Category Archives: Lawlessness

How The Obama Administration Raided The Treasury To Pay Off Insurers

As discussed earlier, I have moved most of my blogging on the Affordable Care Act over to Forbes blog site: The Apothecary.  Here’s where you can find my latest entry.  It’s about Obama administration lawlessness in running the Transitional Reinsurance program.

Here are a few paragraphs to whet your interest.  To see more, go here.

This is about a raid conducted in the murky twilight of the Federal Register. It’s a scheme in which the Obama administration collected less in taxes from health insurers (mostly off the Exchanges) than they were required to do under the Affordable Care Act, created a plan to pay insurers selling policies on the Exchange considerably more than originally projected, and stiffed the United States Treasury on the money it was supposed to receive from the taxes. It’s a different bailout than the Risk Corridors program. That, at least, was originally authorized by statute.  This is about a diversion that took place in spite of a statute that explicitly prohibited it.  And the consequence of the diversion of funds was to enrich insurers and, probably, to keep more insurers selling policies on the Exchanges than would otherwise be the case.

The transitional reinsurance program as implemented, however, has become entirely unmoored from the statute that created it. It has instead embarked on a progressively stranger course in which two of the most recent diversions were  underassessing health insurers to pay for the program and then using the first $2 billion collected not to pay the United States Treasury as called for by the statute but instead to pay off insurers selling individual health insurance policies on the Exchange and, some times, off the Exchange.  Indeed, not only has $2 billion from the 2014 money been diverted from the Treasury to insurers but it looks as if at least an additional $800 million from the 2015 money is heading in the same direction.

By combining the two revisions of the original reinsurance parameters, the Obama administration made the program about 40% juicier for insurers . To the cynical eye, this could be seen as one of several administrative cures for the Obama administration’s politically understandable yet completely illegal decision to starve exchange insurers of potential customers who would now, by administrative fiat, often be permitted to keep those dreadful policies that the Affordable Care Act was supposed to eliminate. With foolish campaign promises as the motivation, one illegality begat another.

And now let’s take a closer look at the Obama administration’s legal justification for shoveling money to insurance companies on whose graces the success of Obamacare rests . You can read it above.  CMS contended that, because the statute was silent or ambiguous; it gave CMS discretion.  According to CMS, the statute used “shall” when it came to the $10 million to be collected for reinsurers in 2014 and used only “reflects” when it came to the $2 million for the Treasury, implying that the collection of money for reinsurers was more mandatory than collection of money for Treasury. Besides, argued CMS, the premium “stabilization” purpose of the ACA would be enhanced by funneling more money to insurance companies.

This reading of the statute makes no sense, however. The ambiguity exists only by virtue of ignoring a provision of the statute never even mentioned by CMS its legal analysis. By sending out a specific bill to health insurers and third party administrators to cover the Treasury payments, CMS had clearly collected money under the program in part pursuant to section 1341(b)(3)(B)(iv), the part that requires $5 billion for Treasury.  Look at paragraph (b)(4): “Notwithstanding the preceding sentence, any contribution amounts described in paragraph (3)(B)(iv) shall be deposited into the general fund of the Treasury of the United States and may not be used for the program established under this section.” But this diversion of funds collected for the Treasury into the hands of the insurers was precisely what CMS now purported to find justification for in the language of the statute.  CMS’s argument is particularly strange given the“miscellaneous receipts statute” which says that agencies generally can’t just keep money they collect; rather they must “deposit the money in the Treasury as soon as practicable without deduction for any charge or claim.”

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Why the House Lawsuit Over Cost Sharing Reductions Might Win But Won’t Kill Obamacare

As discussed in my previous blog post, I have moved most of my blogging activity on the Affordable Care Act to Forbes Apothecary site.  Here’s a summary of what is discusses.  To see the rest, go here.

The most glaring problem with the argument in House v. Burwell brought by House Democrats is that it rests on a false premise: Obamacare could not function unless it provided an appropriation for cost sharing reductions.  This is just not true.  As I now show, for better or worse, the ACA could function in a very similar way even if no appropriation was made for cost sharing reductions.

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Bad news for Obamacare: Insurers lost a lot of money in 2014

In testimony before Congress last June,  I think I may have shocked some Representatives by estimating that insurers selling policies on the individual exchanges as part of the Affordable Care Act would be sufficiently unprofitable that they would get only 37% of what they would have received under the Risk Corridors program had the federal government not required that the budget for that program be balanced.  It turns out, however, that my gloomy estimate was, in fact, wrong — but only because it was far too cheery.  In fact, according to data released yesterday, insurers will receive only 12.5% of what they thought at one time they would receive.  There is a $2.5 billion shortfall between the money taken in under that program from profitable insurers and the money now owed to those who lost money, at least as the government measures it.

The shortfall spells trouble for Obamacare in a number of ways.  And it is difficult to overestimate how troubling this development should be for supporters of that program.

Some Exchange insurers are likely in serious trouble

First, it likely means that some of the smaller insurers who, at least  before passage of section 227 of the Cromnibus bill last December,  had anticipated receiving full payment for the money the government owes under the Risk Corridors program, are going to find themselves with a serious cash flow problem. Some may even find  themselves with solvency problems given the improbability that the full amount of the Risk Corridor obligation will ever be paid.  Companies that had booked Risk Corridor payments as receivables valued at 100% of the face amount, may have to start writing off at least part of them off as uncollectable.  Thus, when CMS says that the government’s inability to pay 87.5% of what it owes may create “some isolated solvency and liquidity challenges,” that is likely an understatement. Fortunately, as the Wall Street Journal reports, some insurers apparently saw the handwriting on the wall and accounted for the Cromnibus limitation properly so as not to deceive shareholders or state regulators.

Bad news for Exchange premiums

Second, it augurs severe pressure on insurance pricing in the healthcare exchanges.  The reason that there is a $2.5 billion shortfall is that a lot of insurers lost a lot of money selling policies on the Exchanges during 2014.  Insurers, like other businesses, have this habit of trying to make up for past losses by charging more in the future.  So we will see later this month some of the effect when the Obama administration releases data on premiums for 2016, but the massive losses in 2014 shown by the Risk Corridors results is likely to add to pricing pressures.

The Obama plan to rescue insurers has failed

Third, it shows that broken promises have consequences.  Let’s go through some history here.  Remember the infamous promise, “if you like your healthcare plan, you can keep it.  Period.”?  That was, of course, not exactly true in light of what the statute actually said.  And, when Americans saw their policies cancelled as a result, the Obama administration decided it would delay and relax enforcement of the various provisions of the ACA that would have killed enough many non-Exchange insurance plans.

But this refusal to salvage the political rhetoric by sacrificing the language of the statute got many insurers angry. The insurershad priced their policies on the assumption that of course the Obama promise was the usual political moonshine and that those healthy insureds previously owning now non-compliant policies would migrate their way over to Exchange policies and stabilize that market.  In true Cat in the Hat Comes Back style, the Obama administration “solved” that problem, as I explained twice (here and  here) in December of 2013, by fiddling with the accounting rules in the Risk Corridors program by making it more difficult for insurers to be deemed to have made sufficient money to owe the government and making it easier for insurers to be deemed to have lost money and thus be owed money by the government.  (Although its pronouncements were a bit cryptic, as I noted last April, the CBO may have estimated that the cost of this gimmick was as much as $8 billion).  Now, however, with the Cromnibus bill prohibiting the Obama administration from dipping into unspecified accounts to pay for Risk Corridors,  which I guess is what they planned since no money was ever appropriated for the program, that last bit of  multi-billion tinkering has backfired.   Insurers will not be paid for Risk Corridors for a long time if ever and, thus, they have indeed suffered a significant loss of a chain of make-it-up-as-you-go-along policies designed to salvage the ACA.

Don’t trust government accounting

Fourth, the Risk Corridors deficit exposes as pure bunkum the statements of many in Washington in the post ACA era — and continuing even today — about the state of the insurance market and the Risk Corridors program. Recall that at one point not too long ago the CBO was asserting that the Risk Corridors would actually make the government $8 billion.  This was done, perhaps not coincidentally, after an effort by Senator Marco Rubio gained prominence to defund Risk Corridors as an insurance industry bailout.  Devoted readers may also recall that I found the CBO’s estimate “baffling,” a bit of cynicism whose sagacity may have improved with age.  And even today with the announcement,  officials at CMS repeated the technically correct and yet practically dubious notion that, yes, there were shortfalls today, but Risk Corridor payments made by insurers in 2015 and 2016 might be enough not just to overcome the 2014 deficit now valued at $2.5 billion but also to make whole insurers who lost money in 2015 and 2016.

And the plea to undo Cromnibus

It is no wonder that former CMS head administrator Marilynn Tavener, now speaking for the America’s Health Insurance Plans, is now saying it is “essential that Congress and CMS act to ensure the program works as designed and consumers are protected.” By “as designed, Ms. Tavenner means  before Cromnibus when Congress, in a spasm of fiscal responsibility, required that Risk Corridors, for which no money was ever appropriated, actually pay for itself just like the Risk Adjustment program.  Translation of Ms. Tavenner: find someone else’s money somewhere to bail out insurers who lost money in the Exchanges.

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Court creates big problems for stability of Obamacare

Judge Rosemary Collyer of the United States District Court for the District of Columbia ruled this afternoon that the House of Representatives could pursue a legal action — had “standing” to use legal parlance — against a representative of the Obama administration for illegally spending money to fund a key part of the Affordable Care Act: cost sharing reductions. The judge did not decide the merits of the claim brought by the House of Representatives, noting that the Obama administration hotly dispute the allegations made by the House.

The judge’s ruling today is of great significance to the future of the Affordable Care Act.   If the House of Representatives prevails on the merits of its claim — which is that Congress appropriated no money to pay insurance companies billions of dollars to provide about 6 million  Americans with policies with much richer benefits than they otherwise would have been entitled to —  the future of the ACA will be cast in doubt.  It will likewise label members of the Obama administration as having undermined the Constitutional structure  and, as I have discussed elsewhere, conceivably expose those spending  and receiving the money illegally to criminal penalties. Success by the House in this lawsuit will not just threaten policies in states that failed to establish their own Exchanges, but health insurance policies purchased on Exchanges in all 50 states. The kicker is that many individuals had believed that the “standing barrier” was pretty strong but that, if it could ever be pierced, the House had a very strong case on the merits.The language of Judge Collyer in her opinion fortifies the House’s position.

I have written about this issue several times. See here and here.  Let me provide a summary. From all appearances, Congress did not directly appropriate money for a 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.

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. And 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.  The problem, as outlined at some length in Judge Collyer’s opinion, is that Congress never actually made a specific appropriation to fund the cost sharing reductions.

What Judge Collyer says quite clearly in her opinion in United States House of Representatives v. Burwell  is that mere contemplation to fund is not enough.

Appropriation legislation “provides legal authority for federal agencies to incur obligations and to make payments out of the Treasury for specified purposes.” Id. at 13. Appropriations legislation has “the limited and specific purpose of providing funds for authorized programs.” Andrus v. Sierra Club, 442 U.S. 347, 361 (1979) (quoting TVA v. Hill, 437 U.S. 153, 190 (1978)). An appropriation must be expressly stated; it cannot be inferred or implied. 31 U.S.C. § 1301(d). It is well understood that the “a direction to pay without a designation of the source of funds is not an appropriation.” U.S. Government Accounting Office, GAO-04-261SP, Principles of Federal Appropriations Law (Vol. I) 2-17 (3d ed. 2004) (GAO Principles). The inverse is also true: the designation of a source, without a specific direction to pay, is not an appropriation. Id. Both are required. See Nevada, 400 F.3d at 13-14. An appropriation act, “like any other statute, [must be] passed by both Houses of Congress and either signed by the President or enacted over a presidential veto.” GAO Principles at 2-45 (citing Friends of the Earth v. Armstrong, 485 F.2d 1, 9 (10th Cir. 1973); Envirocare of Utah Inc. v. United States, 44 Fed. Cl. 474, 482 (1999))

Judge Collyer also appears clear that Congress never appropriated any money for the Cost Sharing Reductions.

Finally on January 17, 2014, the President signed the Consolidated Appropriations Act for 2014, Pub. L. 113-76, 128 Stat. 5 (2014). That law similarly did not appropriate monies for the Section 1402 Cost-Sharing Offset program.8 Indeed, the Secretaries have conceded that “[t]here was no 2014 statute appropriating new money” for the Section 1402 Cost-Sharing Offset program. 5/28/15 Tr. at 27.


And all of this spells big time trouble.  Judge Collyer emphatically rejected the argument that the executive branch could increase its power by spending money Congress had not actually appropriated by using “standing doctrine” to prevent anyone from challenging the increased spending.

Once the nature of the Non-Appropriation Theory is appreciated, it becomes clear that the House has suffered a concrete, particularized injury that gives it standing to sue. The Congress (of which the House and Senate are equal) is the only body empowered by the Constitution to adopt laws directing monies to be spent from the U.S. Treasury. See Dep’t of the Navy v. FLRA, 665 F.3d 1339, 1348 (D.C. Cir. 2012) (“Congress’s control over federal expenditures is ‘absolute.’”) (quoting Rochester Pure Waters Dist. v. EPA, 960 F.2d 180, 185 (D.C. Cir. 1992)); Nevada v. Dep’t of Energy, 400 F.3d at 13 (“[T]he Appropriations Clause of the U.S. Constitution ‘vests Congress with exclusive power over the federal purse’”) (quoting Rochester, 960 F.2d at 185); Hart’s Adm’r v. United States, 16 Ct. Cl. 459, 484 (1880) (“[A]bsolute control of the moneys of the United States is in Congress, and Congress is responsible for its exercise of this great power only to the people.”), aff’d sub nom. Hart v. United States, 118 U.S. 62 (1886). Yet this constitutional structure would collapse, and the role of the House would be meaningless, if the Executive could circumvent the appropriations process and spend funds however it pleases. If such actions are taken, in contravention of the specific proscription in Article I, § 9, cl. 7, the House as an institution has standing to sue.

(emphasis added)

So, we shall see. There is more to the Judge’s ruling and more to the lawsuit.  Today’s ruling, however, revives the specter of the judicial branch reducing the likelihood that the Affordable Care Act can achieve the objectives of its supporters.


Note:  Kudos to Sarah Kliff and Andrew Prokop, who, though I do not think they share my views on the ACA generally, have nonetheless written (really swiftly!) a good article on today’s ruling.

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The Cons of the ACA

Recently, I was honored to speak before the PIAA, a group of insurance professionals, at the organization’s annual conference in Las Vegas.  The idea was that I would speak on the problems with the ACA and Ardis Hoven, M.D., past president of the the AMA, would speak on positives about the ACA.  I thought the format worked well and I appreciated the high level of discussion and civility of Dr. Hoven.

Here’s what I had to say. Since you can’t use footnotes or hyperlinks in a speech, I’ve provided a few additional annotations here to show the source of some of the information.

The Speech

I’m here to talk about the architecture of the ACA and its problems.

The ACA takes a bold risk.  It places our economy and our health on an metaphorical aircraft whose ability to fly is challenged by history. It proceeds on the assumption that, whereas almost all community rating systems in health insurance have crashed in ugly adverse selection death spirals, the craft engineered by the Obama administration and its consultants is so sophisticated that it will avoid such a fate.  Many will tout what they see as the success of the ACA thus far in reducing the number of uninsured and the absence of many catastrophic failures as evidence that the ACA flies.  But we have not seen turbulence. It is an open question whether, long term, the ACA can survive in its present form.

Let us now talk about how the ACA flies.  It uses a variety of mechanisms to keep it aloft.  The problem is that almost every one of them has the potential for being undermined.

Individual Subsidies

The ACA depends desperately and in perpetuity on taxpayer funded policy subsidies provided directly to the insured. There is a premium subsidy based on household income. And there is another effective premium subsidy achieved through what is termed a “cost sharing reduction program” but this really amounts to people getting gold, platinum or diamond — my term — policies but only having to pay the silver price.  These subsidies have been crucial to the touted success of the ACA.  They have brought low risk individuals into the pool. Without the subsidies, the insurance market would need to depend solely on risk aversion to achieve price stability and escape the death spiral.  Prior experiments relying only on risk aversion alone have been notoriously unsuccessful.

For better or worse, the subsidy has had an immense effect. A recent study conducting by Avalere shows that 83% of Exchange enrollees have incomes at 250% or less of the federal poverty level for their households. The take up rate among those eligible for ACA exchange policies falls from 76% for those earning 100-150% of FPL down to just 16% for those earning 300-400% of FPL. Take up then plummets to 2% for those earning more than 400% of FPL and who are thus ineligible for subsidies.

This elasticity in the demand for health insurance is precisely why the forthcoming Supreme Court decision in King v. Burwell is of such great importance.  If the Supreme Court issues a square holding that the federal government lacks authority to pay the premiums where the state itself has not directly established an Exchange, and neither Congress nor the states does anything to fix the matter, expect insurers in those states rapidly to stop offering individual health insurance on the Exchanges. Indeed, clause IVB in the contracts those insurers negotiated with the federal government precisely in anticipation of King v. Burwell would permit those insurers not just to exit the market next year but to cancel existing policies midstream.

A side point, but one that might trouble this audience.  Every insurer that I know of is accepting payments from the federal government for cost sharing reductions.   But those payments are almost certainly illegal. Congress never appropriated any money for Cost Sharing Reductions.  So, under the law as written, insurers who want to play in the Exchanges are really supposed pay for cost sharing reductions themselves.

Of course, to my knowledge, that’s not happening. The money now landing in insurer’s bank accounts is coming from a fund set up for tax refunds that is, by law, dedicated exclusively to that purpose.  That, I believe is unlawful and, should another party ever control the Executive branch and want to look for a villain or want to extort various favors from someone whom they have over a barrel, might it not chase insurers for receipt of diverted funds?  There is a 1938 Supreme Court decision saying the Government can recover funds paid illegally and a 1990 Supreme Court decision saying that a claim of estoppel can not lie against the federal government.   So, before insurers become accessories or before they count as money on their balance sheets that they might have to pay back, they might want to look at these cases.

Reinsurance subsidies

There are also less visible features of the ACA that are designed to improve the probability of the airplane staying aloft. The ability of the ACA to fly also depends substantially for 2014, 2015 and 2016 on premiums subsidized by free specific stop loss reinsurance given to insurers who agree to risk their capital in untested Exchange markets.  It is, however, a form of support that is going to flame out after 2016.

How much support does it provide? If you use the data from the 2016 draft actuarial value calculator produced by CMS, you can compute that the subsidy will still be about 3% of premiums for 2016.  It was higher in 2014 and 2015. How will the ACA continue when prices increase at least 3% more just due to the elimination of this single subsidy.  The naive might think that 3% is not all that much.  And, without taking adverse selection into account, I would expect the market to shrink only by about an equal percentage.  But if history and economics tells us anything — and it does — because of adverse selection, the actual price increase will be greater and the resulting decline in enrollment will be greater.

I would not expect Congress to do any sort of mid-flight refueling of reinsurance subsidies, to continue my airplane metaphor. The policy justification for specific reinsurance subsidies seems rather thin.  If reducing the overall risk to insurers was the issue, aggregate stop loss, perhaps available at an actuarially fair price, rather than free specific stop loss reinsurance would make more sense.  And if the government, and, derivatively, the insurance industry, was fearful of there being no market for reinsurance where the risk involved was so untested, Congress could have made a guess and established a fair price and reinsurance facility itself. Moreover, if uncoupling household income from the ability to obtain medical care was a primary goal of the ACA,  why would Congress not just increase individual premium subsidies instead of sending that money to enrich, sorry guys, insurance companies?  This form of corporate welfare helps people at 350% of federal poverty level or even people at 1000% of FPL buying unsubsidized policies on the Exchange as much as it helps the person earning 150% of FPL who might desperately need more assistance. If one accepts major premises of the ACA, one might seriously question why such is the case.

Risk Corridors: The Free Derivative

The ACA depends somewhat for 2014, 2015 and 2016 on another form of subsidies for the insurance industry.  It indirectly subsidizes premiums by providing insurers with a free financial derivative: risk corridors that reduce the amount of capital prudent insurers might otherwise need to stockpile or aggressive state regulators might require them to stockpile. This reduction occurs because Risk Corridors reduces the probability of insurers losing substantial amounts of money via participation in the Exchanges. To use a finance term, Risk Corridors reduces Value at Risk, which is a decent estimate of the amount of money participating insurers need to keep in more liquid and probably less lucrative investments.

If you run the computations — ask me how — it looks as if Risk Corridors reduces the amount insurers need to charge for Exchange policies by a little less than 1%.  Again, you might say, in what I suspect would be a deprecating tone, big deal. And, I agree that, taken by itself, the ACA is unlikely to crash based on a 1% increase standing alone.  But it’s all cumulative and the problem with death spirals is that once you find yourself in their clutches they are a bit like a black hole, very difficult to escape.

Insurers may not have to wait until 2017 for Risk Corridors to disappear.  They are already in grave trouble.  Congress also never appropriated any money for Risk Corridors. And this wasn’t an accident. The statute, as written, depends on assessments on insurers based on a formula to magically equal payments out to insurers based on a formula over the 3-year span of the program.  We are already seeing, as many predicted, however that such an assumption was unwarranted.  Due perhaps to loss leader pricing and the predictable propensity of consumers to pick precisely those plans that were charging too little relative to actuarial risk, it appears that, on balance, at least after what I would hope would be clever but lawful accounting, that few insurers are making enough money under Obamacare policies to provide any funding to the many insurers who gained volume at the expense of profitability. So, when the Obama administration suggested it might lawlessly raid other government accounts to fund Risk Corridor deficits, Congress responded in section 227 of the Cromnibus bill by walling off the plump Medicare Parts A and B trust funds and CMS operating accounts as a source to repay obligations created by the Risk Corridor program.

Might deficits in early years of Risk Corridors be funded out of profits in later years as the Obama administration has suggested? The omens aren’t good. According to a review of 2014 industry filings by Standard & Poors, Risk Corridors will likely collect less than 10 percent of what industry is expecting to be reimbursed. 14% of insurers will likely pay into Risk Corridors.  56% expect money out. The absence of Risk Corridor money will be fatal to some insurers.

Already, we are seeing the death and near death of some less well capitalized insurers, particularly the co-ops capitalized, I might add, not so much by private investors but by $2.4 billion from the taxpayers in a less well publicized cost of Obamacare. Low premiums are not of terribly great value if they end up bankrupting private insurers on whom the success of Obamacare depends.

Individual Punishment

Thus far, I have spoken of the carrots to get even people of low risk to participate in the Exchange marketplaces.  Obamacare is fueled, however, not just by subsidies but by punishment. Obamacare chose a different punishment model than for programs such as Medicare Part B or Medigap.  In those programs, and in some Republican proposals for Obamacare reform, if you don’t select insurance when you are first eligible, you just pay a lot more for insurance if you elect coverage later.  No commerce clause problems, no tax. Obamacare, by contrast, increases administrative costs by potentially assessing  a penalty each year if you don’t have coverage. The ability of this punishment to stem a death spiral depends on the size of the punishment and the number of people who are subject to it.  And what I now wish to suggest is that even without its formal repeal, the Individual Mandate was weak to begin with and has been further enfeebled by administrative moves taken in response to political uproar.

Consider, for example, a slightly fictionalized version of one typical American. According to the Kaiser Foundation Calculator, a 45 year old non-smoking person making $48,000 per year would expect to pay $3,742 on average for a Silver Policy.  Suppose, however, that the individual considers themselves to be only 30 in health years. The individual thus considers its average expenses that would be covered by insurance to be $2,941.  Would the $746 difference in tax created by the mandate be sufficient to get that person to purchase an Exchange policy.  Not if that person was risk neutral.  $746 in tax is less than the $801 excess in medical expenses.

Alternatively, eliminate $3,000 from the person’s income. Now, because the premium the individual would have to pay is more than 8% of household income, the individual is exempt from the individual mandate. There are a significant number of uninsured people thus exempted from the mandate on grounds that they are simply too poor to purchase Obamacare.

But there’s more to make sure, as the CBO recently confirmed, that only one in six of the uninsured will actually be subject to the mandate.  There is the absurdly expanded hardship exemption. There’s the health sharing ministry exception mostly for evangelical Christians. And there’s the peculiar 3 months off exemption (26 USC § 5000A(e)(4)).

In short, one of the reasons Obamacare will have difficulty flying is that we are afraid of our inability accurately to determine whether people can really afford insurance and at what price.  For now, though, if one wants to rely on sticks, the stick is actually too weak and hits too few people.

The Employer Mandate

Another key component of the ACA has been the employer mandate.  Or, at least it was supposed to be a key component.  In fact, in what a lot of people, including me, think is a very dangerous precedent that will, one day, bite ACA proponents in the proverbial behind, the Obama administration simply decided, without any apparent discretion, to delay enforcement of the law for one year and, for the current year, to apply the statute only to employers with more than 100 employees, even though the number the statute picks is 50. If a change to the tax code is so complicated that it takes mid sized businesses with financial advisors 5 years to understand it, perhaps that’s a sign there is something more fundamentally wrong.

At any rate, the employer mandate is, for lack of a more sophisticated term, stupid. If it actually works, it keeps people off the individual exchanges, which is exactly what should not be happening. The employer mandate perpetuates both symbolically and literally the counterproductive tie between a poorly functioning and lumpy labor market and something as important as health.  It puts the employers’ decision as to what sort of coverage best suits the employee ahead of the ability of the individual to choose.  The tax deductibility of payments helps the wealthy more.  The lack of portability between jobs decreases the sort of continuity of care that might improve health. It is everything a good liberal should hate.  (Indeed, some have had the courage to note the many flaws with the current law.) And so I wonder if King v. Burwell comes out against the government, whether the employer mandate, which has barely made it on to the Obamacare Aircraft, might be abortively deplaned with eager Republicans and Democrats in need to save face actually coming together on this issue.  Indeed, if I were a Limbaugh-style Republican who wanted Obama to fail, I would actually insist on the employer mandate continuing as a way of starving the individual exchanges of healthy people who might stabilize their prices and of helping high income voters more.


One’s perspective on the ACA can’t be whether it helps insurers or whether it helps the medical profession.  In fact it shouldn’t even be on whether more people have health insurance.  The positive factor to be considered is whether it has improved health.  I will concede that, on balance, it probably has — slightly. Many medical interactions are beneficial and, although supply of medical practitioners has not increased much, there are 2-4% more such interactions thanks to the ACA.   In any event, whether the ACA marginally improves health is not the exclusive test.  These programs have to be paid for and they come at a heavy price.  The CBO now estimates the ACA will increase our budget deficit by $849 billion dollars through 2026. It is not, contrary to prior representations, paid for.

If you forget about Medicaid expansion and take the net increase the uninsured as a result of the ACA and divide that by the cost of providing coverage to them, it turns over 10 years to average with premium subsidies, cost sharing reductions, the 3Rs, and administrative costs about $7,600 per person.  And in addition to racking up our already bloated deficit, there will be be taxes, fees and subsidies that have their own perverse incentives. Some have estimated the cost of providing a currently uninsured person an additional year of a quality life at over $200,000 possibly over $1 million. That’s enough that we have to look hard at whether there might be some better and simpler alternatives.

As we move forward  ought to be looking not at Obamacare vs. The Bad Old Days Where Evil Insurers Deprived Sick People of Coverage but rather to a variety of alternatives ranging from, yes, Bernie Sanders Single Payer plan to, better,  libertarian plans to use market mechanisms more effectively  to perhaps better yet, lots in between.  Yes, Obamacare has gotten off into the air, but if they would honestly call “Mayday,” it is my hope that a variety of people would try to help out.

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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.


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.


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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Latest unlawful Obama administration “fix” may create standing for challenges

This past Thursday, the Obama administration issued its latest “fix” to the troubled roll out of the Affordable Care Act. The Center for Medicare & Medicaid Services issued a guidance that permits federal funds to go to insurers and insureds involved in sale of an individual health insurance outside of either a federally established or state-established Exchange. The premise of the guidance is that, in certain states such as Maryland, Massachusetts, Hawaii and Oregon, the complete dysfunctionality of the websites that were intended to determine eligibility for Obamacare subsidies may have led people to enroll in policies off the Exchanges; these purchasers, the guidance directs, should be treated the same as if the state Exchanges had made a timely determination and the individuals had enrolled in an Exchange policy. The guidance implements this concept by retroactively making such individuals eligible for premium tax credits the same as if they had purchased a policy on the Exchange and requires their insurers to readjudicate their claims both retroactively and for the remainder of the policy year as if they were eligible for the same cost sharing reductions that would have applied had they purchased a policy on the Exchange.

The Obama administration’s guidance calling for expenditures of taxpayer money plainly violates the Affordable Care Act. Unlike prior violations incurred in an effort to rescue the ACA from implementation and architectural infirmities, however, this one may actually hurt legal entities in a traceable and individualized fashion.  Some off-Exchange insurers may have standing to challenge the violation in court should they have the courage to pursue that option.

The illegality problem

Here’s why the Obama administration’s action is unlawful.

Premium Tax Credits

Under section 1401 of the ACA, which creates new section 36B of the Internal Revenue Code, the government may provide premium tax credits to the individual only for a “coverage month.”  The idea was that households with incomes less than 400% of the federal poverty level would ultimately see their federal income  taxes reduced to help compensate for the cost of purchasing health insurance.  But not any kind of health insurance purchase constitutes a “coverage month.”  Under section 36B(c)(2)(A), a coverage month is only one in which the taxpayer “is covered by a qualified health plan … that was enrolled in through an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act.”  (emphasis mine) But the policies the Obama administration are now going to subsidize were not enrolled in through an Exchange established by a State (or the federal government); indeed, such is the entire “innovation” of this CMS guidance. And, thus, there is no statutory authorization for the federal government to be giving these taxpayers a credit.

Cost Sharing Reductions

Under section 1402 of the ACA (codified at 42 U.S.C. § 18071), the Secretary requires insurers to offer contracts with reduced cost sharing (deductibles, copays, out-of-pocket limits etc.) to individuals who purchase “Silver” plans. Purchasers are broken down into categories such that purchasers who fall into progressively lower income categories receive progressively more generous reductions. The program effectively converts “Silver” policies into “Silver-Plus”, “Gold Plus” and “Platinum Plus” policies. The government subsidizes insurers issuing these policies so that the cost sharing reductions should not cost them anything (providing the math is done properly). What the Obama administration is proposing is to extend these cost sharing reductions to insurance purchased off the Exchanges, at least where an application had been made to an Exchange.

Again, the problem is that the statute does not authorize cost sharing reductions for all “qualified health plans” sold on or off an Exchange. Under section 1402(a), such payments are authorized only for an “eligible insured.”  And the definition of “eligible insured” is quite clear. Section 1402(b)(1) requires that an eligible insured “enroll in a qualified health plan in the silver level of coverage in the individual market offered through an Exchange …” (emphasis mine).  Again, that pesky “through an Exchange” language gets in the way of the administration’s goal.  The policies now being offered subsidization are precisely those not offered through an Exchange.” The payments to these insurers announced by the Obama administration are illegal. From a financial accountability standpoint, it is not much different than if the Obama administration just decided to give government money to those ineligible for Medicaid simply because it felt badly for some of them.

Why insurers may have standing to challenge the new regulations

The Obama administration has made a habit in its implementation of the Affordable Care Act to exploit the law of “standing.” This is the doctrine that usually denies individuals with generalized grievances about a law or its implementation from bringing suit. Standing usually requires, among other things, that the plaintiff in a legal action have suffered individualized injury from the statute. Thus, when the Obama administration simply declines to collect taxes (as with the refusal to enforce the employer mandate), it becomes challenging to find someone who can use the judicial system to overturn the action. A similar problem plagues efforts to challenge the Obama administration’s decision to permit insurers to continue to sell policies that do not conform to the requirements of the Affordable Care Act. It’s challenging to find an individual or business that is hurt in a particularized and traceable fashion.

With the latest lawless action, however, the Obama administration may have gone too far.  Insurers who sold off Exchange will be hurt by the cost sharing reductions.  The reason is “moral hazard.” The idea of moral hazard is that the more generous an insurance policy is the greater the frequency with which insureds encounter covered events. In the health insurance arena, people with lower co-pays and deductibles go to the doctor more.  Indeed, the major reason for co-pays and deductibles is precisely to induce insureds to be judicious in their use of expensive medical services.  Moral hazard is one of the major reasons that platinum policies cost more than bronze ones.

When cost sharing reductions imposed on off-Exchange insurers effectively convert their silver policies into silver-plus, gold-plus and platinum-plus policies, those insurers end up paying more in claims.  And, while insurers selling policies on the Exchanges could have taken the induced demand created by cost sharing reductions into account in pricing their policies, there may well be insurers who sold only off the Exchange who, of course, did not take this additional moral hazard into account. Those insurers never dreamed that the government would reduce the amount its insureds would owe in cost sharing. Such insurers should have a strong case for standing in bringing a declaratory judgments to challenge the new guidance or, perhaps, in refusing to honor the demand for cost sharing reductions. Such insurers will, of course, need to be willing to take the political heat that may come from taking on an Executive Branch that more than ever is regulating their products.

A practical problem with imposition of cost sharing reductions on off Exchange policies

There’s also a practical problem with retroactive imposition of cost sharing reductions on off-Exchange insurers.  The guidance issued last week does not seem to address it. There are a lot of ways of achieving cost sharing reductions.  Some insurers might choose to reduce a deductible for some benefits.  Other insurers might choose to reduce a different deductible.  Still others might choose to keep the deductible but reduce copays.  For this reason, insurers selling policies on the Exchanges needed to specify in advance how they were going to achieve cost sharing reductions for their policies. Hence the government’s “Actuarial Value Calculator.” But insurers selling policies off the Exchange may never have gone through such an exercise.  Since CMS is now going to tell these insurers to readjudicate claims once they find out the income level of their insureds, the insurers are somehow going to have to come up, retroactively, with a system of cost sharing reduction.  How the insurer chooses to do so will affect how much each insured gets rebated.

The demand for readjudication gives insurers a second basis for standing.  Claims adjudication is not free.  The insurer is now going to have to go back through claims and resolve them for a second time.  Programming computers to adjust claims on a new basis is not costless. Figuring out whether a given service qualifies for cost sharing reductions is not costless. Cutting checks is not costless. And, having an actuary figure out what forms of cost-sharing reductions actually qualify as appropriate under the ACA is hardly costless either.  In short, the CMS guidance places new and completely unanticipated burdens on insurers who may have chosen to sell off Exchange precisely to avoid some of the regulatory burden that comes with on-Exchange sales.

The possible abortion problem

The “fix” concocted by the Obama administration may also end up violating restrictions in the ACA on federal funds being used to fund elective abortions. I will admit this is a bit speculative, but here’s the issue.  The general problem is that the ACA is an extremely integrated federal statute in which various provisions were enacted on the assumption that the conditions set forth in other provisions would hold.  Once the administration starts lawlessly changing certain parts of the ACA, other sections of the act begin to unravel. With abortion, the problem is that section 1303 of the ACA  (42 U.S.C. § 18023) prohibits federal tax dollars from being used to pay insurers via advances on premium tax credits  to fund elective abortions. Nor may federal funds be used to reduce the amount of “cost sharing” (deductibles, copays) that certain poorer ACA policy purchasers would otherwise pay for services other than elective abortions. There’s an elaborate mechanism specified by the statute involving segregated accounts and allocations that keeps government out of the elective abortion business, almost as if the insured purchased two policies — one for elective abortion and one for everything else — only the latter of which was subsidized by the government.   As a result, to the extent that various plans sold on the Exchanges provided for elective abortions — and apparently plans in at least nine states do so — they were structured to avoid receipt of such payments through segregated accounts.

Policies sold off Exchange never anticipated being the recipient of federal taxpayer money via premium tax credits and cost sharing reductions.  To the extent they provided for elective abortion coverage — and probably some of them did — there would have been no reason to structure them with segregated accounts to avoid receipt of federal funds for abortion.  Thus, when the Obama administration now proposes paying these off-Exchange policies federal tax dollars, the mechanisms for addressing abortion will not exist. I suspect that insurers who chose to sell off Exchange will not be excited by the administrative costs of now establishing segregated accounts. And, of course, if these off-Exchange insurers are not required by the Obama administration to prevent use of federal funds to pay for elective abortions, expect a firestorm of protest from those who believe that the federal government should not be subsidizing elective abortion.


One can be sympathetic to the plight of individuals in states such as Oregon, Maryland and others that wanted subsidized and community rated health insurance and, through no fault of their own, could not get it due to dreadful implementation of database systems that many states managed to accomplish with far fewer problems.  In a world of cooperation, it might have been possible for the Executive branch and Congress to work together to hold these individuals harmless for these failings while preserving political and legal accountability for government officials and contractors who collaborated in the various debacles. Instead, however, we have an illegitimate attempt to use the Executive pen to write around the problem and bail out those responsible for embarrassing state implementations of the ACA.

This fix is not only lawless, it is very sloppy.  It fails to prescribe a method by which the retroactive cost sharing reductions are to be done.  It imposes costs on insurers who may have traded the opportunities of selling on the Exchanges in favor of the comparative regulatory freedom that came with selling off the Exchanges. If the guidance is not clarified, it  may enable strategic behavior by those who purchased off the Exchange without suffering through a dysfunctional Exchange first; it may permit those people to apply for Exchange coverage now, reject it, but still obtain retroactive premium tax credits and cost sharing reductions for their off Exchange policies.  And the guidance as it stands fails to take into account sensitivities concerning elective abortion funding. And, of course, this spending of taxpayer money appears to be proposed via a “guidance” and not even a full fledged regulation promulgated with at least minimal process.

For proponents of the “flexibility” the Obama administration has shown in implementing the ACA in the face of a hostile Congress, however, the main sloppiness with the latest guidance is that it enables the judicial branch to rule on the pattern of unilateral Executive action that has characterized recent implementation of the ACA. Insurers off the Exchange will be hurt by the cost sharing reductions imposed by the guidance and by the administrative costs it creates. The question is, will any of them have the guts to sue.

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