FISCAL WAIVERS AND STATE "INNOVATION" IN HEALTH CARE.

AuthorLawrence, Matthew B.

TABLE OF CONTENTS INTRODUCTION 1481 I. BIG WAIVER IS BIG MONEY 1487 A. Affordable Care Act Pass Through 1488 B. Medicaid Costs Not Otherwise Matchable 1492 II. AGENCY USE OF FISCAL WAIVERS TO INFLUENCE STATE 1496 POLICYMAKING A. Inspiring 1497 1. Theory 1498 a. Intersovereign Spillovers 1498 b. Fiscal Waiver Authorities as a Pigouvian 1500 Subsidy and Innovation Incentive 2. Practice 1502 B. Steering 1508 1. Theory 1508 2. Practice 1509 III. BIG MONEY INCREASES THE BENEFITS AND RISKS OF 1514 BIG WAIVER A. Theoretical Background 1515 B. Delegated Scarekeeping 1517 1. The "Tyranny of the Budget" 1518 2. Delegated Scarekeeping 1523 C. Waiver Denials as a Source of Agency 1526 IV. EXECUTIVE CONDITIONS 1530 A. An Executive Conditions Doctrine? 1530 1. Practical Difference Between Legislative and 1531 Executive Conditions 2. Legal Vulnerability Associated with 1533 Identification of Executive Conditions B. Processes that Facilitate Steering May Undermine 1541 V. THE FUTURE OF FISCAL WAIVERS IN HEALTH REFORM 1544 A. HHS Should Formalize Waiver Negotiations 1545 B. The Case for a Pioneer Pathway 1546 1. Expansion of Federal Role Would Not Alleviate 1547 Tyranny of the Budget 2. A Pathway for Pioneering Reforms Should Include 1550 More Predictability and Fiscal Flexibility for States a. Carefully Constrain Awards 1551 b. Guarantee Awards and Waive Budget Neutrality for 1554 Potentially Transformative State Requests CONCLUSION 1556 INTRODUCTION

The interaction between fiscal federalism and state innovation has received insufficient attention in prior scholarship. (1) This Article is the first to focus on a particularly important legal tool in this interaction that is reshaping both federalism and health policy today: fiscal waiver authorities in health care. Fiscal waiver authorities are statutory delegations of discretion to agencies to alter the terms of the fiscal relationship between the federal government and states from a legislative baseline. This Article describes how the Department of Health and Human Services (HHS) has used fiscal waiver authorities in Medicaid and the Affordable Care Act (ACA) to influence state health policy choices; to draw general implications for law and legal scholarship; and to develop specific prescriptions for courts, HHS, and Congress.

This Article's study of fiscal waiver authorities in health care demonstrates that an agency can use such authorities to influence which reforms states pursue in two distinct but overlapping ways: inspiring and steering. Inspiration entails an agency incentivizing state development of novel reforms, spurring the "laboratories of democracy." Steering entails an agency directing state behavior through implicit or explicit conditions on fiscal waiver approvals, just as Congress steers states when it creates legislative conditions on spending awards for states.

Fiscal waivers' use to inspire and induce state policy making in health care implicates two primary sets of issues. The first set of issues stems from the way the delegation of discretion over spending from Congress to HHS impacts how the federal government decides whether to invest in health and health care. Here fiscal waivers appear in a positive light. Scholars increasingly appreciate how scorekeeping rules in the congressional budget process have held back and warped health reform. (2) Fiscal waivers are a distinctive and valuable tool in health policy because they reduce these score-keeping barriers. They delegate the task of measuring a state reform's financial costs and benefits to the agency at the time it considers the waiver request, rather than to congressional score-keepers at the time legislation is considered, making it easier to identify and unlock federal funds for worthwhile health investments.

Delegating discretion over spending on states from Congress to HHS raises a second set of issues relating to the way HHS exercises that discretion. HHS can use its power to deny lawful waivers or sculpt payments to states through waivers, thereby shaping states' financial incentives. Such steering can be fraught. HHS can encourage states to cut benefits and eligibility by molding their incentives; the Trump administration sought to use fiscal waivers in this way.

Moreover, the agency can influence states through hidden conditions on waiver awards--that is, conditions that are not necessarily public and not necessarily written. While only one state to date has challenged the use of hidden conditions on fiscal waivers in a lawsuit it eventually dropped, the threat of future such challenges leaves current fiscal waiver practice legally vulnerable on federalism, nondelegation, and administrative law grounds.

Ultimately, this Article endorses fiscal waivers in theory for their distinctive ability to circumvent the tyranny of the budget but calls for close scrutiny of their use to influence state policy choices in practice. This means scrutiny not just of agency decisions approving states' fiscal waiver requests but also, and especially, scrutiny of agency decisions denying such requests (including conditions the agency puts on approval).

Fiscal waiver authorities are not just an abstract concept. They are already a driving force in health care. The federal government's $1.28 trillion in health care spending annually represents 36 percent of costs nationwide. (3) (This share will only grow, and the federal government would pay 100 percent of Americans' health care costs (accounting for 18 percent of GDP) under prominent "Medicare for All" proposals.) (4) The Trump administration leveraged this fact to use fiscal waiver authorities to drive its agenda, pressuring states to cut benefits and eligibility in Medicaid and the ACA with the promise of a share of the resulting federal savings. (5) Indeed, all but one "state innovation waiver" granted to states under the ACA to date has been stimulated by states' desire for increased federal funding. (6) Yet fiscal waiver authorities have been ignored in legal scholarship on the very "big waiver" provisions in which they play a load-bearing part, which has continued an unfortunate trend in legal scholarship to focus on regulatory matters to the exclusion of fiscal matters. (7)

The coronavirus pandemic has underscored the need for greater understanding of legal tools that facilitate investment in health and health care despite a (rightly or wrongly) constrained fiscal environment. It has laid bare the spillovers and fragmentation associated with overlapping federal and state responsibility in health and health care, (8) the resulting lack of investment in public health and the social determinants of health, (9) and the disparate impact of this lack of investment on people of color. (10) This Article's proposed pioneer pathway, a fiscal waiver tailored to promote transparency and avoid abuse, could begin to restore accountability while inspiring health and health care investment by breaking down fiscal barriers.

This Article proceeds in five parts. Part I introduces fiscal waiver authorities in health care. It summarizes the focus of "big waiver" scholarship on regulatory waiver authorities--which permit an agency to alter the rules set by Congress--in the ACA, Medicaid, and other intrastatutory federalism programs. (11) It then explains that the ACA and the Medicaid statute also include fiscal waiver authorities--which permit an agency to alter the payments to states from a default set by Congress--and describes the paramount role such authorities play in health reform.

Part II distinguishes two uses of fiscal waiver authorities to influence state policy choices. HHS has used fiscal waiver authorities to inspire state innovation and also to steer states to adopt federally selected reforms and abandon federally disfavored reforms. Part II explains that this use of fiscal waiver authorities under the Trump administration raises concerns from both substantive and structural perspectives. The administration used fiscal waiver authorities to inspire states to cut benefits and eligibility and also to coerce states to adopt particular agency-selected reforms that further that end rather than other reforms, such as state-based single payer, which could create federal savings by improving health or health care.

Part III discusses implications for several threads of legal scholarship. Health and fiscal law scholars have lamented that scorekeeping rules distort and depress health reform; fiscal waivers delegate scorekeeping and thereby circumvent this barrier to new investment. But this perk does not make fiscal waivers simply another argument in favor of "big waiver." The use of fiscal waivers to inspire and steer state policy raises distinctive federalism, administrative law, and substantive concerns that complicate the normative analysis developed in this literature. In particular, this use underscores the necessity of scrutinizing waiver denials and threatened denials, not just waiver approvals.

Part IV turns to the potential for legal controversy surrounding agency-imposed conditions on waiver approval. It explains that the lack of formality surrounding fiscal waiver deliberations might lead courts to scrutinize executive conditions under federalism, nondelegation, and administrative law doctrines. It then recommends HHS bring greater formality to its administration of fiscal waivers to reduce that risk.

Part V concludes on an upbeat note, addressing the possibility of new fiscal waiver authorities in future health reform legislation. It explains that an expanded federal role in health care would in some ways deepen the problem that budget rules pose for health investment, because states would retain primary responsibility for the health of their populations but have reduced financial incentive and fiscal capability to invest therein. Part V therefore derives from this Article's discussion a set of statutory constraints to frame a pioneer pathway...

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