Category Archives: Issue spotter

Insurers run risk accepting illegal cost sharing reduction payments

In a set of letters addressed this week to Treasury Secretary Jack Lew and Health and Human Services Secretary Sylvia Burwell, Congressman Paul Ryan and Fred Upton, acting as chairs of various House committees, ask a very good question: where has the Executive branch found the authority to pay $2.7 billion to the insurance industry under the  guise of the “cost sharing reduction” program that is part of the Affordable Care Act?  That program, contained in section 1402 of the ACA and sometimes called the “Section 1402 Offset Program,”  was intended to permit lower income households purchasing “Silver” health insurance policies on the Exchanges set up by the ACA to get policies that not only had subsidized premiums but also provided greater benefits.  Purchasers receive plans at the “Silver” price but that actually have cost sharing similar to more generous Gold or Platinum policies.  The federal government would pay insurers for the expected difference in costs.  Congress, so far as anyone can tell, never appropriated any money to pay for this cost sharing reduction program, however. If true, this means that insurers still wishing to sell in the Exchanges needed to recoup losses on cost sharing reduction policies not from the federal government but, presumably, by charging other policyholders more.

The Ryan and Upton letters, coupled with the complaint in a lawsuit filed by the House of Representatives against Lew, Burwell and others last year, set forth what appears to be a persuasive argument: Congress never appropriated any money for this program. Thus, the Obama administration’s payment of billions of dollars to insurers for cost sharing reductions out of funds intended for tax refunds is not, as the executive branch has asserted through Secretary Burwell in May of 2014, a matter of “efficiency.”  Instead it is a diversion of funds intended to cover refunds of taxes into a program having nothing  to do with refunds. It is no more appropriate than paying for cost sharing reduction by raiding the Indian Health Service appropriation on the theory that it too was significantly affected by the ACA.

The Illegality of the Cost Sharing Reduction Payments

I have another question, though.  It starts with an assumption. Assume, for the moment, that there is no good answer to the question posed by Congress and that the Obama administration is acting unlawfully. Assume that by contracting with insurers to pay money and by then paying them money pursuant to the cost sharing reduction program, high level Obama administration officials are violating, in a fairly obvious way:

  1. Article I, section 9 of the Constitution (“No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law”);
  2. The “Purpose Statute,” 31 U.S.C. § 1301 (“Appropriations shall be applied only to the objects for which the appropriations were made except as otherwise provided by law”); and
  3. The Anti-Deficiency Act, 31 U.S.C. § 1341(a)(1) (“An officer or employee of the United States Government or of the District of Columbia government may not— (A) make or authorize an expenditure or obligation exceeding an amount available in an appropriation or fund for the expenditure or obligation; (B) involve either government in a contract or obligation for the payment of money before an appropriation is made unless authorized by law …“).

Assume, then  that the General Accounting Office is dead on when it recently wrote: “Agencies may incur obligations and make expenditures only as permitted by an appropriation. … The making of an appropriation must be expressly stated in law. 31 U.S.C. § 1301(d). It is not enough for a statute to simply require an agency to make a payment.” Assume that the District of Columbia Circuit got it right when it recently cited constitutional scholar Joseph Story for the proposition that “If not for the Appropriations Clause, `the executive would possess an unbounded power over the public purse of the nation; and might apply all its monied resources at his pleasure.'” Assume, even, that what is going on is a criminal offense under 31 U.S.C. § 1350:

An officer or employee of the United States Government or of the District of Columbia government knowingly and willfully violating section 1341(a) or 1342 of this title shall be fined not more than $5,000, imprisoned for not more than 2 years, or both.

The Problem for Insurers Receiving Illegal Payments

Now, perhaps no one has standing directly to challenge the billions in unauthorized expenditures on cost sharing reductions. Perhaps the Obama Justice Department is unlikely to bring criminal charges against its cabinet officials under 31 U.S.C. § 1350 for knowing and willful unlawful diversion of federal funds.   But, here’s the question.

Might not insurers receiving these unappropriated funds pursuant to the cost sharing reduction program be civilly and, potentially, criminally liable when it is plain that the payments are unauthorized?

If I were an insurance company, whose balance sheets often go through life with a bullseye painted on them and whose executives are seldom the subject of public adulation, I would be concerned about the potential for serious liability.  To be sure, the Obama administration is unlikely to pursue the matter; but any political constraints against revenge/just desserts by some future administration against Obama cabinet officials who engaged in the diversion might not protect insurers and, potentially, their executives. They might well be painted as conspirators or possibly accessories in receipt of patently unauthorized funds.

If insurers could at one time claim ignorance of the problems with the payments as a defense, that time appears to have expired. This is not an instance of trapping insurers by forcing them to look through, every time they get a federal dollar, the maze of federal appropriation statutes. We now have (a) the well publicized House lawsuit, (b) the now publicized letter of the Congressman to Secretaries Lew and Burwell and, perhaps most tellingly, (c) insurers’ deliberate insertion in their 2015 contracts with the federal government provisions excusing them from a remaining duty of performance (subject to state law) if cost sharing subsidies are not available to enrollees.  Since the most probable basis for such a discontinuation of cost sharing subsidies would be a finding that their payment was unlawful,  insurers thus sure look like they are on notice that there is a very serious question as to whether these payments are authorized by law.

I hope some courageous attorneys and auditors working for insurers receiving hundreds of millions of dollars under the cost sharing reduction program and who may well have duties to shareholders are busy researching both the legality of the continued receipt of funds. I hope they are also urgently researching whether any notice of potential illegal receipt needs to be provided — now — to shareholders.

Some initial legal research

Here’s what those researching civil and criminal liability are likely to find.  First, they are going to find many cases, including United States v. Wurts, a 1938 decision of the Supreme Court, authorizing the government to recover benefits paid in error or  without authorization.   There the issue was whether the government could recover a tax refund wrongfully paid even in the absence of a specific statute authorizing recoupment.  The court said that the government had inherent power.

The Government by appropriate action can recover funds which its agents have wrongfully, erroneously, or illegally paid. ‘No statute is necessary to authorize the United States to sue in such a case. The right to sue is independent of statute,’

And Wurts, although an older case, is cited today. A 2005 case, for example, cited Wurts in an effort by the government to recover payments wrongfully made to Medicare providers.  A 2003 case relied on Wurts to recover interest wrongfully paid by the government to a taxpayer.

The insurance industry will not be able to defend against their repayment obligations by asserting, “but the Obama administration told us these payments were authorized.” Such an “estoppel” claim will fail. The key case here is a United States Supreme Court case from 1990, Office of Personnel Management v. Richmond, 497 U.S. 1046. It held that so-called “equitable estoppel” does not lie against the government, even in circumstances far more sympathetic than those that would be presented in a suit against large insurers.  In OPM, the Court wrote:

Extended to its logical conclusion, operation of estoppel against the Government in the context of payment of money from the Treasury could in fact render the Appropriations Clause a nullity. If agents of the Executive were able, by their unauthorized oral or written statements to citizens, to obligate the Treasury for the payment of funds, the control over public funds that the Clause reposes in Congress in effect could be transferred to the Executive. If, for example, the President or Executive Branch officials were displeased with a new restriction on benefits imposed by Congress to ease burdens on the fisc (such as the restriction imposed by the statutory change in this case) and sought to evade them, agency officials could advise citizens that the restrictions were inapplicable. Estoppel would give this advice the practical force of law, in violation of the Constitution.

What this means, at a minimum, is that insurers should be very concerned that, given certain political developments, they may well be forced to give the cost sharing subsidies back.  Publicly traded insurers at least, then need to be concerned about whether they have a duty to shareholders — right now —  to warn them that their financial statements may not reflect this contingent liability.  At the very least, these insurers need to look at the size of these cost sharing payments relative to other assets and income to see if a repayment obligation would materially affect their financial statements.

Insurer liability for criminal conspiracy?

But perhaps it gets worse. An aggressive prosecutor might think about criminal liability.  Could the insurers receiving these funds be seen as conspiring with federal government officials to violate 31 U.S.C. § 1350?  There is, after all, a general federal conspiracy statute, 18 U.S.C. 371:

If two or more persons conspire either to commit any offense against the United States, or to defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy, each shall be fined under this title or imprisoned not more than five years, or both.

To be sure, the “conspiracy” at issue here is not exactly a classic conspiracy in which one person robs a bank while the other serves as driver of the get-away car. Moreover, there has been no effort at concealment by the insurance industry that they are receiving these funds.  If this is a conspiracy or an abetting, it is one occurring in plain view. Nonetheless, there are cases that should trouble insurers.

Consider United States v. Mellen, 393 F.3d 175 (D.C. Cir. 2004). There a government employee conspired with a government vendor to divert tens of thousands of dollars of electronic equipment to her home. Among those indicted for this unauthorized diversion was the employee’s husband, an employee of the federal Environmental Protection Agency.  The husband, though not particularly active in his wife’s crime, except for giving a stolen laptop to his son from a prior marriage, was nonetheless convicted for conspiracy based on this lesser participation and knowledge that the goods were stolen.  As now-Chief Justice Roberts phrased it in upholding conviction on a federal conspiracy charge:

Here, a jury could have concluded that Luther was in charge of the couple’s finances, that he understood the way government purchasing works, and that he knew the nature of his wife’s work. It would not take a rocket scientist to deduce that the electronic equipment Luther was himself using was stolen—an EPA employee with procurement training could do that.

Moreover, Roberts said, the defendant could not avoid liability by attempting not to investigate whether the goods were stolen.

[G]uilty knowledge need not be proven only by evidence of what a defendant affirmatively knew. Rather, the government may show that, when faced with reason to suspect he is dealing in stolen property, the defendant consciously avoided learning that fact.

Although the issue of cost sharing reduction payments is not exactly equal to the domestic situation at issue in Millen and receipt of stolen property, there is enough similarity to give pause. If the property is stolen (the payment is unauthorized) and the defendant has reason to suspect he is dealing with stolen property (unauthorized payment) and stealing of government property (making an unauthorized payment under 31 U.S.C. § 1350) is unlawful, those with even minor acts in furtherance of the transaction may be held liable for criminal conspiracy.  Although the crime is not a strict liability one, actual knowledge that the goods are stolen (payments are unauthorized)  is not required.

The law says that faced with suspicion — perhaps the sort generated by the House lawsuit here and the insurer’s own contract — conscious avoidance of learning of the provenance of the money may not prove an adequate defense.  Insurers at this point likely have some duty to perform some legal research. How much suspicion of a crime is required? Some courts say one needs to believe it to a “high probability.”  Maybe that’s not met here — at least not yet.  But if I were an insurer or an insurance executive I would hate for my fate to rest on that thin reed.

Let’s take one more case: United States v. Kozeny, 667 F.3d 122 2d Cir. 2011), the appeal of a conviction against a Frederic Bourke Jr.  for conspiracy to violate the Foreign Corrupt Practices Act.  The case involved bribes paid to government officials in Azerbaijan in connection with the privatization of the state oil company there. Again, I would hardly contend that this case is on “all fours” with what is going on with cost sharing reductions, but it is still instructive and disturbing.

Here’s why Kozeny should trouble insurers taking cost sharing reduction payments. One of the issues in the case was whether the trial judge had erred in giving the jury an instruction under which it could find Bourke guilty of conspiracy if he “consciously avoided” knowledge that his business partner was paying bribes to Azerbaijani officials.  The appellate court upheld the giving of the instruction, saying it had a factual predicate.  Here’s the kind of evidence found sufficient for a conscious avoidance instruction leading to a conspiracy conviction. The quotes below occurred in meetings between Bourke, his attorneys, and other investors.

  1. “I mean, they’re talking about doing a deal in Iran…. Maybe they … bribed them, … with … ten million bucks. I, I mean, I’m not saying that’s what they’re going to do, but suppose they do that.”
  2. I don’t know how you conduct business in Kazakhstan or Georgia or Iran, or Azerbaijan, and if they’re bribing officials and that comes out … Let’s say … one of the guys at Minaret says to you, Dick, you know, we know we’re going to get this deal. We’ve taken care of this minister of finance, or this minister of this or that. What are you going to do with that information?
  3. What happens if they break a law in … Kazakhstan, or they bribe somebody in Kazakhstan and we’re at dinner and … one of the guys says, ‘Well, you know, we paid some guy ten million bucks to get this now.’ I don’t know, you know, if somebody says that to you, I’m not part of it … I didn’t endorse it. But let’s say [ ] they tell you that. You got knowledge of it. What do you do with that? … I’m just saying to you in general … do you think business is done at arm’s length in this part of the world.

One wonders if there have not been parallel conversations amongst insurers. There may well have been speculation between insurers and their attorneys (that becomes unprivileged at some point) as to whether the cost sharing reduction payments don’t come unlawfully from unappropriated funds.  There may well have been speculation that the motivation for the payments was political — making sure Obamacare succeeds — rather than strict conformity with the law.

Conclusion

To be sure, it can’t be the case that any time an insurer or other party investigates whether payments from the federal government have been appropriated or not, the insurer can’t take the money without fear of criminal liability. No one would do business under those circumstances. But, at some point, insurers can’t resemble ostriches on  receipt of funds where there has been considerable warning that the payments are unauthorized. And, if their own investigation yields conclusions similar to that of the House of Representatives in their lawsuit, insurers who continue to accept funds do so at considerable risk. In the mean time, at a minimum, it would be prudent for insurers to place cost sharing reduction funds in some sort of segregated account so that there would be no issue of returning the money when some court authoritatively holds that the payment of these federal funds, without an appropriation from Congress, however much it helped Obamacare, however much Congress should have included an appropriation for them, was nonetheless illegal.

 

 

 

 

 

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Is there an answer to the House lawsuit on the ACA other than standing?

Many have been concerned that the architecture of health insurance without medical underwriting created by the Affordable Care Act was inherently unstable and that, sooner or later, the markets it created would contract due to serious adverse selection problems. Although various creative bolsters from the Obama administration have delayed that forecast from yet materializing, except perhaps for the most generous of ACA exchange plans, as it turns out, the more immediate threat to Obamacare may come not from its inherent architectural deficiencies but from technical flaws now being unearthed by program detractors.

One of these flaws has been much in the news: the failure of the premium tax credits section of the ACA (section 36B of the Internal Revenue Code) to extend to policies sold in states that did not establish an exchange pursuant to section 1311 of the Act.  There are approximately 34 such states. In 2014, they covered about two-thirds of those enrolled in individual health plans through the Exchanges.  The Supreme Court is likely to decide this term in King v. Burwell whether the Obama administration’s determination to extend tax credits to persons in those 34 states is lawful.  A decision against the Obama administration, which appears to be the prevailing prognostication,  will throw major parts of the ACA  into turmoil because only the sicker insureds with incomes that now qualify them for policies are likely to purchase those policies at full freight.  Insurers, knowing of that proclivity, are going to be very leery of selling such policies; adverse selection would seem inevitable.  It remains to be seen whether legislative action at the federal level — revision of section 1311 of the ACA — or at the state level — grudging creation of exchanges — would return those markets to equilibrium following a decision expected by many in King v. Burwell.

Another flaw, however, has not received much attention — until late. It is the apparent failure of Congress directly to appropriate money for another critical part of Obamacare that keeps premiums low: the cost sharing subsidies created by section 1412 of the law and now codified at 42 U.S.C.  § 18071.  The idea of this provision is that poorer purchasers can purchase a policy for “Silver” prices that ordinarily would have 30% cost sharing, but receive a policy that provides anywhere from “Silver plus” (27%) to “Platinum-plus” (6%) levels of cost sharing.  This way, lower-middle-class people can get a policy that they might be able to afford without much of its purpose being undone by hefty deductibles and copays.

Cost Sharing Reductions
Cost Sharing Reductions

 

For the reasons I outline below, it appears clear that Congress at least strongly contemplated that provision of these extra benefits to the poor would come not from higher prices for policies paid by wealthier purchasers on the individual exchange.  Instead, the federal treasury would pay the insurers for the extra costs they incurred in offering these more generous variants of the policy.  It appears that the Obama administration has been making such payments to insurers, even if the amount of the payments — potentially in the billions —  has not been made clear. (see 3:29:36 of this CSPAN video and the comments of CMS administrator Marilyn Tavenner).

In the lawsuit captioned United States House of Representatives v. Burwell, however, filed November 21, 2014, the plaintiff demonstrates with some care how Congress never actually appropriated any money for the cost sharing subsidies that sweeten Obamacare coverage. Presumably, insurers should thus have to cover themselves the resulting extra expenses created by higher utilization and lower deductibles and copay. Presumably insurers should do so out of revenues they receive from customers paying the full price. Gross premiums for everyone would thus need to be higher: probably 10-15% higher to cover the shortfall.  And if insurers neglected to take those extra expenses into account, well, tough on the insurers one supposes.  Such a lack of empathy would not be without recent precedent.  Congress just hurt the insurers badly in section 227 of the Consolidated and Further Continuing Appropriations Act, 2015 (“Cromnibus”) by apparently cutting off a creative funding arrangement the Obama administration had undertaken to make payments to/bailout the insurance industry through the Risk Corridors subsidy program.

The complaint
The complaint

Incomplete funding of Risk Corridors is middling potatos, however, compared to non-funding of cost sharing. I would not be surprised to see an increase of 10-15% in gross premiums result if such cost sharing payments were found unlawful.  An increase of (1) 10-15% resulting from the absence of appropriations for cost sharing subsidies, (2) perhaps 3% from whatever premium increases  are likely to result from  the “Cromnibus” decision not to permit circuitous funding of Risk Corridors deficits and (3)  perhaps another  7% from  increases in premiums that will result from the ACA-required phaseout of the Transitional Reinsurance provision under which the federal treasury covers insurers for insureds with large losses all adds up to a gloomy future for the Affordable Care Act. And that’s true even if, as its proponents claim, the cost curve is being bent. One reason insurance premiums are as low as they in the Exchanges is that, behind the scenes, the government is heavily subsidizing them in a variety of ways.

This cumulative projected increase can not be dismissed by asserting that the increase in premiums resulting from court-barred federal subsidies would affect only those earning more than 400% of the Federal Poverty Level and thus ineligible for Obamacare subsidies. Yes, it might appear that the net premium for others under section 36B really relates only to their incomes and not to the gross premium for insurance.

But the appearance of a limited effect is misleading in at least two respects.  Increases in premiums resulting from court decisions and statutory reductions will matter more broadly.  First, the subsidy only covers the cost of the second lowest silver plan in the rating area.  The many people wanting a plan more expensive than that — a Silver PPO in many parts of the country or even a Gold or Platinum HMO — will be affected.  Indeed, their net premiums will go up by a higher percentage than the increase in the gross premiums because the denominator of the increase calculation will not be the old gross premium but the (smaller) old net premium.  Second , to the extent that insurers attempt to compensate for the premium revenue shortfall by raising premiums on employer-sponsored insurance, under Revenue Procedure  2014–37 (page 363), which purports to implement section 36B, such a move would trigger increases in percentages of income that individuals have to pay as the net premium for even the second lowest cost Silver Plan.

So, what’s the answer?  We haven’t seen the literal answer in court to the complaint by the House of Representatives and, of course, there’s a very serious issue as to whether this is the kind of dispute that belongs in a court anyway.  Bet the house that the Obama administration will raise issues called “standing” and “political question doctrine” in an effort to get the case dismissed.  But, if those objections fail, is there an answer to the core of the House of Representative’s complaint on this point?

Congress intended that the federal treasury fund cost sharing

One answer might be that Congress at the time of the ACA’s passage clearly intended that payments for cost sharing reduction come out of the federal treasury and not through insurers charging higher prices.  The evidence on this point seems rather compelling.  Here is at least some of it.

  1. In discussing premium tax credits and cost sharing reductions, Section 1412(a)(3) of the ACA says that the “The Secretary [of HHS], in consultation with the Secretary of the Treasury, shall establish a program under which— the Secretary of the Treasury makes advance payments of such credit or reductions to the issuers of the qualified health plans in order to reduce the premiums payable by individuals eligible for such credit. “
  2. Section 1412(c), captioned “(c) PAYMENT OF PREMIUM TAX CREDITS AND COST-SHARING REDUCTIONS” states in subparagraph (3) “COST-SHARING REDUCTIONS.—The Secretary shall also notify the Secretary of the Treasury and the Exchange under paragraph (1) if an advance payment of the cost-sharing reductions under section 1402 is to be made to the issuer of any qualified health plan with respect to any individual enrolled
    in the plan. The Secretary of the Treasury shall make such advance payment at such time and in such amount as the Secretary specifies in the notice. “
  3. Section 1313(a)(6)  of the ACA , captioned  “APPLICATION OF THE FALSE CLAIMS ACT” states:  “Payments made by, through, or in connection with an Exchange are subject to the False Claims Act (31 U.S.C. 3729 et seq.) if those payments include any Federal Funds. Compliance with the requirements of this Act concerning eligibility for a health insurance issuer to participate in the Exchange shall be a material condition of an issuer’s entitlement to receive payments, including payments of premium tax credits and
    cost-sharing reductions, through the Exchange. ”  This provision makes little sense if cost sharing reductions were not paid for by the federal government.
  4. Section 1332 of the ACA addresses the possibility of states getting a waiver from many of the provisions of Title I of the ACA and says that in such event “the Secretary shall provide for an alternative means by which the aggregate amount of such credits or reductions that would have been paid on behalf of participants in the Exchanges established under this title had the State not received such waiver, shall be paid to the State for purposes of implementing the State plan under the waiver. ” Why would the State receive such funds for cost sharing reduction if the ACA did not contemplate that the federal government would already be paying for them?
  5. Section 6055 of the ACA requires issuers of “minimum essential coverage” to provide information on the amount of any cost sharing reductions received.  This provision makes no sense if insurers were just supposed to absorb the reductions and pass them on to other customers.
  6. Section 10104(c) of the ACA addresses limits on use of federal funds to pay for abortions.  It says no qualified health plan may pay for abortion services with  “[a]ny cost-sharing reduction under section 1402 of the Patient Protection and Affordable Care Act (and the amount (if any) of the advance payment of the reduction under section 1412 of the Patient Protection and Affordable Care Act).”  This prohibition would hardly seem necessary if cost sharing reductions were supposed to be absorbed internally by the insurer.

But perhaps it takes more than intent in a bill

My assumption, however, is that plaintiff House of Representatives will concede that the ACA certainly authorizes payments for cost sharing reductions and may indeed have contemplated that they would be made, but that it takes more than authorization for the executive branch. The House will argue, however, that to actually to make the payments: the Executive branch needs money. And it needs the money to be  in the right account via a formal appropriation by Congress.  The House will likely cite “The Purpose Statute,” 31. U.S.C. §1301 in support of this assertion.  This statute reads: “Appropriations shall be applied only to the objects for which the appropriations were made except as otherwise provided by law. ” It will likely also cite 31 U.S.C. §1341(a)(1), the Antideficiency Act in support. It says “An officer or employee of the United States Government or of the District of Columbia government may not make or authorize an obligation exceeding an amount available in an appropriation or fund for the expenditure of obligation.”

These statutory citations are indeed foreshadowed by several paragraphs on the House complaint during which it recites the requests of HHS for appropriations to pay for Cost Sharing Reductions ($4 billion) and asserts that no such appropriation was ever made.  The plaintiff notes that, by contrast, Congress did appropriate funds for the first cousin of Cost Sharing Reductions, advance premium tax credits through a standing appropriation under 31 U.S.C. § 1324 for tax refunds due individuals.

Or maybe not

I would expect two rejoinders to this argument.  The first is a technical and statutory one: apparently the Secretary has at one time asserted that appropriations for premium tax credits also covers cost sharing reductions.   The second is that any law restricting the executive’s power to spend money in this fashion is itself unconstitutional.

A statutory rejoinder?

Although acceptance of this first statutory argument would avoid the turmoil sure to erupt if cost sharing subsidies are judicially prohibited and the difficulties of constitutional adjudication, it strikes me, at least initially, as a loser. Although premium tax credits have a similar objective to cost sharing reductions, the two programs are not identical.  They could operate independently. There are many who are entitled to premium tax credits who are not entitled to cost sharing reductions.  If similarity of objective means that funds between programs are transferrable, an awful lot of Congress’ “Power of the Purse” has been evaded.

It’s also possible, however, since we haven’t seen the defendant’s response to the complaint that there’s some more authorization somewhere for the spending. If so, the House of Representatives is going to have egg on its face.  I assume, however, that  the House wouldn’t have been so foolish to file this lawsuit if it had not its homework carefully and failed to find even a needle-in-a-haystack explicit authorization for the spending.

A constitutional rejoinder

The harder question — and the one that would make House of Representatives v. Burwell a case about far more than the ACA — is the constitutional one.  Under what circumstances does the President have authority to spend unappropriated funds? Much ink has been spilled by scholars on this issue over the decades . Tahere are some older Supreme Court cases (Hooe and Sutton and Bradley) that indirectly suggest that the limits created by the predecessors to these statutes are real and permissible.  There’s also a thorough review of the then-existing literature by the Clinton-era Department of Justice in a memo of its Office of Legal Counsel from 2001 (2001 WL 36175929). Perhaps more relevant will be two cases which, though not binding on the Supreme Court, will likely have some precedential force.

West Point: Excellent views, historic buildings
West Point: Excellent views, historic buildings

Consider first Highland Falls-Fort Montgomery Central School District v. United States, 48 F.3d 1166 (Fed. Cir. 1995), a case decided by the Federal Circuit in 1995.  It involved a statute, the “Impact Aid Act” designed to help certain categories of schools: (1) “section 237” school districts whose property tax base was reduced by the presence of a lot of non-taxable federal property in the area, (2) school districts that had to educate children of workers on federal property, and (3) school districts that had incurred a substantial increase in the number of attending children.  Highland Falls, which sits near the West Point Military Academy, was an example of the first kind of district.  It should have received money pursuant to the Impact Aid Act since West Point apparently ate up apparently 50%  — and a beautiful 50% at that — of the property in the district .  But Congress, instead of allocating a lump sum for all payments to be made under the Impact Aid Act, split up the money with specific appropriation for each of the three categories of hardship it identified. And, apparently, the amount of money allocated to the category against which Highland Falls was claiming was short whereas the amount of money Congress had allocated to two other categories was more complete.  So, Highland Falls wanted the Department of Education (DOE) to transfer money from the more fully funded accounts to the one that would benefit it.

The court in Highland Falls refused to direct such a reallocation of appropriated funds.  Here’s what it said when DOE declined to do so:

Section 1341(a)(1)(A) makes it clear that an agency may not spend more money for a program than has been appropriated for that program, while § 1532 provides that an agency may use money appropriated for one program to fund another program only when authorized to do so by law. It is undisputed that, in each of the relevant fiscal years, Congress appropriated specific amounts to pay for § 237 entitlements. It also is undisputed that, in each of the relevant fiscal years, in order to fund § 237 entitlements at 100% levels, it would have been necessary for DOE to use money appropriated by Congress for entitlements under other sections of the Act—squarely in contravention of § 1532. The approach DOE followed was consistent with this statutory landscape.

As noted above, in order for DOE to fund § 237 entitlements at 100% in accordance with § 240(c), the agency would have had to transfer money from other sections’ appropriations to fund § 237. If DOE had followed such an approach, it would have been spending more money than Congress had appropriated for § 237 entitlements, in violation of § 1341(a)(1)(A). In addition, it would have been depriving at least one other section’s program of funds expressly appropriated for it by Congress. Put another way, it would have been “raiding” one appropriation account, for example § 238 or § 239, to credit another, § 237, in violation of § 1532.

Now, this is not a square holding on precisely the issue in the House of Representatives current lawsuit. It’s not a case where — as here — the Executive branch undertook a reallocation and someone wanted to challenge it.  Nonetheless, the language of Highland Falls is supportive of the House’s point.  Having decided, apparently, not to allocate funds for Cost Sharing, the executive branch can’t raid a related fund to help pay for it.

Also relevant will be Eastern Band of Cherokee Indians v. United States, 16 Cl. Ct. 75 (1988). There an Indian tribe sought money to equalize funding of its schools relative to local schools.  There was a federal statute that was supposed to provide such money.  But Congress had declined to appropriate funds for this special “set aside.”  The tribe asked that money be used from other accounts controlled by the Secretary of the Interior to make the statutory payments.  The court upheld the government’s decision not to do so.

The Set–Aside Fund was not funded in fiscal year 1986, the year of plaintiffs’ request. Plaintiffs argue that the Department of Interior could have applied funds from other accounts. However, the Anti–Deficiency Act, 31 U.S.C. § 1341(a) states that a United States officer may not authorize expenditures “exceeding the amount available in an appropriation or fund for expenditure or obligation.” Thus, the officers of the Department of the Interior could not grant the plaintiffs’ request for funding. Penalties for violating the Anti–Deficiency Act are codified at 31 U.S.C. §§ 1349 and 1350. The court thus finds that the plaintiffs have failed to state a claim upon which relief may be granted as funds are not available to satisfy plaintiffs’ claim.

Again, not a case 100% on point, but still one that, at least in dicta, reinforced the House’s claim here that the executive can not dip into one pot of money, even if related and even if efficient, to pay bills for another program. And that is true even if Congress has earlier expressed its intent that such a program be funded.

MRE Beef Stew
MRE Beef Stew

And there is, on the other hand a case involving a disappointed bidder and military purchases of diced turkey (with gravy) and beef stew: Southern Packaging and Storage Company, Inc. v. United States (D.S.C. 1984). There, a district court found that, although the  purchase from a Canadian company violated the “Buy-American” provision of the Department of Defense Appropriations Act there was no violation of the anti-deficiency statute because the amount spent on combat rations — even Canadian-sourced ones — did not exceed the overall Congressional appropriation.

There is, in addition, lots of non-judicial authority on the subject, ranging from death-match law review articles by Professors Sidak (1989 Duke L.J. 1162 (1989)) and Stith, (97 Yale L.J. (1988)),  to summaries of the law from the United States General Accountability Office to a memorandum from the Clinton-era Justice Department.

Conclusion

So, there is a lot more to be said on this subject and we have not yet had the benefit of Secretary Burwell’s research and argument.  But, at least for now, provided the House can overcome the substantial justiciability questions, it looks like it may have a strong case on the merits. Of course, the House ought, like all of us, to be careful what it wishes for.  One wonders what reaction many Americans will have to a House legal victory when they find that they can no longer afford the health insurance they purchased due to what they may well regard as a “technicality.”

 

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Reinsurance reduction will add 7% to gross premiums for 2015

That’s in addition to whatever increases are caused by medical inflation and adverse selection

 

As we draw to what was originally to be the close of the 2014 regular open enrollment period for policies sold on Exchanges under the Affordable Care Act and as the evidence comes in on the actual numbers and demographics of purchasers, it’s time to start thinking about 2015. In this post, I’m not going to speculate today about the effects of the expanding the “hardship exemption” from the individual mandate on insurers’ experience in 2014, the effect of the “Honor System” in extending the time in which individuals can purchase coverage on the Exchange without medical underwriting, or on the effects of any of the other the myriad changes in the law that have been promulgated by the Executive Branch since Congress passed the ACA in 2010. Instead, I want to focus on the effect of statutory changes in the government-created reinsurance program on likely premiums in 2015.

First, a refresher. One of the ideas behind Obamacare was to lure people into the Exchanges with carrots and sticks.  The most frequently discussed carrots were advanced premium tax credits that reduced the effective price of insurance for many individuals and, for many of those receiving the premium tax credits, contracts with extra benefits (cost-sharing reductions) for which the purchasers do not have to pay. Not only, however, are Exchange policies subsidized by reducing the price to the consumer but also by reducing the cost the insurer faces in paying claims.  A key mechanism for this latter reduction for the first three years of the program is free “reinsurance” provided to all insurers for slices of their claims. Of course, the reinsurance isn’t really free; there’s a $63 per insured life tax levied on other health insurance policies in order to make policies on the Exchange more attractive, a transfer whose justice will not be considered today.

The reinsurance works in 2014 by having the government reimburse insurers for 80% of the amount of any insureds claim between $45,000 and $250,000. Thus, if an insured had claims of $105,000, the government rather than the insurer would pay for $48,000 of the claim while the insurer itself would pay for the remaining $57,000.  If an insured had claims of $30,000, the insurer would pay the whole bill.  And if an insured had claims of, say, $300,000, the government would cover more than half — $164,000 — while the insurer itself would pay the remaining $136,000.

Sample of the data embedded in the Excel spreadsheet for The Actuarial Value Calculator
Sample of the data embedded in the Excel spreadsheet for The Actuarial Value Calculator

One can use information contained in the government’s own “Actuarial Value Calculator” to estimate the effect of this reinsurance on Exchange premiums.  (I’ve placed a graphic above this paragraph showing some of the information in the Calculator.)  Based on my computations using Mathematica and done in connection with a recent academic conference, the reinsurance should lower the price of an Bronze policy by about $450 (11%), a Silver policy by $531 (11%), a Gold policy by $545 (11%) and a Platinum policy by $616 (10%).

The parameters of the reinsurance policy will change in 2015.  HHS currently says that instead of “attaching” at $45,000, reinsurance will only kick in if an individual’s claims exceed $70,000. And instead of reimbursing the insurer 80% of the slice between the attachment point and the $250,000 limit, the government will now reimburse just 50% of the slice. The table below shows the results of this change in reinsurance on the expected value of the reinsurance policy. If one assumes that medical inflation will be 4%, the value of the reinsurance will range from $192 for Bronze policies to $243 for Platinum policies. These computations are all again done using Mathematica based on data provided by the government itself in its Actuarial Value Calculator.

Value of reinsurance subsidy in 2015 for varying rates of medical inflation
Value of reinsurance subsidy in 2015 for varying rates of medical inflation

Insurers will need to compensate for the diminished reinsurance by raising prices.  How much?  The table below shows the answer: somewhere between 7 and 8% depending on the type of policy being sold and the rate of medical inflation.

Increase in premiums for 2015 just to cover reduction in reinsurance subsidies
Increase in premiums for 2015 just to cover reduction in reinsurance subsidies

If one adds regular medical inflation to the increases induced by reduced subsidization, here’s a picture of what we get. To obtain a single result for each rate of medical inflation, I’m going to weight the metal tiers according to their rough proportions in the market as last measured.

Projected premium increases for 2015 with reinsurance subsidy reductions taken into account for varying rates of medical inflation
Projected premium increases for 2015 with reinsurance subsidy reductions taken into account for varying rates of medical inflation

The results of combining ordinary medical inflation with reinsurance reductions are a bit scary.  While most people seem to believe the ACA system can survive premium increases of 6% or 8%, what we see is that even if medical inflation is kept to 4%, the results of combining medical inflation with subsidy reduction is a 12% hike.  And, if insurers are nervous about pricing in 2015 due to higher than expected claims experience in the early parts of 2014 or the persistence of problematic demographics such that they expect ordinary claims inflation of 10%, then we start getting into premium increases of about 18%.

Is there a workaround?

It is fair to say that the Obama administration has not been reluctant to change implementation of the Affordable Care Act in response to changing circumstances.  And, I suspect that if the Obama administration starts getting hints that insurers selling on the Exchanges are either thinking of pulling out of the Exchanges or of raising premiums significantly, one of the ways it will respond is by altering the parameters of the reinsurance program.  The attachment point, limit and reimbursement rate are all matters as to which the Obama administration has regulatory flexibility.  Indeed, it changed the 2014 reinsurance parameters favorably for insurers late into the process. And, of course, by providing a lower attachment point, higher reimbursement rate and/or a higher limit, the government can increase the effective subsidy created by the free reinsurance and thereby reduce pressure on insurers to raise premiums.

If, for example, the Obama administration were to go to, say, a 65% reimbursement rate rather than a 50% rate for 2015 and were to go to a $60,000 attachment point rather than a $70,000 one, a 4% increase in medical inflation might result in a lesser 9% increase in premiums rather than 12%.  And even a 10% increase would result in a lesser 14% increase in premiums rather than an 18% one.

The problem with this “fix,” however is that it costs money.  And, by statute, the government is supposed to spend $4 billion less on the reinsurance program on claims for 2015 than it spent on claims for 2014.  That’s why HHS reduced the reinsurance parameters for 2015 in the first place.

I can foresee two ways around this limitation.  The first is for the Obama administration to engage in creative math and find a theory under which the projected cost of its reinsurance program aligns with statutory requirements.  While cynics may be fond of my projection of this response, there is a serious question as to the extent that principled actuaries in the Executive branch will permit this “methodology” to be used. The second possibility is for the Obama administration to stockpile funds from 2014  and use them to pay reinsurance in 2015.  Section 1341(b)(4)(A) of the ACA appears to make this possible.  This scheme only works, however, if the government actually has money left over from its 2014 reinsurance pool.  And, while lower than expected enrollments in the Exchanges increase the probability that there will be money remaining, that potential surplus could well be eaten away if claims for 2014 are higher than expected.

A result of improper conceptualization

Amidst all the technical detail, it’s worth thinking about how this could have happened. How could the architects of the ACA, who were acutely aware of the risks of an adverse selection death spiral, create a system in which there were built in pressures to increase premiums? I think the answer comes in examining the rhetoric of the reinsurance program.  It was not articulated as a subsidy but rather as a way of reducing the risk of entering the Exchanges. See here, here and here for examples.   If adverse selection or moral hazard drove claims costs up, the government would significantly insulate insurers from that risk by providing reinsurance. This, along with Risk Corridors in the first three years of the program, and Risk Adjustment thereafter, was supposed to provide insurers with comfort as they deliberated whether to enter an untested market for health insurance in which most of their conventional underwriting mechanisms were prohibited. And, indeed, the Transitional Reinsurance program does reduce risk. Based on my computations, it reduces the standard deviation of losses for Bronze policies from $16,403 to $11,430 and for Platinum policies from $17,215 to $11,598.

If one conceptualizes the transitional reinsurance program merely as a risk reduction policy, it makes sense to phase it out as insurer experience with the purchasing pools in the ACA.  Insurers gain confidence in how to price their policies.  But what appears to have been forgotten in that calculation is that these reinsurance subsidies also save insurers lots of money.  And insurers will need to respond to the phasing out of these substantial subsidies by raising premiums.  Whether that tunnel vision in conceptualization contributes to an implosion of the ACA, at least in some states, remains to be seen.

 

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How Virginia insurers got the federal government to pay for bariatric surgery under Obamacare

I’ve been doing some research into the effects of market concentration on health insurance premium pricing on the health insurance Exchanges run by the federal government.  During the course of that research, I discovered what I first thought had to be a programming error on my part or a database error on the part of healthcare.gov: Silver and Gold plans that were costing individuals age 50 upwards of $2,000 per month.  Yes, per month!

It turns out, however, that these exorbitant prices are not errors. They represent a clever attempt by several insurers in Virginia — Optima Health, Coventry Health Care of Virginia, Inc., Innovation Health Insurance Company, and Aetna —  to get the federal government to pick up a substantial part of the tab for bariatric surgery. Here’s how it works.  The insurer offers the consumer a premium that is often $2,000 per month ($24,000 per year) more than it charges for other essentially identical plans. The bonus is that the insurer offers the consumer,  in addition to the usual benefits, bariatric surgery, which is otherwise subject to coverage restrictions in Virginia. Now, the only person who would rationally purchase such a policy is one who is pretty certain to undergo such surgery. And, as it happens, bariatric surgery (such as a gastric bypass) appears to cost between $20,000-$25,000. In effect, then, the insured prepays for the surgery via augmented premiums and perhaps piggybacks on the insurer’s bargaining power with surgeons to get a cheaper price.

So far, however, this does not seem like a compelling business model for insurance; at best it converts insurance into an elaborate financing scheme. But wait: if the insured has a relatively low income (and obesity correlates with poverty in modern America), under the cost sharing reductions provisions of the ACA (42 U.S.C. § 18071) the federal government now picks up much of the deductible and coinsurance that would otherwise be owed. Instead of there being, say, an $3,500 deductible and a $6,350 coinsurance limit, as there is under the Aetna Classic 3500 PD:MO policy offered in Virginia, if the person is poor enough (100-150% of federal poverty level), the deductible under the Aetna Classic 3500 PD: CSR 94% MO  is now $300 and the out-of-pocket limit is now $1,250. The federal government is thus likely to pay for $3,200 to $5,100 of the bariatric surgery that would otherwise come out of the patient’s pocket.

Is this legal under the ACA? I believe it may well be. I don’t see a violation of the “metal tiering” provisions of the ACA.  Under section 1302 of the ACA (42 U.S.C. § 18022), whether something qualifies as a Silver or Gold plan depends on the cost to the insurer of providing essential health benefits to a standard population, not on the cost to the insurer of providing its actual health benefits to the population it anticipates attracting.  That may not be a very good system, but is the one in the law; it is probably simpler than some alternatives. Moreover, section 1302(b)(5) of the ACA makes clear that a health plan may provide “benefits in excess of the essential health benefits described in [the ACA].” And, since some states apparent include bariatric surgery in their list of essential health benefits, it’s hard to say that Congress implicitly rejected paying for this procedure.

Footnote: I suppose there could be an issue as to whether this plan conforms to Virginia insurance regulations.  I’m not an expert on that, but my working assumption is that the Virginia regulatory apparatus has approved these plans.

Is what these insurers are doing appropriate?  That’s a tricky question. Basically what they are doing is the result of a decision by the Department of Health and Human Services relating to implementation of sections 1201 and 1302 of the ACA. HHS, instead of creating some uniform concept of Essential Health Benefits for those states that elected not to make their own decision, instead decided to try and mimic features of the “largest plan by enrollment in the largest product by enrollment in the State’s small group market.” 45 C.F.R. 156.100) That essentially made it a bit a matter of luck as to the circumstances under which bariatric surgery or other weight loss programs would be covered by plans permitted to be sold after 2013 on the individual market. It meant that in some states the risk of needing (or badly wanting) bariatric surgery would be spread among all those purchasing non-grandfathered plans after 2014 whereas in other states either the risk would not be transferred at all or would be transferred, as in Virginia, only at a high price. The map below created by the “Obesity Care Continuum” shows how the states differ.

 

Obesity treatment under state benchmark plans
Obesity treatment under state benchmark plans

And should bariatric surgery itself be covered?  It’s not an easy decision.  On the one hand, bariatric surgery frequently results in part from poor health choices made by the individual. Yes, there may be contributing factors such as access to healthy foods, genetics, access to safe methods of exercise, but, still, most people have a choice not to become obese.  And, if the condition is viewed as substantially the result of individual choice, the case for socializing and spreading the risk is weaker. On the other hand, there are plenty of risks that health insurance policies do pay for — both before and after the ACA — that likewise result substantially from personal choice.  They cover orthopedic surgery for (mostly wealthy) people who choose to ski. They cover smoking related conditions — albeit for an additional premiums which, if actually collected, would still probably be less than the actuarial risk of tobacco use. They cover treatment in at least some forms for the variety of conditions created by substance abuse (drugs, alcohol). They sometimes cover non-surgical costs to which obesity contributes even when those problems are partly the result of individual choices. And they covers the costs of treating sexually transmitted diseases even when those diseases might, in some instances, have been prevented by safer sexual practices. Untangling fault out of medical need is often a tricky proposition indeed.

So, perhaps these Virginia insurers are doing the public a service by evading/working around restrictions in the Obamacare package of essential benefits provided in some states that were unduly narrow.  Indeed, on this view, the problem is not that the federal government is subsidizing bariatric surgery, it is that individuals have to pay these enormous extra premiums for a risk that should be shared and that are shared in some states. It will be interesting to see what happens with these Virginia plans and whether what has started there extends to other states in which bariatric surgery is not presently considered an essential health benefit.

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A roadmap for legal attacks on the employer mandate delay

After going through notice and comment rulemaking, the Internal Revenue Service and the Department of the Treasury announced a “final rule” Monday that the employer mandate  tax contained in the Affordable Care Act (26 U.S.C. § 4980H) will not apply at all to large “bubble” employers with between 50 and 99 workers until after December 31, 2015, and that employers with 100 or more workers can avoid the § 4980H tax from December 31, 2014 to December 31, 2015, by offering compliant health insurance coverage to 70% of its employees. These provisions amend previous IRS rulings that the employer mandate tax would start for plan years beginning after December 31, 2014, and that a large employer would need to offer health insurance coverage to 95% of its employees before it would be exempt from the potentially steep taxes imposed by section 4980H.  Both the new final regulations and the earlier ones contradict the language of the Affordable Care Act, which states that the tax kicks in for plans beginning after December 31, 2013, and that an employer must offer health insurance coverage to “all” of its employees, not 95% and certainly not 70%, before it could escape this form of taxation.

In this blog entry, I want to accomplish three goals.  I want to educate on the legal issues created by the recent regulation.  I want to suggest both a conventional path to challenge the regulation and an unconventional path.  And, I want to advocate.  I want to implore the readers of this blog who are predisposed to think highly of President Obama to really question the precedent they let be set by permitting an Executive to refuse to collect a tax for years in circumstances where it is crystal clear that Congress has directed that it be done. There is a serious risk that future leaders may not share the same priorities as President Obama or themselves. Immunizing non-collection decisions from judicial correction will lead to collapse of government programs those sympathetic to our current President believe are worthy. It could also lead subsequent Congresses to refuse to enact government programs that make sense only if payment for them can not be subverted by a recalcitrant executive branch.   In short, the people who should be most disturbed about what the President has done are his many friends who support not just the now-gutted employer mandate but who believe that the federal government has a major role in, as with the ACA, redistributing wealth acquired through the market.  I would be very impressed if they mustered the courage to stand up to their friends.

A conventional path to challenge the employer mandate delay

Here are some plausible book moves in the legal chess game that likely lies ahead for the decision yesterday to modify the times and conditions under which the employer mandate will be enforced.

Standing

Opponents will hunt for a plaintiff.  As others have noted, due to a doctrine called “standing,” this will not be so easy. Under Supreme Court precedent, the plaintiff is going to have to show (a) that the failure to enforce the employer mandate caused the plaintiff’s employer not to provide health insurance, (b) that the employer would provide the requisite form of health insurance if the tax were being enforced, and (c) that the plaintiff has  actually been damaged by the failure of their employer to provide health insurance. If, for example, the employer says it is not sure what it would do if the tax were imposed, a case challenging the delay is likely to fail for lack of standing. Or if it could be shown that the failure of the employer to provide health insurance actually permitted the employee to purchase equally good and similarly priced health insurance on an individual Exchange, a case challenging the most recent IRS rules would likewise likely fail for lack of standing.

On the other hand, there may well be plaintiffs out there with standing to sue.  There are about 18,000 firms with more than 50 employees in the United States. While some might make decisions on whether to provide health insurance that would be unaffected by the tax, if even 5% would admit to being affected by the tax — whose whole point, after all, is precisely to cause the result plaintiff will need to show — that would represent a universe of 900 potential businesses that almost surely employ more than 50,000 employees. It takes only one employee with standing to bring suit in order to challenge the legality of the President’s latest actions.

The best plaintiff would be an employee of a large corporation that has not provided “minimum essential coverage” (a/k/a/ health insurance) but which says, without equivocation, that it would do so if the employer mandate were in place. It would be best if the insurance the employer would have provided would cost the employee less than alternatives made available on the individual Exchanges.  Perhaps, for example, the employee worked for an employer that had extraordinarily healthy employees — a large gymnasium chain filled with youthful, mostly male, low-health-cost physical trainers , for example —  and could thus provide even minimally acceptable coverage via self insurance for less than the amount the employee could obtain on an individual Exchange.

Violation of the Administrative Procedures Act

Plaintiff’s argument

Once the standing hurdle is overcome, expect a challenge based on violation of section 702 of the Administrative Procedures Act (5 U.S.C. § 702).  This law states: “A person suffering legal wrong because of agency action, or adversely affected or aggrieved by agency action within the meaning of a relevant statute, is entitled to judicial review thereof.”  The plaintiff will argue that Congress has spoken with crystal clarity on the issue of when section 4980H was supposed to take effect: it was supposed to take effect for plan years beginning after December 31, 2013.  There is nothing ambiguous about that date. There is nothing for the Supreme Court — let alone the Internal Revenue Service — to interpret.

Saying the year 2013 means the year 2015 is completely and totally absurd. The 2013 date chosen by Congress did not encompass the idea of “sometime in the kind of nearish future.” Congress balanced many factors, including the difficulty of complying with the statute and the desirability of having the employer mandate coordinate with many other provisions of the ACA that take effect starting in 2014.  Moreover, given the enormous costs of the ACA, even in the reduced form taken by original projections, the $10 billion per year in tax revenues the employer mandate was expected to generate, was another reason to call for adoption in 2013. Under these circumstances, Congress did not choose to give large employers 5 years and 9 months to figure out how to finance and acquire health insurance for their employees; Congress thought 3 years and 9 months of “transitional relief” was perfectly adequate. Congress did not want the goal of reducing the number of uninsureds subverted by letting employers off the hook or, perhaps, the burdens on the subsidized Exchanges exacerbated by large employers not pulling their weight.

The situation is no better, plaintiffs will argue, for the Obama administration’s decision in the regulations to distinguish amongst different sorts of large employers, letting employers with between 50 and 99 employers off the hook in the year 2015 while compelling at least some employers with more than 100 employees to provide health insurance in the same year. The statute carefully defined large employers in this context to mean more than 50 employees and deliberately chose 50 as the point at which to balance the importance of employer-provided insurance against the administrative and financial burdens of forced provision. Congress did not choose, for example, to stage imposition of the employer mandate first on the biggest of the large employers and a year or so later on the smaller within that group.

Finally, even if there was some basis for staging imposition of the mandate, plaintiffs will argue, the Obama regulations have butchered the provision of 4980H that calls for imposition of a large tax unless the employer offers insurance to all eligible employees. Conceivably the agency could stretch the “all” concept to 95% as it did before.  Perhaps 95% could be justified as a bright line proxy for the sort of honest mistakes that Congress would not have wanted to serve as a predicate for a hefty tax. But when the Executive branch goes from “all” to 70% it can not be said with a straight face that anyone is speaking about  providing a safety zone against honest mistakes.  Now we are talking an entirely different regulatory regime.  The Administrative Procedures Act does not give the Executive branch the power to legislate; and if it did so, the APA would itself be unconstitutional.

The Chevron Deference rebuttal

Expect the defendants to fight back with something known in the law as “Chevron deference.” This widely cited doctrine emerges from the observation that executive agencies actually have a lot of expertise in interpreting statutes in their area.  Therefore, it should be assumed that Congress would have wanted the agency to have considerable leeway in interpreting statutes. So long as the agency follows the right procedures in developing its rules, such as the “notice and comment” rulemaking that preceded the recent pronouncement on the employer mandate,  the rules developed by the agency are lawful and binding even if the court would itself not have interpreted the statute the way the agency does. The main caveat — and it is the big “Step 1” in the Chevron process — is that the agency’s interpretation has to be a reasonable interpretation of the statute, a “permissible construction.”

But, the plaintiff will argue — and I believe with great success —  “Chevron deference” does not exist where the statute is really not subject to interpretation at all. As the Supreme Court said in Chevron, USA v. Natural Resources Defense Counsel, Inc., “If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.” And it is hard to imagine anything clearer than “December 31, 2013.”  It is hard to imagine a construction of “all” — particularly in a context in which alternative taxes (4980H(b)) are placed on employers that offer compliant health insurance to at least some of their employees– that could mean 70%.  It is just not a reasonable construction.

“But wait,” I hear some judge asking.   “Are you saying that the IRS could not give a company a few extra weeks to get health insurance? Are you saying that the IRS could not give companies any leeway in obtaining health insurance and saying that if a single employee goes uninsured the company is subject to a $2,000 per employee (minus 30) tax?” No, not quite. As to the few weeks grace period, I do not believe the IRS can interpret the statute to permit such to occur automatically.  I understand giving a select company a few extra weeks if there were extraordinarily circumstances — a natural disaster, an unintentional failure of communications — but Congress (a) already gave the companies more than a three year grace period to get health insurance for their employees and (b) assesses the tax on a monthly basis, $166.67 per employee per month, so that the company would not in fact be hit with a $2,000 whammy.  And as to whether the IRS could give companies some leeway, again, if there were a factual showing that it would be easy for a company to mess up on a small percentage of employees and that some accommodation was necessary in a particular case, I do not believe some leniency would subvert the intent of Congress. But I see no evidence from the IRS that a 30% mistake zone is necessary; instead, this appears to be a way of simply mellowing out a tax regime that the Executive branch now believes (perhaps rightly) is too harsh without, however, asking Congress, who might actually agree were the case respectfully put to them, to assist with a modification of the statute.

The Prosecutorial Discretion rebuttal

The better argument the Obama administration will muster goes under the name “prosecutorial discretion.” The idea, buttressed by many case, including the 1985 Supreme Court decision in Heckler v. Chaney, is that the Executive branch needs lots of leeway in determining enforcement priorities and there is therefore a very strong presumption against judicial review of decisions not to prosecute and not to pursue agency enforcement actions. And while, to be sure, most of these cases arise where the government is less transparent about its enforcement priorities, surely the government should not be restricted in its otherwise existing discretion just because it sought notice and comment before deciding what to do and was transparent enough to publish the basis on which it would make decisions.

Here are some quotes from Chaney which the Obama administration’s attorneys  are likely to throw in the face of any potential challenger to its regulations.

  • “[A]n agency decision not to enforce often involves a complicated balancing of a number of factors which are peculiarly within its expertise. Thus, the agency must not only assess whether a violation has occurred, but whether agency resources are best spent on this violation or another, whether the agency is likely to succeed if it acts, whether the particular enforcement action requested best fits the agency’s overall policies, and, indeed, whether the agency has enough resources to undertake the action at all. An agency generally cannot act against each technical violation of the statute it is charged with enforcing. The agency is far better equipped than the courts to deal with the many variables involved.”
  • “In addition to these administrative concerns, we note that, when an agency refuses to act, it generally does not exercise its coercive power over an individual’s liberty or property rights, and thus does not infringe upon areas that courts often are called upon to protect.
  • “[A]n agency’s refusal to institute proceedings shares to some extent the characteristics of the decision of a prosecutor in the Executive Branch not to indict — a decision which has long been regarded as the special province of the Executive Branch, inasmuch as it is the Executive who is charged by the Constitution to “take Care that the Laws be faithfully executed.” U.S.Const., Art. II, § 3.”
  • “The danger that agencies may not carry out their delegated powers with sufficient vigor does not necessarily lead to the conclusion that courts are the most appropriate body to police this aspect of their performance.”

Sounds bad for our plaintiff!

There is, however, the noteworthy footnote 4 in Chaney that should give plaintiffs some hope. After all, Chaney articulates the doctrine of agency discretion as a strong presumption, not an irrebutable one. Here is what Justice Rehnquist said:

We do not have in this case a refusal by the agency to institute proceedings based solely on the belief that it lacks jurisdiction. Nor do we have a situation where it could justifiably be found that the agency has “consciously and expressly adopted a general policy” that is so extreme as to amount to an abdication of its statutory responsibilities.” See, e.g., Adams v. Richardson, 156 U.S.App.D.C. 267, 480 F.2d 1159 (197) (en banc). Although we express no opinion on whether such decisions would be unreviewable under § 701(a)(2), we note that, in those situations, the statute conferring authority on the agency might indicate that such decisions were not “committed to agency discretion.”

In other words, plaintiffs may be able to argue that this is not a case where the agency is in fact making enforcement decisions based on budgetary priorities or the probability of success. Few if any of the reasons behind the discretion doctrine exist here; the doctrine of discretion should not exist for its own sake precisely because it derogates from popular sovereignty exercised via Congress. There should be enough of a paper trail for the plaintiff to show persuasively that, the agency is making an enforcement decision based on a sense that the statute is unfair or unwise or, if someone has left a smoking-gun email around, pure political considerations.

The facts of Adams bear some resemblance to the facts here. Just as here there is a statute calling on the IRS to levy a tax starting in 2014, in Adams, there was a statute that directed certain federal agencies to terminate or refuse to grant assistance to public schools that were still segregated. Just as here the agency in charge (the IRS) is apparently going to refuse to pursue that tax in 2014 (and 2015) as a matter of policy, in Adams the federal agency in charge (Health, Education and Welfare) effectively adopted a policy of refusing to stop funding segregated public schools. The fact that there was general non-enforcement as a matter of policy distinguished the case, in the view of the Adams court, from conventional prosecutorial discretion.

The other hope for plaintiffs would be to use the extreme example of this case as a way of infusing contemporary doctrine on review of agency inaction with some thoughts from Justice Thurgood Marshall in his concurring opinion in Heckler v. Chaney. Marshall’s thoughts might have particular appeal to Justice Elena Kagan, for example, who, in addition to being fair minded, was one of Marshall’s clerks close to the time Chaney was decided.  Marshall, who perhaps unfortunately took an expansive view of the majority opinion in order to criticize it, and who appears to have drafted without noting its cautionary footnote 4, wrote several quotations that might prove helpful if introduced gently.

“[T]his ‘presumption of unreviewability’ is fundamentally at odds with rule-of-law principles firmly embedded in our jurisprudence, because it seeks to truncate an emerging line of judicial authority subjecting enforcement discretion to rational and principled constraint, and because, in the end, the presumption may well be indecipherable, one can only hope that it will come to be understood as a relic of a particular factual setting in which the full implications of such a presumption were neither confronted nor understood.”

“But surely it is a far cry from asserting that agencies must be given substantial leeway in allocating enforcement resources among valid alternatives to suggesting that agency enforcement decisions are presumptively unreviewable no matter what factor caused the agency to stay its hand.” (emphasis in original)

Moreover, conceivably traction might be gained in an attack on the employer mandate regulations by limiting the theory of the case to agency failure to enforce a regulation as opposed to decisions of prosecutors not to pursue criminal charges. As Justice Marshall wrote:

“A request that a nuclear plant be operated safely or that protection be provided against unsafe drugs is quite different from a request that an individual be put in jail or his property confiscated as punishment for past violations of the criminal law. Unlike traditional exercises of prosecutorial discretion, “the decision to enforce — or not to enforce — may itself result in significant burdens on a . . . statutory beneficiary.” (citing Marshall v. Jerrico, Inc., 446 U. S. 238446 U. S. 249 (1980)).

Nonetheless, plaintiffs will have to contend with the fact that (a) Thurgood Marshall’s ideas on prosecutorial and agency discretion were not shared by the remainder of the court and (b) the extreme conditions found in Adams have not been found in other cases in which such “footnote 4” claims have been brought.  The presumption established by Heckler v. Chaney has clearly remained a very strong one.

A Tax Whistleblower action: An unconventional path for challenging the employer mandate delay

The greatest difficulty for those disturbed by the Obama administration’s regulatory subversion of its own law is the prosecutorial discretion argument discussed above. Almost everyone thinks there should be some degree of prosecutorial discretion and the case law strongly and pretty persuasively supports the idea that the judicial branch should at least seldom be able to force prosecutors or agencies to more forcefully enforce laws, particularly where Congress has the ability to coerce the Executive branch to do so through aggressive techniques such as appropriations or, I suppose, in the most egregious cases, impeachment.  The tension will be whether and under what circumstances the Executive branch under the rubric of “prosecutorial discretion” can completely subvert the language and intent of a statute through a refusal to collect a tax.

So, might there be another path for attacking the regulation, one either already in existence or one created by Congress?

IRS Form 211 (filled in)
IRS Form 211 (filled in)

Perhaps. There is a remedy on the books already that might at least make the Obama administration squirm. It would do so because it might make clear that what was going on was not an exercise in prosecutorial discretion at all, but rather an effort to rewrite the statute.  The idea is to for anyone at all to be a whistleblower  under 26 U.S.C. § 7623 and to advise the IRS via a Form 211 that a particular large employer, preferably one that had over 1030 employees and therefore could owe more than $2,000,000 in 4980H taxes, had failed to provide health insurance to its employees and had failed to pay any of the taxes created in section 4980H. The whistleblower does not need to show fraud to file a Form 211. The whistleblower merely needs to show that there has been an underpayment of tax. Of course, to protect against claims of bad faith, the Form 211 should disclose that the claimant knows that the employer is relying on IRS regulations as a defense but that the claimant asserts that those regulations are unlawful.

Now, I would not expect the IRS to then take a customary next step of pursuing the non-paying large employer for the 4980H taxes. I would not expect the IRS to provide any award to the whistleblower that would be available if the IRS had actually collected any money as a result of the Form 211 filing.  But it is this failure of the IRS to do anything or to pay anything that might trigger the right of the Form 211 claimant to bring a legal action in which the legality of the Obama administration’s delay of the employer mandate could be challenged. Section 7623(b)(4) of the Internal Revenue Code permits “any determination regarding an award” to be appealed to the Tax Court, which has jurisdiction over such appeals.

Again I would not expect the IRS to take such an appeal lying down.  The IRS will claim that it has complete discretion over whether to pursue a taxpayer brought to its attention under Form 211. A decision to the contrary could create the potential for massive, expensive litigation.  Moreover, the IRS will say, the appeal permitted by section 7623(b)(4) is one over the size of any award not over whether the IRS decides to proceed with any administrative or judicial action based on information contained in a Form 211.

These will be strong arguments. They may well persuade the Tax Court.  They may well persuade a Circuit Court of the United States to which an adverse decision of the Tax Court can be appealed. But what they will expose is that the IRS does not regard the regulatory changes it has made as merely ones of prosecutorial discretion — deciding where and how to expend its resources detecting underpayments. Here, that work has already been done for them. Instead, they constitute a substantive rule on the circumstances — none for 2014 and few for 2015 — under which a large employer that fails to provide health insurance should be liable for taxes that Congress demanded be paid under section 4980H.  Perhaps, therefore, the Tax Court, or, on appeal, an Article III appellate court or the Supreme Court might summon up the courage to  say, kind of like the suggestion in footnote 4 in Chaney, that, although the IRS may have broad discretion, it does not  have “discretion” to abdicate its statutory responsibilities. It can not fail to pursue obvious tax deficiencies brought to its attention by a third party when the only reason for so declining is an unlawful regulation promulgated by the IRS in a usurpation of legislative powers. Whatever one thinks of the merits of the employer mandate, such a decision, in my view, would be a healthy restoration in the balance of power among the federal branches of government.

One other note

It was suggested by a friend that Congress could overcome such exercises of prosecutorial discretion by an expanded use of  “qui tam” lawsuits. This remedy, which dates back to the 13th Century and has seen a resurgence over the past 20 years in the United States, allow a private citizen to bring a civil action in the name of the government and collect some of the money otherwise owed to the government.  Qui tam litigation is a broad and complex subject on which I do not pretend great expertise. But, as I understand it, qui tam lawsuits generally permit a private party to go forward only if the Executive branch either supports the private party’s efforts at supplemental enforcement of a regulatory norm or at least acquiesces to it.  Under 31 U.S.C. 3730(c)(2)(A) and case law interpreting one of the major branches of qui tam actions, the government can basically kill a qui tam lawsuit to which it objects even if the underlying claim is meritorious. It would therefore take a special qui tam statute that expressly squelched this veto power in order for such action by Congress to permit an attack on the delay of the employer mandate.  More fundamentally, however,  the probability of a gridlocked Congress enlarging qui tam rights to facilitate judicial overturning of the Obama administration’s delay of the employer mandate and doing so over a presidential veto is about zero.

Caution

I’m forging some new ground here and laying out arguments without weeks of legal research in order to get them on the table.  I am likely missing things or even, perchance, getting things wrong.  My hope, however, is that what I’ve written is intelligent and helpful enough to get others to discuss further and potentially take action on the serious legal issues involved when a President decides not to collect taxes that Congress has clearly demanded be paid.

Acknowledgement

This blog post benefited greatly from a conversation with Professor Sapna Kumar, an expert on administrative law.  I, of course, am responsible solely for any mistakes made herein and I have no idea what Professor Kumar — whose main focus is the intersection of administrative law and intellectual property — thinks about the Affordable Care Act or its implementation. So, if you don’t like the post or there is something wrong, don’t blame her.

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Three questions for President Obama this afternoon

President Obama is holding a press conference this afternoon before he leaves on vacation.  Here are three questions I would put to him.

1. A number of small businesses will receive cancellation notices sometime this year because their plans no longer conform with the Affordable Care Act. There’s some controversy about how many such notices will go out, but clearly millions of people will be affected. Will the protections you have now afforded to individuals who had their plans cancelled this year such as exemption from the individual mandate and the ability to uncancel their policy likewise apply to small employers and those insured by them?

2. Your Solicitor General argued to the Supreme Court that the individual mandate, what you called the minimum coverage provision, was crucial to the Affordable Care Act, that it, unlike other provisions of the ACA were inseverable.  Here are quotes from pages 46 and 47 of the brief filed by your Solicitor General:

It is evident that Congress would not have intended the guaranteed-issue and community-rating reforms to stand if the minimum coverage provision that it twice described as essential to their success were held unconstitutional.

It is well known that community-rating and guaranteed issue coupled with voluntary insurance tends to lead to a death spiral of individual insurance.

Given the arguments made on your behalf, which may well have been correct, why are you not concerned that exempting more individuals from the individual mandate will not, as the insurance industry is complaining, destabilize the insurance markets and threaten the success of your legislation?

3. Are you concerned that while things are going better in some states such as New York, in many states such Oregon, Maryland, Texas there are a very low number of people enrolling in plans on the individual Exchanges so that even the most massive surge will not correct the situation before coverage begins January 1 or perhaps even before the end of March. Everyone agrees that low enrollment increases the risk that the markets in these states will become unstable?  If that risk materializes, what is Plan B?  What plans do you have to address the situation in those states?

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Obama administration shocking decision to drop individual mandate — but only for some

I’m going to have to wait until tomorrow to say much more, but the Obama administration issued a shocking decision late today to exempt those who had individual policies cancelled this year from the individual mandate contained in the Affordable Care Act.  The Wall Street Journal apparently broke the story.  Here is the New York Times article.  Here is a Washington Post article from a strong Affordable Care Act supporter. Here is the Huffington Post article. Here’s Fox News. (CNN has yet to publish anything I can find on the subject) Not surprisingly, the insurance industry has already protested the apparent move. “This latest rule change could cause significant instability in the marketplace and lead to further confusion and disruption for consumers,” said Karen Ignagni, president of America’s Health Insurance Plans, the industry’s main trade group.

A copy of the decision, made thus far only in a letter from Secretary Kathleen Sebelius to six senators (all of whom are apparently facing tough re-election battles) is here.

Excerpt from Sebelius letter to senators
Excerpt from Sebelius letter to senators

Legality

The purported legal basis for the exemption comes in 26 U.S.C. 5000A(e)(5), which reads:

(e) Exemptions

No penalty shall be imposed under subsection (a) with respect to— …

(5) Any applicable individual who for any month is determined by the Secretary of Health and Human Services under section 1311 (d)(4)(H) to have suffered a hardship with respect to the capability to obtain coverage under a qualified health plan.

The Obama administration is now apparently interpreting having to comply with the mandate itself — but only after one’s individual insurance policy was cancelled — as the requisite hardship. A prior regulation issued on July 1, 2013, by HHS had taken a narrower view of what the requisite hardship was:

(g) Hardship—(1) General. The Exchange must grant a hardship exemption to an applicant eligible for an exemption for at least the month before, a month or months during which, and the month after, if the Exchange determines that—
(i) He or she experienced financial or domestic circumstances, including an unexpected natural or human-caused event, such that he or she had a significant, unexpected increase an essential expenses that prevented him or her from obtaining coverage under a qualified health plan;
(ii) The expense of purchasing a qualified health plan would have caused him or her to experience serious deprivation of food, shelter, clothing or other necessities; or
(iii) He or she has experienced other circumstances that prevented him or her from obtaining coverage under a qualified health plan.

I look forward to hearing from others, and in particular from people with a commitment to the rule of law who previously have supported the ideas behind the ACA, but it is not clear to me that any of the pre-existing bases contained in this regulation for claiming a hardship exemption would apply to having a predicted cancellation in one’s individual insurance policy. Maybe at this late hour there are arguments and other documents I am not considering. Surely, however, the existence of the ACA itself can not be the human-caused event creating the hardship. Moreover, I have trouble seeing how the cancellation of a plan makes it more difficult for these individuals — as opposed to others in similar circumstances — from obtaining coverage under a qualified health plan.  I can well imagine cynics saying that the only real hardship involved here is having believed President Obama when he said that if you liked your health plan you could keep it and thus not having saved up for the higher prices that often exist in policies with “Essential Health Benefits.” Of course, if , as the Obama administration has claimed, many of these cancelled policies were junk that the policyholder should be glad to be rid of, it becomes yet more challenging to see much of a hardship at all in being offered real insurance coverage with all of its greater benefits.

In any event, it does not take a fertile imagination to foresee legal challenges to this limited exemption from those not fortunate enough to have had health insurance in the past but who are not being given a similar exemption from the individual mandate. I can easily see challenges based on failures of administrative procedure and equal protection.

The Death Spiral

I and others will need to think hard about the issue of magnitude. Obama administration officials are reported as having stated at a briefing that all but 500,000 of those with canceled policies will be enrolling in policies under the Exchange. This claim, however, is impossible to reconcile with existing enrollment statistics and assertions that millions of individuals have had their individual policies cancelled.  It is difficult to see how this decision would not exacerbate at least somewhat the risk of an adverse selection death spiral overtaking the Exchanges in many states.  The tax created by the mandate has always been justified as necessary to induce people of low or moderate risk to join those of higher risk in purchasing policies on the Exchange. By now exempting perhaps millions of people from this requirement — and, in particular, people who are most likely to have satisfied medical underwriting in the recent past — the Obama administration decision will likely diminish enrollment, at least somewhat, in the insurance Exchanges and, correlatively increase price pressures and insurer losses during 2014. To the extent that insurers systematically lose money as a result of this apparent decision, the federal government will be spending millions more — perhaps hundreds of millions more — in payments under the Risk Corridors program.

Implications

There’s one more implication we need to think about.  Although experts vary greatly on the magnitude, clearly a number of small businesses are going to lose their health insurance policies this coming year for failure to conform to the new ACA requirements.  This is the “second wave” that is sometimes spoken about. Are the significant number of employees and dependents who are thus subject to a risk of loss of coverage likewise going to receive an exemption from the individual mandate?

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The Risk Corridor Calculator: How the government plans to use fictitious profits to shovel more money to insurers

Snapshot of the Risk Corridor Calculator
Snapshot of the Risk Corridor Calculator

This is a different kind of blog entry.  There isn’t going to be too much text here. Instead, I want to direct you to a spreadsheet I created (The Risk Corridors Calculator) available on Google Docs and the first (click here to watch it on YouTube) of two videos I’ll be making that explain

(1) how Risk Corridors work under the regulations originally proposed by the Department of Health and Human Services (HHS)

(2) how the insurance industry could lose money notwithstanding Risk Corridors as a result of President Obama changing his mind and conditionally permitting certain insurers for one year to “uncancel” certain  policies that the Affordable Care Act would otherwise have have prohibited starting in 2014; and

(3) how the proposed revisions to the Risk Corridor regulations will shovel money to many insurers and could put them back in the same position they would have been had President Obama not changed his mind.

[Note from 8:32 a.m. 12/6/2014: I discovered a small error in the Risk Corridors Calculator. It has been fixed.  It does not affect anything essential in this blog. Unfortunately, I will need to conform the video to the Calculator, which is likely not to happen until later today. So, if you watch the video today, it is conceptually fine, but just be aware that one of the formulas was off.]

In essence, however, the proposed HHS regulations impute fictitious “profits” to insurers that they then get to subtract from their net premiums.  As a result, it will look to the Risk Corridors program as if the insurer is losing more money in an Exchange plan and therefore entitled to greater government assistance.  (The government has now acknowledged that, although the Congressional Budget Office scored it as costing nothing, Risk Corridors need not be budget neutral.) Another way of thinking about the proposal is that it creates phantom costs that affect the apparent (though not the real) profitability of the insurer and then shovels money to insurers based in part on those phantom costs. It is little different than the government insisting that the insurer lost money due to claims that it actually did not pay and is therefore entitled — even under a formula that is formally unchanged — to greater payments from the government.  Viewed yet another way, it is almost as if the proposed regulations treat what President Obama did as a “tort,” and remedy the wrong by licensing the aggrieved insurers to use contorted accounting to place themselves back in the same position they would have been in had the President not, in effect, interfered with the prospective economic advantage they thought they had in the Exchanges.

Neither this blog entry nor the video will address whether the proposed regulations are permissible as a matter of administrative law or separation of powers. Nor will I explore today whether the regulatory changes can be seen as a necessarily evil. Exposing what is actually going on here, however, must create some serious concerns for all concerned about the rule of law. When section 1342 of the Affordable Care Act (42 U.S.C. § 18062) speaks of “allowable costs,” one would initially think it referred to costs actually incurred by the insurer as a result of running its program. Those costs might be paying claims, paying the electric bill, marketing costs and, perhaps, some reasonable allowance for profit — such as the 3% of after tax premiums actually placed in the original regulations.

But it is going to take some work to show that, by “allowable costs,” the statute meant costs that the insurer did not actually incur in running its program. The burden will be even higher due to the fact that the proposed regulations apparently contemplate varying this heightened profit allowance from state to state. This will be done not in response to different rates of return on capital in the different states, but only to take account of differential losses to insurers caused by different state responses to President Obama’s about-face on whether certain plans that violate ACA requirements could continue to be sold outside of the Exchanges.

In short, the increase in “profit” sure looks like a book-keeping entry whose sole purpose has nothing to do with anything in the statute but is instead designed to restore the insurer to the position it would have been in had federal policy not changed. It is as if the insurers are being given some sort of entitlement to the profits they would otherwise have made and the administration is looking for any term in the statute not glued down (such as an 80% reimbursement rate on certain losses) in order to accomplish this goal.

Fleshing out  more fully these matters of statutory interpretation, separation of powers, and administrative law will be left for later, however, along with a fuller explanation of what is going on inside the Risk Corridor Calculator that I created. For now, play with the spreadsheet and enjoy the video.

Resources

Society of Actuaries, Health Watch: Risk Corridors under the Affordable Care Act — A Bridge over Troubled Waters, but the Devil’s in the Details

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Could the American Enterprise Institute possibly be right there is this massive second wave of cancellations coming?

Short answer: The AEI estimate looks high but, yes, a massive second wave of cancellations is coming

The American Enterprise Institute (AEI) has received considerable press over the past 24 hours for asserting that the Affordable Care Act will generate a massive second wave of insurance cancellations this summer as small employers (and their employees) will be compelled to abandon policies that do not provide “Essential Health Benefits” and meet other standards of the Affordable Care Act.  Fox News has asserted that the AEI statement means that up to 100 million people could be canceled next year.  Other news sources and  at least one influential conservative radio talk show host are making similar claims.

If this were true, it would obviously be a subject of considerable importance.  Anyone doubting this point should consider the firestorm that erupted over the recent cancellations of a much lower number of individual health insurance policies as a result of the Affordable Care Act’s insistence that health insurance meet its full standards starting in 2014 and the tough limitations on “grandfathering” exemptions for older health insurance plans.

But, is it true?  Is it really true that there could be a large number of cancellations?  Could we really be talking about 100 million people? Could the very conservative AEI  be making political hay rather than something more factual? Let’s look at the argument.  It’s part legal and part statistical. I’m going to break the argument down into pieces and see how it holds up.

1. Legal Basis

The legal part stems from the claim that although large businesses (more than 100 employees) are not required to provide “Essential Health Benefits” under the Affordable Care Act for all insurance plans beginning after January 2, 2014, small businesses are.  That appears to be true.  Section 1201 of the Affordable Care Act, which, among other things, amends section 2707 of the Public Health Service Act, reads as follows: “A health insurance issuer that offers health insurance coverage in the individual or small group market shall ensure that such coverage includes the essential health benefits package required under section 1302(a) of the Patient Protection and Affordable Care.”  (emphasis added. It does not say “in the individual, small group or large group market” but rather “in the individual or small group market.”  And if one goes through the statutory labyrinth from Section 1304(a)(3) of the ACA to 1304(b), one learns that, at least until 2016, the small group market means insurance purchased by employers with 100 or fewer employees.

There is, however, an exemption for grandfathered plans.  Section 1251(a)(2) makes clear that almost all of the provisions of the Subtitle that contains section 1201 of the ACA doe not apply to “to a group health plan or health insurance coverage in which an individual was enrolled on the date of enactment of this Act.” There’s an exception to the exemption, but it does not apply to this situation.

So, it sure looks to me as if all non-grandfathered plans issued in by 100 of fewer workers will, beginning for plan years that begin after January 1, 2014, be compelled to provide “Essential Health Benefits” along with other requirements of the ACA.

2. How many policies are we talking about?

The Census Bureau keeps track of how many employees are employed by firms of different sizes. The last time they looked, 2010, there were roughly 39 million people employed in such firms.  So, an upper bound on the number of policies — note, policies, not persons — affected is 39 million.

The 39 million policy figure must be reduced, however, in figuring out how many cancellation notices are likely to go out in 2014. This is so for several reasons (two of which I will confess to having forgotten about during a very transitory first posting of this blog entry).

The first reason the 39 million figure is too high is that not all small employers provide health benefits.  According to the Kaiser Family Foundation’s 2013 Annual Survey of Employer Health Benefits (page 39), about 57% of employees in firms with under 200 employees provide health benefits.  It doesn’t have data on firms under 100 employees, but if one eyeballs the data that is provided, I don’t think one would be too far off estimating that about 50% of firms with fewer than 100 employees provide health benefits. So, this takes us down to about 19.5 million employees.

But the 19.5 million employee figure needs to be reduced because not all employees accept health insurance even when it is offered. According to Kaiser (same report as above, page 49), the take up rate among those with fewer than 200 employees is 62%.  It doesn’t look like it varies too much according to firm size in that range, so we’ll say there are roughly 12 million employees in small firms who get health insurance through their jobs.

But the 12 million figure needs to be yet further reduced because some policies will remain grandfathered and thus exempt from the Essential Health Benefits requirement.  According to the same Kaiser report  (page 223), about 49% of employees in firms with under 200 employees were in grandfathered plans.  It doesn’t have data on firms under 100 employees, but if one eyeballs the data that is provided, I think it is fair to say that about 50% of employees in firms with under 200 employees were in grandfathered plans as of 2013. This figure needs to be reduced, however, to take account of the decay in the proportion of plans that can remain grandfathered as time goes on.  From 2011 to 2012, for example, the percentage of workers in smallish firms in  non-grandfathered plans grew from 37% to 46%. And from 2012 to 2013,  the percentage of workers in smallish firms in  non-grandfathered plans grew from 46% to 51%.  So, it’s not unreasonable to believe that something like 56% of workers in firms with 100 or fewer workers will be in non-grandfathered plans at some point during 2014.  Could be a few percentage points higher, could be a few percentage points lower.

If we do the multiplication, however, that means that we are at roughly 7 million policies that will be required to provide Essential Health Benefits at some point during 2014.  But we need to do a little more subtraction because, surely, there must be some of these policies that are essentially in compliance with the ACA right now.  There might be “cancellation notices” with respect to these policies but if the policy content and prices doesn’t change as a result, few people will care.  How many such compliant policies are there?

I will confess that I don’t know how many small group policies already comply with the requirements of the ACA and would thus likely not change substantially if they needed to be cancelled. But my guess is that the number is rather small.  The Robert Wood Johnson Foundation noted several years back that a lot of individual and small group policies did not provide Essential Health Benefits such as substance abuse benefits. The independent research firm HealthPocket found recently that only 2% of individual health insurance plans covered all Essential Health Benefits and that the average plan covered about 76% of those benefits.  HealthPocket did not, however, study small group policies.

In the absence of great evidence, I am going to assume, probably quite liberally, that 1/3 of the plans that will be required to provide Essential Health Benefits either already provide them or provide something sufficiently close to them that any cancellation of those policies will not require significant alteration of the plan. This means, however, there are — just to keep the numbers round — 5 million small group policies that will be cancelled in 2014 and that will need to be altered significantly as a result of the ACA’s EHB requirement.

3. How many people are we talking about?

But policies do not equal people.  There is often more than one person on a policy: a spouse and a dependent or two. This means that while 5 million is a plausible lower bound on the number of people who will be getting potentially unwelcome cancellation notices in 2014, it is likely to low an estimate. And on this point, we have decent data. A 2009 report by America’s Health Insurance Plans found that the average policy covered 3.03 lives.  There is no reason to think that this number has either materially changed over the past few years or that small group plans are different from other plans.

So, again doing some rounding, if we do the multiplication of 5 million policies by 3 lives per policy, that means that 15 million or so Americans now getting health insurance through a small employer are likely to get meaningful cancellation notices this coming year. Another 6 million Americans now getting health insurance through a small employer will get cancellation notices but might receive similar coverage without large disruption. 

4. Conclusion

Is the claim true?

Bottom line: so far as I can see at this time, the American Enterprise Institute statement is truthy but somewhat exaggerated. The 100 million figure looks very high to me, but the real number of something like 15 million Americans (many of whom will be voting in Congressional elections right after receiving the notice) should be high enough to get the nation’s attention. Indeed, if my figures on the number of already-compliant policies is overly generous, the real number might be as high as 21 million Americans.

Does it matter?

To be sure, some of the plans into which these displaced Americans may end up may be better than those they have presently. Not being able to keep your health insurance doesn’t always make you worse off.  Some of the adjustments that need to be made to bring the policies into compliance may be relatively small and relatively inexpensive.  Many of the policies will not have been the sort of “junk” that can exist in the individual market. and thus transitioning to compliant plans, though initially stressful, may not end up being permanently traumatic. Moreover, under section 1421 of the ACA (26 U.S.C. § 45R), for some employers with 25 or fewer (not well paid) employees there will be tax credits of up to 50% to help them purchase insurance.

But the fact that the cancellation notices may not be calamitous for some does not mean that they will not pose serious problems for millions of employers and employees. For the many employees in firms with more than 25 employees or who are in firms with fewer than 25 employees but who are somewhat better paid, the tax credit provision offers no relief.  For the many small businesses whose policies were close to compliant, even having to pay a little more for “better” policies may be a big deal.  If the experience of these 15 million policyholders is similar to those of the millions of those with recently ACA-cancelled individual policies, many of them are going to find that the better insurance policies mandated by the ACA comes with a significant price tag that they or their employer, or a combination of the two, are going to pay.

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Five questions journalists should be asking about the Affordable Care Act

I’m hearing a lot of the lazy “but what are the political implication” perpetual horse race questions from the media about recent developments surrounding the Affordable Care Act. That’s fun Inside-the-Beltway stuff, but in the mean time there are real people who are likely to be helped and hurt with matters as essential as their health.  So, what I am not hearing enough of yet, however, are tough, substantive questions that get to the heart of whether the Affordable Care Act is going to be stillborn. Here are some questions that I think intelligent journalists and blogger ought to be asking in light of recent developments with the Affordable Care Act.  Getting answers in many cases may take persistent questioning and closer scrutiny of existing documents. In others, FOIA requests may be needed.

1. Actual v. Anticipated Age Distributions in the Exchanges

What is the age distribution by state and in the aggregate of persons who it is claimed have enrolled in Exchange-based plans under the Affordable Care Act? Once we have this data, we can compare it to (a) census data on the age distributions in the various states and (b) any prior estimates on what the age distribution of Exchange enrollees would be such as those described in this government document.  If there is a significant difference between the age distribution encountered thus far and the anticipated age distribution, that increases the probability of the ACA succumbing to an adverse selection death spiral.  This is so because, although the ACA permits some age rating, it damps the actual variation in expected claims from lowest to highest eligible ages down to a 3:1 ratio.

2. Actual v. Anticipated Metal Tier Distributions

What is the distribution of enrollees amongst the various “metal tiers” ranging from bronze through platinum?  If the enrollees are flocking disproportionately to the platinum and gold plans, that suggests the people who are enrolling may be disproportionately unhealthy.  While those plans were expected to draw a slightly less healthy population, the government planned on there still being a significant number of healthy people in those pools.  According to data contained inside the government’s “Actuarial Value Calculator,” the predicted mean claim for bronze policies (across ages, genders, regions, etc.) was $4,977 per person whereas the predicted mean claim for platinum policies (again across ages, genders, regions, etc.) was $5,804. (Cells C88 in various tabs) I believe that significant selection of these more generous plans should give insurers (and insureds) concern about a death spiral materializing.

3. Where is additional “Risk Corridor” money coming from?

3. What the heck does this sentence mean in the letter from Gary Cohen, Director of the Center for Consumer Information and Insurance Oversight (pronounced suh-sy-o) to state insurance commissioners providing details on President Obama’s announcement that he would not be enforcing the Essential Health Benefit restrictions on certain non-grandfathered plans?

Though this transitional policy was not anticipated by health insurance issuers when setting rates for 2014, the risk corridor program should help ameliorate unanticipated changes in premium revenue. We intend to explore ways to modify the risk corridor program final rules to provide additional assistance.

To me, this sounds like the President is saying they will buy off the insurance companies in the Exchanges, who stand to lose as a result of the decision to starve them of mostly healthy insureds forced out of “substandard” nongroup policies.  The President may be hinting that he will  try to make them whole through providing more money under the Risk Corridors provisions of section 1342 of the Affordable Care Act, 42 U.S.C. § 18062. As discussed in a prior blog post, this may in fact be possible, but it is not clear where the money is coming from.  I suspect this issue may form a significant part of the conversations between insurance CEOs and President Obama that will apparently occur at the White House later today. If so, journalists need to push on where President Obama is finding the money and how much money are we talking about?

CBO thought Risk Corridors would be costless
CBO thought Risk Corridors would be costless

Journalists might also note in pursuing this matter that it has hitherto been assumed by the Congressional Budget Office that the Risk Corridors program would be a net zero. Here’s what they said in their Regulatory Impact Analysis of March 2012:

CBO did not score the impact of risk corridors and assumed collections would equal payments to plans and would therefore be budget neutral.

If, as I have argued, the assumption in the CBO document has always been doubtful and is now almost certainly false, again, where is the money coming from and could we be talking about tens of billions of dollars? Is President Obama going to (a) keep his promise and (b) pacify the insurers by just spending lots of money that was previously unbudgeted and undisclosed?

A shout out, by the way, to blogger Kathleen Pender for being one of the few to focus on this issue.

4. Are any insurers yet threatening to pull out?

Have any state insurance commissioners heard rumblings or worse about various insurers pulling out for 2014 or declining to take on any more enrollees, if that restriction is permitted?  I suggested in a Houston Chronicle op-ed yesterday that such a development was likely, but I don’t know of evidence that it has yet occurred.  I could imagine, for example, insurers who priced their policies high relative to others of the same metal tier in the same market wanting to exit. They would want to do so because very few people are likely to select their plan and so there may be a lot of administrative costs for very little benefits and because the people who did select their plan may have done so because they believed the networks and coverages were more generous — something the less healthy would particularly care about. I could also imagine insurers who priced their policies low relative to others of the same metal tier in the same market wanting to exit.  If, as is feared, the pool of exchange insureds is older and sicker than projected, the victims are likely to be the insurers who price low and thus have the highest amount of business in the Exchanges.

5. How serious are the  insurance industry groups and actuarial warnings?

Journalists should be pressing people like Karen Ignani, president and chief executive of America’s Health Insurance Plans, Corri Uccello, senior health fellow at the American Academy of Actuaries, Jim Donelon, President of the extremely powerful National Association of Insurance Commissioners, and others on how great they regard the threat of the Exchanges becoming destabilized as a result of the combination of minuscule current enrollments coupled with the competitive alternative that appears to have been created by President Obama’s announcement yesterday or by the Upton and Landrieu bills circulating in Congress that do roughly the same or more to starve the Exchanges of healthy insureds. These individuals are issuing some fairly significant warnings about what is going on.  Jim Donelon, for example, states:

This decision continues different rules for different policies and threatens to undermine the new market, and may lead to higher premiums and market disruptions in 2014 and beyond.

The American Academy of Actuaries, via David A. Shea, Jr., Vice President, Health Practice Council, warns:

 Premiums in the new 2014 insurance markets would have been higher if the ACA rules regarding cancelled policies had been relaxed.

 Approved premiums for 2014 are based on assumptions regarding plan cancellation requirements under ACA rules. The premiums approved for 2014 may not adequately cover the cost of providing benefits for an enrollee population with higher claims than anticipated in the premium calculations.

 Costs to the federal government could increase as higher-than-expected average medical claims are more likely to trigger risk corridor payments.

 Relaxing the plan cancellation requirements could increase premiums for 2015. Insurers cannot increase premiums in future years to make up for prior losses. However, assumptions regarding the composition of the risk pool would reflect plan experience in 2014.

This sounds very serious.  Journalists ought to try to develop some statements from these people on the “order of magnitude” of the threats they see occurring as a result of recent developments.

 

 

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