U.S. Court of Appeals for the Federal Circuit (Photo: Michael A. Scarcella) (Photo: Michael A. Scarcella)

A federal appeals court panel today issued a 2-1 ruling that could cost some health insurers billions of dollars in Affordable Care Act subsidy program payments, and could push all federal vendors to determine whether the payment arrangements they have with the federal government are actually contracts.

A three-judge panel at the U.S. Court of Appeals for the Federal Circuit issued the ruling on Moda Health Plan Inc. v. the United States (Case Number 2017-1994). The panel also issued a related ruling, on Land of Lincoln Mutual Health Insurance Company v. United States, that echoes the effects of the Moda Health ruling.

Moda Health, Land of Lincoln Mutual and other health insurers have been suing the federal government in an effort to collect billions of dollars that were offered to them through the Affordable Care Act risk corridors health insurance subsidy program. Congress has refused to appropriate the cash to make up for a program funding shortfall.

The U.S. Court of Federal Claims ruled in favor of Moda Health in February 2017.

Chief Judge Sharon Prost and Circuit Judge Kimberly W. Moore held that, even though insurers had a written agreement with HHS, the agreement was not a contract.

(Related: Judge Backs Health Insurer in ACA Payment Suit)

“The overall scheme of the risk corridors program lacks the trappings of a contractual arrangement,” Prost writes in an opinion for the majority.

Circuit Judge Pauline Newman blasted the majority’s ruling.

“The government’s ability to benefit from participation of private enterprise depends on the government’s reputation as a fair partner,” Newman writes. “By holding that the government can avoid its obligations after they have been incurred, by declining to appropriate funds to pay the bill and by dismissing the availability of judicial recourse, this court undermines the reliability of dealings with the government.”

Prost and Moore were appointed to their posts by former President George W. Bush. Newman was appointed by former President Ronald Reagan.

Representatives from Moda Health and the other parties involved were not immediately available comment. Moda Health could ask all Federal Circuit appeals court judges to rehear the case together, “en banc.” The company could also file an appeal with the U.S. Supreme Court.

America’s Health Insurance Plans, a group that represents health insurers, said in a statement that the courts should stand up for health insurers’ ability to collect the risk corridors program payments.

A document  that includes the new ruling on the Moda Health case, and the dissent, is available here.

ACA Risk Corridors Program Basics

In 2009 and most of 2010, while Barack Obama was president, Democrats were in charge of both the House and the Senate. They created the two-law package now known as the Affordable Care Act.

One part of the ACA package imposed new underwriting and benefits rules on issuers of major medical insurance. Most of the new rules took effect in January 2014.

Another part of the ACA created the ACA public exchange system. The exchange system, which provides a web-based supermarket for health insurance, also came to life in January 2014.

The ACA risk corridors program was supposed to use cash from health insurers that did well in the ACA public exchange program in 2014, 2015 and 2016 to help exchange plan issuers that did poorly during those years, to buffer the issuers against exchange startup problems.

The ACA risk corridors program was based on a somewhat different risk corridors program that serves insurers in the Medicare Part D prescription drug plan market.

Risk corridors program managers ended up collecting only enough cash from thriving exchange plan issuers to pay about 15% of the subsidy program payments owed for 2014.  Managers have made none of the payments owed for 2015 and 2016.

Congress has passed legislation, in the form of appropriations bill riders, forbidding the federal government from using any revenue source other than cash from the thriving exchange plan issuers to make additional risk corridors program payments.

Managers of some failed health insurers, and some state insurance regulators, say the ACA risk corridors program payment problems contributed to the failures of many small, new health insurers, including many of the nonprofit, member-owned insurers with funding from the ACA Consumer-Operated and Oriented Plan loan program.

Prost’s Opinion

Prost writes in her opinion that Moda Health relied heavily on the arguments made in connection with Radium Mines Inc. v. United States, a 1957 case. That case came about because of problems with an Atomic Energy Commission program that provided a 10-year guaranteed minimum price for uranium.

A federal court held that the uranium incentive program “‘ripened into a contract when it was accepted by the plaintiff’s putting itself into a position to supply the ore or the refined uranium’” described in the program rules, according to Prost’s summary of the Radium Mines ruling.

That case is different from Moda Health’s case, because, in the Radium Mines case, the government itself never disputed that it had the intent to form a contractual relationship with the uranium dealers, Prost writes.

“Here, no statement by the government evinced an intention to form a contract,” Prost writes. “The statute, its regulations, and HHS’s conduct all simply worked towards crafting an incentive program. These facts cannot overcome the ‘well-established presumption’ that Congress and HHS never intended to form a contract by enacting the legislation and regulation at issue here. Accordingly, Moda cannot state a contract claim.”

The Dissent

Newman argues in her dissent that, although Congress restricted the sources of funding HHS could use to make ACA risk corridors program payments, Congress never actually changed the program terms.

She contends that the government does have an obligation to meet the ACA risk corridors program obligations, in part because health insurers took actions based on a belief that the government would make good on the obligations.

“The creation of the risk corridors program as an inducement to the insurance industry to participate in the Affordable Care Act, and their responses and performance, negate any after-the-fact implication of repudiation of the government’s obligations,” Newman writes. “The appropriations rider cannot have retroactive effect on obligations already incurred and  performance already achieved.”

Retroactive effect for a rider is not available to ‘impair rights a party possessed when he acted, increase a party’s liability for past conduct, or impose new duties with respect to transactions already completed,’” Newman writes, citing a 1994 Supreme Court ruling. “‘If the statute would operate retroactively, our traditional presumption teaches that it does not govern absent clear congressional intent favoring such a result.”

Keeping Moda Health from collecting risk corridors money clearly impairs the rights Moda Health believed it had it acted, Newman writes.

Reactions

AHIP said in its statement that millions of Americans rely on the individual market for their coverage, and it suggested that a failure to pay the risk corridors program amounts owed could lead to long-term problems for federal government efforts to attract private-sector partners.

“Courts have long recognized that companies doing business with the federal government — including but not limited to health insurance providers — must be able to rely upon the federal government as a fair and reliable partner,” AHIP said. “This protects not only the interests of the private market and consumers, but also the government’s own long-term interest in maintaining strong partnerships with the private sector.”

— Read 20 Biggest New ACA Risk Corridors Failure Absorberson ThinkAdvisor.

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