Douglas v. Independent Living Center: The most important healthcase federalism case you've never heard of?

One can make a plausible case, at least for this SCOTUS term, that there is an inverse relationship between the news coverage of a federalism case and that case's practical importance for the federal system's actual operation. Take HHS v. Florida (aka the PACA "individual mandate" case). The case is, of course, receiving piles of media and judicial attention, the Court having lavished two hours of oral argument on the individual mandate alone. But striking down the individual mandate on the grounds proffered by Florida has zero practical effect on the power of the federal government, which, under Florida's (aka Randy Barnett's) theory, could impose practically the same mandate on private individuals to buy health insurance just so long as the mandate was conditioned on some commercial activity -- say, working at a job affecting interstate commerce. In short, in the unlikely event that Florida wins, we will get more "federalism etiquette, akin to the requirement that guns cross state lines before the feds can ban 'em: Congress will just have to latch on to individual mandates some nexus to some commercial activity -- driving a car, buying or renting a house, holding down a job, etc.

Now consider a case that the media has pretty much ignored but that arguably has much more important implications for how our federalism operates -- Douglas v. Independent Living Center. In this decision handed down last Wednesday, the Court ducked a decision on whether beneficiaries of Medicaid have a right under the Constitutions' Supremacy clause to enforce the Medicaid grant program's requirements against the State of California. Those federal conditions require that California maintain payments "sufficient to enlist enough providers so that care and services are available under the plan at least to the extent that such care and services are available to the general population in the geographic area" (42 U.S.C. section 1396a(a)(30)(A)). After California slashed payments by 10% without any findings as to "sufficiency," the affected healthcare providers sued under the Supremacy clause, effectively claiming that California's cuts were "preempted" by federal law.

Unlike the "individual mandate" issue, designing remedies for subnational governments' violations of conditions on federal grants is a vitally important issue, not just a way to give President Obama a black eye. As I suggest after the jump, the entire intergovernmental system of poverty alleviation -- not just Medicaid but also all of the other state-federal poverty programs like Title I of ESEA, CDBGs, TANF, Head Start, and the SNAP ("Food Stamps") program -- is threatened by familiar subnational incentives to "cheat" by diverting the money to ends other than relief of poverty. The Douglas Court used APA section 706 review of federal agency discretion rather than private causes of action directly against the state grantee as the tool of choice -- a sort of compromise between agency power and private rights. Whether it is a compromise that will succeed over the long haul is uncertain. But this sort of fine-grained institutional engineering is far more important for real federalism than the practically vacuous but politically fraught symbolism of the PACA litigation.

1. Consider, first, the problem of states' faithless agency when administering federal poverty programs. It is a familiar point that poverty programs provide a beneficial external effect that subnational governments tend to slight: Each state has incentives to encourage neighboring states to bear the cost of indigent citizens, by encouraging the latter to migrate to the former. One does not need to be an economist to see that (in Justice Cardozo's words) states will "h[o]ld back through alarm lest, in laying such a toll upon their industries, they would place themselves in a position of economic disadvantage as compared with neighbors or competitors" (Steward Machine at 588). Federal correction of this subnatinal incentive with grants, however, requires the feds to have some effective way of inducing the states to comply with federal grant conditions. Given that all money is green, monitoring such compliance can be tricky: How can one tell if states are not reducing their own fiscal efforts on behalf of the poor by exactly the amount of the federal grant? In particular, how can one tell if the states are spending "enough" when the program does not consist of a specific entitlement to a fixed sum of money but rather to an amorphous quantity of "adequate" care?

California's behavior in Douglas suggests precisely the sort of faithless agency that the feds are supposed to check. Initially (in early 2008), the California legislature simply imposed an "across-the-board" 10% cut on Medicaid expenditures. They made no findings that 10% was the right cut in light of medical costs or patient needs: The cut was driven purely by the need to reduce expenditures rather than raise taxes. By early 2009, California had backed off this most aggressive position and instead more modestly clipped spending (by, for instance, capped wages and benefits of in-home care providers). But there still was no systematic effort to measure how much cares costs and whether the cuts imposed were consistent with the federally defined minimum level of adequate care.

2. Second, consider the difficulty of using a private litigation remedy to correct states' bad incentives. Charles Reich's concept of "New Property" specifies that the beneficiaries have some sort of entitlement to the "right" level of care that they should be able to vindicate through some sort of private cause of action. The problem with such "New Property," however, is that, for complex programs -- health care and education, for instance -- the right is an entitlement to a collective good of sound decision-making in general, not an individual sum of money. Reducing wasteful or inefficient spending does not violate federal grant conditions, while reducing necessary spending does, and the distinction between the two has to be based on the overall quality of the states' decision-making process, not the state's denail of a particular benefit in any specific case.

Guided by the idea that federal poverty programs encourage collective governance rather than any specific individual benefits level, the SCOTUS has, in cases like Blessing v. Freestone, 520 U.S. 329 (1997) and Gonzaga University v. Doe, 536 U.S. 273 (2002) trimmed back on judicial inferences that either federal benefits statutes or section 1983 create any private cause of action to enforce federal benefit requirements. The plaintiff-respondents attempted an end-run around these SCOTUS decisions by claiming that California's 10% plan violated the Supremacy clause by running afoul of the Medicaid Act. But this re-packaging of the private cause of action was not likely to persuade the Court: Even the Obama Administration weighed in with an amicus brief arguing that there could not be a private cause of action to enforce the criteria with which states must comply in order to qualify for federal grants.

In principle, Ex Parte Young states that private persons can raise a federal law as a defense against state actions that are preempted by that law. But the Obama Administration relied on the pre-"New Property" idea that federal "preemption" of the state's denial of monetary assistance is different from the ordinary federal preemption of a state's "affirmative enforcement actions." But why, exactly? Both state actions arguably violate federal law: Why is an individual's protecting their access to health care from an illegal 10% cut different from an HMO's protecting itself from state tort liability with ERISA preemption?

The amicus brief did not offer any justification or even explanation for the distinction, but the implicit reasoning is easy to infer: Public money is different from private property or liberty -- even public money to which a private person is allegedly entitled. Both the Administration's and Court's intuitive sense is that private parties just cannot have the same access to the courts for claims on a state's fisc as for claims to be left alone by the state. This taken-for-granted distinction suggests how utterly dead Reich's concept of "New Property" is, forty years after it was triumphantly announced as the dawn of a new legal era.

3. So what should be the remedy for state disobedience to federal commands, if private causes of action against the state government are not permitted? The majority, in an opinion by Justice Breyer, offered an interesting compromise between total agency discretion and private entitlement to sue: The majority remanded the case to the Ninth Circuit for a determination of whether the respondents should proceed against the Center for Medicaid & Fedicare Services ("CMS") under the APA rather than against California under the Supremacy clause. This solution was plausible because CMS approved some of California's proffered plan amendments a month after oral argument, thereby giving rise to some administrative "action" that the federal courts could review pursuant to APA section 704.

How effective is such judicial review of federal agency action? On one hand, one could argue that it is better than a purely administrative remedy under which the federal agency threatens recalcitrant states with loss of federal money. Especially where the grant revenue funds a redistributive program that the state might be tempted to forego entirely, the threat to pull the grant might not be credible: Why would the federal agency hurt the very people that the federal program is trying to assist? On the other hand, judicial review of CMS's decision to settle with California places the agency squarely in the courtroom where it can defend its systematic approach to managing state-federal relations. Justice Breyer sent unsubtle signals that the Ninth Circuit should afford CMS maximum deference, citing Chevron and Brand X.

One can reasonably complain that Breyer's compromise was legally shady. As Chief Justice Roberts noted in a dissent joined by Justices Scalia, Alito, and Thomas, Justice Breyer's suggestion required a wholesale transformation of the plaintiffs' lawsuit -- not only the legal theory but the nature of the record, the defendant, and the standard of review. By contrast, the dissent "would dispel all these difficulties" by simply kicking the respondents out of court altogether.

As a matter of tight logic, it is hard to argue with Roberts' dissent. As a matter of practical federalism, however, I do not think that the majority could stomach leaving the plaintiff-respondents with no remedy whatsoever. I am not sure whether the sort of highly deferential remedy suggested by the majority will be very effective in the future: What will program beneficiaries do when the federal agency simply sits on its hands? Will such inaction constitute "action" under Heckler v. Chaney, Norton v. SUWA, 542 U.S. 55 (2004) and APA section 551(13)?

Search me. But I much more certain that the reality, as opposed to the PR, of federalism rests more on such nitty-gritty than on the high-falutin symbolism of the litigation over the individual mandate.