Risk of Loss of Medicaid Funds Not Coercive Under Tenth Amendment

In West Virginia, the federal government pays approximately 75 percent of Medicaid expenditures and thus receives 75 percent of recoveries from estates. West Virginia receives more than one billion dollars in Medicaid funds each year; the gross proceeds of its estate recovery program is $2.5 million.

Under the federal Medicaid statute, West Virginia could lose all or part of its Medicaid funding if it failed to comply with federal requirements, including the estate recovery program. When the federal Medicaid agency threatened to initiate compliance proceedings, West Virginia came into compliance with the estate recovery provision. It then sued to declare the requirement unconstitutional, contending that the potential penalties are unduly coercive and hence violate the Tenth Amendment. The District Court questioned the authority of the coercion theory, as has some Circuits, see e.g., Kansas v. United States, 214 F 3d 1196, 1202 (10th Cir) , cert. den. 531 U.S. 1035 (2000), and the case was dismissed.

The Fourth Circuit affirmed, but on different grounds. West Virginia v. U.S. Dept. of Health and Human Services, 2002 WL 864263 (4^th Cir. 2002). The Fourth Circuit recognizes the coercion doctrine as a Tenth Amendment limitation on federal conditions imposed on States through the Spending Power of Congress. However, because West Virginia's claim was a facial challenge to the estate recovery requirement, it affirmed the dismissal of the suit.

The Fourth Circuit relied on the fact that the Medicaid statute gave the Secretary discretion to limit the amount of the penalties imposed for non-compliance by the states. Applying a "proportionality" test, a limited penalty could be consistent with the purposes of the estate recovery program and hence not violate the Tenth Amendment.

West Virginia argued that the mere threat of loss of all Medicaid funds was coercive, since it could not risk loss of all Medicaid funds by not engaging in estate recovery. Therefore, it had no real choice but to comply. To be constitutional, it argued, the state must have sufficient information as to the penalty to intelligently weigh their public policy judgments against the cost of refusing to comply. But the Fourth Circuit found that the Medicaid Act is not coercive simply because it fails to reach an idealized standard of specificity of the penalty. The complexity of the Medicaid statute justifies giving the Secretary the discretion to determine the appropriate penalty. The court left open the question as to whether the Tenth Amendment would permit a total loss of Medicaid funding for non-compliance with the estate recovery requirement, but the opinion suggests that such a penalty would be coercive. 2002 WL 864263 at 8.