Since the Affordable Care Act (ACA) was enacted in 2010, there has been substantial litigation stemming from legal challenges and varying interpretations of key provisions within the legislation. Expert witnesses are playing a key role on the forefront of these evolving issues, both in terms of providing opinions in litigated matters and in performing complex calculations on a consulting basis.
One such issue receiving significant attention this year is the risk corridor program, which was created to share risk among those health insurers that offered qualified health plans through the ACA market. This program was one of three risk mitigation programs created under the ACA; these programs are commonly referred to as the “three Rs”: risk corridor, risk adjustment, and reinsurance. Unlike the reinsurance program, which is a permanent program, both the risk corridor and risk adjustment programs were temporary programs in place from 2014 through 2016 only. The risk corridor program was designed to share risk—both gains and losses—between insurers to protect against inaccurate rate setting. The delta between each insurer’s plan’s allowable costs and its target amount was used to calculate risk corridor charges or payments. If the plan’s allowable costs were less than 97 percent of its target amount (creating an excess gain), then an issuer would pay the U.S. Department of Health and Human Services (HHS) (payments into the government). If allowable costs were more than 103 percent of the target amount (creating an excess loss), the health insurer would expect to be reimbursed by HHS (payments out of the government).
At the onset, the risk corridor program was not specifically required by the ACA legislation to be implemented in a budget-neutral manner (meaning that payments out of the government could not exceed total payments into the government thereby having no budgetary impact for the program payments in and out). However, at year-end 2014, one year into the program, Congress passed appropriation riders that required the risk corridor program be implemented in a budget-neutral manner for the entirety of the three-year program.
The calculation of risk corridor amounts for the first year of the program was published by the Centers for Medicare and Medicaid Services (CMS) in November 2015, at which time, it was apparent that the program was facing significant shortfalls of collections of payments into the government to support the payments out of the government. For 2014, a total amount of $2.87 billion was requested by health insurers for payment out of the government and only $362 million was paid into the program by health insurers. As a result, the government reduced the risk corridor payments to insurers pro rata to the extent of the shortfall, announcing the 2014 payment proration rate would be 12.6 percent of amounts requested by health insurers for that program year. The remainder of 2014 requested payments would continue to be paid based on the availability of payments into the government for the 2015 and 2016 program years.
With the conclusion of the three-year program, the CMS released the final amount of payments related to the 2014 plan year in November 2017, which showed that less than 17 percent of the amounts requested by health insurers in 2014 would be paid based on available payments into the government for the entire three-year program. For the combined three years, a total of $12.7 billion was requested by health insurers for payment by the government and only $482 million of that has been paid, or 4 percent overall, and all of that only for the 2014 plan year. No amounts were paid out of the government to health insurers related to the 2015 and 2016 plan years.
As a result, there were significant implications to the financial statements of health insurers expecting payments from the government under the risk corridor program. Those insurers were required to evaluate the amounts for collectability, which resulted in companies writing-off those balances in part or in total. Ultimately, excluding the risk corridor amounts reduced insurance company solvency levels, and in some instances, resulted in insolvency.
Resulting Litigation
Multiple health insurers have filed lawsuits against the United States for the unpaid portion of their risk corridor amounts. The majority of these cases have been brought in the U.S. Court of Federal Claims. The specific arguments in each of these cases has varied but have focused on several primary areas:
- whether the government is obligated to make the payments out to insurers regardless of the amount of payments in from insurers (i.e., budget neutrality of the program)
- whether the appropriations riders could legally amend the program to make it budget neutral
- whether payments were required on an annual basis or could be made at the conclusion of the three years covered by the program
- whether the government entered into an implied-in-fact contract requiring payment to health insurers of the full amount
Two cases will likely determine whether the full amounts under the risk corridor program are due to health insurers: Land of Lincoln and Moda Health Plan.
Land of Lincoln. In November 2016, the U.S. Court of Federal Claims dismissed claims by Land of Lincoln Health (LofL) against the United States. The judge in LofL found that the ACA language for the risk corridor program was ambiguous and could be implemented in a budget neutral manner, and further, that the program could be administered over the three-year life versus annually. The judge also dismissed LofL’s claims related to a breach of an implied-in-fact contract.
Moda Health Plan. Conversely, in February 2017, the U.S. Court of Federal Claims found in favor of Moda Health Plan, Inc. by granting partial summary judgment on the issue of liability against the United States. The judge found that annual payments for the risk corridors program were required and that the program was not designed by Congress to be budget neutral. The judge also found that the Government breached an implied-in-fact contract with Moda.
These two cases were consolidated for purposes of appeal and are currently pending in the U.S. Court of Appeals for the Federal Circuit. Oral arguments in these cases were held in January 2018, and a decision is likely to come sometime this spring or summer. Much is at stake based on the pending decision—over $12.2 billion in risk corridor amounts has not been paid by the government to health insurers. Due to the high impact, it is possible this issue will ultimately be heard and decided by the Supreme Court, and the industry is watching the outcome of these cases closely.
Dozens of additional individual suits have already been filed, as well as a class-action suit, which is led by Health Republic and represented by Quinn Emanuel, with as many as 40 providers joining the class. These cases have generally been stayed pending the decision by the U.S. Court of Appeals for the Federal Circuit. It is likely that additional health insurers will file suits in the coming months if the outcome of the decision in the LofL and Moda cases is favorable for them.
In addition to the collectability of the risk corridor payments, there are also questions as to the netting of amounts due to and from the government with other programs, such as the risk adjustment and reinsurance program and whether offsets are allowed.
While over $12.2 billion in risk corridor payments is at stake in the risk corridor-related litigation, this program is only one piece of active litigation related to the ACA; there are many areas and provisions of the ACA that are currently in the process of being litigated.
Use of Experts
The use of experts in these types of insurance litigation is invaluable. Experts can serve many purposes as a testifying or consulting expert. If health insurers are successful in the risk corridor litigations, experts may be needed to assess the extent of damages to insurers that were adversely impacted due to the lack of payments and/or to evaluate the accuracy and completeness of the risk corridor calculations themselves.
Further, the circumstances around risk corridor payments, among other factors, have contributed to the financial deterioration of many small and mid-size health insurers. For these health insurers, experts can serve a vital role in understanding the contributory factors that led to financial distress and/or ultimately insolvency, as well as assist with many other areas, which include, but are not limited to:
- evaluation and analysis of financial statements, including restatements
- interpretation of the accounting guidance applicable to the 3Rs programs and other insurance-related distinctions (under both statutory accounting principles and generally accepted accounting principles)
- evaluation of the existence and extent of third-party liability (auditor, actuary, directors and officers, management, etc.)
- calculations and analysis related to insolvency and risk-based capital
- calculations of damages
- tests of the accuracy of claims and adequacy of loss reserves
- subject-matter expertise to support receivers, liquidators, or insurers
Experts can serve an integral role throughout the litigation process—from initial evaluation of issues and liability questions, document review, discovery assistance, and ultimately expert testimony. Stay tuned as developments continue with ACA-related litigation over the coming months and years.
Amy Yurish is a director with Veris Consulting Inc. in Reston, Virginia.