By Patricia K. Ruiz, J.D.
The ACA created an obligation to compensate insurers for unprofitable exchange participation, and now $12 billion is on the line.
The Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) expanded health care coverage to many who may have not otherwise been able to afford it by, among other efforts, establishing the health insurance marketplaces and providing premium tax credits. To encourage insurers to make qualified health plans (QHPs) available on the marketplaces, the ACA created three premium stabilization programs to limit the risk taken on by insurers: (1) the temporary risk corridors program, (2) the temporary reinsurance program, and (3) the permanent risk adjustment program. The temporary framework of the risk corridors sought to compensate insurers for unexpectedly unprofitable plans during the first three years of the marketplaces’ operation. However, insurers are still waiting to collect their compensation from HHS.
On April 24, 2020, the U.S. Supreme Court delivered a much-awaited decision finding that the federal government owes insurers $12 billion in payments under the risk corridors program. This Strategic Perspective gives an overview of the risk corridors program and the litigation surrounding these payments, which played a critical role in enticing insurers to offer qualified health plans (QHPs) on the ACA’s health insurance exchanges.
Calculation of risk corridors payments
Section 1342 of the ACA created the risk corridors program to provide issuers with protection against uncertainty resulting in part from the health reform law’s prohibition against denying enrollment to individuals based on preexisting conditions. The program limited issuers’ losses and gains for calendar years 2014 through 2016. ACA section 1342(b)(1) states that the HHS secretary "shall pay" QHPs that suffer losses above a set amount, while section 1342(b)(2) states that QHPs experiencing gains above a set amount "shall pay" the HHS secretary. ACA section 1342(b) required the Secretary to establish a payment methodology specifying payments out, payments in, allowable costs, and target premium amounts.
Prior to entering the marketplace, according to Katie Keith, J.D., M.P.H., of Georgetown’s Center on Health Insurance Reforms and Keith Policy Solutions, LLC, insurers did not price their plans to account for the impact of grandmothered policies, as HHS announced its transitional policy after premiums had been set for 2014. Under the transitional policy, health insurance issuers were allowed to choose to continue coverage that would otherwise be terminated or cancelled for non-compliance with the ACA, and individuals and small businesses were allowed to re-enroll in those plans. As a result, insurers bore greater risk than they expected when setting 2014 premiums. HHS acknowledged this increased risk in its transitional policy announcement but noted in its 2015 notice of benefit and payment parameters (79 FR 13743, March 11, 2014) that the risk corridors program should help ameliorate these unanticipated changes in premium revenue.
Budget neutrality. HHS stated in a March 2013 final rule (78 FR 15409, March 11, 2013) that the ACA does not require the risk corridors program to be budget neutral and that "regardless of the balance of payments and receipts, HHS will remit payments as required under section 1342." According to Keith, insurers agreed to enter the marketplaces in 2014 with the expectation that risk corridor payments would be made if due under the formula set forth by section 1342, regardless of how much money was collected.
In a 2014 guidance, HHS provided details on its new budget neutrality program. While HHS stated that it anticipated that risk corridors collections would be sufficient to pay all of the risk corridor payments due, it said that if the collections are insufficient to make the payments, all risk corridors payments for the year would be reduced pro rata to make up for the shortfall. The collections received for the next year would be used to pay off the payment reductions of the previous year in a proportional manner to the point where the issuers are fully reimbursed for the previous year. Then, the collections would be used to fund the current year’s payments. After payments are made for the previous year, if the collections for the current year are insufficient to make the current year’s payments, those payments will be reduced pro rata to the extent of the shortfall. Conversely, if any funds are left after the current year’s payments are made, the excess will be held to offset any potential insufficiencies of the next year. HHS stated that if risk corridor collections do not match risk corridor payments in the final year of the program, it would establish in future guidance or rulemaking on how to calculate payments.
In February 2014, Congress asked the Government Accountability Office (GAO) to determine sources of funds to use to make payments to insurers under the risk corridors program. The GAO identified two potential sources of funding in the appropriations for Program Management (PM) for CMS in FY 2014, including a lump sum of more than $3 billion for carrying out CMS’s "other responsibilities," as well as "such sums as may be collected from authorized user fees. The GAO determined that "other responsibilities" could encompass payments to health plans under the risk corridors program, and payments in from the program constituted "user fees," such that "any amounts collected in FY 2014 pursuant to section 1342(b)(2) would have been available . . . for making the payments pursuant to section 1342(b)(2)," even though HHS had not planned on making those collections or payments until FY 2015.
Because appropriations acts are nonpermanent legislation, the GAO stated, language appropriating funds for other responsibilities of CMS would need to be included in the CMS PM appropriation for FY 2015 for it to be available for payments to health plans under section 1342(b)(1). Additionally, language appropriating funds that may be collected from authorized user fees would also need to be included in the CMS appropriation for FY 2015 for any amounts CMS collected in FY 2015 under section 1342(b)(2) to be available to CMS for making payments to insurers under section 1342(b)(1).
In December 2014, Congress passed its appropriations to HHS for FY 2015 reenacting the user fee language and providing a lump sum for CMS’s PM account. However, the lump-sum appropriation included a rider providing that "[n]one of the funds made available by this Act from the Federal Hospital Insurance Trust Fund or the Federal Supplemental Medical Insurance Trust Fund, or transferred from other accounts funded by this act to the [CMS PM account] may be used for payments under section 1342(b)(1) . . ." Congress enacted identical riders in FY 2016 and FY 2017.
Shortfall and ensuing litigation
CMS announced in 2015 that it expected incoming payments of approximately $362 million but had received requests for outgoing payments of $2.87 billion. CMS planned to issue prorated payments at a rate of 12.6 percent with the shortfall being made up by incoming payments received after the 2015 benefit year. In a follow-up letter, HHS said that, in the event of a shortfall following the final year of the risk corridors program, it would explore other sources of funding for risk corridor payments, subject to the availability of appropriations. In a November 2017 report, CMS showed that the total amount of payments collected for the 2014-2016 benefit years fell short of the payments due by more than $12 billion.
Several insurers sued the federal government, asserting that their plans were unprofitable during the risk corridor program’s three-year term and that under section 1342, the HHS secretary still owed them hundreds of millions of dollars. After mixed rulings in lower court, the Federal Circuit held that the government did not have to pay insurers the full amount owed under the risk corridors program, finding that the appropriations bill riders clearly indicated Congress’ intent to prevent the use of taxpayer funds to support the risk corridors program and temporarily suspended the obligation for 2014 through 2016 (see Health plans lose battle for risk corridors payments, June 20, 2018). The court also determined that the overall scheme of the risk corridors program lacked the features of a contractual arrangement. The Federal Circuit denied the insurers’ request for en banc review and the insurers’ petitioned for Supreme Court review.
Certiorari. In June 2019, the U.S. Supreme Court granted petitions for certiorari in three separate appeals from the Federal Circuit (Moda Health Plan, Inc. v. U.S. ; Land of Lincoln Mutual Health Insurance Co. v. U.S.; Maine Community Health Options v. U.S. ) (see Supreme Court will hear arguments on risk corridors program payments, lack of funds, June 26, 2019). The cases presented three questions: (1) whether section 1342 obligated the government to pay participating insurers the full amount calculated by the ACA; (2) whether the obligation survived Congress’ appropriations riders; and (3) whether petitioners may sue the government under the Tucker Act to recover on that obligation.
Supreme Court decision
In an eight to one majority, the Supreme Court concluded that the statutory language of section 1342 of the ACA imposed a legal duty to pay insurers the full amount of risk corridor payments—more than $12 billion—that matured into a legal liability through the insurers’ participation in the health insurance exchanges (See Plain language of ACA requires Congress to make full risk corridor payments, April 27, 2020). The court held that the ACA must be given its plain meaning—that the government "shall pay" the sum required by section 1342. Further, the Supreme Court held that Congress did not impliedly repeal the obligation through its appropriations riders.
Obligation to make risk corridors payments. Justice Sandra Sotomayor wrote on behalf of the majority that the risk corridors statute created a government obligation to pay insurers the full amount set forth in section 1342’s formula, as the government may incur an obligation directly through statutory language even if the statute does not provide details about how the obligation must be satisfied. Section 1342 imposed an obligation by using the mandatory term "shall," and this legal duty matured into a legal liability through the insurers’ participation in the health insurance exchanges. The mandatory nature of section 1342’s language is underscored by adjacent provisions differentiating between when the HHS Secretary "shall" take certain actions and when she "may" exercise discretion. Further, the language of section 1342 does not require the risk corridors program to be budget-neutral, nor does it suggest the payments to unprofitable plans were dependent on payments to the Secretary from profitable plans. It also does not state that partial payment would satisfy the government’s whole obligation under the risk corridors program.
Despite arguments by the government, neither the Appropriations Clause nor the Anti-Deficiency Act addresses whether Congress can create or incur an obligation directly by statute. Additionally, section 1342’s language does not predicate the payments on whether Congress expressly provided budget authority before appropriating funds. Section 1342 does not contain language limiting the obligation to the availability of appropriations, and the Court noted that because Congress expressly used such limiting language elsewhere in the ACA, it did not intend the obligations of section 1342 to be limited as such.
Effect of appropriations riders. The Court found that Congress did not impliedly repeal the obligation to provide risk corridors payments through its appropriations riders. According to the Court, repeals by implication are not favored, thus, it said it would regard each of the two statutes effective unless Congress’ intention to repeal is "clear and manifest," or the laws are "irreconcilable." In the context of the appropriations actions, intention to repeal requires the government to show "something more than the mere omission to appropriate a sufficient sum." The Court found that the appropriations riders did not manifestly repeal or discharge the government’s obligation and did not indicate any other purpose than the disbursement of a sum of money for the particular fiscal years. Further, the Court found no indication that HHS and CMS thought that the riders clearly expressed an intent to repeal.
While appropriations measures have in the past been found irreconcilable with statutory obligations to pay, the riders in this case did not use the kind of "shall not take effect" language or purport to suspend prospectively or foreclose funds from being used toward risk corridors payments. The appropriations measures also did not reference section 1342’s payment formula—let alone irreconcilably change it—nor did it provide that payments from profitable plans would be used to fully pay the government’s obligation to unprofitable plans.
Insurers properly relied on Tucker Act. While the United States is immune from certain damages suits, the Tucker Act allows some suits to be brought in the Court of Federal Claims. The Act does not create substantive rights, so a plaintiff must premise the damages action on other sources of law that can fairly be interpreted as mandating compensation by the federal government for the damage sustained—unless the statute creating the obligation provides its own remedies or the Administrative Procedure Act creates an avenue for relief.
In this case, the risk corridors statute is interpreted fairly as mandating compensation for damages, and neither exception to the Tucker Act applies. The "shall pay" language falls within the class of statutes permitting recovery of money damages in the Court of Federal Claims. Further, there is no separate route of compensation that would take away jurisdiction from the Court of Federal Claims; the Administrative Procedure Act does not bar suit under the Tucker Act, either.
Dissent. Justice Alito dissented, arguing that, while the majority is correct in its conclusion that section 1342 created a binding obligation on the government that was not suspended by appropriations riders, the majority’s conclusion that insurers properly sued under the Tucker Act was incorrect. By inferring that the Tucker Act provides a private right of action for insurers provides "a massive bailout for insurance companies that took a calculated risk and lost." This private right of action turns on section 1342’s inclusion of the "shall pay" language. However, Alito write, the phrase the "Secretary shall pay" appears in many other federal statutes, and construing the language as creating a cause of action has the potential for significantly more litigation over other federal statutes.
What will risk corridors payments look like for insurers?
According to Keith, the question is what comes next. The $12 billion judgment is significant, but the decision’s impact will not be equally felt among insurers, with impact varying by insurer and by state. Insurers will not receive their money right away, either, she said, given the process used to recover from the Judgment Fund.
From here, the Court of Federal Claims will receive the cases on remand and then issue judgment for each insurer and a ruling against HHS. HHS must then ask the Treasury’s Financial Management Service (FMS) to submit a request for certification of payment from the Judgment Fund. Upon determining the judgment is final, the FMS would make a direct payment to the party. It is not likely that HHS would reimburse the Judgment Fund. However, there are still at least 116 insurers with cases pending before the Federal Circuit, and, in light of the Supreme Court decision, more lawsuits may be coming from insurers who have not yet sued. While the lawsuits may be relatively simple to resolve, it will take time for the lower courts to process these claims and issue judgment.
Keith told Wolters Kluwer that she does not see much impact from COVID-19, aside from potential delays in the courts and by HHS in processing these claims. "It’s not clear to me yet how smooth—or not—that process will be," she said, "but the courts are working on a more limited capacity, and HHS is quite busy with [pandemic] response. So you could imagine some delays in receiving actual judgments from the court, which would affect the timing of HHS’s request for payment from the Judgment Fund."
Consideration in MLR calculations. According to Keith, insurers that offered during 2014, 2015, and 2016 QHPs that are still in existence, payments from the Judgment Fund are likely to affect their medical loss ratio (MLR) for 2020 if funds flow to insurers this year. The ACA states that insurers must spend a certain percentage (their MLR) of premium revenue on health care claims or quality improvement expenses. The remainder of premium revenue may go to expenses such as administrative expenses, profit, and marketing. If insurers fail to make an MLR of 80 percent in the individual or small group markets or 85 percent in the large group market, the insurers must pay the difference to their enrollees as a rebate.
For 2020’s MLRs, current regulations may require risk corridors payments to be considered revenue in the year received. If the payments received by insurers from the Judgment Fund are treated as risk corridors payments, the recovery amount will reduce an insurer’s MLR, increasing the potential for rebates, particularly if the insurer’s ratio of medical claims to revenue is pushed below 80 percent, Keith said. Combined with the COVID-19 pandemic, which caused significantly fewer medical claims to be filed in 2020, MLRs could trigger record-high rebates. Enrollees would receive the rebates in the summer of 2021. Keith noted that the rebates would flow to those enrolled in coverage for 2020, not those enrolled between 2014-2016 who were burdened with higher premiums because of the shortfall of risk corridor payments. If those insurers had a much larger presence in the first few years of the individual market but have a much lower presence now, the insurers could make significant rebates to a small group of enrollees in the markets in which they remain.
On the other hand, risk corridors payments may count against an insurer’s MLR for previous years, being applied to the year they were obligated (2014-2016), rather than when they were received (2020). In this situation, 2020 MLRs would not be affected, and insurers would instead be required to recalculate MLRs and rebates for prior years.
Keith noted that HHS may issue new regulations or guidance to address the Supreme Court’s decision and how incoming funds may affect MLRs. The payments may not be treated as a risk corridors payment for purposes of the MLR but may be used as another sort of input in the MLR methodology. Insurers may argue that recovered funds should not be fully treated ask risk corridors payments made during 2014-2016 because of the impact of legal fees and other administrative expenses related to the litigation, she said.
There are as many as 64 individual risk corridors lawsuits remaining pending and more expected to be filed, so saga is not yet over. Insurers in these pending lawsuits, Keith said, want the Federal Circuit to enter judgment immediately in accordance with the Supreme Court decision. They argue that the amount of damages owed is not in dispute, as HHS has already calculated and made public the amount each insurer is owed.
The government, however, requested a 45-day delay, which it said is necessary to review the Court’s opinion, confer with HHS and other officials, and develop an "efficient and appropriate process" for resolving all of the pending risk corridors lawsuits. The government has said it is concerned about previous pro rata distribution of risk corridors payments and needs time to ensure payment records are accurate. It also wants to consider insurers that have outstanding debts owed to HHS under other ACA programs. For the most part, courts have granted the government’s request for a 45-day delay to give the government time to consider how it wants to proceed.
With $12 billion on the line, insurers have cleared the largest hurdle, but questions still remain about how and when the funds will be fully paid.
Attorneys: Katie Keith, J.D., M.P.H. (Georgetown University Center on Health Insurance Reforms; Keith Policy Solutions, LLC).
Companies: Maine Community Health Options; Land of Lincoln Mutual Health Insurance Co.; Moda Health Plan, Inc.; Blue Cross and Blue Shield of North Carolina
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