On October 12, 2017, the Trump administration announced that it will immediately stop making cost-sharing reduction (CSR) subsidy payments, which allow health insurers to defray out-of-pocket costs to insure low-income Americans. This decision will likely have—and likely was intended to have—a deleterious effect on the Affordable Care Act (ACA) and the state exchanges it created. The decision also has an immediate effect on Qualified Health Plan (QHP) issuers that still must provide state-approved benefits even though they will not be reimbursed as the ACA requires.
Section 1402 of the ACA requires the federal government to reimburse the QHP issuer for the CSR reductions; however, Congress has never made specific appropriations for the executive branch to make CSR payments. Up to now, the government, through the Obama and the Trump administrations, was making CSR payments on a monthly basis despite the absence of specific appropriations. Section 1402 has been interpreted to require that QHP issuers provide the reductions whether or not the government reimburses them.
Cost for Insurers
The administration’s recent decision not to make payments will cost QHP issuers an estimated $7 billion per year. Actuaries project that insurers would have to raise their rates 20 to 25 percent or exit the exchanges to make up for the loss of subsidies in 2018. However, the decision to immediately cut subsidy funding inflicts an immediate loss on insurers for calendar-year 2017 that cannot be recovered by raising rates next year, and some QHP issuers may have already agreed to stay in the program in 2018. The first CSR payment that the administration says it will not make comes on or about October 18.
The decision to stop paying CSRs arrives just after products were “locked down” for 2018. Insurers and states that assumed CSR payment may wish to raise rates, but doing so this late in the year raises operational challenges in states served by the federal government’s healthcare.gov. Some insurers may now want to exit the ACA Marketplace in 2018, but regulators might block an exit. The recently signed 2018 QHP Agreement and federal regulations place obligations on insurers with finalized and approved rates and benefits. The confluence of business, operational and policy problems that the non-payment of CSRs creates at this point in the year is without precedent for both insurers and regulators.
Behind the Decision
The administration claims its decision is premised on a district court’s decision in House v. Burwell, which held that the executive branch’s payments to QHP issuers under Section 1402 are unconstitutional under the Appropriations Clause. Despite mandatory language in Section 1402 that “the Secretary [of Health and Human Services] shall make periodic and timely [CSR] payments to the issuer equal to the value of the reductions,” Congress did not make specific appropriations for the payments. Accordingly, in the court’s view, the Secretary lacks constitutional authority to make them. Up until the administration’s recent decision, the government had continued to make payments pending the prior administration’s appeal of the decision. Given the administration’s recent decision to stop payments, it is not likely to pursue an appeal of the district court’s decision. However, a group of state attorneys general have already intervened in the House appeal and announced their intent to file a lawsuit in federal court in California for injunctive relief requiring the United States to comply with its obligations to make CSR payments.
Recourse for Insurers
QHP issuers may be wondering: what legal recourse is available for insurers to receive reimbursement of the CSR costs? Even if the House v. Burwell opinion is left intact and the state attorneys general do not succeed in their lawsuit, QHP issuers still have an avenue to pursue amounts due under the CSR program for the remainder of this year. The Tucker Act is a congressionally created vehicle for private parties to hold the government liable for money damages arising from its failure to meet its statutory and contractual obligations. Through the Tucker Act, QHP issuers can sue the government as a whole for violation of Section 1402 and breach of the QHP contract and implicit contracts created through the ACA. The court in House v. Burwell expressly noted that such Tucker Act claims may be available in spite of its opinion, but it declined to decide the merits of such claims. So that legal avenue remains open, and the issue will be ripe when the government misses its first CSR payment.
For its part, the government will likely defend against such claims as it did in House v. Burwell and it is doing in currently pending risk corridors cases. The government has argued that it is precluded from making any payments beyond those specifically appropriated by Congress. But QHP issuers have arguments here as well. Congress has, through the Judgment Fund, created a permanent appropriation to assure payment of statutory and contractual obligations of the government that are obtained through the Tucker Act. Since the ACA and QHP agreements require the government to pay QHP issuers, a court can order payments due under the statute and agreements. Indeed, failure to make a court-ordered payment to cover the judgment would leave Congress in an extremely awkward position—one that, to our knowledge, has not happened in modern U.S. history—with potential longer-term impacts to the willingness of private parties to participate in government funded programs.
The administration’s decision to stop CSR payments will certainly disrupt ACA markets, but QHP issuers still have recourse to obtain CSR payments owed to them. The Tucker Act and the Judgment Fund provide a means for issuers to seek recourse against the government for this latest decision.