any experimental, pilot, or demonstration project which in the judgment of the Secretary, is likely to assist in promoting the objective of” Medicaid.”  Id.  A waiver can be granted where a state shows that a “demonstration project” is “likely to assist in promoting the objectives” of Medicaid.  Id. at *4.   Medicaid does not have a standalone purpose section like some social welfare statutes.  It does, however, have a provision that states the reason funds are being appropriated, describing the purpose of Medicaid to:  "Furnish (1) medical assistance on behalf of families with dependent children and of aged, blind, or disabled individuals, whose income and resources are insufficient to meet the costs of necessary medical services, and (2) rehabilitation and other services to help such families and individuals attain or retain capability for independence or self-care."  42 U.S.C. § 1396-1.

          Arkansas opted into Medicaid and its 2013 waiver program encouraged enrollees to seek employment by offering voluntary referrals to the Arkansas Dept. of Workforce Services.  Dissatisfied with participation, in 2017 Arkansas applied to amend its existing waiver under section 1315.  The new version of a program, called Arkansas works, introduced several new requirements and limitations.  Id. at *1.  One of these new requirements was that beneficiaries between 19 and 49 years of age who were not pregnant or frail were required to “work or engage in specified educational, job training, or job search activities for at least 80 hours per month” and to document such activities.  The failure to meet the work requirements for any three months during a plan year would result in disenrollment in the plan.  The person would not be able to re-enroll until the following plan year.  Id.

          In 2018, HHS approved the waiver.  In the approval letter, the Secretary analyzed whether Arkansas Works would “assist in promoting the objectives of Medicaid.”  Id. at *2.  The Secretary identified three objectives of the program: (i) improving health outcomes, (ii) addressing behavioral and social factors that influence health outcomes, and (iii) incentivizing beneficiaries to engage in their own health care and achieve better health outcomes.  The Secretary found that the community engagement requirements of Arkansas Works would “encourage beneficiaries to obtain and maintain employment or undertake other community engagement activities that research has shown to be correlated with improved health and wellness.”  Id. at *2.  Responding to concerns that the new program would cause disruptions in care or create barriers to coverage for beneficiaries not exempt, the Secretary stated that “Arkansas had several exemptions and would ‘implement an outreach strategy to inform beneficiaries about how to” remain in the program.  Id. at *2.  The new Arkansas Works program resulted in significant coverage loss:  More that 18,000 people or 25% of those subject to the work requirement lost coverage as a result of the project in just five months.  Id. at 7.

          Residents of Arkansas filed suit under the Administrative Procedure Act alleging that the Secretary's decision was arbitrary and capricious.  The district court agreed observing that the Secretary's letter did not consider whether Arkansas Works would reduce Medicaid coverage.  Instead of addressing whether Arkansas Works would further the stated objective of Medicaid, the district court noted that the Secretary considered alternative objectives, primarily healthy outcomes.  The court stated that concern was not a substitute for considering Medicaid's central concern with is to cover health costs through provision of free or low-cost health coverage.  Id. at *3.  The district court found that HHS's decision was “arbitrary and capricious because it did not address … whether and how the project would implicate the ‘core' objective of Medicaid:  the provision of medical coverage to the needy.”  Id.

          The D.C. Circuit noted that the Secretary has considerable discretion to grant a waiver but rejected the government's argument that waiver decisions were unreviewable under the APA.  Id. The court noted that the exception to review under the APA is “very narrow” and bars review only in those rare instances where “there is no law to apply.”  Id.  The court found that the statute provides the standard of review: the Secretary may approve experimental, pilot, or demonstration projects only in so far as they are “likely to assist in promoting the objectives” of Medicaid, 42 U.S.C. § 1315(a).  Id.

          The D.C. Circuit stated that its review is de novo in an APA case and found that “[t]he district court is indisputably correct that the principal objective of Medicaid is providing health care coverage.”  Id. at *4.  The court noted the agreement of the First, Third, Sixth, Ninth Circuits and the Supreme Court as to the purpose of Medicaid, although with slightly different reasoning.  Id. at **4-5.  The court acknowledged that in enacting Medicaid Congress may have been hoping to incentivize secondary benefits such as healthier outcomes or more engagement in enrollees their health care “but the ‘means [Congress] has deemed appropriate' is providing health care coverage.”  Id. at 5.  “While furnishing health care coverage and better health outcomes may be connected goals, the text specifically addresses only coverage.”  Id. (citing 42 U.S.C. § 1396-1).  The court of appeals noted that where Congress wants to pursue additional objectives within social welfare programs it says so in the text.  Id. at *6.

          In concluding the Secretary's approval was arbitrary and capricious the court observed that the Secretary failed to address an important aspect of the problem as required by Motor Vehicle Mfrs. Ass'n of U.S. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43. (1983).  “A critical issue in this case is the Secretary's failure to account for loss of coverage, which is a matter of importance under the statute.  The record shows that the Arkansas amendments resulted in significant coverage loss.”  Id. at *7.  Instead, the court noted, the Secretary's analysis considered only whether the demonstrations would increase healthy outcomes and promote engagement with the beneficiary's health care.”  Id.  The court acknowledge that the Secretary approval letter was no devoid of analysis, but concluded it was an irrelevant analysis.  The court affirmed the judgment of the district court and vacated the Secretary's approval.  Id.