A Department of Health and Human Services (HHS) decision to discontinue ACA cost-sharing reduction (CSR) payments to insurers offering policies through ACA exchanges has cleared its first legal hurdle, with a U.S. district court declining to block the Administration’s action on an emergency basis.

On October 12, 2017, the Trump Administration declared it was “immediately” ending CSR payments, which are paid directly to insurance companies to offset the reduced cost sharing plans must offer to some enrollees based on income. The Trump Administration asserts that the payments are not legal because it claims Congress did not appropriate funds for CSR payments (unlike ACA premium tax credits, for which funds are specifically appropriated). The Congressional Budget Office (CBO) previously forecast that discontinuing CSR payments would trigger increased premiums for “silver plans” (which enrollees generally must purchase to qualify for CSR subsidies), which in turn would increase both average per-capita subsidies and the number of individuals receiving subsidies. In fact, the CBO estimated that cutting off CSR payments would result in a net $194 billion increase in the federal deficit from 2017 through 2026.

The Trump decision was immediately challenged in federal district court by 18 Democratic state attorneys general, who sought an emergency ruling requiring continuation of the CSR payments while the suit was pending. In a decision filed on October 25, 2017, Judge Vince Chhabria of the U.S. District Court for the Northern District of California declined to provide emergency injunctive relief. Although the court determined that ACA “required the federal government to pay the insurance companies in advance for [the cost-sharing] reductions,” and that the ACA “authorized the costs-sharing reductions program and the CSR payments to the insurers,” the court noted that the ACA “did not explicitly make a permanent appropriation for the CSR payments to the insurance companies.” The Court observed that “[o]n the merits, it’s a close and complicated question,” but the Judge determined that “it appears initially that the Trump Administration has the stronger legal argument.”

As to the harm caused by the sudden CSR payment stoppage, the Judge found that “the emergency relief sought by the states would be counterproductive.” The court explained that most states accounted for possible termination of CSR payments by allowing health insurers to increase their 2018 premiums for silver plans sold through the Exchanges to compensate for the loss of the CSR payments. The court indicated that because the premium tax credits for low-income beneficiaries increase by the amount of the increase in premiums (specifically, for the silver plan with the second-lowest premium), low-income beneficiaries were expected to generally be able to purchase the same or better coverage at the same net premium. Therefore, as a practical matter, Judge Chhabria pointed out, “most state regulators have devised responses that give millions of lower-income people better health coverage options than they would otherwise have had.” While the motion for a preliminary injunction is denied, full adjudication of the case on the merits will continue likely through cross motions for summary judgment.

The Court also noted that “there may be very real harm to the insurance companies” for the CSR payments owed for the remaining months of 2017, observing that “the insurance companies could presumably recover that money…through lawsuits brought under the Tucker Act, 28 U.S.C. §1491(a)(1)” in the U.S. Court of Federal Claims, citing one of the cases brought in that court seeking payment of ACA “risk corridor” payments that have not been paid to health insurers as an example.

Meanwhile, the efforts of Senators Lamar Alexander and Patty Murray to pass a bipartisan plan to stabilize the insurance markets continue. Included in their proposal is formal appropriation of the cost-sharing-reduction payments. It remains unclear, however, whether their proposal will get to the floor of the Senate for a vote.