Can Government Break Its Promises?
Obamacare law’s promises to insurers later broken by Republicans. Courts will decide if that’s legal
Next month, the US Supreme Court will consider whether the federal government is free to break its promises. How the court answers this question will have both ethical and economic implications.
In establishing the healthcare exchanges, the authors of the Affordable Care Act (Obamacare) recognized that healthcare insurers who contemplated participating were faced with considerable uncertainty. There was no history that could be used to set premiums. If the insurers set premiums too low, they could end up operating at a loss or even unable to pay their members’ medical expenses.
Recognizing this danger, the ACA included so-called “risk corridors”:
The Secretary shall establish and administer a program of risk corridors for calendar years 2014, 2015, and 2016 under which a qualified health plan offered in the individual or small group market shall participate in a payment adjustment system based on the ratio of the allowable costs of the plan to the plan’s aggregate premiums.
Under this program, if an insurer’s costs exceeded its premiums, insurers with lower costs would be assessed to reduce the loss. The law committed the government to contribute to the risk corridors in case overall costs exceeded premiums.
As Obamacare took effect, the Obama administration faced opposition from people facing the loss of lower-cost healthcare plans. These plans were lower cost for two reasons. First, they didn’t cover all the procedures mandated by the ACA. Second, people with pre-existing conditions would have been rejected by the plans’ “underwriting” processes.
Reacting to this pressure, the Department of Human Resources (HHS) introduced a “transitional policy” that allowed people with non-conforming plans to keep them for up to three years. HHS acknowledged that this “transitional policy was not anticipated by health insurance issuers when setting rates for 2014.” By excluding holders of the lower-cost, lower coverage plans from the pool of people buying plans, the average cost would be higher than anticipated. However, it argued that “the risk corridor program should help ameliorate unanticipated changes in premium revenue.” HHS later extended the transitional period to last for the duration of the risk corridor program.
As explained by the Association for Community Affiliated Plans:
The executive branch’s last-minute “keep your plan” initiative excused many healthy individuals from migrating to the marketplaces—leading to smaller, sicker marketplace risk pools than insurers had expected. … Throughout 2014, this phenomenon greatly increased insurers’ losses and the government’s risk corridors obligations.
By 2014 Republicans had gained control of Congress. They placed a provision in legislation to make the risk corridor program budget neutral, prohibiting HHS from transferring funds from other sources to fund the risk corridors. Instead, only money brought into the program by insurers could be used to make payouts.
The result of this switch on the health market was predictable. A number of insurers left the individual market. Others went bankrupt. The survivors raised their premiums in subsequent years.
The effects can be seen in annual reports from two healthcare cooperatives. In 2016-17, Wisconsin’s Common Ground Healthcare Cooperative reported a loss of $36 million, including a $26.7 risk corridor write-off. The report concluded that “the market is still volatile and quite frankly broken.”
The following year, it reported a loss of $11 million and commented on damage to the healthcare insurance market:
We are the only insurance company serving the health insurance Marketplace (Healthcare.gov) in seven Wisconsin counties. In our other 12 counties, we are one of only two or three carriers. While this is sad news for our state, I’m glad we could give people living in those counties the chance to use their federal tax credits to afford quality, comprehensive coverage in 2018.
Even though the federal government has time and again refused to pay its obligations to us under the Affordable Care Act, CGHC is gaining financial strength. 2017 would have been a breakeven year had the federal government not ended Cost Share Reduction plan payments to insurers for the last three months of the year.
The report noted a new effort at sabotaging the market under the Trump administration:
A recent surprise was an announcement by the President that he would stop making payments to issuers for “Cost Share Reduction” plans which we are required to offer. This amounted to an approximate $12 million loss in net operating gain after the federal government withheld payments for these plans for the last three months of 2017.
Annual reports from Maine’s Community Health Options tell a similar story:
- 2015 was a challenging year … The cost of medical and pharmacy claims outstripped premiums and produced a financial deficit, a phenomenon widely experienced by insurers throughout the country.
- The year 2016 was fraught with financial difficulty. We entered the year knowing our rates were insufficient relative to the building utilization patterns and realization of medical needs of our membership. While significant financial losses were a shared experience among three quarters of insurers across the country– and many had much greater than our $58 million deficit – most had greater starting reserves to withstand the widespread financial strain that was commonplace on the Marketplace. Thus our achievement in pulling through financially and returning to Open Enrollment at the end of 2016 represents a significant achievement and turning point for us as a company.
- Against a backdrop of political and market uncertainty in 2017, … In October, when President Trump, through Executive Order, eliminated a critical funding component that provided subsidies to Mainers most in need of financial assistance to purchase health insurance … When Maine’s largest for-profit insurer abruptly exited the Maine Marketplace in September 2017 leaving 28,700 members without coverage for 2018 … Throughout the multiple attempts to derail efforts to provide essential health benefits to large numbers of people in Maine …
Maine Community Health Options brought one of three lawsuits aimed at forcing the federal government to fulfill its promises. The others were brought by Land of Lincoln Mutual Health Insurance Company and by Moda Health Plan. The former reports that:
After the Government refused to honor its risk-corridor commitments, Land of Lincoln was forced to enter liquidation on October 1, 2016, three months prior to the end of the policy year, and nearly 50,000 policyholders in Illinois lost their health insurance as a result.
Moda reports that it “was owed more than $210 million … for 2014 and 2015. When the government reneged on those payments, Moda was forced to withdraw from providing ACA plans in Washington and Alaska. That eliminated any competition on Alaska’s exchange, sent premiums there skyrocketing, and forced the state to create an emergency reinsurance fund.”
Eventually, the three challenges were consolidated and appealed to the United States Court of Appeals for the Federal Circuit. In its decision, the two-judge majority wrote:
We conclude that the plain language of section 1342 [establishing the risk corridors] created an obligation of the government to pay participants in the health benefit exchanges the full amount indicated by the statutory formula for payments out under the risk corridors program.
Despite this concession, the two judges concluded that:
Although section 1342 obligated the government to pay participants in the exchanges the full amount indicated by the formula for risk corridor payments, we hold that Congress suspended the government’s obligation in each year of the program through clear intent manifested in appropriations riders.
It was left to the Judge Pauline Newman (appointed by Reagan) to get to the core of the issue:
The government’s ability to benefit from participation of private enterprise depends on the government’s reputation as a fair partner. By holding that the government can avoid its obligations after they have been incurred, by declining to appropriate funds to pay the bill and by dismissing the availability of judicial recourse, this court undermines the reliability of dealings with the government.
The health insurers have appealed this decision to the US Supreme Court, which is scheduled to hear arguments in December. In addition to briefs from the parties to the case, others have submitted “amicus” briefs.
For example, nine economists write:
If … the government can use financial incentives to induce private parties to enter and/or more fully participate in a market, but then turn around and not make the payments it promised, the government’s ability to influence the behavior of private actors in the same and even different markets in the future will be diminished.
… if the government’s promises to pay are unreliable and subject to “bait and switch” behavior—and private actors have limited ability to compel compliance with those promises, such as through litigation like this—then the government’s ability to achieve policy objectives through incentivizing private action will be substantially undermined.
Similarly, the US Chamber of Commerce expressed concern about allowing the government to fail to honor its commitments:
Many of the Chamber’s members partner with the federal government in a variety of areas. Congress promotes these efforts because in many instances the public interest is best served (and frequently, can only be served) with public-private partnerships. … Such statutory commitments can only be effective, however, if the federal government honors its obligations to the business community and conducts itself as a reliable business partner.
The Justice Department’s brief argues that the government is free to renege on promised payments if Congress refuses to fund those payments. Accepting that proposition adds political risk to the other risks that private sector players must consider. Are the promises only as durable as the results of the next election?
The only brief supporting the government’s ability to break its promises comes from Charles Koch’s Americans for Prosperity:
What the insurance companies really want is a bailout for their bad decisions. They tried to reap guaranteed profit from a risky industry by participating in a poorly designed government program. It did not work, and Congress decided not to issue a bailout.
The “bad decision” the insurance companies made was to trust the government to honor its promises.
If this is what the AFP and the Trump Justice Department believe is an ethical way to treat these insurers, they are sending a message to all businesses that you cannot trust the government to live up to its promises.
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