‘Catastrophic implications’: Inside the NC court battle over Medicaid cuts

A legal battle underway Tuesday could have far-reaching implications for North Carolinians who live or work in adult-care homes — as well as having broader political implications for a fight between the state’s Democratic governor and Republican lawmakers.

The Republican-led state legislature failed to pass a new state budget. Legislative leaders say they have no plans to attempt another budget vote for at least several more months. As a result, the state’s Medicaid program is underfunded by hundreds of millions of dollars.

To manage the shortfall, Democratic Gov. Josh Stein’s administration has begun cutting what the state’s Department of Health and Human Service reimburses health care providers — hospitals, doctors, health clinics, specialty homes and others — for treating patients on Medicaid. The federal program, which is administered by the state, insures about 3 million North Carolinians, or nearly one in every three state residents.

Many of those providers are now seeing their reimbursements cut by between 3% and 10%. In response, several groups of patients and providers have sued, arguing that DHHS isn’t authorized to cut the rates without approval from lawmakers. The administrative law judge hearing the case didn’t immediately issue a ruling after Tuesday’s hearing ended but said he expects to make a decision Tuesday or Wednesday.

So far the challengers have had at least temporary success in pausing the cuts. On Tuesday, lawyers for adult care homes are seeking a more permanent victory for the clients, to block the cuts from being put into place. The state, however, argues that a win in court for them could have a domino effect that would shut down North Carolina’s entire Medicaid program — ending coverage for all 3 million North Carolina patients — unless the legislature takes action. Legislative leaders have so far decided not to act.

The case is being heard by the Office of Administrative Hearings, a quasi-judicial organization that hears disputes involving state agencies.

Robb Leandro, who represents the adult care homes, urged Administrative Law Judge John Evans on Tuesday to rule in their favor and stop the cuts to protect providers who care for what he described as the state's most vulnerable population: “These low-income, elderly adults — many of whom would have no other place to go.”

The adult-care homes won a temporary pause to the cuts last month. Tuesday’s hearing could deliver a more permanent victory. If that happens, the state could be flooded with additional litigation from others in the health care industry.

Stein and his top DHHS officials have said they don’t want to cut the reimbursement rates but believe they have no other choice, to ensure that Medicaid remains solvent. Erin Hukka, a DHHS lawyer, reiterated that in court Tuesday.

“The department does not want to be in this situation,” Hukka said. “The department does not want to make these cuts. But, in doing so, the department did certainly follow the law.”

Medicaid is banned from spending money it doesn’t have. Without additional funding, she said, the program will run out of money by May — or possibly sooner — if it’s ordered to stop the cuts. Businesses and patients would be harmed if Medicaid had to stop providing coverage, she said.

“In addition to the catastrophic implications any injunction would have on the 3.1 million North Carolinians [on Medicaid], there are also implications that it would have on providers long term,” she said.

Could Medicaid cut off for everyone?

Leandro argued in court Tuesday that DHHS, which is overseen by Stein, has no legal authority to cut rates, since state law sets those rates. But Hukka said state law also requires DHHS to have a balanced budget, with no deficit spending — and to serve Medicaid patients.

If DHHS isn’t allowed to stretch its budget with these cuts, she said, Medicaid will become insolvent within months or possibly even just weeks, depending on who else sues and potentially wins. Insolvency could mean none of the 3 million North Carolinians on Medicaid would be able to get coverage for medical care.

This lawsuit alone wouldn’t force Medicaid to run out of money, she acknowledged. But Hukka said a win for the adult care homes in this case would likely cause every other type of medical provider to also sue, and cite this case as a reason to block all the cuts.

“Medicaid is looking at a shortfall that would make the program insolvent in spring of next year, which means none of the 3 million Medicaid beneficiaries will get service,” she said. “... It is a very slippery slope. And we have to ask ourselves: Who will be responsible for the abrupt end of Medicaid coverage come spring?”

Political fight over Medicaid

Stein has called on the state legislature to fully fund Medicaid using a standalone bill, outside the stalled budget debate. That would end the cuts immediately.

The state Senate and House of Representatives have each voted on their own standalone bills to fund Medicaid. However, the chambers have refused to pass each others’ bills, as unrelated budget disagreements continue to scuttle negotiations. GOP leaders of both chambers rejected Stein’s call for a special session to address Medicaid last month.

Democratic lawmakers showed up for the special session, but no Republicans did. In the meantime, the funding shortfall remains.

Republican state lawmakers have criticized Stein, saying the cuts were premature and politically motivated.

They believe his administration put them in place to get lobbying groups for hospitals and doctors, who spend large sums of money on state politics, to become frustrated with Republican lawmakers. Stein and his top health officials, however, say they have no guarantee that Republicans will ever put aside their disagreements to get a budget passed and that if DHHS doesn’t begin Medicaid reimbursement cuts now, the financial impact could become even worse as time goes on.

“Part of the reason why we put the rate cuts in place — and the magnitude of the rate cuts — is really to consider what happens if no additional dollars are funded,” DHHS Secretary Dev Sangvai told WRAL in a November interview.

Leandro, however, said there have been Medicaid shortfalls in each of the past five years. And in none of those years, when it former Gov. Roy Cooper’s administration was running DHHS, did the agency react by cutting what it pays providers.

“They have always, over the last five years, had a different certified budget than what the General Assembly and what the department believed it needed,” Leandro said. “In none of those years did they cut rates. … And in none of those years did Medicaid run out of money.”

Stein has said this year is different since the legislature appears so stuck on budget negotiations, with no resolution in sight. House Speaker Destin Hall signed a letter promising to fund Medicaid by May 2026, by which time DHHS expects to run out of money if the cuts are stopped in court. But Senate leader Phil Berger declined to sign the letter.

Stein says lawmakers have had many options to pass a budget, or to pass a separate law funding Medicaid, but have refused to work together to do so. He noted that GOP leaders did put their differences aside in October — the same month the Medicaid cuts went into place — to come back into session to redistrict the state’s congressional map to further favor Republican candidates — a move that a federal court recently upheld.

Their priorities, Stein said, are clearly not on ensuring programs like Medicaid are funded moving forward. “The Republican majority has made the time to damage our democracy with their gerrymander,” Stein said in a written statement. “But when it comes time to protect people’s health care? When it comes time to enact a comprehensive budget? They’re on vacation, and they’ll see us next year.”