HIGHLIGHTS:

  • Health insurers seeking payment under the Affordable Care Act's Risk Corridor Program were dealt a blow following a recent U.S. Court of Appeals for the Federal Circuit ruling that reversed an earlier decision against the U.S. Department of Health and Human Services.
  • The Risk Corridor Program was a temporary, three-year program designed to compensate insurers for premium pricing inaccuracies.
  • The insurers may appeal this decision to the full U.S. Court of Appeals for the Federal Circuit or the U.S. Supreme Court.

A three-judge panel of the U.S. Court of Appeals for the Federal Circuit on June 14, 2018, reversed the ruling of a U.S. Court of Federal Claims judge against the U.S. Department of Health and Human Services (HHS) in a lawsuit regarding the Patient Protection and Affordable Care Act's (ACA) Risk Corridor Program. The decision deals a blow to health insurers seeking payment under the program.

Program Background

The Risk Corridor Program was among the ACA's premium stabilization programs alongside the Risk Adjustment Program and the Reinsurance Program. Because the ACA imposed numerous new requirements and rules and insurers lacked reliable data to allow them to accurately price their health insurance, the ACA established the premium stabilization programs to mitigate insurers' risks and bring them into the ACA marketplace.

The Risk Corridor Program was a temporary, three-year program designed to compensate insurers for premium pricing inaccuracies. If an insurer underestimated the actual cost of the ACA health insurance policy, then it was due a certain payment. If an insurer overestimated the actual cost of the policy, then it had to pay into the program.

Unlike the Medicare Advantage Risk Adjustment program, whose payments to insurers are made based on the insurers performance and are irrespective of other insurers' performance, or the ACA Risk Adjustment program, which is zero sum, the statutory Risk Corridor payment was not explicitly designed to be budget neutral until HHS began rulemaking in 2014 and 2015.

When it became apparent that far more insurers underpriced the premiums for their health insurance policies and would require payment from the government under the formula, HHS indicated that the program would be budget neutral. So, insurers due payment would be paid only from the funds collected from insurers paying into the Risk Corridor program. Congress soon passed legislation declaring that payments under the Risk Corridor program could not be paid from government funds.

Court Rulings

Previously, the insurers won at the trial level, where a judge with the Court of Federal Claims ruled against HHS, finding that the government owed health insurers risk corridor payments under the statutory formula in the ACA.

The Court of Appeals took issue with the HHS Transitional Policy, wherein HHS declined to enforce certain ACA provisions for non-grandfathered policies, that is those entered into after March 10, 2010, but before Jan. 1, 2014. The transitional policy "allowed insurers to continue to offer plans that did not comply with certain of the ACA's reforms even for non-grandfathered plans." According to a Milliman study cited by the Court, the new transitional policy allowed healthier individuals to maintain their non-ACA qualified coverage and left insurers with greater risk than anticipated.

The Court agreed with health insurers that the ACA had created an obligation to pay the full payment laid out in the statutory formula, in spite of the lack of a later appropriation authorizing such payments. However, the Court then agreed with the government that subsequent riders repealed or suspended the obligation to pay the risk corridor payments. As a result, the Court found that the government was not obligated to pay more than $12 billion owed to health insurers under the Risk Corridor Program. The Court also rejected an argument that HHS breached an implied-in-fact contract by failing to pay the full Risk Corridor payments.

Conclusion 

After HHS restricted Risk Corridor payments, the Statutory Accounting Principles Working Group of the National Association of Insurance Commissioners adopted INT 15:01 ACA Risk Corridors Collectability regarding the Statement of Statutory Accounting Principles No. 107 – Risk-Sharing Provisions of the Affordable Care Act. In those documents, regulators limited the admissibility of anticipated Risk Corridor receivables. As a result, most of the receivables owed to health insurers should have been written off. The restriction of the admissibility of anticipated Risk Corridor receivables caused several health insurers to become impaired or insolvent, including one of the plaintiffs in the case. However, from a financial accounting perspective, this ruling generally should not impact health insurers any further.

The insurers may appeal this decision to the full U.S. Court of Appeals for the Federal Circuit or the U.S. Supreme Court.