The volume of health insurer insolvencies since 2010 provides obvious insight into the ramifications of the government reneging on its promises. An overwhelming majority of the insurers created pursuant to the Patient Protection and Affordable Care Act (ACA) have been placed in some form of insurer delinquency proceedings, if not liquidation.  This is despite the diligent efforts of state insurance regulators to regulate towards solvency in the interests of the policyholders.  These insurers, known as Consumer Operated and Oriented Plans (CO-OPs)[1], were intended as an alternative to the public option under the ACA.  The ACA created 23 CO-OPs with the assistance of $2.4 billion in start-up loans and “solvency” grants.  Taxpayers’ concerns were assuaged when they were told not to be concerned about the loans because the government had carefully screened CO-OP applicants and picked only those that showed a “high probability of financial viability.”[2]  The level of financial support from the government no doubt eased the minds of these taxpayers.  But apparently the public was enveloped in a false sense of security.

The ACA adopted a series of measures designed to expand coverage in the individual health insurance market.  King v. Burwell, 135 S. Ct. 2480, 2485 (2015).  CO-OPs are only a small part of the coverage options made available to consumers.  The ACA provided billions of dollars through subsidies to help individuals buy insurance.  Id. at 2489.  Further, the ACA generally requires each individual to maintain coverage or pay a penalty.  Id. at 2486.  Finally, the ACA strictly prohibits insurers from denying coverage or charging higher premiums based upon an individual’s health status.  Id.

In order to make coverage available, the ACA created the Federally Facilitated Marketplace and state so-called “exchanges.”  See ACA at §§ 18031-18041.  Exchanges are the only form in which consumers can purchase coverage with the assistance of a federal subsidy.  Exchanges represent the only distribution channel in which insurers can market their plans to the millions of individuals who receive federal subsidies.  Because of the opportunities created by the ACA’s exchanges for insurers electing to participate, insurers were willing to incur risk to participate.  However, given the novelty of the exchange, the creation of the new so-called CO-OPs, the unknown impact on the marketplace and the insurers’ profitability concerns, the ACA required the government to mitigate pricing risk and incentives for adverse selection arising from the system created through the ACA.  Risk was ameliorated through the ACA’s establishment of three programs – referred to as “premium-stabilization” programs modeled on pre-existing programs established under the United States Medicare program.  Colloquially referred to as the “3 Rs,” these programs began with the 2014 calendar year and consist of (i) reinsurance, (ii) risk adjustment, and (iii) risk corridors.  See 42 U.S.C. §§ 18061-18063.  The 3 R programs are intended to distribute risk among the insurers participating and to mitigate risk underlying the ACA distributions system.  Each of the programs is funded by monies that are ultimately paid into the program by insurance carriers and health plans.

Pursuant to Section 1341 of the ACA, the reinsurance program (a temporary program for enrollment years 2014, 2015 and 2016) contemplated that amounts would be collected from insurers and self-insured group health plans and used to fund payments to issuers of eligible plans that covered high-cost individuals in the individual marketplace.  42 U.S.C. § 18061.  On the other hand, the risk adjustment program, created by § 1343 of the ACA, was intended as a permanent program under which amounts collected from reinsurers whose plans have healthier-than-average enrollees are used to fund payments to insurers whose plans have sicker-than-average enrollees.  42 U.S.C. § 18063.  Finally, the risk corridor program, created by Section 1342 of the ACCA, was established as a temporary program for enrollment years 2014, 2015 and 2016 and required that amounts collected from profitable insurance plans be used to fund payments to unprofitable plans, to offset losses by those plans.  42 U.S.C. § 1862.

Of the three programs, the risk corridor program has been the subject of the most litigation, including various class action suits in the U.S. Federal Court of Claims.  The controversial provision is paragraph (a) of § 1342 which directs the United States Department of Health and Human Services (DHHS) to “establish and administer a program of risk corridors” under which insurers offering individual and small-group qualified health plans between 2014 and 2016 “shall participate in a payment adjustment system based on the ratio of the allowable cost of the plan to the plan’s Aggregate Premiums.”  42 U.S.C. § 18062(a).

This payment methodology is laid out in paragraph (b) of Section 1342 and provides that if an insurer’s “allowable costs” (which amounts to claims costs) are less than the “target amount,” (premiums minus allowable administrative costs) by more than 3%, then the plan must pay a specified percentage of the difference to DHHS.  Id. § 18062(b)(2).  Those payments are referred to in the statute as so-called “payments in.”  Id.  On the other hand, if an insurer’s allowable costs exceed the target amount by more than 3%, the payment-methodology provision requires that DHHS pay a specified percentage of the difference.  Id. § 18062(b)(1).  The payments from DHHS are referred to in the statute as “payments out.”  Id.  The payment methodologies are codified in regulations adopted by DHHS at 45 C.F.R. § 153.510(b)-(c).  Neither the relevant provisions of the ACA nor codifying regulations join “payments out” to any independent source of taxpayer funds.  “Payments in” from insurers are the exclusive source of funds referenced in Section 1342 of the ACA.  Nonetheless, the government now takes the position that because Congress is not actually appropriated funds or are authorized appropriation for risk corridor payments, payments out will be significantly truncated if not eliminated.  When Congress enacted the ACA in 2010, it made no appropriation, and authorized no appropriations, for risk corridor payments.  Arguably, such Congressional action was unnecessary prior to 2015 as the ACA did not contemplate payments to be made before that time.

In March, 2014, the DHHS advised insurers that it would “implement the risk corridor program in a budget neutral manner.”  79 Fed. R. 13, 744, 13, 787 (March 11, 2014).  A month later, DHHS released guidance explaining that, if the total amount that insurers paid into the risk corridor program for a particular year was insufficient to fund in full the “payments out” calculated under the statutory formula, payments to insurers would be reduced pro rata to the extent of any shortfall.  See, CMS Risk Corridors and Budget Neutrality (April 11, 2014) (APPX 229-230).  The April 2014 release also provided that collections received for the next year would first be used to pay off the payment reductions insurers experienced in the previous year, in a proportional manner, and then be used to fund payments for the current year.  Id.

DHHS, indeed, implemented the payment methodology described above when collections ultimately proved insufficient to pay in full amounts calculated under the statutory formula.  In 2015, DHHS announced that for the 2014 program, the total amount that insurers would pay in ($362 million) was $2.5 billion less than the total amount that insurers requested ($2.87 billion).  Accordingly, DHHS announced that it would make prorated payments of 12.6% of the amount requested for 2014.  Id.  Subsequently, in November 2016, DHHS announced that it would apply the total amount that insurers were expected to pay in 2015 to outstanding requests for 2014, leaving insurers with approximately $8.3 billion less than the total amount calculated as “payments out” for those years.

As a result of the government’s actions with respect to the risk corridor program, various insurers, including CO-OPs, filed suit in the Federal Court of Claims, ultimately alleging that the government was obligated to pay insurers the full amount calculated under the formula in Section 1342(b)(1), regardless of how many insurers paid into the program under Section 1342(b)(2).  In the aggregate, the insurers involved in these suits are seeking billions of dollars for 2014 and 2015 plan years.  Actions pending include:  (i) the U.S. Court of Appeals for the Federal Circuit in Moto Health Plans, Inc. v. United States, on appeal from the U.S. Court of Federal Claims in Case No. 1:16-cv-00649; (ii) Lincoln Mutual Health Co. v. United States, 129 Fed. Cl. 81 (2016), appeal pending No. 17-1224 (Fed. Cir.); (iii) Health Republic Insurance Company v. United States, U.S. Court of Federal Claims (No. 16-259C); and (iv) Blue Cross and Blue Shield of N.C. v. United States, (No. 2017-2154).  

The issues addressed in these litigations and others impact not only solvent carriers and ultimately their policyholders, but a number of insolvent CO-OPs who in large part were forced into insurance rehabilitation and liquidation proceedings as a result of the failure of the federal government to make good on its promises to make the risk corridors support payments required by the ACA.  The insurance industry, the policyholders for whom it provides coverage, and academic scholars anxiously await the outcome of litigation to determine whether courts will hold the federal government accountable.

[1] The ACA created CO-OPs as a replacement for the government-run “public option,” which was cut from the law at the last minute to ensure that it could attract votes required to pass.

[2] CO-OPs are directed by their customers and designed to offer individuals and small businesses additional affordable, consumer-friendly and high quality health insurance options.  The program offers low-interest loans to eligible non-profit groups to help set up and maintain these issuers, and included awards for initial funding which resulted in a CO-OP option for consumers in 28 of the United States as well as funding for four of the current CO-OPs planning to expand operations into neighboring states to offer coverage.  CO-OPs were offering plans through the new health insurance marketplace as well as outside the marketplace, effective January 1, 2014.

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