State of WV v. HHS ( 2002 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
STATE OF WEST VIRGINIA; DARRELL 
V. MCGRAW, JR.,
Plaintiffs-Appellants,
v.
U.S. DEPARTMENT OF HEALTH &
HUMAN SERVICES,
Defendant-Appellee,

and
No. 01-1443
DONNA E. SHALALA SECRETARY,
UNITED STATES DEPARTMENT OF
HEALTH AND HUMAN SERVICES;
NANCY-ANN MIN DEPARLE,
Administrator, Health Care
Financing Administration,
Defendants.
ROBERT A. BAILEY,
Amicus Curiae.

Appeal from the United States District Court
for the Southern District of West Virginia, at Charleston.
Joseph Robert Goodwin, District Judge.
(CA-98-1150-2)
Argued: October 31, 2001
Decided: May 7, 2002
Before WILLIAMS and TRAXLER, Circuit Judges, and
Malcolm J. HOWARD, United States District Judge for the
Eastern District of North Carolina, sitting by designation.
2 STATE OF WEST VIRGINIA v. U.S. DEPT. HHS
Affirmed by published opinion. Judge Traxler wrote the opinion, in
which Judge Williams and Judge Howard joined.
COUNSEL
ARGUED: Silas Bent Taylor, Senior Deputy Attorney General,
WEST VIRGINIA ATTORNEY GENERAL’S OFFICE, Charleston,
West Virginia, for Appellants. Mark Bernard Stern, Appellate Staff,
Civil Division, UNITED STATES DEPARTMENT OF JUSTICE,
Washington, D.C., for Appellee. ON BRIEF: Stuart E. Schiffer, Act-
ing Assistant Attorney General, Charles T. Miller, United States
Attorney, Michael S. Raab, Vesper Mei, Appellate Staff, Civil Divi-
sion, UNITED STATES DEPARTMENT OF JUSTICE, Washington,
D.C., for Appellee. Michael A. Bailey, Clarksburg, West Virginia,
Amicus Curiae.
OPINION
TRAXLER, Circuit Judge:
The State of West Virginia brought this action against the United
States Department of Health and Human Services and its Secretary
(together, "HHS") challenging, on Tenth Amendment grounds,1 the
constitutionality of amendments to the federal Medicaid program that
require West Virginia to adopt a program to recover certain Medicaid
expenditures from the estates of deceased Medicaid beneficiaries. The
district court granted summary judgment in favor of HHS, see West
Virginia v. United States Dep’t of Health & Human Servs., 132 F.
Supp. 2d 437 (S.D.W. Va. 2001), and West Virginia appeals. We
affirm.
1
The Tenth Amendment provides that "[t]he powers not delegated to
the United States by the Constitution, nor prohibited by it to the States,
are reserved to the States respectively, or to the people." U.S. Const.
amend. X.
STATE OF WEST VIRGINIA v. U.S. DEPT. HHS 3
I.
A.
The Medicaid program, 42 U.S.C.A. §§ 1396, 1396a-v (West 1992
and Supp. 2001), established as part of the Social Security Act in
1965, "is a cooperative federal-state public assistance program that
makes federal funds available to states electing to furnish medical ser-
vices to certain impoverished individuals." Mowbray v. Kozlowski,
914 F.2d 593, 595 (4th Cir. 1990); see also Harris v. McRae, 448
U.S. 297, 301 (1980). If a state elects to participate in the Medicaid
program, it must submit a Medicaid plan to HHS for approval. If the
plan is approved by HHS, the state is then entitled to reimbursement
from the federal government of a certain percentage of the costs of
providing medical care to eligible individuals—the "Federal medical
assistance percentage" ("FMAP").2 42 U.S.C.A. § 1396b(a)(1) (West
Supp. 2001); see generally Atkins v. Rivera, 477 U.S. 154, 156-57
(1986). If a state fails to comply with the requirements imposed by
the Medicaid Act or by HHS, the state risks the loss of all or a part
of its FMAP. See 42 U.S.C.A. § 1396c (West 1992); Bowen v.
Massachusetts, 487 U.S. 879, 885 (1988). West Virginia currently
receives more than $1 billion in Medicaid funds from the federal gov-
ernment each year.
When determining whether an individual is eligible for Medicaid
benefits, the value of the individual’s home is usually excluded.3 As
2
Each state’s FMAP is determined by a statutory formula that estab-
lishes a reimbursement rate of between 50% and 83% and gives higher
reimbursement rates to states with lower per-capita incomes. See 42
U.S.C.A. §§ 1396b(a)(1), 1396d(b) (West Supp. 2001). For fiscal year
2002, West Virginia’s FMAP is approximately 75%; only Mississippi’s
FMAP is higher. See Federal Financial Participation in State Assistance
Expenditures, 65 Fed. Reg. 69560, 69561 (Nov. 17, 2000).
3
The Supplemental Security Income ("SSI") program generally
excludes an individual’s principal residence when calculating SSI eligi-
bility. See 42 U.S.C.A. § 1382b(a)(1) (West Supp. 2001). The Medicaid
Act incorporates this exclusion. See 42 U.S.C.A. §§ 1396a(a)(10)(A)
(i)(II) (West Supp. 2001); 1396a(a)(10)(A)(ii)(V) (West Supp. 2001);
1396a(a)(10)(C)(i)(III) (West Supp. 2001).
4 STATE OF WEST VIRGINIA v. U.S. DEPT. HHS
the district court explained, the effect of this exclusion is to allow
"someone with a potentially valuable asset to receive benefits along
with those who have greater financial need. Congress addressed this
anomaly through estate recovery." West Virginia, 132 F. Supp. 2d at
440 (footnote omitted).
Before 1993, the Medicaid Act permitted states, under certain cir-
cumstances, to recover medical costs paid by Medicaid from the ben-
eficiary’s estate. In 1993, however, in the face of rapidly escalating
medical-care costs, Congress amended the act to require states to
recover certain Medicaid costs from the estates of certain deceased
beneficiaries. See Omnibus Budget Reconciliation Act of 1993, Pub.
L. No. 103-66, § 13612, 107 Stat. 312, 627-28 (codified at 42
U.S.C.A. § 1396p(b)(1) (West Supp. 2001)). In West Virginia, poten-
tial beneficiaries are required to "spend down" their income and assets
before they become eligible for benefits. Thus, the home (exempted
from eligibility requirements) typically is the only significant asset
subject to the estate recovery provisions.
In general terms, the estate recovery provisions apply only to indi-
viduals who are permanently institutionalized or who began receiving
nursing-home or other long-term care services after age 55. See 42
U.S.C.A. § 1396p(b)(1) (West Supp. 2001). The provisions do not
take effect while there is a surviving spouse or dependent child of the
beneficiary, see 42 U.S.C.A. § 1396p(b)(2) (West Supp. 2001), and
may be waived in cases where they "would work an undue hardship,"
see 42 U.S.C.A. § 1396p(b)(3) (West Supp. 2001). Potential Medicaid
beneficiaries are informed of the estate recovery provisions before
they elect to accept Medicaid benefits. See J.A. 298-99.
From the funds collected from the estates, the federal government
is credited with a percentage equal to the state’s FMAP, and the state
retains the balance. When the mandatory estate recovery provisions
were enacted, Congress expected that the federal government would
realize savings of $300 million over five years. The federal govern-
ment has in fact realized even greater savings—more than $100 mil-
lion in 1999 alone. See J.A. 53; Brief of Appellee at 7-8.
Sixteen thousand West Virginians receive Medicaid services that
subject them to the mandatory estate recovery program. The annual
STATE OF WEST VIRGINIA v. U.S. DEPT. HHS 5
cost of providing these services is approximately $425 million, of
which approximately $320 million is paid by the federal government.
See Brief of Appellant at 17. The average estate recovery claim in
West Virginia is approximately $50,000.00, but the amount actually
recovered averages only $14,000. In West Virginia, the estate recov-
ery program yields gross proceeds of approximately $2.5 million
annually, approximately 75% of which must be credited to the federal
government. See Brief of Appellant at 12-13, n.8. The annual amount
recovered in West Virginia through the estate recovery program is
thus approximately two-tenths of one-percent of the more than $1 bil-
lion in Medicaid funds received by the state each year.
B.
Simply put, the State of West Virginia believes that the estate
recovery program is bad public policy that yields little in terms of dol-
lars actually recovered but creates substantial non-financial problems,
such as "widespread clinical depression in aged and disabled nursing
home residents." Brief of Appellant at 11. The program generally
affects the poorest segment of the elderly population, those who can-
not afford to buy long-term care insurance and those who cannot
afford or do not appreciate the need for the legal advice necessary to
engage in the various forms of estate-planning that can protect certain
assets while retaining Medicaid eligibility. During oral argument,
West Virginia described the program as a "betrayal of the New Deal,"
in that the federal government promised it would take care of its citi-
zens, yet never suggested that the elderly and destitute would later be
required to forfeit the homes for which they had worked so diligently.
West Virginia officials thus initially resisted implementing the
estate recovery program, and no legislation was passed in the 1994
legislative session, as required by the 1993 Medicaid amendments.
See Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103-66,
§ 13612(d), 107 Stat. 312, 628-29. Thereafter, HHS notified West
Virginia that it would initiate "compliance proceedings" against the
state that "could result in West Virginia losing all or part of its Fed-
eral financial participation in the State’s Medicaid Program." J.A.
155.
The HHS warning had its desired effect, and the West Virginia leg-
islature during the next legislative session authorized an estate recov-
6 STATE OF WEST VIRGINIA v. U.S. DEPT. HHS
ery program. See W. Va. Code § 9-5-11c. West Virginia’s opinion
about the estate recovery program, however, did not change, and the
legislation authorizing the program also directed West Virginia’s
attorney general to "commence an action in a court of competent
jurisdiction to test the validity, constitutionality, and the ability of the
Congress of the United States to mandate the implementation" of the
estate recovery program. W. Va. Code § 9-5-11c(g). Complying with
that statutory directive, West Virginia’s attorney general brought this
action.
II.
As a general rule, Congress may use its broad powers under the
Spending Clause to induce the states to behave in a certain way, by
offering federal funds to states that agree to certain congressionally
imposed conditions. See New York v. United States, 505 U.S. 144,
168 (1992) (explaining that attaching conditions to funds disbursed
under the Spending Clause is a "permissible method of encouraging
a State to conform to federal policy choices"); Maryland Psychiatric
Soc’y, Inc. v. Wasserman, 102 F.3d 717, 719-20 (4th Cir. 1996) ("By
virtue of its spending power, Congress is permitted to condition
receipt of federal funds upon certain state actions."). As the Supreme
Court has explained, this use of the spending powers respects the
autonomy of the states and the limited authority conferred on the fed-
eral government by the Constitution:
[T]he residents of the State retain the ultimate decision as to
whether or not the State will comply [with the conditions
imposed on the receipt of federal funds]. If a State’s citizens
view federal policy as sufficiently contrary to local interests,
they may elect to decline a federal grant. If state residents
would prefer their government to devote its attention and
resources to problems other than those deemed important by
Congress, they may choose to have the Federal Government
rather than the State bear the expense of a federally man-
dated regulatory program, and they may continue to supple-
ment that program to the extent state law is not pre-empted.
Where Congress encourages state regulation rather than
compelling it, state governments remain responsive to the
STATE OF WEST VIRGINIA v. U.S. DEPT. HHS 7
local electorate’s preferences; state officials remain account-
able to the people.
New York, 505 U.S. at 168.
There are, of course, certain limits to the federal government’s
spending powers. "Federal expenditures must (1) benefit the general
welfare, and the conditions imposed on their receipt must be (2)
unambiguous, (3) reasonably related to the purpose of the expendi-
ture, and (4) cannot violate any independent constitutional prohibi-
tion." James Island Pub. Serv. Dist. v. City of Charleston, 249 F.3d
323, 326 (4th Cir. 2001) (internal quotation marks omitted); see New
York, 505 U.S. at 171-72. In addition, the Supreme Court has cau-
tioned that "in some circumstances the financial inducement [to com-
ply with a condition imposed upon the receipt of federal funds]
offered by Congress might be so coercive as to pass the point at
which pressure turns into compulsion." South Dakota v. Dole, 483
U.S. 203, 211 (1987) (internal quotation marks omitted). Thus, while
Congress may use its spending powers to encourage the states to act,
it may not coerce the states into action. If the Congressional action
amounts to coercion rather than encouragement, then that action is not
a proper exercise of the spending powers but is instead a violation of
the Tenth Amendment. See New York, 505 U.S. at 156 ("If a power
is delegated to Congress in the Constitution, the Tenth Amendment
expressly disclaims any reservation of that power to the States....");
Gregory v. Ashcroft, 501 U.S. 452, 460 (1991) ("As long as it is act-
ing within the powers granted it under the Constitution, Congress may
impose its will on the States."); Gillespie v. City of Indianapolis, 185
F.3d 693, 704 (7th Cir. 1999) ("Whether Congress has invaded the
province reserved to the States by the Tenth Amendment is . . . a
question that must be answered by inquiring whether Congress has
exceeded the limits of authority bestowed upon it by Article I of the
Constitution.").
West Virginia does not contend that the estate recovery provisions
fail to satisfy the general spending clause requirements set forth
above. Instead, West Virginia argues only that the estate recovery
provisions are unduly coercive and therefore violate the Tenth
Amendment. Its argument in this regard is fairly straightforward.
8 STATE OF WEST VIRGINIA v. U.S. DEPT. HHS
West Virginia willingly agreed to participate in the Medicaid pro-
gram in 1965, when the program was established. At that time, states
were not required to recover expenses from the estates of deceased
beneficiaries. To meet the requirements of the Medicaid program,
West Virginia was required to expand and improve its medical infra-
structure. The state funded these improvements through the issuance
of long-term development bonds to be paid primarily through antici-
pated Medicaid reimbursements. Almost thirty years later, however,
Congress changed the rules of the game and required the states to
implement an estate recovery plan, a policy with which West Virginia
strongly disagrees.4 Given its poverty rate and high percentage of
elderly residents, West Virginia is unusually dependent on federal
Medicaid dollars—nationally, approximately 15% of the population is
covered by Medicaid, but 20% of West Virginians are covered. See
Brief of Appellant at 14. West Virginia contends that because the fed-
eral government has "co-opted the tax-base," Brief of Appellant at 13,
West Virginia cannot realistically replace lost Medicaid funds by
increasing taxes on its citizens.5 According to West Virginia, if fed-
eral Medicaid funds were withdrawn, West Virginia’s health care sys-
tem would effectively collapse. Thus, faced with the federal
government’s threat to withdraw Medicaid funding, West Virginia
argues it had no choice but to comply by implementing an estate
recovery program. West Virginia therefore argues that the federal
government’s requirement that it adopt an estate recovery program
violates the Tenth Amendment.
The district court suggested that the estate recovery provisions
4
West Virginia so strongly opposes the estate recovery program that it
asserts that "had West Virginia . . . been told that its failure to implement
Estate Recovery would require it to replace with state funds the minus-
cule federal revenues thereby lost, it would gladly have done so to pro-
tect its aged and disabled citizens from the ‘harsh consequences’ of
Estate Recovery." Brief of Appellant at 26.
5
The federal government’s tax receipts now amount to approximately
20% of the country’s gross domestic product, more than double the level
of 1940. See J.A. 255. West Virginia thus argues that "Congress ha[s]
consumed a disproportionate share of the available tax base," Reply Brief
of Appellant at 4, which, particularly in light of West Virginia’s high
poverty rate, effectively prevents West Virginia from raising state taxes.
STATE OF WEST VIRGINIA v. U.S. DEPT. HHS 9
might be coercive, see West Virginia, 132 F. Supp. 2d at 442, but the
court nonetheless rejected West Virginia’s Tenth Amendment argu-
ment, stating that "[t]he Supreme Court [has] admonished courts to
avoid becoming entangled in ascertaining the point at which federal
inducement to comply with a condition becomes compulsion." Id. at
444 (internal quotation marks omitted). On appeal, West Virginia
contends that the district court effectively concluded that a Tenth
Amendment claim based on the coercion theory is not viable, even
though six judges of this court indicated their acceptance of the theory
in Virginia Department of Education v. Riley, 106 F.3d 559, 569-72
(4th Cir. 1997) (en banc) (opinion of Luttig, J., in which Wilkinson,
C.J., and Russell, Widener, Wilkins, and Williams, JJ., joined). We
agree with West Virginia that, while the district court’s treatment of
the coercion theory finds support in cases from other circuits, it is
inconsistent with the views expressed by six judges in Riley. Nonethe-
less, as we explain later, we conclude that the district court properly
granted summary judgment to HHS.
Other circuits have expressed strong doubts about the viability of
the coercion theory. See Kansas v. United States, 214 F.3d 1196, 1202
(10th Cir. 2000) ("[T]he coercion theory is unclear, suspect, and has
little precedent to support its application."); California v. United
States, 104 F.3d 1086, 1092 (9th Cir. 1997) ("[T]o the extent that
there is any viability left in the coercion theory, it is not reflected in
the facts of this record."); Nevada v. Skinner, 884 F.2d 445, 448 (9th
Cir. 1989) ("The difficulty if not the impropriety of making judicial
judgments regarding a state’s financial capabilities renders the coer-
cion theory highly suspect as a method for resolving disputes between
federal and state governments."); Oklahoma v. Schweiker, 655 F.2d
401, 414 (D.C. Cir. 1981) ("The courts are not suited to evaluating
whether the states are faced here with an offer they cannot refuse or
merely with a hard choice. . . . We therefore follow the lead of other
courts that have explicitly declined to enter this thicket when similar
funding conditions have been at issue.").
We acknowledge that the coercion theory is somewhat amorphous
and cannot easily be reduced to a neat set of black-letter rules of
application. The Supreme Court recognized as much in Charles C.
Steward Machine Co. v. Davis, 301 U.S. 548 (1937). In Steward
Machine, the Court upheld the constitutionality of Title IX of the
10 STATE OF WEST VIRGINIA v. U.S. DEPT. HHS
Social Security Act, concluding, inter alia, that the act "is not void
as involving the coercion of the States in contravention of the Tenth
Amendment or of restrictions implicit in our federal form of govern-
ment." Id. at 585. While accepting the possibility that the economic
pressure inherent in a conditional funding offer might pass "the point
at which pressure turns into compulsion," id. at 590, the Court also
made the following observations:
The difficulty with the petitioner’s contention is that it con-
fuses motive with coercion. Every tax is in some measure
regulatory. To some extent it interposes an economic imped-
iment to the activity taxed as compared with others not
taxed. In like manner every rebate from a tax when condi-
tioned upon conduct is in some measure a temptation. But
to hold that motive or temptation is equivalent to coercion
is to plunge the law in endless difficulties. The outcome of
such a doctrine is the acceptance of a philosophical deter-
minism by which choice becomes impossible. Till now the
law has been guided by a robust common sense which
assumes the freedom of the will as a working hypothesis in
the solution of its problems. The wisdom of the hypothesis
has illustration in this case. Nothing in the case suggests the
exertion of a power akin to undue influence, if we assume
that such a concept can ever be applied with fitness to the
relations between state and nation. Even on that assumption
the location of the point at which pressure turns into com-
pulsion, and ceases to be inducement, would be a question
of degree, — at times, perhaps, of fact.
Id. at 589-90 (internal quotation marks and citation omitted). These
observations clearly highlight the difficulties associated with the
application of the coercion theory.
In addition, the Supreme Court since 1937 has not struck down a
Congressional exercise of its spending powers,6 and we are aware of
6
In United States v. Butler, 297 U.S. 1 (1936), the Court struck down
the Agricultural Adjustment Act of 1933, a New Deal-era subsidy pro-
gram that offered payments to farmers who agreed to reduce their pro-
STATE OF WEST VIRGINIA v. U.S. DEPT. HHS 11
no decision from any court finding a conditional grant to be imper-
missibly coercive. Although the Supreme Court has more than once
referred to the existence of the coercion theory, see Dole, 483 U.S.
at 211; College Sav. Bank v. Florida Prepaid Postsecondary Educ.
Expense Bd., 527 U.S. 666, 687 (1999); Steward Machine Co., 301
U.S. at 590, its cases have provided little guidance for determining
when the line between encouragement and coercion is crossed.
For example, the Court in Dole upheld a requirement that the states
raise their minimum drinking age to 21 or lose five percent of their
federal highways funds. See Dole, 483 U.S. at 211. The Court stated
that a financial inducement could amount to coercion, but merely con-
cluded that the drinking-age statute was not coercive, without sug-
gesting under what circumstances coercion might be found:
When we consider, for a moment, that all South Dakota
would lose if she adheres to her chosen course as to a suit-
able minimum drinking age is 5% of the funds otherwise
obtainable under specified highway grant programs, the
argument as to coercion is shown to be more rhetoric than
fact. . . .
Here, Congress has offered relatively mild encourage-
ment to the States to enact higher minimum drinking ages
than they would otherwise choose. But the enactment of
such laws remains the prerogative of the States not merely
in theory but in fact.
duction. The Supreme Court concluded that the act violated the Tenth
Amendment because it regulated "agricultural production, a matter
beyond the powers delegated to the federal government." Id. at 68. The
court rejected the government’s argument that the voluntary nature of the
Act eliminated any Tenth Amendment concern, concluding that "[t]he
regulation is not in fact voluntary. The farmer, of course, may refuse to
comply, but the price of such refusal is the loss of benefits. . . . The
power to confer or withhold unlimited benefits is the power to coerce or
destroy. . . . This is coercion by economic pressure. The asserted power
of choice is illusory." Id. at 70-71 (footnote omitted).
12 STATE OF WEST VIRGINIA v. U.S. DEPT. HHS
Id. at 211-12. And the Dole Court also repeated the observations
made in Steward Machine about the "endless difficulties" associated
with determining whether a state has been coerced. See id. at 211.
These oft-mentioned "endless difficulties" in applying the coercion
theory have led some courts to conclude, in essence, that the theory
raises political questions that cannot be resolved by the courts. For
example, the Ninth Circuit stated that
[t]he difficulty if not the impropriety of making judicial
judgments regarding a state’s financial capabilities renders
the coercion theory highly suspect as a method for resolving
disputes between federal and state governments.
. . . The purpose of the coercion test is to protect state
sovereignty from federal incursions. If this sovereignty is
adequately protected by the national political process, we do
not see any reason for asking the judiciary to settle questions
of policy and politics that range beyond its normal expertise.
Skinner, 884 F.2d at 448 (footnote omitted). Thus, most courts faced
with the question have effectively abandoned any real effort to apply
the coercion theory. See Kansas, 214 F.3d at 1202 (rejecting the argu-
ment that a condition attached to receipt of "Temporary Aid to Needy
Families" grant was impermissibly coercive); Texas v. United States,
106 F.3d 661, 666 (5th Cir. 1997) (rejecting with little analysis the
argument that federal law requiring states accepting Medicaid funds
to provide medical services to illegal aliens violates the Tenth
Amendment); California, 104 F.3d at 1092 (rejecting California’s
claim that its agreement to provide emergency medical services to
illegal aliens in order to continue receiving Medicaid funds was
coerced because it had "no choice but to remain in the program in
order to prevent a collapse of its medical system"); Schweiker, 655
F.2d at 414 ("The courts are not suited to evaluating whether the
states are faced here with an offer they cannot refuse or merely a hard
choice.").
In this circuit, however, the coercion theory is not viewed with
such suspicion, but instead has been endorsed by a substantial number
of the judges on this court, as evidenced by our en banc decision in
STATE OF WEST VIRGINIA v. U.S. DEPT. HHS 13
Virginia Department of Education v. Riley, 106 F.3d 559 (4th Cir.
1997). Riley involved the Commonwealth of Virginia’s challenge to
the United States Department of Education’s decision to withhold for
one year all the funds Virginia was entitled to receive under the Indi-
viduals with Disabilities Education Act ("IDEA"), 20 U.S.C.A.
§§ 1411-20 (West Supp. 2001). The department withheld the funds
because it believed that Virginia had violated the IDEA by failing to
provide educational services to disabled students who had been sus-
pended or expelled for disruptive conduct unrelated to their disabili-
ties. A majority of the en banc court concluded that the funds could
not be withheld because the IDEA did not clearly and unambiguously
impose such a condition. See id. at 561; see also Dole, 483 U.S. at
207 ("[I]f Congress desires to condition the States’ receipt of federal
funds, it must do so unambiguously. . . ." (internal quotations marks
omitted)). What is most important to this case, however, is the Tenth
Amendment concerns raised by six members of the court.
Because of the majority’s interpretation of the IDEA, it was not
necessary for the court to consider Virginia’s Tenth-Amendment chal-
lenge to the department’s decision to withhold the federal funds. Six
of the thirteen judges of the en banc Riley court, however, believed
that if the IDEA were interpreted to require Virginia to provide edu-
cational services to the expelled and suspended students, "substantial"
Tenth Amendment questions would be raised. See Riley, 106 F.3d at
569 (opinion of Luttig, J., in which Wilkinson, C.J., and Russell,
Widener, Wilkins, and Williams, JJ., joined). Writing for these
judges, Judge Luttig noted that Virginia had approximately 128,000
handicapped students, of whom only 126 had been expelled or sus-
pended. Thus, while the Department of Education challenged Virgin-
ia’s treatment of only one-tenth of one percent of its handicapped
students, the department withheld the entirety of its annual $60 mil-
lion special education grant, "a condition considerably more perni-
cious than the ‘relatively mild encouragement’ at issue in Dole." Id.Judge Luttig elaborated:
[I]f the Court meant what it said in Dole, then I would think
that a Tenth Amendment claim of the highest order lies
where, as here, the Federal Government . . . withholds the
entirety of a substantial federal grant on the ground that the
States refuse to fulfill their federal obligation in some insub-
14 STATE OF WEST VIRGINIA v. U.S. DEPT. HHS
stantial respect rather than submit to the policy dictates of
Washington in a matter peculiarly within their powers as
sovereign States. In such a circumstance, the argument as to
coercion is much more than rhetoric; it is an argument of
fact. It is, as well, an argument that the Federal Government
has, in an act more akin to forbidden regulation than to per-
missible condition, supplanted with its own policy prefer-
ences the considered judgments of the States as to how best
to instill in their youth the sense of personal responsibility
and related values essential for them to function in a free
and civilized society. As such, it is an argument well-
grounded in the Tenth Amendment’s reservation "to the
States respectively, or to the people" of those "powers not
delegated to the United States by the Constitution, nor pro-
hibited by it to the States."
Id. at 570 (citation omitted).
This analysis, of course, cannot be viewed as the holding of the
court in Riley given that Judge Luttig’s Tenth Amendment analysis
was not necessary to the disposition of the case, see id. at 569, and
the analysis represented the views of only six judges. Nonetheless, we
believe that Riley strongly indicates that the coercion theory remains
viable in this circuit, and that federal statutes that threaten the loss of
an entire block of federal funds upon a relatively minor failing by a
state are constitutionally suspect. But we need not so hold, because
even under the standards set forth in Judge Luttig’s opinion in Riley,
we conclude, as we explain below, that West Virginia’s Tenth
Amendment challenge must fail.
III.
A.
West Virginia’s Tenth Amendment argument centers on its asser-
tion that the federal government would withhold all of West Virgin-
ia’s federal Medicaid funds unless West Virginia implemented an
estate recovery program. Given that the federal government provides
West Virginia with more than $1 billion in Medicaid funds each year
but recovers less than $2 million each year from the estate recovery
STATE OF WEST VIRGINIA v. U.S. DEPT. HHS 15
program, West Virginia argues that the threatened penalty is so dis-
proportionate to the effect of West Virginia’s breach that it must be
viewed as coercive.
If the government in fact withheld the entirety of West Virginia’s
FMAP because of the state’s failure to implement an estate recovery
program, then serious Tenth Amendment questions would be raised.
Cf. Riley, 106 F.3d at 570 (opinion of Luttig, J.) ("I would think that
a Tenth Amendment claim of the highest order lies where, as here, the
Federal Government . . . withholds the entirety of a substantial federal
grant on the ground that the States refuse to fulfill their federal obliga-
tion in some insubstantial respect."). In reality, however, the govern-
ment threatened to withhold "all or part of [West Virginia’s] Federal
financial participation in the State’s Medicaid Program." J.A. 155
(emphasis added). This small difference in language makes all the dif-
ference in our analysis.
Once West Virginia failed to enact an estate recovery program
within the time frame established by Congress, its Medicaid plan was
no longer in compliance with the Medicaid Act. When the Secretary
of HHS determines that a state plan or its administration fails to com-
ply with the Act,
the Secretary shall notify [the] State agency that further pay-
ments will not be made to the State (or, in his discretion,
that payments will be limited to categories under or parts of
the State plan not affected by such failure), until the Secre-
tary is satisfied that there will no longer be any such failure
to comply.
42 U.S.C.A. § 1396c (West 1992) (emphasis added). The notice sent
by HHS to West Virginia—that West Virginia stood to lose all or part
of its Medicaid funds if it did not comply with the estate recovery
provisions—thus stated the universe of possibilities established by
Congress for cases involving non-compliant state plans.
Clearly then, the circumstances of this case are substantially differ-
ent from those in Riley. Here, the federal government did not with-
hold (or threaten to withhold) the entirety of a substantial federal
grant because of an insubstantial failing by the state. Instead, the fed-
16 STATE OF WEST VIRGINIA v. U.S. DEPT. HHS
eral government simply informed West Virginia, in language tracking
that of the Medicaid Act, of the potential consequences that would
flow from the failure to enact an estate recovery program. West Vir-
ginia thereafter complied with the estate recovery provisions. Thus,
the question we must answer is not whether the federal government
could withhold all of West Virginia’s Medicaid funds had West Vir-
ginia not implemented an estate recovery program. That question is,
at this point, a hypothetical one that is not properly before us. Instead,
the question we face is whether Congress’ requirement that states par-
ticipating in the Medicaid program implement the estate recovery pro-
visions or lose all or part of their FMAP is impermissibly coercive
and thus violates the Tenth Amendment. As to that question, we are
constrained to answer it in the negative.
West Virginia is in effect mounting a facial challenge to the consti-
tutionality of the estate recovery provisions. West Virginia, therefore,
has a very heavy burden to carry, and must show that the estate recov-
ery provisions cannot operate constitutionally under any circum-
stance. See United States v. Salerno, 481 U.S. 739, 745 (1987) ("A
facial challenge to a legislative Act is, of course, the most difficult
challenge to mount successfully, since the challenger must establish
that no set of circumstances exists under which the Act would be
valid."); Schweiker, 655 F.2d at 406 (stating that "one who contests
congressional exercises of the spending power must show that by no
reasonable possibility can the challenged legislation fall within the
wide range of discretion permitted to the Congress" (internal quota-
tion marks omitted)).
As noted above, the Medicaid Act gives the Secretary the ability
to impose upon a non-compliant state a penalty less drastic than the
withholding of the state’s entire FMAP; the Secretary may instead
withhold funds only from the categories that are affected by the fail-
ure. See 42 U.S.C.A. § 1396c. This discretion allows the Secretary to
impose a penalty that is proportionate to the breach, which we believe
saves the estate recovery provisions from West Virginia’s Tenth
Amendment challenge. While it is certainly possible that, in a given
case, the sanction actually imposed by the Secretary might not be pro-
portionate to the breach and might be constitutionally suspect, the
mere possibility of a constitutional violation is insufficient to sustain
a facial challenge to a statute. See Salerno, 481 U.S. at 745 ("The fact
STATE OF WEST VIRGINIA v. U.S. DEPT. HHS 17
that the . . . Act might operate unconstitutionally under some conceiv-
able set of circumstances is insufficient to render it wholly invalid,
since we have not recognized an ‘overbreadth’ doctrine outside the
limited context of the First Amendment." (emphasis added)).
West Virginia, however, insists that the only lesser sanction per-
mitted by the language of section 1396c is the withholding of FMAP
funds for the long-term care services that subject a beneficiary to the
mandatory estate recovery provisions, which in West Virginia would
amount to approximately $300 million, almost one-third of the Med-
icaid funds West Virginia receives. West Virginia suggests that even
this more limited sanction would be unconstitutional, given the mea-
ger funds collected through the estate recovery program and the dev-
astating effect the loss of $300 million would have on West Virginia’s
health care system.7
We need not decide whether the withholding of all federal funds
for West Virginia’s long-term services would pass constitutional mus-
ter, because we cannot agree with West Virginia’s cramped view of
the Secretary’s discretion to fashion appropriate penalties. If a state
plan is non-compliant, section 1396c gives the Secretary the discre-
tion to limit federal payments "to categories under or parts of the
State plan not affected by [the] failure." While the Secretary might
conclude that the long-term care services are the parts of the plan
affected by a state’s failure to implement an estate recovery program,
it is entirely possible that the Secretary could properly view such a
failure as affecting other aspects of the state’s Medicaid plan. See
Schweiker v. Gray Panthers, 453 U.S. 34, 43 (1981) (noting that Con-
7
As the former director of West Virginia’s Department of Health and
Human Resources explained, "[b]y virtue of its high incidence of dis-
abling disease [particularly lung cancer, black-lung disease, and other
respiratory diseases] and senior citizens, West Virginia has a far greater
need for long-term care services . . . than most, if not all, other states."
J.A. 144. "[T]he entire infrastructure for providing long-term care in
West Virginia is utterly dependent the Medicaid program," J.A. 144,
such that "without federal Medicaid funding, long-term care services in
West Virginia would instantly collapse throughout the State. No other
aspect of the Medicaid program [is] more sensitive or vulnerable to fed-
eral Medicaid requirements." J.A. 145.
18 STATE OF WEST VIRGINIA v. U.S. DEPT. HHS
gress granted the Secretary "exceptionally broad authority" under the
Medicaid statute); see also Rust v. Sullivan, 500 U.S. 173, 184 (1991)
(explaining that "substantial deference is accorded to the interpreta-
tion of the authorizing statute by the agency authorized with adminis-
tering it"). For example, David McNally, the deputy director of the
office in charge of Medicaid financial management, stated that if a
state failed to comply with the estate recovery provisions, it might be
possible to withhold the federal government’s administrative match-
ing funds,8 "on the basis the state is not properly administering the
program." J.A. 290-91. Such a limited sanction could be sufficiently
proportionate to the breach as to avoid any Tenth Amendment con-
cerns. We therefore reject West Virginia’s argument that the statute
can only operate in an unconstitutional manner.
To the extent that West Virginia contends its actions were coerced
by the mere possibility that it could lose all of its federal funds, that
argument is unavailing. West Virginia suggests that had Congress
imposed a more narrowly tailored penalty for failure to comply with
the estate recovery provision,9 then the program might not have been
coercive. That is, had the states known up-front the precise cost of
refusing to comply with the estate recovery provisions, the states
could then have intelligently weighed their public policy judgments
against the costs of not complying with the program in order to decide
whether to implement an estate recovery program. The essence of this
argument is that a federal conditional grant is per se unconstitutional
unless the governing statute anticipates every way in which the condi-
tions could possibly be violated and creates enforcement mechanisms
that directly and as narrowly as possible target each potential viola-
8
In addition to the FMAP, and subject to certain exceptions, the federal
government reimburses the states for 50% of the costs that are "found
necessary by the Secretary for the proper and efficient administration of
the State plan." 42 U.S.C.A. § 1396b(a)(7) (West Supp. 2001).
9
For example, West Virginia notes that in cases involving the overpay-
ment of federal Medicaid funds (which results when states misspend fed-
eral funds—for example, on services not authorized by Medicaid), the
Secretary may simply "disallow" the portion of the funds misspent. See
42 U.S.C.A. § 1316(d) (West Supp. 2001); 42 U.S.C.A. § 1396b(d)(5)
(West Supp. 2001). The remedy for overpayment in such a case is thus
"exactly proportionate to the breach." Brief of Appellant at 34.
STATE OF WEST VIRGINIA v. U.S. DEPT. HHS 19
tion. While such a statute almost certainly would not be found to be
unduly coercive, the Medicaid Act is not coercive simply because it
fails to reach this idealized standard of specificity.
The Medicaid Act is an "enormously complicated program[ ]. The
system is a web; a tug at one strand pulls on every other." Stephenson
v. Shalala, 87 F.3d 350, 356 (9th Cir. 1996). Given this complexity,
there are untold ways in which a state plan might fail to comply with
the Act and the governing regulations. To require the Act to create
narrowly tailored enforcement mechanisms directed at each of the
specific ways in which a plan might fail to comply would further
complicate an already too complex statute. See Gray Panthers, 453
U.S. at 43 (noting that "[t]he Social Security Act is among the most
intricate ever drafted by Congress. Its Byzantine construction . . .
makes the Act almost unintelligible to the uninitiated" (internal quota-
tion marks omitted)); Friedman v. Berger, 547 F.2d 724, 727, n.7 (2d
Cir. 1976) (lamenting the complexity of the Medicaid Act and its reg-
ulations and stating that "[t]here should be no such form of reference
as ‘45 C.F.R. § 248.3(c)(1)(ii)(B)(2)’ . . .; a draftsman who has gotten
himself into a position requiring anything like this should make a
fresh start"). Through section 1396c, Congress dealt with the myriad
forms of non-compliance in an entirely reasonable manner, by setting
forth in broad terms the consequences for failure to comply and
explicitly granting the Secretary the discretion to determine the appro-
priate sanction in any given case. While Congress could have
included a more limited sanction narrowly directed to failures to
implement an estate recovery program, we cannot conclude that its
failure to do so renders the estate recovery provisions per se unconsti-
tutional.
Again we emphasize that our conclusions flow in large part from
the fact that West Virginia is launching a facial challenge to the estate
recovery provisions. If West Virginia had not implemented an estate
recovery program and the Secretary had imposed a sanction, then the
focus of our analysis would be different. We recognize, of course,
that, in light of the amount of Medicaid funds received by West Vir-
ginia (more than $1 billion annually), this would be an extremely dif-
ficult step for the state to have taken. Nonetheless, given the posture
of this case, we simply are not at liberty to assume that the cost of
refusal would have been the loss of all of West Virginia’s federal
20 STATE OF WEST VIRGINIA v. U.S. DEPT. HHS
reimbursement funds. See Salerno, 481 U.S. at 745 (explaining that
for a facial challenge to succeed, "the challenger must establish that
no set of circumstances exists under which the Act would be valid").
B.
West Virginia attempts to bolster its coercion argument by pointing
to several observations made by Judge Luttig in his Tenth Amend-
ment discussion in Riley. Judge Luttig noted that the government’s
decision to withhold Virginia’s entire $60 million grant because the
state failed to offer educational services to 126 of the state’s 128,000
disabled students "begins to resemble impermissible coercion, if not
forbidden regulation in the guise of Spending Clause conditions, as
well." Riley, 106 F.3d at 569 (citations omitted). Judge Luttig also
pointed out that education, the area in which the federal government
was seeking to impose its wishes on Virginia, was a subject tradition-
ally reserved to the states, see id. at 562, 570, 571, and that Virginia
resisted the federal policy because it believed the policy to be mis-
guided in that "it deprives the State of its most effective disciplinary
and instructional tool for instilling in its especially recalcitrant stu-
dents the sense of responsibility they so sorely lack." Id. at 571.
Tracking Judge Luttig’s analysis, West Virginia argues that: (1) the
federal government’s requirement that it seek recovery from the
estates of deceased Medicaid beneficiaries is a "‘regulatory device’ to
compel the states to implement a federal policy judgment," Brief of
Appellant at 30; (2) issues of inheritance and health care are subject
matters traditionally reserved to the states; and (3) its resistance to the
estate recovery program is based on West Virginia’s "legitimate per-
ception that the Estate Recovery program is bad public policy that
impacts adversely upon the delivery of medical services to the aged
and disabled." Brief of Appellant at 32-33. Given our conclusion that
the estate recovery provisions are not facially coercive, these argu-
ments are insufficient to establish a Tenth Amendment violation.
We agree with West Virginia that health care and inheritance are
subject matters generally reserved to the states, and we assume that
West Virginia truly believes that the estate recovery program is bad
public policy. But points like these merely reflect basic concerns of
federalism. While they might explain why a coercive federal action
STATE OF WEST VIRGINIA v. U.S. DEPT. HHS 21
will be held to violate the Tenth Amendment, they do not, in and of
themselves, establish a Tenth Amendment violation. See Litman v.
George Mason Univ., 186 F.3d 544, 556 (4th Cir. 1999) (explaining
that "in New York [v. United States, 505 U.S. 144 (1992),] the Court
emphasized that principles of federalism do not pose an independent
constitutional bar to Congress’ powers under the Spending Clause").
That is, if the federal action is not impermissibly coercive and is in
all other respects a proper exercise of the spending power, a Tenth
Amendment violation will not be found simply because the federal
action operates in an area that would otherwise be left to the states or
because the action reflects what the state perceives to be a bad policy
decision. Cf. New York, 505 U.S. at 167 (noting that "under Congress
spending power, Congress may attach conditions on the receipt of
federal funds" and that "[w]here the recipient of federal funds is a
State, as is not unusual today, the conditions attached to the funds by
Congress may influence a State’s legislative choices" (internal quota-
tion marks omitted)).
Moreover, while Congress generally may not "compel the States to
enact or enforce a federal regulatory program," Printz v. United
States, 521 U.S. 898, 935 (1997); see New York, 505 U.S. at 175-76,
Congress may use its spending powers to encourage (but not coerce)
the states to enact certain laws, see Dole, 483 U.S. at 207("[O]bjectives not thought to be within Article I’s enumerated legisla-
tive fields may nevertheless be attained through the use of the spend-
ing power and the conditional grant of federal funds." (internal
quotation marks and citation omitted)); Petersburg Cellular P’ship v.
Board of Supervisors, 205 F.3d 688, 701 (4th Cir. 2000) ("[I]f Con-
gress desires that the states themselves become involved in a sug-
gested federal regulatory scheme, it may employ incentives to
encourage the states to do so. But it cannot coerce and unilaterally
erase the lines of separation." (citations omitted)) (opinion of Nie-
meyer, J.). Thus, the fact that compliance with the estate recovery
provisions required West Virginia to enact and enforce certain laws
is of no significance in and of itself, so long as the imposition of the
estate recovery provisions is a proper exercise of Congress’ spending
powers. Cf. South Carolina v. Baker, 485 U.S. 505, 514-15 (1988)
("That a State wishing to engage in certain activity must take adminis-
trative and sometimes legislative action to comply with federal stan-
22 STATE OF WEST VIRGINIA v. U.S. DEPT. HHS
dards regulating that activity is a commonplace that presents no
constitutional defect.").
Animating much of West Virginia’s argument on appeal is its view
that the estate recovery provisions violate the Tenth Amendment by
forcing West Virginia to implement an unpopular federal program
and forcing its officials to incur the wrath of an unhappy electorate
that should instead be directed to federal officials. Ensuring that the
proper officials are held politically accountable for their decisions
certainly is one of the most important principles of a federalist soci-
ety:
[W]here the Federal Government compels States to regulate,
the accountability of both state and federal officials is
diminished. . . . [W]here the Federal Government directs the
States to regulate, it may be state officials who will bear the
brunt of public disapproval, while the federal officials who
devised the regulatory program may remain insulated from
the electoral ramifications of their decision. Accountability
is thus diminished when, due to federal coercion, elected
state officials cannot regulate in accordance with the views
of the local electorate in matters not pre-empted by federal
regulation.
New York, 505 U.S. at 168-69. But a proper exercise of the federal
government’s spending powers does not raise accountability ques-
tions.
If the federal incentive complies with the general spending clause
requirements and cannot be considered coercive, then the ultimate
political decision lies with the state. If the conditions imposed on the
federal grant are repugnant to the state, the state may decline to accept
the funds. See, e.g., South Dakota v. Dole, 791 F.2d 628, 634 (8th Cir.
1986) ("Very simply, to the extent a state finds the conditions
attached by Congress distasteful, the state has available to it the sim-
ple expedient of refusing to yield to what it urges is ‘federal coer-
cion.’"), aff’d, 483 U.S. 203 (1987). If the state, however, decides that
its citizens are better served by the acceptance of the funds even
though the funds come with a condition that the state would otherwise
find objectionable, then it is completely proper for the state to be held
STATE OF WEST VIRGINIA v. U.S. DEPT. HHS 23
accountable for that decision. See New York, 505 U.S. at 168 ("Where
Congress encourages state regulation rather than compelling it, state
governments remain responsive to the local electorate’s preferences;
state officials remain accountable to the people."). Because we have
rejected West Virginia’s coercion argument and West Virginia does
not otherwise contend that the estate recovery provisions exceed Con-
gress’ powers under the Spending Clause, its accountability argument
fails.
IV.
The Medicaid Act gives the Secretary the authority to impose a
sanction short of withholding all Medicaid funds in the event a state
fails to comply with the Act’s estate recovery provisions. See 42
U.S.C.A. 1396c. Although West Virginia believed an estate recovery
program was bad public policy, it nonetheless enacted such a program
before the Secretary imposed any sanction for West Virginia’s initial
failure to timely implement an estate recovery program. Given these
circumstances, the only question we decide today is whether the
requirement that states implement an estate recovery program on pain
of losing all or part of their Medicaid funds is impermissibly coercive
on its face and therefore violates the Tenth Amendment, a question
we answer in the negative. We express no opinion, however, about
whether the estate recovery provisions would be constitutional if the
only sanction available for states refusing to implement an estate
recovery program were the loss of the state’s entire Medicaid reim-
bursement from the federal government.
AFFIRMED