Tag Archives: cost sharing reductions

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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Backstop argument shouldn’t rescue Obama administration in House lawsuit

A recap of where we are in House v. Burwell

The hottest issue in the law of Affordable Care Act at the moment is whether the Obama administration had constitutional authority to pay insurers billions of dollars for the “Cost Sharing Reduction” provisions when Congress did not appropriate any money for that program.  Those who believe the Obama administration has acted illegally got a boost  recently from United States District Court Judge Rosemary Collyer, who ruled that the House of Representatives had standing to sue Obama administration officials for these sorts of payments.

But it was not just that Judge Collyer ruled in favor of standing that creates the tempest; it was what she said in her opinion. As I noted in a recent blog entry, in resolving the standing issue, Judge Collyer appeared to reject the Obama administration’s main defense. Instead, she wrote:

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.”

And that would seem to be precisely what we have here. It is very clear that there is no clear direction from Congress to pay insurers for the cost sharing reductions.  Indeed, as Judge Collyer notes:

On July 13, 2013, the Senate Appropriations Committee adopted S. 1284, a bill appropriating monies to HHS and other agencies. An accompanying report stated that “[t]he Committee recommendation does not include a mandatory appropriation, requested by the administration, for reduced cost sharing assistance . . . as provided for in sections 1402 and 1412 of the ACA.

To be sure, Committee reports are not the same thing as the law. Nonetheless, to the extent they are relevant, here they are highly unsupportive of the notion that Congress intended to spend money on this program.

Moreover, Judge Collyer rejected the argument that the Obama administration could spend money on cost sharing reductions because, unlike in other areas of the ACA, Congress had not explicitly forbad it. Wrote Judge Collyer,  “The absence of a restriction, however, is not an appropriation. ”

Looking at a fallback argument

And, so, what’s left?  And here is where we get to an argument that is just too perfect ” It was articulated recently by Professor Nicholas Bagley of the University of Michigan on his Incidental Economist blog and has been attributed as well by a big proponent of the ACA to Professor David Super of Georgetown University.  I’m going to quote it here, leaving Professor Bagley’s hyperlinks intact so that you can get a sense of at least some of the authorities on which he relies. (Obviously, his blog post (like mine) is not a brief or a law review article, and I am by no means contending that his links were insufficient).

Even without an appropriation, health plans still have a statutory entitlement to cost-sharing payments. What that means in non-legalese is that Congress has promised to pay them money—whether or not there’s an appropriation. And health plans can sue the government in the Court of Federal Claims to make good on that promise. (Congress has undeniably appropriated the money to pay court judgments.)

Now, before we go further, note that this may not exactly be a legal argument.  That is, Professor Bagley could well be right that the lawsuit is kind of pointless if the insurers get paid in the end, but  the House could still be right that the Obama administration acted unconstitutionally by paying insurers without compelling them to go through those extra hoops. But this ignores, of course, the expressive value of the lawsuit which is that the Obama administration is acting lawlessly in implementing the ACA. (It is consistent, though, with some people’s view that, whatever its merit and whatever the importance of the principles at stake, the lawsuit is, in today’s political environment, misguided because cutting off cost sharing reductions is going to anger a lot of people and Republican fingerprints are all over the lawsuit).

Whether Professor Bagley is making a legal or pragmatic argument,  (or both), however, I think it is just a little too perfect.  It assumes its own conclusion.  If it were true that a beneficiary of a federal program — here, poor little insurance companies — could recover in the Court of Federal Claims when Congress failed to appropriate any money for their welfare program, then there would be far less point, really, in Congress ever making appropriations. It would change the Constitution to say something like, “The Executive may draw money from the Treasury except where prohibited by Congress.”  The presumption would have changed from giving Congress the power of the purse,  which is what I thought the Constitution meant, to giving those powers to the President, which I thought was kind of more like a monarchy.

Moreover, there is a decent reason that  we separate passage of a bill from funding of its programs.  And it is well illustrated by the ACA.  Consider the cost sharing reductions.  They were enacted in March, 2010 when the ACA passed.  But they were not to take effect until January 1, 2014. It could well be that, between passage and effect, budgetary priorities shift.  Perhaps we need more money for relocating refugees than we did at the time the original legislation was enacted, or perhaps we became more concerned about an ever growing multi-trillion dollar national debt. But Congress thought, if we ever do have the money, this cost sharing reduction program is a pretty good idea.  And so, the solution is to say, as we have, and as Judge Collyer did, that passage of a bill, generally speaking, is different than appropriation of funds. Congress can enact laws and then not fund the “promises made therein” at least for some period of time.  I do not think Congress had to formally repeal cost sharing reductions in order to put the program on hold and then reenact the program when money became available.

Now, I can imagine Professor Bagley at this point rejoining, “but Congress did appropriate the money by creating a permanent appropriation for judgments rendered in the Court of Federal Claims. ” But if that were true, Congress would have to, each time it did not wish to appropriate funds for a program it has enacted, create an exception to the permanent appropriation for judgments rendered in the Court of Claims.  In addition to converting one provision of the US Code into a trash compactor for discarded legislative ideas, such a requirement would seem to violate the whole idea, at least of Judge Collyer, that  “the absence of a restriction … is not an appropriation. ”

Does Slattery v. U.S. mean that Bagley is actually right? (No)

I will confess that my own above arguments were more thoroughly persuasive to me until I looked at Slattery v. U.S., 635 F.3d 1298 (Fed. Cir. 2011), which involves the Tucker Act. There, the Federal Circuit abrogated a prior doctrine announced in Kyer v. U. S., 369 F.2d 714 (Ct. Cl. 1966),  under which, if there was an agency of the United States, such as army post exchanges (PX) that operated without use of appropriated funds but on the basis of other revenues, there was a jurisdictional bar against the Court of Federal Claims hearing the case and thus no ability of the plaintiff to recover absent a seldom-obtained explicit consent to suit from the otherwise sovereignly immune United States.

Slattery itself involved a claim by the shareholders of a bank against the FDIC which, apparently, did not receive federal funding but which is a federal instrumentality.  Supposedly, in the course of coaxing the bank to have another failing bank merged into it, the FDIC had created contractual assurances that the method of accounting and capitalization standards for the assuming bank would be, for lack of a better term, fairly mellow.  Later, in apparent violation of the contract, the FDIC imposed stricter standards and the bank ran into problems as a result. The court held that the fact that the FDIC did not receive an appropriation did not prevent the Court of Federal Claims from hearing the case.

We conclude that the source of a government agency’s funds, including funds to pay judgments incurred by agency actions, does not control whether there is jurisdiction of a claim within the subject matter assigned to the court by the Tucker Act. The jurisdictional criterion is not how the government entity is funded or its obligations met, but whether the government entity was acting on behalf of the government. … Thus we confirm that Tucker Act jurisdiction does not depend on and is not limited by whether the government entity receives or draws upon appropriated funds.

So, one might be tempted to run with this language and say that, indeed, the insurance companies can sue in the Federal Court of Claims for the money the government “should” have paid them  under the cost sharing reductions (except of course that the Obama administration has paid them.) The fact that no money was appropriated doesn’t matter.  But, I don’t think this is quite right.  For one thing, Slattery is about jurisdiction, not about the merits. All it is really saying is that the fact that the federal entity was not funded by Congressional appropriations does not, in and of itself, create an automatic bar to the court hearing the case.  It does not say that, if the federal agency was acting way outside its authority that the federal government must pay the claim out of the permanent appropriation.  Moreover, in the Slattery case itself, the basic idea was that the FDIC had not honored the deal under which it persuaded one bank to take on a problem bank, not that the FDIC had no authority whatsoever to assist with bank mergers.

Moreover, if you look at the language of Slattery very carefully, the issue is “whether the government entity was acting on behalf of the government.”  Here, I say, it sure looks like the Treasury was not acting lawfully in paying insurers for cost sharing reductions out of money that was supposed to go for tax refunds. And so, it may well be that the Treasury was not acting on behalf of the government but on behalf of the extra-legal objectives, however meritorious or well intentioned they may have been, of the President.  Thus, although as a lawyer for HHS I would certainly be citing Slattery a lot, it does not address the issue in the current case.

And one more thing

Could we also think for a bit about how strong the insurers’ claims in the Court of Federal Claims would really be?  My heart bleeds for insurance companies perhaps more than most, but I have trouble working up a great deal of sympathy here. Insurers surely  became aware at some point before the beginning of 2014 that Congress had not appropriated any money for the cost sharing reduction program.  They would certainly be aware of a problem if the court rules in this case that payments to them are illegal!  And, yet, knowing this, they would seek to sue for making contracts with limited cost sharing available to policyholders at discount prices?  Its not quite the same thing as suing to enforce a contract  where you knew the money to pay you had been embezzled, but it is not that far off either.

 

 

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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.

Conclusion

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

 

 

 

 

 

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

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

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

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

Cost Sharing Reductions
Cost Sharing Reductions

 

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

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

The complaint
The complaint

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

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

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

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

Congress intended that the federal treasury fund cost sharing

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

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

But perhaps it takes more than intent in a bill

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

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

Or maybe not

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

A statutory rejoinder?

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

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

A constitutional rejoinder

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

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

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

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

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

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

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

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

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

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

MRE Beef Stew
MRE Beef Stew

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

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

Conclusion

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

 

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

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

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

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

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

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

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

 

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

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

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

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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.

 Conclusion

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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