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AG Derek Schmidt: Court sets Kansas damages in ‘Obamacare’ case at $56 million

Release Date: Jul 31, 2019

TOPEKA – (July 31, 2019) – The federal government must repay Kansas more than $56 million for illegally collecting an Obamacare fee from the state over a three-year period, a federal district court judge in Texas ruled yesterday.

In 2015, Kansas Attorney General Derek Schmidt and five other states sued the federal government, arguing that the Health Insurance Provider (HIP) Fee — one of the numerous taxes and fees imposed by the Affordable Care Act, or “Obamacare” — was being illegally collected from their state treasuries. Federal statute expressly prohibits the imposition of the HIP fee on states. But in states like Kansas that contract with private managed care organizations (MCOs) to operate their Medicaid programs, the federal government imposed the fee on the MCOs, then adopted a regulation requiring the MCOs to pass the cost of the HIP fee through to the state.

“As we’ve argued from the beginning of this case, the two-step HIP Fee scheme illegally taxes treasuries in states like Kansas to pay for federal expenditures, and the unlawfully collected amounts must be returned to the states,” Schmidt said. “We’ve thought this was illegal, and the court has agreed.”

Federal District Judge Reed O’Connor ruled in March 2018 that the regulation mandating the MCOs pass the cost of the HIP fee through to the states was illegal. In August 2018, the judge ordered the federal government to return to the states the money it had illegally collected.

Since then, the states and the federal government have been in discussions about the amount of money at issue. For Kansas, the court originally identified more than $142 million in total payments illegally collected, but a portion of that was paid by the state with federal funds. The $56,555,998 now entered in final judgment for Kansas is the net amount paid from state taxpayer funds over the three-year period for Fee Years 2014-2016. The federal government has now agreed not to challenge the amount of money to be returned to Kansas under yesterday's judgment — it will only appeal whether the payment must be made at all.

The federal government suspended collection of the fee in Fee Year 2017. Kansas filed a second lawsuit challenging collection of the fee for Fee Year 2018, and that remains pending in federal district court in Texas. That second lawsuit is likely to remain on hold while an appeal in the first suit is considered.

The federal government is appealing the judgment entered yesterday, arguing even if the fee was illegally collected it is not liable to return the illegally collected funds to the states. With the finalized judgment entered yesterday, the federal government is ordered to return the money to Kansas, but that order is stayed temporarily while the court considers whether to give the federal government time to appeal before it must pay.

“We will now shift our attention to preserving our judgment on appeal,” Schmidt said. “The federal government continues to fight our claim to recover these illegally collected funds, so Kansas cannot yet count on this money being available.”

The federal government’s appeal will be heard in the 5th U.S. Circuit Court of Appeals in New Orleans. In addition to Kansas, the states that brought this lawsuit are Texas, Indiana, Louisiana, Nebraska and Wisconsin. The finalized judgment requires the federal government to return more than $479 million to the six states that brought the lawsuit.

The case is Texas v. United States, No. 15-cv-151 (N.D. Tex.). A copy of the judgment entered yesterday may be found at http://bit.ly/2YAjBx2.

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