Is the Buffalo Buyout Constitutional?

The “Buffalo Buyout” has elicited considerable attention and a number of creative nicknames since it was added by House Republican leaders to the draft American Healthcare Reform Act on Monday night. (Among others: “Tammany Haul,” “Upstate Shakedown,” “Long Island Larceny,” “Hudson Heist.”) Amidst the outrage over the provision (outrage that is, I think, quite justified), one key point has been lost: the Buffalo Buyout is quite likely unconstitutional, and New York State will have a very strong argument if it tries to kill the provision in court. (Thanks to Howard Chernick for helping me think through these issues.)

To see why, let’s start with the text of the Buffalo Buyout (or, to use its technical title, “Decrease in Target Expenditures for Required Expenditures by Certain Political Subdivisions”):

(A) IN GENERAL. — In the case of a State that had a DSH allotment under section 1923(f) for fiscal year 2016 that was more than 6 times the national average of such allotments for all the States for such fiscal year and that requires political subdivisions within the State to contribute funds towards medical assistance or other expenditures under the State plan under this title (or under a waiver of such plan) for a fiscal year (beginning with fiscal year 2020), the target total medical assistance expenditures for such State and fiscal year shall be decreased by the amount that political subdivisions in the State are required to contribute under the plan (or waiver) without reimbursement from the State for such fiscal year, other than contributions described in subparagraph (B).

OK, let’s parse this. First, the phrase “DSH allotment under section 1923(f)” refers to allotments under the Medicaid Disproportionate Share Hospital Payment Program. In brief: The Medicaid statute requires states to make payments to hospitals that treat a large share of low-income patients. The federal government will reimburse states for these DSH payments up to a certain cap. The caps are set according to each state’s historical DSH payments. New York’s cap is much higher than any other state’s, and New York is the only state with an allotment that is more than six times the national average. So New York is the only state to which the provision applies.

And what does the provision do? Starting in fiscal year 2020, it reduces the “target total medical assistance expenditures” for New York by the amount that New York requires its subdivisions (cities and counties) to contribute toward Medicaid. “Target total medical assistance expenditures” are calculated (roughly) as follows: Take the state’s average per-patient Medicaid expenditures for fiscal year 2016, adjust that for healthcare inflation, and multiply that by the number of people in the state on Medicaid. The target matters under the AHCA because, starting in fiscal year 2020, if a state spends more than the target amount, then the difference will count as “excess aggregate medical assistance expenditures.” The federal Medicaid reimbursement for the state will then be reduced by ¼ times the excess times the state’s federal medical assistance percentage (FMAP), which for New York is 50%.

So for New York, what this means (if I’m following the cross-references correctly) is that if the state requires counties to pay a portion of Medicaid costs, then the amount that New York receives from the federal government will be reduced by as much as 12.5% times the county contribution (maybe less than 12.5% if New York can keep the growth of per-patient Medicaid costs below the nationwide rate of healthcare inflation). The idea is to penalize New York State by cutting federal funding if it makes its cities and counties bear a portion of Medicaid expenses — unless an exception kicks in. And when does that happen? Subparagraph (b) tells us:

(B) EXCEPTIONS. — The contributions described in this subparagraph are the following:

(i) Contributions required by a State from a political subdivision that, as of the first day of the calendar year in which the fiscal year involved begins —

(I) has a population of more than 5,000,000, as estimated by the Bureau of the Census; and

(II) imposes a local income tax upon its residents.

(ii) Contributions required by a State from a political subdivision for administrative expenses if the State required such contributions from such subdivision without reimbursement from the State as of January 1, 2017.

The only political subdivision with more than 5 million people in New York State is New York City, which happens to impose a local income tax upon its residents (one of whom happens to be the First Lady). In other words: If New York City wants the benefits of the Buffalo Buyout, it needs to nix the city income tax, which hits high earners such as the Trumps at a 3.876% rate.

There is no assurance that the Buffalo Buyout will work. Governor Cuomo and the State Legislature might look at this and say: “For every $1 that we make the counties pay, we’ll lose 12.5 cents in federal funds? Bummer, but we’d still rather impose the $1 cost on counties than have to raise 87.5 cents through state taxes.” In which case the Buffalo Buyout wouldn’t help Buffalo at all: it would simply mean fewer federal dollars for New York State, to the detriment of taxpayers in Buffalo and Brooklyn alike. The Buffalo Buyout will be the Buffalo Bust.

And, perhaps more importantly, there is no assurance that the Buffalo Buyout will hold up in court. I see three lines of attack, the second and third of which strike me as the strongest.

The first line of attack relies on NFIB v. Sebelius, the Supreme Court’s 2012 decision upholding the Affordable Care Act’s individual mandate and striking down elements of the Medicaid expansion. With respect to the latter, Chief Justice Roberts said that the ACA was unconstitutional insofar as it placed “a gun to the head” of states. There, the “gun” was the threat that states would lose all federal Medicaid funding — which constituted more than 10% of most states’ total revenue — if they didn’t extend coverage to all individuals below 133% of the poverty line.

The problem with the “gun to the head” argument in this instance is that AHCA’s gun isn’t that much more than a toy: 12.5% times the $2.2 billion that counties outside New York City pay for Medicaid (12.5% x $2.2 billion = $275 million). Governor Cuomo’s most recent budget called for $152.3 billion of state spending next fiscal year. The gun here is less than 0.2% of the state’s total spending. New York State has a real option to say “no.” So the Buffalo Buyout might survive the NFIB “gun to the head” test precisely because it quite likely won’t work.

A second, and stronger, line of attack relies on Shelby County v. Holder, a 2013 case striking down section 5 of the Voting Rights Act. There, Chief Justice Roberts said that the section 5 coverage formula was inconsistent with the “fundamental principle of equal sovereignty among the States.” He reasoned:

[D]espite the tradition of equal sovereignty, the Act applies to only nine States (and several additional counties). While one State waits months or years and expends funds to implement a validly enacted law, its neighbor can typically put the same law into effect immediately, through the normal legislative process.

The differential treatment of states under section 5 failed because the federal government could not “demonstrate the continued relevance of the formula to the problem it targets.” Chief Justice Roberts added that “in the context of a decision as significant as this one — subjecting a disfavored subset of States to extraordinary legislation otherwise unfamiliar to our federal system — that failure to establish even relevance is fatal.”

If section 5 was suspect because it applied to only nine states, then surely the same is true for a provision that applies not to nine states but to one. Is the decision to target New York State relevant to the problem Congress is trying to solve? It’s not even clear what the problem is. Why does Congress care whether Medicaid is partially funded through city and county taxes? And even if that problem is a problem, it’s not clear why the problem has anything to do with the size of the state’s DSH allotment. (Maybe the exception for New York City can be justified on the grounds that a subdivision with more than 5 million people and its own personal income tax is perfectly capable of raising revenue on its own?)

Defenders of the Buffalo Buyout might try to distinguish Shelby County on the grounds that section 5 of the Voting Rights Act infringed upon states’ ability to structure their own electoral systems, whereas the Buffalo Buyout only infringes upon New York’s ability to structure its own fiscal system. But I don’t see why that distinction makes a difference. Decisions about voting are important state decisions, but so are decisions about taxing and spending. Bottom line: The argument against the Buffalo Buyout based on Shelby County isn’t surefire, but it’s certainly formidable.

A third line of attack, and probably the strongest of the three, relies on South Dakota v. Dole, a 1987 case in which the Supreme Court upheld a federal statute that pulled a portion of federal highway funds from states that failed to raise their drinking age to 21. The problematic language for the Buffalo Buyout is as follows:

The spending power is of course not unlimited, but is instead subject to several general restrictions articulated in our cases. The first of these limitations is derived from the language of the Constitution itself: the exercise of the spending power must be in pursuit of “the general welfare.” In considering whether a particular expenditure is intended to serve general public purposes, courts should defer substantially to the judgment of Congress. Second, we have required that, if Congress desires to condition the States’ receipt of federal funds, it must do so unambiguously[,] enabling the States to exercise their choice knowingly, cognizant of the consequences of their participation. Third, our cases have suggested (without significant elaboration) that conditions on federal grants might be illegitimate if they are unrelated to the federal interest in particular national projects or programs.

Even giving substantial deference to Congress, it is hard to grasp how the Buffalo Buyout “is intended to serve general public purposes” when it applies only to some counties in one state. The provision is unambiguous now (though convolutedly crafted), but it wasn’t there when New York State chose to sink the cost of building up a statewide administrative infrastructure to implement Medicaid. And again, it is unclear how shifting revenue-raising responsibilities from certain counties to Albany is at all related to the federal interest in this particular program (which is about health care, not property tax relief).

All of which is to say: While it’s looking ever less likely that the AHCA will make it through the House, much less the Senate, a serious court challenge looms further down the road. Whatever happens on Capitol Hill, the Buyout may go the way of the buffalo still.