CSR Litigation Update: California Court Denies States' Motion for Preliminary Injunction – What Does This Mean for Health Insurers?

On October 25, 2017, in the case State of California v. Trump, the U.S. District Court for the Northern District of California denied a motion brought by 17 states seeking to order the Trump administration to resume cost-sharing reduction (CSR) payments to Qualified Health Plan issuers under the ACA. Although the motion only sought preliminary relief while the merits of the states’ case could be fully briefed and decided, the order is an indication of the ultimate decision the Court will reach. 

How Did the Court Reach Its Decision?

In its 29-page order, the Court grapples with two primary issues. First, it considers whether the states are likely to succeed on the merits of their case. In the Court’s mind, this issue boils down to whether or not Congress appropriated money for the CSR payments. If not, then the Court finds it lacks the authority to order the administration to pay.

Recognizing that “both sides have reasonable arguments,” the Court finds that “it initially appears the Administration has the stronger legal position.” Here the states rely heavily on the other major ACA subsidy – premium tax credits – which the Court recognizes “fit hand in glove” with the CSRs (“the tax credits allow lower-income people to buy health coverage, and the cost-sharing reductions allow people to actually use this coverage”) and which have a clear appropriation. The states argue that, given their close relationship, the appropriation for tax credits must also apply to the CSR payments. “That might be right,” the Court observes, “but it’s not a necessary conclusion.” Ultimately the Court errs on the side of caution and declines to find that the tax credit appropriation applies to CSRs.

The second issue the Court considers is what harm will occur if the CSR payments are not ordered. While recognizing that the states will incur “significant administrative costs,” the Court describes the “crucial question” instead as whether the public would be harmed and the objectives of health care reform impeded. “Any significant interference with that goal not clearly permitted by law,” the Court holds, “is a major harm that would justify an injunction.”

Again, however, the Court is not ultimately moved by the states’ arguments. A final decision on the merits, the Court predicts, will only take a matter of months, minimizing the harm inflicted. Moreover, the Court finds, many insureds under the ACA might suffer no harm at all from the termination of CSR payments, and might even see a benefit, because there would be a corresponding increase in the amount of available tax credits. The Court similarly rejects the states’ arguments about increased premiums, marketplace confusion and fleeing insurers. 

Where Does This Leave Health Insurers?

Initially, the decision has little if any impact on the ability of health insurers to seek monetary damages against the federal government incurred from the termination of CSR payments. As we have described in previous articles, health insurers have a viable option to seek such damages under the Tucker Act in the U.S. Court of Federal Claims. In fact, the Court recognized that the ACA “requires the federal government to pay insurance companies to cover the cost-sharing reduction,” and that “[t]he federal government is failing to meet that obligation.” While the Court did not go so far as to weigh in on the merits of any such claims, the Court’s view of the statutory obligation seems clear.

The other question is where this leaves the states’ case, as well as House v. Hargan (formerly House v. Burwell). As for the states’ case, the Court has scheduled a conference for November 21, 2017, where the states will have a chance to express how they intend to proceed. Again, although a ruling on preliminary relief often indicates where a court is likely headed, here the Court left the states several additional angles to argue the merits, which the Court described as “a close and complicated question.” The tougher issue might be that the states will need to sharpen their arguments on harm, where the Court appears less convinced.

As for House v. Hargan, that case remains pending before the D.C. Court of Appeals. It remains to be seen whether the administration will drop the appeal, and if so, what the states that have intervened in that case will do (the parties have status reports due shortly). Notably, the Court in the states’ case in California observed that there were “serious questions” about whether the D.C. Circuit even has jurisdiction to consider the appeal, given that both the Obama and Trump administrations had raised arguments about whether the House of Representatives had standing to bring the lawsuit in the first instance. 

Along with the many pending cases over risk corridors, this means that, despite the Court’s ruling here, the litigation over the ACA and CSR payments is far from over.