Charlie Brown, Lucy, and Risk Corridor Payments

On October 13, 2015, your humble blogger received the AIS Inside Health Insurance Exchange quote of the day related to non-payment of the Risk Corridor payments, “…. there was a contract going into this that there would be certain protections… and plans would price as best as they could, knowing that there was no actuarial precedent for the risk. The news that CMS could pay carriers 12 cents for every dollar requested for the first year of the risk corridor program felt like Lucy moving the football at the last second.”

Recently, Judge Wheeler of the Court of Federal Claims awarded Moda, an Oregon health plan, $2.14 billion in unpaid Risk Corridor funding. While some may view the action as “standard” or “routine,” the ruling should not be over looked due to the precedent it could set for other health plans locked in litigation with the government over the issue.

The Affordable Care Act created certain protections for health plans entering an individual market that was historically void of medical underwriting. Referred to as the three R’s, these protections constitute Risk Adjustment, a permanent protection; Reinsurance, a temporary insurance established for 2014-2016; and Risk Corridors, another temporary protection established for 2014 to 2016. The latter of these programs, Risk Corridors, set profit and loss boundaries for a provisional period in an effort to control the destabilizing effects of high-cost market conditions and the disparity between premiums and claims.

In 2014, the first year of exchange operations, CMS began registering the idea of “budget neutrality” pertaining to Risk Corridor payments, implying that the agency would need to take in the same amount from profits as are paid out to compensate for losses. Later in 2015, the Congress seized a political opportunity by labeling the Risk Corridor program as a bailout for failing insurers under Obamacare. And while there was no statutory basis for budget neutrality under the ACA, Congress attached a budget neutrality provision for the program to an appropriations bill, effectively compelling CMS to mandate budget neutrality.

The impact of this series of actions was quite disruptive to the industry. Health plans, most of whom incurred losses in 2014, received only 12 percent of their expected payments. Damaging effects were further manifested through the failure of about 12 CO-OPs, who lacked the required risk-based capital after clearing the remaining 88 percent from their balance sheets. And, from a market standpoint, the financial losses for the industry were staggering, resulting in a shaken confidence in the government.

Since 2014, 12 lawsuits have been filed and are pending in the Court of Federal Claims. The lawsuits involving CO-OPs, Blues plans, and provider sponsored plans share a common argument: the ACA acts as a unilateral contract for qualified health plans operating on exchanges, and any amendments, such as budget neutrality, require statutory modification, instead of emendation through an appropriations rider.

In the Oregon event, Judge Wheeler accepted the argument, concluding that Moda is in fact entitled to these payments.

As this process continues to play out, the government will almost certainly appeal this decision to the Federal Circuit and, because the Federal Circuit has authority over the Court of Federal Claims, all seventeen cases will likely need to be reconciled. However, it is possible reconciliation does not occur and the issue works its way to the Supreme Court, attracting more plaintiffs and civil litigation along the way.

After 2014, the NAIC recommended that all regulators enforce the removal of any remaining Risk Corridor payments from their balance sheets. As such, no payer in the country has built their pricing or business decisions on this program in recent years. Consequently, some upward pricing pressure has likely been created, particularly in 2016 and 2017. We do believe we are beginning to see some premium stabilization and predictability, which renders the utility of a Risk Corridor program a moot topic. Nevertheless, the extraordinary losses incurred by the insurance industry in the early days of the ACA’s implementation could be partially redressed under the right judicial outcome.

Charlie Brown may just kick that football after all.