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:
- Article I, section 9 of the Constitution (“No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law”);
- 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
- 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.
- “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.”
- 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?
- 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.