Tag Archives: statutory interpretation

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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Phantom costs: The lawless proposal to buy off the insurance industry via a “fix” to Risk Corridors

In my last blog post, I began to explain the proposed “fix” to the Risk Corridors program that the Obama administration seeks to achieve through modifications of its regulations. This is the provision of the Affordable Care Act under which the federal government reimburses large proportions of money lost by insurers over the next three years selling insurance to individuals in the Exchanges or to small employers.  Originally thought by many to be budget neutral, if, as appears increasingly possible, insurers on average lose significant money in the Exchanges, Risk Corridors could cost the federal government hundreds of millions of dollars or more.

I also suggested in that prior blog post that the “fix” raised serious concerns about the rule of law and separation of powers.  In this post, I want to follow up and explain further the accounting trickery and word play in which the administration is engaged and why it is not authorized by any law passed by Congress. Basically, the proposed changes in the regulations amount to an illegal pay off to the insurance industry so that they do not exit the Exchanges after having had the rug pulled out from under them by another decision not to enforce the law as written.

In sum, the Obama administration is proposing without any statutory authorization to let insurers increase the amount they get from the federal government under the Risk Corridors provision of the Affordable Care Act by treating as a “cost” money that the insurers have not spent and that can not be fairly said to be a cost of doing business.  The Obama administration makes this use of phantom costs appear more palatable by terming it “profit” and likening it to an opportunity cost of capital. But the increased “profits” the Obama administration now seek to permit insurers to subtract as a cost has completely detached itself from anything to do with real opportunity costs of running a business. The Obama administration would have been equally dishonest had they permitted insurers to place triple their rent on their Risk Corridor accounts and term the extra 200% a cost of business that entitled them to yet more money from the government. The proposed regulations should be seen as unlawful as an attempt by the Executive branch to change hard percentages used in the statute such as  80% into 95% simply because the Executive thought it better balanced the interests at stake.

Background

The fundamental problem stems from the divergence between what the President repeatedly told Americans during his presidency — if you like your health care plan, you can keep it — and what the Affordable Care Act (a/k/a Obamacare) really said, particularly as it ended up being implemented by the President’s own executive agencies (here and here). The insurance industry acted as if the rule of law mattered, not the campaign rhetoric or people’s perceptions of it, and set its prices in the healthcare Exchanges in accord with the law and the administration’s own forecasts of its effects on competing policies otherwise available to healthy people.  So, when the President announced on November 14, 2013, that his administration would conform the law to his rhetoric and public expectations (by declining under certain circumstances to execute sections 2701-2709 of the Public Health Service Act as modified by the Affordable Care Act), the insurance industry had a fit. It appropriately warned the President that, by reviving competitive sources of health insurance for some of their healthiest potential insureds, he was destabilizing the insurance markets. And, since the keystone of the President’s signature piece of legislation, the Affordable Care Act, depends on happy private, profitable insurers, this was a warning the President and his executive agencies had to heed.  Instead of backing down on the November 14, 2013 announcement, the President doubled down on regulatory change. This past week the Department of Health and Human Services proposed in the Federal Register how current Risk Corridor regulations might be amended to give insurers relief.

A Quick Look at the Statute

For ready reference, here’s an excerpt of the key part of the Risk Corridors statute in question.  You can try to read it now or refer to it periodically as you progress through the remainder of this blog entry.

(b) PAYMENT METHODOLOGY.—
(1) PAYMENTS OUT.—The Secretary shall provide under the
program established under subsection (a) that if—
(A) a participating plan’s allowable costs for any plan
year are more than 103 percent but not more than 108
percent of the target amount, the Secretary shall pay to
the plan an amount equal to 50 percent of the target
amount in excess of 103 percent of the target amount;
and
(B) a participating plan’s allowable costs for any plan
year are more than 108 percent of the target amount,
the Secretary shall pay to the plan an amount equal to
the sum of 2.5 percent of the target amount plus 80 percent
of allowable costs in excess of 108 percent of the target
amount.

The Federal Register Proposal

The fundamental idea in the new Risk Corridors proposal is to put the insurers back in the same position they would have been in had the non-enforcement announcement (“the transitional policy”) not been made.One can see this point made repeatedly in the Federal Register proposal:

Therefore, for the 2014 benefit year, we are considering whether we should make an adjustment to the risk corridors formula that would help to further mitigate any unexpected losses for issuers of plans subject to risk corridors that are attributable to the effects of the transition policy. (78 FR 72349)

We are considering calculating the State-specific percentage adjustment to the risk corridors profit margin floor and allowable administrative costs ceiling in a manner that would help to offset the effects of the transitional policy upon the model plan’s claims costs. (78 FR 72350)

Although the adjustment that we are considering would affect each issuer differently, depending on its particular claims experience and administrative cost rate, we believe that, on average, the adjustment would suitably offset the losses that a standard issuer might experience as a result of the transitional policy. (78 FR 72350)

Two clearly illegal ways to “fix” the problem

The problem the administering agency (Health and Human Services) faces, however, is how. How does HHS “suitably offset the losses that a standard issuer might experience as a result of the transitional policy?” One simple way might have been to adjust the reimbursement percentages contained in the statute, changing them from 50% and 80% for different levels of losses to higher levels. The problem is that the statute (42 U.S.C. § 18062) specifically sets forth the 50% and 80% reimbursement percentages and it would challenge even the most fertile imaginations to contend that it was within the province of an administrative agency to interpret those, as, say, 70% and 95%. And in the current gridlock — and with proposals to repeal Risk Corridors circulating —  getting such a proposal through Congress would seem impossible.

Alternatively, the administration might have made the insurers whole by adding state-by-state constant terms to the formula for reimbursement that roughly approximated the amount a typical insurer might lose in that state. Again, though, that would just constitute a statutorily unauthorized give away of federal taxpayer to the insurance industry.  Congress did not authorize payments so that insurers could maintain the same profits they would have earned in an alternative regulatory environment; instead Congress attempted to compress the profits and losses of insurers based on the regulatory environment that they in fact were in.

The “fix” suggested by the Federal Register proposal: what’s the difference?

What I now want to persuade you of, however, is that, after one strips away the confusing accounting, the Federal Register proposal, in its essence, amount to the same thing as these clearly unauthorized alternatives.  They are, in effect, a coverup for a giveaway of government money. The are very much the assumption of legislative powers by the executive branch of government.

The conceptual problem

One can almost see the problem without doing the math. The very objective set forth repeatedly in the Federal Register proposal — of putting the insurer back into some alternative financial condition, almost as if the government had taken their property or committed a tort by changing the rules — is nowhere to be found in the Risk Corridors statute. Section 1342 speaks of real premiums earned and real costs incurred and looks at their ratio in order to determine federal aid to insurers writing in the Exchanges. That perspective is echoed in the initial regulations published in the Federal Register months before the “transitional policy” brouhaha broke out. The definitions of critical terms adopted in those regulations speak of costs “incurred” or the “sum of incurred claims” or “premiums earned.” (See note below on definitions). Moreover, the definitions are nationwide. There is no sense that the values in the regulations (such as limits on the amount of administrative costs that can be claimed by an insurer) need to be adjusted on a state-by-state basis. And that refusal to adjust the regulations based on different economics in different states exists under the current regulations even if insurers in different jurisdictions have different financial experiences under the Affordable Care Act or face different state regulatory environments.

So, with those darned percentages statutorily nailed down, how does one achieve the objective in the Federal Register proposal of giving insurers their anticipated profits back? The answer is that the Federal Register proposal attempts to add a phantom cost that will vary state-by-state in precisely the amount needed to do the job.  Of course, writing “state-specific phantom cost” into the regulations would alert everyone that the plan was just to shovel money to insurers to keep them happy regardless of what was in the law. So, instead, the idea was to seize upon a word already in the regulations — “profit” — and alter its definition beyond recognition. Expanded “profit” could then do the same job as “state specific phantom cost.”

The math

Here are the specifics. The statute makes the amount the insurer receives in Risk Corridor payments (or pays) depend on a ratio.  A higher ratio often results in more payments and never results in smaller payments from HHS. The numerator of the ratio is something called “allowed costs,” so the higher the allowed costs, the better HHS treats the insurer under Risk Corridors.  The denominator of the ratio is something called “the target amount.” Because higher ratios are good for the insurer, the smaller the “target amount” the better HHS treats the insures under Risk Corridors. (Remember, dividing by a smaller number yields a higher result.) And “target amount” is defined as total premiums less administrative costs.  So, the more an insurer can stuff into administrative costs, the smaller the denominator, the higher the ratio, and the better the insurer fares under Risk Corridors. Indeed, much of the regulatory effort has been appropriately devoted to deterring insurers from exploiting the formula by stuffing overhead they incur servicing non-ACA policies into “administrative costs” that increase their Risk Corridor payments. (Good idea!)

Back in March of 2013, in trying to figure out how to operationalize the ideas contained in the Risk Corridors statute, HHS decided to recognize that the insurer risks its capital in order to operate an insurance company. HHS recognized that it is therefore appropriate to treat some of that opportunity cost as a true cost. (I have no particular problem with the concept). Perhaps unfortunately, but as a convenient shorthand, HHS called this opportunity cost “profit.” Be clear, however, the term “profit” as used in the regulations had little to do with how much money the insurer actually made; it was just an easy term to reflect the fact that when insurers use money to establish offices and buy computers they forgo interest and dividends  that they might otherwise have earned.

But how much of this opportunity cost called “profit” should an insurer be entitled to use to reduce its Risk Corridor denominator?  After receiving comments that were apparently almost uniform on the subject — the one dissent advocated a lower number — HHS decided to use 3% of after-tax premiums. It called this number, “the profit margin floor.”

Several things are significant about the decision to use 3% of premiums.  First, the profit margin floor is 3%, not 6% or 9% or some higher number yet. No one apparently thought the number should be higher. Second, the number is uniform across states. This is entirely sensible because, to the extent that an allowance for capital costs is appropriate at all, capital costs of an insurer are incurred in a national market. Insurers in California do not have opportunity costs of capital that differ very much from insurers in Texas. And, third, the number is a coefficient of net premiums rather than assets probably because use of premiums provides a sensible surrogate for the amount of capital risked by running an Exchange insurance operation instead of running one’s entire insurance business.

What the new Federal Register proposal does is to increase the profit margin floor and to do it in a state-specific way. By increasing the profit margin floor, one can decrease the target ratio denominator and increase the Risk Corridors ratio, which in turn can increase the payment made by HHS to the insurer.  Mathematically, increasing the profit margin floor is little different than permitting the insurer to count triple-rent on its offices rather than real rent or to just pad its electric bills by, say, a million dollars. All are additions of non-existent “phantom costs” that act to decrease a denominator and, derivatively, increase a ratio upon which reimbursement depends.

Moreover, the amount by which the profit margin floor will need to be increased is not a trivial amount.  As shown in the Risk Corridors Calculator, “profit margins” may need to be tripled or more to bring an insurer back to the same position they were in originally.  I would not be surprised to see the profit margin floor in some states in which adverse selection proves particularly problematic to be upwards of 12%.  I am not aware of many insurers making 12% of their premiums in profits, which is precisely why, before they saw the need to repair the damage done by the President’s change of mind, HHS was using 3% as the appropriate figure with only lower numbers being suggested.

Why the proposed fix is unlawful

Any thought that the proposed increase in profit margin floor might have something to do with economic reality, with changes in the cost of capital, is belied by the way HHS explains the change and by the state-by-state approach it now proposes to take.  The HHS explanation is that, because different states are implementing “the transitional plan” differently, the need to adjust Risk Corridors to bring insurers back to their former position differs as well.

We believe that the State-wide effect on this risk pool will increase with the increase in the percentage enrollment in transitional plans in the State, and so we are considering having the State-specific percentage adjustment to the risk corridors formula also vary with the percentage enrollment in these transitional plans in the State. (78 FR 72350)

Of course, in some sense, this is true. But this simply highlights the point that the adjustments to profit margin floor have nothing to do with real costs, the concept the statute cares about.

Not enough? Take a look at the explanation for why HHS did not adjust profit margin floors it on an insurer-by-insurer basis.  It has nothing to do with different costs of capital that different insurers might face, but again, the state-by-state approach is used because it is a simpler way of approximating and offsetting the loss insurers would face in each state as a result of differential effects of the transition policy.

Although the adjustment that we are considering would affect each issuer differently, depending on its particular claims experience and administrative cost rate, we believe that, on average, the adjustment would suitably offset the losses that a standard issuer might experience as a result of the transitional policy. (78 FR 72350)

The administrative law and separation of powers issue is whether the agency empowered with administering Risk Corridors can count as a cost not an expense the insurers actually incur as a result of being in an Exchange but the “regulatory taking” that will occur differentially in each state as a result of President Obama changing his mind. I suppose that, if there is someone with standing to challenge this give away of government money, it will ultimately be for the courts to decide this question.  (By the way, if anyone can suggest someone who might have standing, email me). And I suppose someone can argue that it actually fulfills some general intent of the ACA to keep insurers involved in the Exchanges and not have them flee when other regulations change.

Executive administrative agencies such as the Department of Health and Human Services have the authority under some circumstances to interpret statutes; courts will often then defer to their interpretations. But this fix is not a stretch; if it actually does what its drafters intend, it will be a redraft of the Affordable Care Act itself. I see no difference except opacity between what the Obama administration has done by seizing on a code word “profit” and expanding its definition beyond recognition and saying that when the statute says 80% of losses, surely that could be construed as 95%. Both are unlawful.

Two final notes

The allowable administrative cost cap percentage and the medical loss ratio

Careful readers of the Federal Register will note that there are two other matters it discusses.

The Federal Register proposal also discusses the need to adjust the “allowable administrative costs ceiling (from 20 percent of after-tax profits) in an amount sufficient to offset the effects of the transitional policy upon the claims costs of a model plan.” This provision is needed because otherwise, even if the profit margin floor were increased, insurers would bump up against the existing administrative cost ceiling of 20%.  So, to make sure that the phantom cost “profit margin floor” increase really works, the proposed regulations propose removing that constraint. And to make sure that evil insurers do not take advantage of the relaxed constraint to allocate more of their costs to Exchange plans, the regulations make clear that the insurer would had to have met the 20% standard before consideration of increased “profit” was made.

The Federal Register proposal also discusses a need to adjust the Medical Loss Ratio (MLR) percentages. This is the provision of the ACA that says that if insurers spend too much of their money on non-claims matters, they have to pay a rebate to their insureds.  The problem becomes that if insurers are permitted to treat more than 20% of their premiums as administrative costs for purposes of Risk Corridors they might want to treat more than 20% of their premiums as legitimate administrative costs for purposes of MLR rebates. It’s a little fuzzy, but it sounds as if HHS wants to tweak the MLR regulations so that the MLR provisions do not take away from insurers what they will be winning if the remainder of the Federal Register proposal goes into effect.

The typo in the statute

There’s a complication we have to work through. This whole area is complicated by the fact that there is a typographic error in section 1342.  Here again is the relevant part.

(b) PAYMENT METHODOLOGY.—
(1) PAYMENTS OUT.—The Secretary shall provide under the
program established under subsection (a) that if—
(A) a participating plan’s allowable costs for any plan
year are more than 103 percent but not more than 108
percent of the target amount, the Secretary shall pay to
the plan an amount equal to 50 percent of the target
amount in excess of 103 percent of the target amount;
and
(B) a participating plan’s allowable costs for any plan
year are more than 108 percent of the target amount,
the Secretary shall pay to the plan an amount equal to
the sum of 2.5 percent of the target amount plus 80 percent
of allowable costs in excess of 108 percent of the target
amount.

See in subparagraph (1)(A) where it says “the Secretary shall pay to the plan an amount equal to 50 percent of the target amount in excess of 103 percent of the target amount.” But if you think about it, this could never happen.  Taken literally, there could never be a payment under this provision. So long as the target amount is a positive number, which it always will be since premiums are positive, the target amount can NEVER be in excess of 103% of the target amount.  5 can never be in excess of 103% of 5 (5.15).  10 can never be in excess of 103% of 10 (10.30). Can’t happen.

Looking at the next subparagraph, (1)(B), resolves the mystery of subparagraph (1)(A). It speaks about paying “ 80 percent of allowable costs in excess of 108 percent of the target amount.” (emphasis mine). And this makes complete sense.  The more the insurer loses, the more the government reimburses the insurer.  That’s the whole point of the provision.  I therefore believe that  subparagraph (1)(A) should be interpreted to mean “the Secretary shall pay to the plan an amount equal to 50 percent of  allowable costs in excess of 103 percent of the target amount.”

So, I assume that courts will interpret the statute to read as Congress must have intended it and not as some sort of cute joke resting on a mathematical impossibility.  See United States v. Ron Pair Enterprises, 489 U.S. 235 (1989) (“The plain meaning of legislation should be conclusive, except in the ‘rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.’ Griffin v. Oceanic Contractors, Inc., 458 U. S. 564, 571 (1982). In such cases, the intention of the drafters, rather than the strict language, controls. Ibid.” )

Note on Definitions

As set forth in the regulations, “Allowable costs mean, with respect to a QHP [Qualified Health Plan], an amount equal to the sum of incurred claims of the QHP issuer for the QHP.” The regulation sensibly uses the word “incurred.” This is so because costs are things the insurer has to pay out or has to accrue liabilities for, not things that, under some other set of circumstances they might otherwise have had to pay out.  If that were not the case, the administration could redefine costs to include anything at all, such as the costs the insurer would have faced if every one of their insureds had cancer.

The regulations tweak the definition of “administrative costs” by adding an extra adjective. They introduce the concept of “allowable administrative costs.”  The insurer is not permitted to reduce its “target amount” by claiming some enormous sum (such as private jets for the CEO) as non-claims costs, subtracting them from premiums and reporting low net premiums (target amount) in order to get paid more by the government under the Risk Corridors program. Instead, the regulations define “allowable administrative costs” as non-claims costs that are not more than 20% of premiums. That makes some sense because section 10101 of the ACA (42 U.S.C. § 300gg-18) often requires insurers whose administrative costs are more than 20% of premiums to pay a rebate to their insureds.

Premiums are also reasonably defined under the existing regulations. They sensibly say, “Premiums earned mean, with respect to a QHP, all monies paid by or for enrollees with respect to that plan as a condition of receiving coverage.” Thus, under the statute and existing regulations, premiums must refer to real premiums, not hypothetical premiums. Premiums are moneys the insurer receives, not money the insurer might have received under some other set of circumstances. Again, this just has to be the case; if it were not true, the administration could funnel virtually an infinite amount of money to the insurance industry by saying that premiums are funds the insurer would have received if no one signed up for their plan. 

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