Did Arizona Fund Medicaid Expansion With an Unconstitutional Tax? Supreme Court Will Decide.

The tax was passed in 2013, but did not receive a two-thirds majority from both chambers of the state legislature.


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When Arizona accepted the Medicaid expansion portion of the Affordable Care Act in 2013, state lawmakers enacted a new levy on hospitals to pay for the state's share of new spending.

They did so, however, without a two-thirds majority in the state House and state Senate—something the state constitution requires for tax increases. There is, however, an exception for "fees."

Is the hospital levy a tax or a fee? Four years after it became law, the state Supreme Court will have the final say. It's a decision that could mean the state's Medicaid provider can no longer collect approximately $285 million from hospitals, potentially jeopardizing health coverage for about 400,000 state residents.

Arizona's high court Tuesday accepted an appeal from legal activists at the Goldwater Institute, a free market think tank, challenging the law. The Goldwater Institute lawsuit contends the 2013 Medicaid expansion violates Proposition 108, a 1992 voter-approved state constitutional amendment. The amendment requires a two-thirds vote of the legislature to approve a measure increasing taxes. The law included an exception for "fees and assessments that are authorized by statute, but are not prescribed by formula, amount, or limit, and are set by a state officer or agency." This has prevented the bill from being declared unconstitutional in previous cases.

Under the Affordable Care Act, states were authorized to expand Medicaid eligibility to able-bodied adults at up to 138 percent of the poverty level. The federal government promised to pick up 100 percent of the tab for new enrollees over the first three years, and then 90 percent in perpetuity for participating states.

Arizona moved to expand eligibility for the joint federal-state health insurance program in 2012, shortly after the U.S. Supreme Court ruled that states had to opt-in to Obamacare's Medicaid expansion. The hospital levy passed in 2013 as a way to restore coverage to childless adults—something required before Arizona could accept Obamacare Medicaid expansion funding—who had been dropped from the state's Medicaid rolls during a budget crunch years earlier.

Lower courts have said the "fee" is constitutional. A decision by the Appeals Court rejected the Goldwater Institute's argument that the assessment on hospitals is a tax because, as Judge Paul McMurdie, wrote for the majority, it "narrowly applied only to hospitals" not a "broad class of citizens subject to a tax."

If that's the case, the Goldwater Institute argues, the constitutional amendment is rendered useless. The lower court's decision "has disastrous consequences for future revenue-raising measures," warns Christina Sandefur, the Goldwater Institute's executive vice president.

Arizona has been central to the ongoing fight over Medicaid expansion and the legacy of the Affordable Care Act.

Brewer was one of several governors who signed onto the lawsuit challenging the Affordable Care Act after the law passed. It eventually went to the Supreme Court, which ruled in 2012 that states could opt out of Obamacare's Medicaid expansion. After the ruling, though, Brewer agreed to accept Medicaid expansion and the federal dollars that came with it.

Current Arizona Republican Governor Doug Ducey criticized congressional attempts by members of the GOP this past summer to repeal Obamacare, concerned by the treatment of states that expanded Medicaid. The Medicaid expansion played a role in Arizona Senator John McCain voting against the Obamacare repeal this past July.