Tuesday, March 20, 2018

Health Insurers' risk corridor suits could seek a lot more than $12.3 billion

Stephanie Armour reports in the Wall Street Journal that a decision should come down soon from the U.S. Court of Appeals for the Federal Circuit in two of the risk corridor lawsuits against the federal government filed by health insurers seeking reimbursement for losses in the ACA marketplace. Those suits seek a total of about $12.3 billion in risk corridor payments the government failed to make in 2014, 2015 and 2016.  In fact, the bill could be considerably higher if insurers prevail. That's what I'd like to spotlight, below.

The risk corridors, to review briefly, were one of three risk management programs the ACA established to cushion health insurers' plunge into an unprecedented market structure. Insurers with losses above a fixed threshold would get a large chunk of them reimbursed by the federal government, while those with profits above a mirror-image threshold would pay a chunk of those gains in. The ACA statute states that insurer losses will be paid according to this formula, and HHS guidance through 2013 affirmed this. In early 2014, though, with the program under attack from Marco Rubio and other Republicans, HHS and CMS indicated that reimbursements would be revenue neutral, and reduced if the contributions from profitable insurers did not cover unprofitable insurers' losses. Republicans then, in omnibus funding bills for FY 2015 and 2016, banned the agency from using its funding streams to pay any shortfall beyond insurers' contributions. In October 2015, CMS announced that it would pay just 12.6% of $2.87 billion in insurers' compensable 2014 losses. A cascade of failures among the nonprofit insurance co-ops established (and underfunded) by the ACA followed. How many of those co-ops would have survived had the risk corridor promises been kept is debatable.  By 2016, the last year of the program, unpaid risk corridor losses totaled $12.3 billion.

The insurers have a clear case on the merits, regardless of what the courts decide about the paradox of funds promised by statute by unappropriated by Congress (one of several such paradoxes generated by serial Republican sabotage of the ACA, all of them eroding the full faith and credit of the U.S. government). One aspect of the complaint highlighting the extent of the moral debt, and possibly the financial one, caught my eye in the class action complaint joined by some 150 insurers, Health Republic Insurance Company v. The United States of America.

It's this: In addition to reimbursement of unpaid risk corridor claims, the suit seeks "consequential damages" and "special damages" -- as do other suits filed by receivers for ACA co-ops that closed their doors. Consequential damages are damages that go beyond the direct damages caused by breach of contract -- in this case, beyond the amount owed to each insurer according to the risk corridor formula. They are damages, such as business income loss, that are a foreseeable consequence of the contract breach. "Special damages" is basically a synonym.

The bar for proving consequential damages is high. "The plaintiff must prove such damages are the
proximate consequence of the breach and were reasonably foreseeable or within the contemplation of the parties at the time the parties entered into the contract" (Dannecker et al). In federal court, "Evidence of special damages is inadmissible if those damages are not specifically pled in the complaint" (Dannecker).

Among the consequential damages that might be sought are losses stemming from company failure. The initial class action complaint alleges those damages --- generally for many in the class and specifically for the lead plaintiff:
As it became clear QHPs would only receive a small fraction of what they were owed under the risk corridor program, many began to fail. For example, eight consumer operated and oriented plans (CO-OPs) created under the Affordable Care Act (including Plaintiff here) announced they were unable to meet cash flow and/or regulatory reserve requirements and closed their doors due to the deficit of risk corridor payments. A number of other insurance companies have also failed due to the Government’s default on the risk corridor amounts it owed (p. 17). 
As for Health Republic (of Oregon):
...Health Republic planned for the worst and structured its business plan so that it needed to only receive 50% of its 2014 compensable risk corridor payments in order to meet cash flow and regulatory reserve requirements. But even this extraordinarily conservative business plan proved unable to withstand the Spending Bill Provisions, as they forced the Government to pay only 12.6% of the 2014 risk corridor amounts owed to all QHPs. Faced with the inevitable fate these non-payments caused, Health Republic acted as a responsible corporate citizen and, rather than close its doors in the middle of a plan year and go into receivership, voluntarily withdrew from the 2016 market and provided notice of this decision to its insureds in the autumn of 2015, and honored all eligible claims for 2015. This is the exact result the risk corridors program was designed to avoid (p. 18). 
The class action thus appears at least implicitly to be alleging "death of a company" damages for some class members, including the lead plaintiff.  One distant cousin of such a claim is a successful suit against a property insurer in New York State. Bi-Economy Market, Inc. Harleysville Insurance Company of New York, et al (2008) made new law in New York.

Bi-Economy, a meat market in Rochester, NY, suffered a major fire in 2002. Its insurer delayed paying most of the company's business interruption claim for hundreds of thousands of dollars, for reasons deemed by the court to be unreasonable. Bi-Economy never resumed operations.  With respect to the consequences of the delay, the New York Court of Appeals ruled:
The purpose served by business interruption coverage cannot be clearer — to ensure that Bi-Economy had the financial support necessary to sustain its business operation in the event disaster occurred...Certainly, many business policyholders, such as Bi-Economy, lack the resources to continue business operations without insurance proceeds. Accordingly, limiting an insured's damages to the amount of the policy, i.e., money which should have been paid by the insurer in the first place, plus interest, does not place the insured in the position it would have been in had the contract been performed.  
That was a break with New York law, which previously limited insurance policyholders' recoveries to basic contract damages.

The United States government is not an insurer. Oh wait...it's the nation's largest insurer. And the risk corridor program is essentially a species of reinsurance -- though the ACA also included a separate reinsurance program.  The failure to pay 87% of risk corridor claims certainly triggered many co-op failures, whether or not most of those failures would have eventually occurred in any case.

Of course, this case is only instructive as an analogy. New York law is not federal law. HHS is not regulated as an insurer. An insurance failure is not a meat market failure. Winning contractual damages alone will be a heavy lift. It's not clear who would be paid in the case of liquidated nonprofits. Etc. etc.

Still, citing cases such as Bi-Economy could prove to be "exactly the right move," said Nicholas Bagley. a health law professor at the University of Michigan. "The Courts of Federal Claims will look to analogous private contract law cases. If there's support for that position in the case law, then there's a fighting chance that's what the insurers could recover."

So be it noted: the risk corridor class action, and other risk corridor suits, are seeking consequential damages.  Also,  payment of legal fees --and pre- and post-judgment interest, which could amount to...quite a lot, if this case drags on for many years.  More may be at stake that $12.9 billion.

Class action complaint: Health Republic v. US

Bi-Economy, NY Court of Appeals

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