January 16, 2018

ACA Risk Corridors Update: Federal Circuit Holds Oral Argument in the Land of Lincoln and Moda Cases

In a crowded courtroom on January 10, the U.S. Court of Appeals for the Federal Circuit held oral argument on appeals of two Risk Corridors decisions from the Court of Federal Claims. The two cases, Land of Lincoln and Moda, are the first of numerous cases to reach appeal and were combined before a single panel of Chief Judge Prost, Judge Newman and Judge Moore. In all of these cases, health insurers are seeking compensation from the U.S. government under Section 1342 of the Affordable Care Act (ACA), known as the Risk Corridors program. 

Risk Corridors Program and Payments Disputes: An Overview

The Risk Corridors program sought to smooth pricing volatility during the early years of the new health insurance exchanges, from 2014 through 2016. The program required insurers with excess profits to remit a portion of those profits to the government (“payments in”), and also promised to compensate unprofitable insurers for a portion of their losses (“payments out”). However, Congress subsequently passed appropriations riders that limited the funding sources for the “payments out.” In turn, the Department of Health and Human Services (HHS) announced that it intended to implement the program in a “budget neutral” manner, and limit the total “payments out” to the total received from “payments in.” As the program unfolded, losses vastly outweighed profits, leaving the program badly underfunded. Congress has continued to restrict funding in subsequent appropriations bills and, as a result, HHS has paid insurers only a fraction of 2014 losses and nothing for 2015 or 2016 losses.

Dozens of insurers have since sued the government for the uncompensated payments in the U.S. Court of Federal Claims, which considers such cases under the Tucker Act. While the arguments have varied, the lawsuits have focused mainly on three points: 1) that Section 1342 is a money-mandating statute obligating the government to make “payments out” without limitation to “payments in”; 2) that the subsequent appropriations riders did not repeal or amend Section 1342 and thus did not vitiate the payment obligation; and 3) that the government is bound to an implied-in-fact contract with the insurers that obligates payment.

Lower Courts Render Divided Decisions

The lower court decisions on appeal reached opposite conclusions. In Land of Lincoln, Judge Lettow dismissed the insurer’s claims, concluding that Section 1342 was “ambiguous in terms of the ‘payments in’ and ‘payments out’” and deferring to HHS’s pronouncement that it would implement the program in a budget-neutral fashion. In Moda, Judge Wheeler agreed with the insurers, holding that Section 1342 is by its plain terms not budget neutral, that the appropriations rider did not clearly repeal the government’s payment obligations, and that the payments could be made from the Judgment Fund. The courts also reached opposite conclusions on whether an implied-in-fact contract existed, with Judge Lettow ruling no and Judge Wheeler ruling yes.

Federal Circuit Oral Argument Summary

At oral argument, the Federal Circuit panel actively engaged counsel for both sides on their respective positions and, as is typical, made no announcement as to how it would ultimately rule. The panel’s questions explored the implications of the appropriations rider and whether it can properly be construed to amend Section 1342 to cap the government’s legal payment obligation. Judge Newman pressed counsel for the government on the question of notice to insurers and the public, pointedly asking, “What is the Government’s explanation for this massive reliance on what you now tell us is meaningless?” The panel also explored at some length the parties’ positions on the implied-in-fact contract claim.

At bottom, we continue to believe that the insurers remain in a strong position. We expect the court to issue a decision in three to six months, at which point the losing side may seek en banc review by the Federal Circuit or review by the U.S. Supreme Court.

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