On December 11, 2024, the Texas Health and Human Services Commission filed a lawsuit in the Western District of Texas, aiming to prevent the enforcement of a May 9, 2014 directive from the Centers for Medicare & Medicaid Services (CMS). This directive asserts that certain public-private collaborations violate Social Security Act provisions against "hold harmless" agreements. The dispute centers on how state governments finance their share of Medicaid expenses and the legality of these partnerships. According to Texas officials, CMS's enforcement lacks proper procedural compliance and has led to the disallowance of nearly $84 million in federal funding between 2014 and 2017.

The Legal Framework Governing Medicaid Funding

Medicaid operates as a cooperative federal-state healthcare initiative, with both levels of government contributing funds. State contributions are termed the "state share," while federal contributions are known as the "federal share" or "federal financial participation." The Social Security Act imposes strict guidelines on financing the state share. While intergovernmental transfers from local entities can be utilized, the federal government prohibits using such transfers if they originate from impermissible provider-related donations, especially those tied to hold harmless arrangements.

In more detail, the Social Security Act mandates stringent rules regarding state share financing. Intergovernmental transfers from local bodies are permissible but must adhere to specific criteria. CMS explicitly disallows federal matching for transfers derived from arrangements deemed impermissible under 42 C.F.R. § 433.54(c). These arrangements typically involve private hospitals agreeing to provide services that governmental hospitals would otherwise be responsible for, with governmental hospitals making intergovernmental transfers to fund Medicaid programs benefiting private institutions. Such setups are considered problematic because they essentially allow private entities to recoup donations through Medicaid payments, thereby violating hold harmless prohibitions.

Contesting CMS’s Interpretation and Enforcement

The Texas Health and Human Services Commission argues that CMS is enforcing its May 2014 directive without adhering to the Administrative Procedures Act's notice and comment rulemaking requirements. The agency contends that the public-private partnerships in question are not explicitly prohibited by the underlying regulations that the directive purports to interpret. This challenge highlights concerns over procedural fairness and the scope of CMS's regulatory authority.

According to the Texas Health and Human Services Commission, CMS's enforcement of SMDL #14-004 has resulted in the disallowance of almost $84 million in federal financial participation from 2014 to 2017. The commission maintains that these partnerships do not constitute impermissible hold harmless arrangements and should not be subject to such restrictions. They argue that CMS failed to follow proper administrative procedures, undermining the legitimacy of its actions. This legal battle underscores broader debates about the balance between federal oversight and state autonomy in managing Medicaid programs, particularly concerning innovative financing mechanisms aimed at enhancing healthcare delivery.