Health Reform WK-EDGE Why more states are unlikely to challenge the Transitional Reinsurance Program
Friday, May 6, 2016

Why more states are unlikely to challenge the Transitional Reinsurance Program

By Carol E. Potaczek, JD

It’s been called “a masterpiece in legal analysis” ( The opinion in State of Ohio v. United States of America, (January 5, 2016, Marbley, A.) comes from a mere district court, but the reasoning it contains could serve as a primer on the Transitional Reinsurance Program (TRP) and federalism. The TRP is a provision of the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148), that most Americans are completely unfamiliar with, and it was meant to provide a smooth transition to the type of health care system in which insurers could not discriminate against so-called “high-risk” individuals in the individual insurance market. Health insurers were to be protected by the TRP from the need to raise premiums that they might attribute to required guaranteed availability of health insurance for high-risk enrollees.

In its suit, Ohio alleged that health plans provided to state employees are not required to make TRP payments, and it came up with a plethora of reasons, which were all thoroughly knocked down by Judge Algenon Marbley. As a consequence, it is hard to imagine how any state could, in the future, challenge its obligation to pay into the TRP, even though the Ohio decision would have only persuasive authority in other states.

With payments for the TRP due soon for the last time for the 2016 year, it might seem that Ohio’s allegations are too late, but the State of Ohio waited until it actually experienced a “loss” in the form of TRP contributions before filing a claim. Ohio paid its TRP contribution on January 15, 2015, and filed suit on January 26, 2015. On their motions to dismiss and for summary judgment, both the federal government and Ohio agreed to forego discovery, based on their agreement that there were purely legal issues involved.

How it works. The TRP requires states to have a reinsurance program under which health insurance issuers and group health plans have to make payments to reinsurance entities for 2014, 2015, and 2016. When the reinsurance entities collect the payments, they, in turn, make reinsurance payments to health insurance issuers covering “high-risk” individuals in the individual market (this does not include grandfathered plans).

How much is it worth? The ACA says, according to the court, that the total TRP payments for 2014, 2015, and 2016 would add up to $25 billion, $20 billion of which is to directly fund the reinsurance program, and $5 billion which is to be deposited in the U.S. Treasury, and is not to be used for the reinsurance program. Additional collections of funds are permitted to fund the TRP’s program administration expenses.

Who contributes. There are two types of entities that are supposed to contribute to the TRP. The first are “health insurance issuers,” and the second types are group health plans. The ACA itself does not define these terms.

How contributions are calculated. Entities are supposed to contribute to the TRP based on their enrollment count, (self-reported), multiplied by a predetermined contribution rate, which was $63 per enrollee for 2014, $44 for 2015, and $27 for 2016. Payments are due in either a lump sum by January 15 following each benefit year or one-sixth of the payments may be deferred until November 15 of each payment year.

Ohio’s claims. One of its arguments centered on definition – specifically the ACA’s definition of “group health plan.” Another of its arguments was that requiring its health plans to make contributions that would be used to fund reinsurance payments to individual-market issuers that cover high-risk/high-cost enrollees violates the 10th Amendment.

Finally, Ohio argued that requiring its health plans to make contributions that would be used to fund reinsurance payments to individual-market issuers that cover high-risk/high-cost enrollees violates the Intergovernmental Tax Immunity Doctrine. These last two were referred to by Ohio as “structural” federalism.

What Ohio sought. Ohio wanted the court to order the federal government to refund Ohio’s and the other suing Ohio entities’ TRP payments and order it to “set aside” regulations, directives, and instructions that would apply the TRP to any state or local governmental entities. It also asked the court to enjoin the federal government from collecting any more similar payments from any state or local governments in the future under the TRP.

The court set out a brief summary of Ohio’s previous challenges to the ACA and declared that, like those challenges, this one against the TRP “misses the mark.” The court’s holding focused heavily on Congress’s intent, which it says was for all group health plans, including those of state and local governments, to contribute to the TRP.

The court granted the Federal Government’s motion to dismiss. It denied Ohio’s motion for summary judgment. It held that Ohio’s claims failed as a matter of law.

Prior to filing the lawsuit, Ohio, plus some of its instrumentalities and subdivisions, paid the required TRP contributions for 2014 under protest. Besides Ohio, the paying entities included four state universities, which joined the suit, plus the Ohio Turnpike and Infrastructure Commission and Warren County.

Contributions were taxes. The federal government had argued that TRP contributions were not internal revenue taxes, and so, did not fall under 28 U.S.C. 1346(a)(1), which allows for concurrent jurisdiction in district courts and the United States Court of Federal Claims. The court advised that, by invoking jurisdiction under this section Ohio was essentially seeking a tax refund in the first count of its complaint.

The federal government had cited a 10th Circuit case holding that a coal reclamation fee assessed by the Department of the Interior was not an internal revenue tax, so that the district court did not have subject-matter jurisdiction. Ohio is, however, in the 6th Circuit, and the district court pointed out that the 6th Circuit Appellate Court has taken a broader view of the term “internal revenue tax,” previously holding that it applied to all “revenue generated within the boundaries of the United States . . .” in Horizon Coal Corp. v. United States, 43 F.3d, 234, 239 (CA-6 1994). The district court held that it was bound by the Horizon Coaldecision unless the Sixth Circuit decides to reinterpret the term “internal revenue tax.”

Cause of action. Next, the federal government argued that, because Ohio had not identified a specific “final agency action” that it was challenging, it lacked a cause of action. Ohio had contended in the second count of its complaint, that the application of the TRP to state and local governments had to be set aside under the Administrative Procedures Act (APA) as an arbitrary and capricious agency action. The APA authorizes judicial review for “final agency action[s] for which there is no other adequate remedy in a court.” The federal government reasoned that Ohio’s payments were voluntary, as opposed to the result of a final agency action, but the court responded that, despite Ohio’s lawsuit and a demand letter seeking return of the TRP payments, the HHS was not, apparently, planning to return the so-called voluntary contributions.

Furthermore, the court found that the HHS had rendered a “final agency action” through notice and comment rulemaking. The court stated that when the HHS finalized regulation 153.400(a)(1)-(2), it confirmed that health care plans for state employees were subject to reinsurance contributions. Therefore, because Ohio had made out a cause of action under the APA, judicial review was permitted and the district court determined that it had jurisdiction.

Congress’s intent and the PHSA. The court explained that the central question in Ohio’s suit was whether or not Congress intended for state and local governmental employers to make reinsurance contributions under 42 U.S.C. Sec. 18061. To answer that, the court looked first to Congress’s statutory language, noting that neither Sec. 18061 nor the ACA, at section 1341, define those terms, although the ACA provides that Public Health Service Act (PHSA) definitions would apply, and the PHSA, in turn, defines health insurance issuers as insurance companies and services, and insurance organizations (including HMOs) that are licensed by state regulators. The PHSA generally defines group health plans as ERISA employee welfare benefit plans, to the extent that the plans provide medical care to employees and their dependents.

Therefore, said the court, it had to determine if Ohio’s employer-sponsored health care plans were group health plans according to the PHSA definition. The court pointed out that non-Federal governmental plans constituted, under the PHSA, a subset of group health plans. Furthermore, 42 U.S. C. Sec. 300gg-91(d)(8)(c) defines a “non-Federal governmental plan” as “a governmental plan that is not a Federal government plan,” which would makes state plans, such as Ohio’s non-Federal governmental plans, a subset of group health plans.

State plans are group health plans. The court then reasoned that evidence that Congress viewed non-Federal governmental plans as a subset of group health plans came into being when it allowed certain governmental health plans to opt out of some requirements applicable to a broader set of group health plans in 42 U.S.C. Sec. 300gg-21(a). This view of non-Federal governmental plans was reinforced by Congress, said the court, when it used the enactment of the ACA partly to re-structure those opt-out provisions. The court further explained that, prior to the enactment of the ACA, self-insured non-Federal governmental plans could opt out of statutory sections of the Code that covered portability, access, renewability, standards for mothers and newborns, parity in mental health and substance use disorder benefits, and coverage for reconstructive surgery following mastectomies.

That allowance to opt out of many Code sections changed, said the court, when Congress enacted the ACA and revised those opt-out provisions. The court quoted an ACA Opt-Out Memo as stating that, “. . . sponsors of self-funded, nonfederal governmental plans can no longer opt out of as many requirements . . . .” The only explanation for such extensive revisions, said the court, is that Congress intended to limit the provisions from which non-Federal governmental plans, such as state plans, could opt out. That action would be pointless, said the court, if those plans were not group health plans subject to the PHSA in the first place. The court said that if it did not construe non-Federal governmental plans, such as Ohio’s state plans, as a subset of group health plans, Congress’s actions would be rendered meaningless.

The court then came up with another indication that non-Federal governmental plans are a subset of group health plans. The PHSA enforcement section allowing for the levying of fines for ACA violations mostly vests enforcement authority with the states (see 42 U.S.C. 300gg-22(a)(1)). However, it is the federal government that has primary enforcement authority for “group health plans that are non-Federal governmental plans.” If, as Ohio contended, plans offered by state or local governmental employers were not group health plans, then the group of plans the PHSA is referring to would be empty, and would result in unintelligible and meaningless results for a primary ACA enforcement mechanism.

In addition, it is unlikely, said the court, that Congress intended to exempt state and local governmental plans from other key PHSA provisions, as amended by the ACA. Otherwise, those plans could deny employees coverage based on preexisting conditions, impose annual or lifetime benefits caps, terminate participants’ coverage if it became too expensive, avoid paying for preventive care, and deny dependent coverage to participants’ children before they reach age 26.

More group plan arguments from Ohio. Ohio had an assortment of other group plan arguments. First, it argued that it was obvious that Congress knew how to specifically impose fees when it wanted to on state and local governments. Ohio pointed to an IRS Code section (Code Sec. 4377(b)(1)(B)) on fees relative to the Patient Centered Outcomes Research Institute (PCORI) which states that “governmental entities shall not be exempt from the fees.” The court responded that the PCORI fees were imposed under the Code, not the PHSA, and that they applied to health insurance policies and plans, not specifically group health plans. Furthermore, said the court, Code Sec. 5000A(f)(1)(B), (f)(2)(A) states that, (in reference to the ACA’s individual mandate), “minimum essential coverage” includes “[c]overage under an eligible employer-sponsored plans,” in turn referring to, “with respect to any employee, a group health plan . . .offered by an employer to the employee which is . . .a governmental plan . . . .”

COBRA arguments. Ohio next pointed to a provision of COBRA (Sec. 300bb-1) which refers to “each group health plan that is maintained by any State.” This reference, said Ohio, means that when Congress really wanted to include governmental entities, it simply added specific language to do that. However, the court responded that Congress had excluded governmental plans from ERISA’s substantive requirements, including continuation coverage requirements, so that is why it became necessary to add government-only language in some provisions.

Ohio also referred to a cross-referenced definition in COBRA, for “group health plan” which stated that, “[f]or purposes of this section, the term ‘employer’ does not include a Federal or other governmental entity.” (Code Sec. 5000(d)). The court didn’t buy that argument either, pointing out that the cross-referenced definition was for the excise tax imposed by Code Sec. 5000, and that separate definitions of “group health plan” in other COBRA amendment sections would have had to include governmental entities. If not, said the court, there could never be such a thing as a “group health plan maintained by [a] State,” as stated in 42 U.S.C. Sec. 300bb-1(a). Stating that it was unwilling to apply a meaningless interpretation to statutory language, the court said that Congress’s treatment of “group health plans” in the definitions section of the COBRA amendments would have to be viewed as consistent with the treatment of “group health plans” elsewhere in the PHSA, meaning that it would have to include governmental entities.

Ohio then argued that, because one section of the Medicare Modernization Act of 2003 (MMA) includes both a definition of a group health plan and a definition of federal and state governmental plans, that Congress must have thought that the term group health plan ordinarily excluded governmental plans in the PHSA. The court didn’t like this argument for two reasons, first, because the MMA definition falls under the Social Security Act, not the PHSA, and limits its definition to only a single section. Second, the court said that, when defining group health plans, the MMA cross-referenced the COBRA amendments to ERISA, and, consequently, ERISA’s governmental plan exclusion. Because ERISA excludes governmental plans from many requirements, Congress made a point of including governmental plans in its definition, in order to ensure that those plans did not fall through the cracks in statutes like the MMA that derive their meaning from many of ERISA’s requirements.

What the court characterized as Ohio’s strongest argument involved qualifications for eligible individuals for one of the PHSA’s guaranteed availability provisions (42 U.S.C. Sec. 300gg-41). One criterion was recent prior coverage under a “group health plan, governmental plan, or church plan . . . .” The court said that the drafters were merely overly cautious, and it admitted that related provisions were not necessarily parallel in every instance. Again, the court said that any other interpretation would be problematic, especially since the restriction of PHSA requirements from which self-insured non-Federal governmental plans could exempt themselves or Congress’s intent when carefully revising the restrictions, would make no sense if Ohio’s argument were valid.

Finally, with regard to Ohio’s last argument regarding group health plans, Ohio pointed to a Congressional Budget Office document, Updated Estimates of the Effects of the Insurance Coverage Provisions of the Affordable Care Act, (April 2014), which stated that the TRP contribution falls on “most private insurance plans.” Reliance on this was incorrect, said the court, because, first, the CBO report only mentioned the TRP in passing, second, it did not address whether or not governmental plans could be group health plans, and third, the CBO has no authority to interpret federal statutes.

Ohio’s plans are employee welfare benefit plans. The court came up with further support of its contention that Congress enacted the ACA with the understanding that state and local governmental health plans are subject to the TRP as a subset of group health plans, as defined in the PHSA. The court further explained that governmental plans are, under ERISA, employee welfare benefit plans, and pointed to ERISA Sec. 1003(b)(1), which states that certain provisions do not apply to an employee benefit plan it if is a governmental plan defined in ERISA Sec. 1002(32).Again determining that Ohio’s interpretation would render something pointless, the exclusion in 1003(b)(1) would be meaningless, said the court, if governmental plans were not employee welfare benefit plans under ERISA in the first place. Obviously, if governmental plans were not employee welfare benefit plans, no exclusion would even be necessary, the court said. The court also pointed to a large body of case law interpreting ERISA’s governmental plan exclusion as further confirmation that governmental plans are a type of employee welfare benefit plan, not a separate category.

Employee welfare benefit plan interpretation is too narrow. Ohio then offered what the court termed a “crabbed” interpretation of an employee welfare benefit plan, which was that, first, employee welfare benefit plans require an employer, and second, ERISA generally defines “employer” as a person, and third, ERISA further defines a person as one of 11 possible entities but does not include state or local governments in the list, meaning that such an omission precludes plans offered by state and local governments from the definition of employee welfare benefit plans, which, in turn, means that they are not group health plans. The court came back with a number of responses, including that ERISA’s definition of governmental plan (Sec. 1002(32)) says that it’s a plan established or maintained by a government for its employees, and that Congress has defined (in Sec. 1002(6)) an employee as any individual employed by an employer. That would mean, using common sense, said the court, that employees cannot exist without an employer.

Also, said the court, courts have held that ERISA’s definition of “person” is not exhaustive, and Ohio’s cite to one 6th Circuit case from 1986 interpreting the term “person” as defined in the Securities Exchange Act added less to the discussion than did a 1997 6th Circuit case interpreting an almost identical provision in the Fair Labor Standards Act as including local governments in the definition of person.

Ohio brings up constitutional issues. Relying on Michigan v. United States, 40 F.3d 817 (CA-6) 1994, Ohio pointed out that the 6th Circuit had previously held that investment income from a state-established trust for college tuition was not subject to federal income tax because there was no plain statement from Congress authorizing tax of the investment income. Countering Ohio’s contention that Michigan stands for the proposition that federal statutes must speak with “blinking lights” before imposing tax liability on states, the court replied that the U.S. Supreme Court has repeatedly underscored the importance of statutory structure, context, and operation when determining congressional intent. The court cited a number of High Court cases that confirmed this, including a holding that Congress does not have to “incant magic words in order to speak clearly,” because, when facing clear statement rules, court “consider ‘context, including the Court’s interpretations of similar provisions in many years past,” (Sebelius v. Auburn Reg’l Med. Ctr., 133 S. Ct. 817, 824 (2013)), and one that advised that a clear statement rule can be satisfied by “statutory structure” and consulting “a broader frame of reference,” that includes “the practical operation and effect” of the law in question.

Not only that, but the PHSA contains, said the court, several plain statements indicating that non-Federal governmental plans are group health plans if they offer medical care. The court advised that ERISA also has some plain statements indicating that, as a type of employee welfare benefit plan, governmental plans are group health plans under the cross-referenced definition in the PHSA.

OHIO’S two Tenth Amendment arguments. Ohio argued that if the TRP were applied to state and local governments, it would violate the Tenth Amendment by “affront[ing] the Constitution’s vertical separation of powers.” The court quickly pointed out that the U.S. Supreme Court has previously held (Garcia v. San Antonio Metro. Trans. Auth., 469 U.S. 528, 554 (1985)), that the 10th Amendment does not bar Congress from holding state employers to the same regulatory standards governing private-sector employers. States must, said the court, seek relief from federal regulation of their economic activities via the political process.

Ohio also argued that the Tenth Amendment was violated when Congress commandeered the regulatory apparatuses of state and local governments. The court conceded that, according to a U.S. Supreme Court opinion, “. . . Congress cannot force the states to enact or administer a federal regulatory regime.” (Cutter v. Wilkinson, 423 F.3d 579, 589 (CA-6) 2005)). Ohio overlooked a key point in this, however, said the court. The High Court has distinguished between acceptable “generally applicable laws that regulate state activities in the same manner as private conduct,” which is what the TRP program does, and unacceptable laws “that seek to control or influence the manner in which the States regulate private conduct.” (Ky. Ret. Sys., 16 F. App’x at 452). In other words, it would have been a violation of the 10th Amendment if Congress has directed Ohio to regulate its own citizens.

In fact, said the court, the Supreme Court has issued a number of rulings that reject the notion that it is a 10th Amendment violation when a federal statute requires the expenditure of state funds for compliance. Similar reasoning was applied, said the court, in Florida ex rel. McCollum v. United States Department of Health & Human Services, 716 F. Supp. 2d 1120 (N.D. Fla. 2010), where Florida and a number of other states contended that the ACA’s employer mandate would “interfere with the states’ sovereignty as large employers and in the performance of governmental functions.” The Florida court dismissed this particular count, saying that any attempts to regulate employment wages and conditions in the national labor market would have a similar adverse impact on a state’s finances, and it saw no reason to treat health care benefits differently from other aspects of employment that Congress may, according to the Supreme Court, regulate against the states. There was no interference with sovereignty, said the court, because the ACA’s employer mandate regulates states the same way it does private employers, as participants in the national labor market.

No violation of the Intergovernmental Tax Immunity Doctrine. Under the Intergovernmental Tax Immunity Doctrine, federal and state governments were assumed to have reciprocal immunity from taxing each other. Ohio, naturally, argued that the TRP violates that, but the court first pointed out that, since the doctrine had severely eroded over time, it now only protects against taxes levied directly on the states if they are discriminatory. Again, the TRP is saved because it applies equally to private-sector and governmental employers, thus requiring, in a non-discriminatory fashion, contributions from both types of employers.

The court referred back to an old U.S. Supreme Court case, New York v. United States, in which a generally applicable federal tax on the sale of mineral water was upheld, even where it was imposed on the State of New York via its bottling and sale of water from Saratoga Springs. The Court described as “sterile” the theory that state public instrumentalities, to the extent that they performed a governmental function, were constitutionally immune from taxation, but they were not immune to the extent they performed a propriety or business function. In that decision, two justices thought that, if a tax imposed on a state was non-discriminatory, it was constitutional, even if it was collected directly from the state. Four of the justices thought that a non-discriminatory tax was constitutional because the state’s functions of government had not been unduly impaired.

Since then, the Supreme Court has upheld the power of Congress to indirectly and non-discriminatorily tax states and to collect user fees from them. Furthermore, the High Court has recommended that a state’s chief remedy from taxation by the federal government lies in the national political process.

The court also stated that, due to the Supreme Court’s ongoing narrowing of the Intergovernmental Tax Immunity Doctrine, the Sixth Circuit held, in Michigan,that Congress may impose a non-discriminatory tax directly on a state “if it wants to.”

Ohio had conceded at oral argument that the TRP imposes a nondiscriminatory tax, and when asked how such a tax could violate the intergovernmental Tax Immunity Doctrine, it responded that, in a footnote in Baker, the Supreme Court implied that the scope of the Intergovernmental Tax Immunity Doctrine was still in question for nondiscriminatory taxes levied directly on a state. However, the court pointed out that, since then, lower courts have answered that question by holding that direct taxes imposed on states are acceptable if they are applied even handedly to public and private entities.

If the employee is determined not to be a full-time employee during the measurement period, the employer is permitted to treat the employee as not a full-time employee during a stability period that followed the measurement period, but the stability period could not exceed the measurement period.

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