THIS IS BIG: Court rules AGAINST insurers in #RiskCorridorMassacre lawsuit

Well this is rather unexpected.

Let's fire up the Wayback Machine, Sherman, and go back to 3 years ago, when the Risk Corridor Massacre first reared its ugly head.

The simplest explanation of how Risk Corridors worked is this:

  • The ACA made dramatic changes to how the individual insurance policy market worked.
  • Since it was so disruptive, it included several provisions to help stabilize the market.
  • One of these programs, called "Risk Corridors", was a temporary (3 year) program which acted as sort of an insurance policy for insurance carriers.
  • In a nutshell: Carriers which earned excessive profits on ACA policies had to place a chunk of those profits into a pool of money. Carriers which took excessive losses on ACA policies were supposed to be reimbursed for a chunk of those losses.
  • If the profits exceeded the losses, the government got to keep the difference, so it was theoretically possible they'd actually profit off the system.
  • If, however, the losses exceeded the profits, the government was supposed to pay out the difference.

(As an aside: For those claiming "government bailout! picking winners and losers!" etc etc, the ACA's risk corridor program is actually very similar in many ways to the permanent Medicare Part D risk corridor program, although there are some key differences between the two).

In any event, that was the original agreement under the ACA. Unfortunately, during the first few years of the ACA, while some carriers did make money on exchange plans, far more ended up taking excessive losses, resulting in a large shortfall, starting with the 2014 season:

Today, HHS is announcing proration results for 2014 risk corridors payments. Based on current data from QHP issuers’ risk corridors submissions, issuers will pay $362 million in risk corridors charges, and have submitted for $2.87 billion in risk corridors payments for 2014. At this time, assuming full collections of risk corridors charges, this will result in a proration rate of 12.6 percent.

In other words, the "losers" are owed about $2.9 billion for 2014 losses, but there's only about $360 million available to pay them, or around 12.6 cents on the dollar.

Again, under the original terms, the government was supposed to cover the other $2.5 billion for 2014 (and billions more in 2015 and 2016; it took some of the carriers until 2017 before they finally figured out how to properly price for the ACA market).

Unfortunately...well, here's how Milliman, one of the most respected actuarial firms in the world described it:

Insurers can now expect to receive only 12.6% of 2014 risk corridor receivables in 2015, with the remainder to be potentially funded in future years. Last week’s announcement validates prior concerns regarding a 2014 risk corridor funding shortfall because of Cromnibus and higher-than-expected 2014 claim costs. This shortfall occurred despite two earlier injections of additional transitional reinsurance program recoveries into the Patient Protection and Affordable Care Act of 2010 (ACA) individual market.

The shortfall will have a significant negative financial impact on insurers who find themselves in a risk corridor receivables position, not only for the 2014 benefit year but also possibly for 2015 and 2016. A 2014 funding shortfall puts the collectability of 2015 and 2016 payouts in increased jeopardy—2014 receivables that were not paid in 2015 will be first in line to receive payments in later years if funds are available.

This paper explores some of the root causes underlying the funding shortfall for the program, highlights how the funding shortfall would have been even greater without the increased individual market reinsurance recoveries announced in June, and considers funding implications for 2015 and 2016.

OK, so that's the gloom and doom confirmation of what I just said. What about the cause of the funding shortfall?

Several causes underlie the 2014 funding shortfall, and these factors will continue to have implications for 2015 and 2016 receivables.

The risk corridor program was designed as a two-sided program requiring insurers with better-than-expected financial results to pay the federal government a portion of their earnings, while at the same time requiring the federal government to reimburse a portion of losses to insurers with worse-than-expected financial results. The program was not originally required to be budget neutral. In other words, payments out of the program could be greater than payments in.

That started to change in 2014, well after premium rates were set, when federal regulators began to talk about budget neutrality. This concept became official with the Cromnibus bill passed by Congress in late 2014. That bill required that 2014 risk corridor receivables paid in 2015 be funded through payables into the program from other insurers. Even before the 2014 funding shortfall was officially announced on October 1, 2015, many industry analysts foresaw that program receivables would far outstrip payables.

Back in December of 2014, during the so-called "CRomnibus Bill" negotiations, a provision was added by Republicans to the "must-pass" spending bill which changed the rules on Risk Corridor payments:

Sen. Jeff Sessions (R-Ala.), then ranking member of the Budget Committee, and Rep. Fred Upton (R-Mich.), chairman of the Energy and Commerce Committee, came up with a new strategy of attacking the legality of the payments. They also enlisted the help of then-Rep. Jack Kingston (R-Ga.), who chaired the appropriations panel that funds the Department of Health and Human Services and the Labor Department.

The lawmakers questioned whether the payments were actually appropriated correctly — forcing the administration to make changes that ultimately allowed the lawmakers to checkmate the administration. In effect, the Centers for Medicare and Medicaid Services (CMS) was forced to admit that the ACA did not automatically appropriate the funds, but it was subject to discretion of Congress. (A Government Accountability Office opinion requested by Sessions and Upton backed up much of the GOP contention.)

So the administration, which had asserted that the risk-corridor funds came from mandatory spending, designated the money as discretionary. Officials made a number of other changes, such as classifying the payments as “user fees,” in an effort retain the authority to spend the money. But if collections fell short, as Republicans expected, then the administration would need approval for the money from Congress.

“Successfully arguing that the ACA did not appropriate money for the risk-corridor program is what ultimately restricted payments to insurers,” said Paul Winfree, at the time a Sessions staff aide.

The stage was set for Kingston to slip in a sentence — Section 227 — in the massive spending bill that said that no funds in the spending bill could be used for risk-corridor payments. This blocked the administration from obtaining the necessary funds from other programs.

Kingston says the conference negotiation consisted of basically him and his Senate counterpart, then-Sen. Tom Harkin (D-Iowa). “I think it was not seen as a big issue,” Kingston said. “He had won on so many things,” particularly on labor issues. So Kingston offered up a health-care request. “Part of these negotiations is you don’t get everything you wanted.”

Indeed, lawmakers and staff members say, stealth was essential for success, which is why they kept quiet about their achievement. Sessions, Upton and Kingston did not issue news releases — but Rubio did, saying the provision was “a step in the right direction.”

Kingston’s maneuver ultimately left a $2.5 billion shortfall in the risk-corridor program in 2015, as the administration only collected $362 million in user fees — and insurers who misjudged the market sought nearly $2.9 billion in payments. Nearly a dozen nonprofit insurance cooperatives have failed as a result.

AS AN ASIDE: I wrote a ton about the Risk Corridor brouhaha at the time, and yet somehow throughout it all I remained under the impression that it was Marco Rubio who spearheaded the move to undermine the funding mechanism. This is mainly because Rubio himself was the one who kept bragging about how he was the brains behind the scheme in the first place. Why he'd want to take credit for helping kick 800,000 people off their policies, putting a dozen companies out of business, putting several hundred people on unemployment and causing premiums to increase for no good reason, I have no idea.

To give you an example of how much Rubio grandstanded on a sabotage act he actually had nothing to do with, check out this clip from FOX News back in December 2015:

Anyway, the carriers continued to lose money in both 2015 and 2016 as well, the 2nd and 3rd years of the Risk Corridor program...which then sunsetted...ironically, just before most carriers started making a profit last year.

As noted, a dozen Co-Ops, as well as at least one private carrier in Wyoming ended up going belly-up, with the #RiskCorridorMassacre being responsible for a large part of this (although there were plenty of other problems with the Co-Op program as well).

After the dust settled, several of the carriers who were stiffed out of the money legally owed to them (along with the creditors for some of the now-liquidated Co-Ops) filed various lawsuits against the federal government to force it to pay them the money owed, which eventually ended up totaling $12.3 billion:

Health insurers and the Trump administration face a court decision shortly that will determine whether the government must pay insurers billions of dollars despite Republican efforts to block payments they view as an industry bailout.

Insurers have filed roughly two-dozen lawsuits claiming the federal government reneged on promises it made to pay them under the Affordable Care Act.

...It could also shape the outcome of other insurer lawsuits that would leave the government potentially owing as much as roughly $20 billion in past and future payments. Those cases, legal experts say, amount to the largest civil lawsuits ever.

More than money is at stake, however. If the federal government loses the lawsuits, the Trump administration could find itself forced to financially support a health law it has been seeking vigorously to undo.

...The standoff focuses partly on a program known as “risk corridors” that sought to entice insurers into the ACA markets by helping cover their financial risk.

...Insurers say the administration promised to cover certain losses even if it didn’t collect enough from participating insurers. But Republicans have put provisions in the federal budget saying the program can only pay out as much as it collected, creating a shortfall for insurers that totaled about $12.3 billion.

But there's a lot more going on here. As law professor Nicholas Bagley has repeatedly noted about the case:

If the administration wins, others may become leery of contracts with the federal government, fearing agreements may later be blocked by an opposing political party, legal experts said.

“When the federal government has made a promise to pay and doesn’t, how do you enforce it?” Mr. Bagley said. “It makes it harder for parties to trust the government.”

With that in mind, Bagley had been pretty confident that the carriers had a strong, solid case...and in fact one federal court did rule in favor of the carriers:

The Court finds that the ACA requires annual payments to insurers, and that Congress did not design the risk corridors program to be budget-neutral. The Government is therefore liable for Moda’s full risk corridors payments under the ACA. In the alternative, the Court finds that the ACA constituted an offer for a unilateral contract, and Moda accepted this offer by offering qualified health plans on the [exchanges].

Today, the Court directs the Government to fulfill [its] promise. After all, “to say to [Moda], ‘The joke is on you. You shouldn’t have trusted us,’ is hardly worthy of our great government.” Brandt v. Hickel, 427 F.2d 53, 57 (9th Cir. 1970).

This is exactly right. Even before the first risk corridor lawsuit was filed, I argued that insurers had viable claims against the federal government for any deficiencies. I’ve expanded on that view in an article in the New England Journal of Medicine and in extensive coverage on the blog. It was only a matter of time before a court entered a money judgment against the United States.

...all of which means you can hear the impending-doom music building up in the background, right?

Yep; sure enough, this happened today:

We have a decision in the risk corridor cases from the Federal Circuit. Insurers lose: they can't recover a dime. Judge Newman dissents.

— Nicholas Bagley (@nicholas_bagley) June 14, 2018

Here's Bagley's full write-up on what happened, why, and what it means for the Full Faith and Credit of the United States of America:

The opinion starts on a bright note for insurers. The ACA, the Federal Circuit reasoned, created an enforceable obligation to pay risk corridor claims in full: the statute is “unambiguously mandatory.” The court brushed back the government’s arguments that the ACA created only a budget-neutral risk corridor scheme: “Nothing in section 1342 indicates that the payment methodology is somehow limited by payments in.”

That’s a big deal. If nothing else other than the ACA were in play, insurers would be entitled to recover everything they say they’re owed.

* * *

Unfortunately for insurers, that’s not all that’s in play. Appropriations riders for fiscal years 2015 and 2016 limited funds available to pay risk corridor claims.

...As the dissent points out, Congress tried and failed to amend the ACA to make the risk corridor program budget neutral. The appropriations rider was the best it could do.

...Even as congressional Republicans kicked up a kerfuffle over “bailouts,” HHS was reassuring insurers that the agency would “record risk corridors payments due as an obligation of the United States Government for which full payment is required.” Knowing full well that it had an obligation to pay, Congress shut off the funding stream in a deliberate effort to sabotage the ACA.

And it worked! Loads of co-ops went under in response to the unexpected financial hit. Did Republicans in Congress care that they were reneging on a promise? Not a bit. They saw a chance to hurt Obamacare, and they took it.

...I’m again at a bit of a loss. You don’t have to use magic words to enter into a contract. You just have to make a promise.

...From there, it’s on to the Supreme Court. Who knows if it’ll agree to hear the case? It’s not an implausible candidate for review, and lord knows the Court can afford to take more cases. But the Court might be gun-shy about wading into another case about the ACA.

So this isn’t the end of the road for insurers. But it’s a Michigan-sized pothole in that road. And the opinion reflects a disturbing unwillingness to hold the government accountable for its promises. That’s a point Judge Newman made in concluding her dissent.

This now makes two situations in which the U.S. Federal Government has stiffed health insurance carriers out of billions of dollars which they're legally owed: The Risk Corridor Massacre and the Cost Sharing Reduction (CSR) reimbursement payment cut-off last fall.

In the case of CSRs, the carriers found a clever way to recoup the money anyway, via Silver Loading (they're still suing to recover the first 3 months of losses, however, which happened in the last quarter of 2017 and thus couldn't be covered by Silver Loading, which didn't start until 2018).

In the case of the Risk Corridor funds, their only option is to sue the government...and that effort suffered a major blow today.

I need to reiterate that this isn't about whether health insurance carriers are Good Guys or Bad Guys. The fact that many carriers are guilty of a long list of sins doesn't change the fact that they entered into what they thought was a legally binding contract in good faith with the United States Government, and the feds screwed them. Twice.

Once you've lost the Full Faith and Credit of the United States, why on earth would any corporation (or, for that matter, any foreign government) ever trust us again?

This, by the way, is the reason why I originally listed "Lock in CSR Reimbursements" and "Restore the Risk Corridor Funding" as the first two items on my "If I Ran the Zoo" wish list over a year ago, though I've since stricken CSRs off the list given the Silver Loading workaround. Again, this isn't about the actual impact making the RC payments would have on preimums/deductibles going forward, but about the United States of America keeping it's promises.