April 18, 2017
Health law attorneys Deborah Dorman-Rodriguez and David M. Kaufman analyze the controversy surrounding Obamacare’s “risk corridor” program — which was designed to reduce risks for insurers entering new marketplaces — and the resulting litigation.
Complex issues involving the ACA remain, including those present in existing litigation over an obscure but financially significant ACA program. Those issues are now percolating through the federal courts.
The so-called risk corridor program has been the subject of intense controversy and litigation. In fact, it is the subject of some 19 lawsuits filed by the issuers of the qualified health plans, or QHPs, selling individual coverage on the health insurance exchanges.
The amounts at issue are remarkably significant. In fact, the federal government may owe more than $8 billion to QHP issuers under the program when the litigation reaches its conclusion.
To encourage insurer participation in the new health insurance exchanges, Congress included three market stabilization programs in the ACA: risk corridors, reinsurance and risk adjustment, referred to collectively as the 3Rs. The programs were designed to partially mitigate the risks to insurers considering entry into the new and uncertain ACA marketplaces.
Under the risk corridor program, insurers with losses exceeding certain financial limits would receive funds through the program while those that earned profits above upper boundaries would pay into it. These “corridors” were established for the first three operational years of the ACA marketplaces: 2014, 2015 and 2016.
The Health and Human Services Department adopted regulations to implement the program, including a formula for calculating whether carriers would pay into or receive funds from the program.
The risk corridor formula is complex, comparing “allowable cost” to a “target amount.” (For a detailed discussion of the risk corridor program formula and examples of how the formula operates in different scenarios, see Doug Norris, Mary van der Heijde and Hans Leida, Risk Corridors Under the Affordable Care Act — A Bridge over Troubled Waters, but the Devil’s in the Details, Health Watch (October 2013).) Allowable costs are defined as those expenses (excluding administrative costs) incurred by the plan in providing covered benefits to enrollees for a year.
The target amount is set by HHS and includes premiums received by the plan less allowable administrative (nonclaim) costs. The ratio of the allowable cost and the target amount is then calculated. If the allowable costs are more than 103 and not more than 108 percent of the target amount, the QHP issuer is to be paid 50 percent of those costs over 103 percent of the target amount.
If the QHP’s costs for operating the plan exceed 108 percent of the target amount, the QHP issuer can then receive 2.5 percent of the target amount plus 80 percent of its allowable costs that exceed 108 percent of the target amount in risk corridor payments.
If a QHP’s allowable costs for a benefit year are lower than anticipated, beyond the boundaries of the “corridor,” the QHP must pay into the program.
If the allowable costs are less than 97 percent (but not less than 92 percent) of the target amount, the plan is required pay HHS 50 percent of the difference between 97 percent of the target amount and the allowable costs.
If a plan’s allowable costs are less than 92 percent of the target amount, the plan must pay 2.5 percent of the target amount plus 80 percent of the difference between 92 percent of the target amount and the allowable costs.
The federal agencies responsible for ACA implementation did not anticipate what actually occurred: QHP losses were larger than amounts paid into the program by profitable QHPs.
In addition, Congress did not appropriate additional ACA funds to cover the QHPs’ losses — leaving open the question of whether the federal agency responsible for administering the 3R programs, the Centers for Medicare and Medicaid Services, (a sub-agency of HHS) is authorized to make full risk corridor payments given that profitable QHP issuers paid in less to the program than nonprofitable QHPs were owed.
As a result, CMS paid only 12.6 percent of the $2.87 billion owed QHPs for 2014. The agency said it would make up the shortfall in future years as funds become available. Additional amounts collected for 2015 went to make up the shortfall for 2014.
Given the extent of the financial losses experienced by QHP issuers to date, it is unlikely that without another source of funding full payment will be made for 2014 — or that any payments will be made for 2015 and 2016.
Some newer, less well-financed QHPs based the success of their business models on receiving millions of dollars more from the 3Rs than were actually paid. Those companies needed 3R funds for continued viability.
Some more established, better-financed companies have simply written off the amounts due under the program, increasing their overall recorded losses from the ACA marketplaces. To compensate for the loss in revenues, some QHP issuers have increased rates or withdrawn from certain markets.
As of March, at least 19 QHP issuers have filed lawsuits against the federal government seeking risk corridor payments. Plaintiffs include QHP issuers from across the country, including, for example, Highmark, which is a Blue Cross Blue Shield plan operating in Pennsylvania; CoOportunity Health, a Consumer Operated and Oriented Plan, or CO-OP, doing business Iowa and Nebraska; and Moda Health Plan, a plan operating in the Pacific Northwest; and most recently by Blue Cross and Blue Shield plans from Alabama and Tennessee.
To date, federal Court of Federal Claims judges have issued three decisions in these cases. Those rulings reflect the judges’ different views regarding the obligations of the federal government under the risk corridor program. They also demonstrate the complexity of the issues and indicate that they will not be resolved any time soon.
Land of Lincoln Mutual Health Insurance Co. v. United States
The first decision in the risk corridor cases was issued by Judge Charles F. Lettow on Nov. 10 in a suit filed by Land of Lincoln Mutual Health Insurance Co., one of the ACA CO-OPs. Land of Lincoln Mut. Health Ins. Co. v. United States, 129 Fed. Cl. 81 (2016), appeal docketed, No. 17-1224 (Fed. Cir. Nov. 16, 2016).
Land of Lincoln, declared insolvent and currently in liquidation, operated in Illinois and provided coverage to about 49,000 enrollees.
The company claimed in its lawsuit that the failure to pay it $72 million in risk corridor payments breached an express or implied-in-fact contract, the covenant of good faith and fair dealing, and the Takings Clause of the Fifth Amendment.
HHS moved to dismiss the case under Federal Rule of Civil Procedure Rule 12(b)(6) for failure to state a claim on which relief could be granted.
Judge Lettow determined that the Court of Claims had jurisdiction over Land of Lincoln’s claims but ruled in favor of HHS on each of them.
The judge found that the ACA does not clearly entitle health plans to risk corridor payments, that HHS reasonably interpreted the statute to not require full risk corridor payments on an annual basis, and that neither Land of Lincoln’s QHP contract with HHS nor any implied contract required full annual risk corridor payments.
The court also rejected Land of Lincoln’s claim based on its reliance on the government’s promises as well as its claim that the failure to fully pay risk corridor payments is a taking of property in violation of the Constitution.
Land of Lincoln has appealed the decision to the U.S. Court of Appeals for the Federal Circuit, where it is currently pending.
Health Republic Insurance Co. v. United States
In a second decision, issued Jan. 10 in a case filed by Health Republic Insurance Co., a CO-OP that operated in Oregon, Judge Margaret M. Sweeney reached a different conclusion.
Health Republic filed its case as a putative class action on behalf of all QHP issuers, seeking the $7 million it claims the company is owed as well as the $5 billion the government allegedly owes to QHP issuers collectively. Health Republic Ins. Co. v. United States, 129 Fed. Cl. 757 (Fed. Cl. 2017).
First, Judge Sweeney certified the class, meaning that a decision in the case could apply to other QHP issuers. On the merits, the judge rejected the government’s motion to dismiss and concluded that under the ACA, Congress intended for HHS to make risk corridor payments to eligible insurers on an annual basis regardless of specific appropriations.
She pointed out that if the ACA risk stabilization programs fail to provide for prompt compensation to insurers after HHS has calculated the amounts due, insurers might not participate in the exchanges, thus defeating the ACA’s goal of creating competitive health insurance markets.
The judge ordered the government to file its answer to Health Republic’s complaint, and the government has since filed a motion for summary judgment.
Moda Health Plan Inc. v. United States
The third decision was issued Feb. 9 in a suit filed by Moda Health Plan Inc., an insurer providing coverage in Alaska, Oregon and Washington. Moda Health Plan Inc. v. United States, No. 16-649, 2017 WL 527588 (Fed. Cl. Feb. 9, 2017).
In that case, Judge Thomas C. Wheeler granted Moda’s motion for summary judgment, ruling that the government must pay Moda the full amount it is owed for annual risk corridor payments for 2014 and 2015.
Moda is seeking risk corridors payments of $89 million for its 2014 QHPs and $101 million for its 2015 QHPs.
Judge Wheeler rejected the government’s arguments and determined that the government has withheld risk corridor payments from Moda unlawfully, concluding that the ACA requires that the payments be made to insurers on an annual basis.
Looking at the statute and how it was initially interpreted by the federal agencies, he determined that Congress did not design the risk corridor program to be budget neutral, meaning that even if the risk corridor amounts paid into CMS by QHPs are less than what QHP issuers are owed under the program, QHPs are still entitled to full annual payment — regardless of congressional appropriation.
In addition, the judge determined that even if the program were designed to be budget neutral, the ACA QHP contracts drafted by HHS constituted an offer for a unilateral contract, which Moda accepted by agreeing to participate on the exchanges.
The court concluded that the government made a promise in the risk corridor program that it must keep. In a memorable phrase, the judge stated that to say, “‘The joke is on you. You should not have trusted us,’ is hardly worthy of our great government.”
Without appropriations to cover risk corridor payments, it is unlikely that the disputes regarding the program will be resolved any time soon.
Considering the complexity of the issues, the significant amounts at stake and the highly political nature of issues involving the ACA, there is a wide range of possible outcomes from the current litigation and related QHP disputes.
HHS issued a bulletin Sept. 9, 2016, stating that it was open to settlement discussions to resolve risk corridor claims. At the same time, the Justice Department filed briefs seeking dismissal of the QHP issuers’ claims.
Absent a congressional appropriation to resolve the cases, payment of any settlement would likely be made from the federal government’s judgment fund. The fund has been used to pay court judgments and compromise settlements of actual or imminent lawsuits against the government. However, use of the fund to resolve the risk corridor cases is controversial.
The House of Representatives filed an amicus brief in the Health Republic case stating it objections to use of the judgment fund to pay risk corridor claims. The House argues that the fund can only be used in cases where payment is “not otherwise provided for” by Congress.
Regarding risk corridors, the House asserts that payments from insurers into the program provided for payment even if the amount was not sufficient to cover the claims. Thus, the House argues, the fund may not be available to pay risk corridors claims.
Legislation has been introduced in both the House and the Senate to prevent such a resolution. See HHS Slush Fund Elimination Act (S. 3481); To limit the use of the judgment fund to settle any lawsuit arising under Section 1342 of the Patient Protection and Affordable Care Act, and for other purposes (H.R. 6339).
With 19 cases possibly being decided by independent judges who are not required to follow the decisions of their judicial colleagues (and due to a lack of binding precedent), a variety of rulings in the remaining risk corridor cases can be anticipated.
In the meantime, now that there have been two decisions favorable to QHPs, more cases may be filed by other issuers in the Court of Federal Claims or in the federal district courts, such as the case filed by the Iowa CO-OP, CoOportunity Health. Gerhart v. United States, No. 16-cv-151, complaint filed (S.D. Iowa June 10, 2016).
The Federal Circuit has jurisdiction over appeals from the Court of Federal Claims; appeals resulting from cases filed in federal district courts will be heard by federal circuit courts.
Given the likelihood of different case outcomes, the significant amounts at stake and the novel legal issues involved, the parties are almost certain to seek U.S. Supreme Court review of any lower court decisions.
Outside of the courts, it remains to be seen whether the new administration may seek to resolve issues surrounding the risk corridor program via some type of administrative settlement through HHS, or with Congress through legislation.