Litigation currently pending before the U.S. Supreme Court is poised to determine whether and to what the extent the federal government can renege on statutory promises it makes to private entities as inducements to do business with it.  At stake is not only the fate of $12 billion in payments the Government statutorily committed to pay health insurers under the “Risk Corridors” program of the Patient Protection and Affordable Care Act (“ACA”), 42 U.S.C. § 18001 et seq. (2012), but the credibility of the Government as a business partner writ large.  Given the Government’s reliance on the private sector to assist with the performance of public-sector tasks throughout our economy, this is an issue of paramount importance.

Background of the Risk Corridors Program

Congress enacted the ACA in 2010, ostensibly to expand access to healthcare and provide health insurance to the previously uninsured.  Central to the ACA was a network of Health Benefit Exchanges where health insurers would offer Qualified Health Plans (“QHPs”) to eligible purchasers in statewide marketplaces.  42 U.S.C. § 18032(c).  To incentivize insurers to participate in the marketplaces, Congress created three premium-stabilization programs.  One was the “Risk Corridors” program, which required the Government and insurers offering QHPs to share in profits or losses exceeding certain thresholds during 2014-2016, the first three years of ACA implementation.  Section 1342 of the ACA mandates that the U.S. Department of Health & Human Services (“HHS”) must reimburse QHP issuers in full for losses sustained in the marketplaces during any of those three years, while reciprocally requiring issuers that profit during the same timeframe to pay a percentage of that profit to HHS.  42 U.S.C. § 18062.  There is no requirement of budget neutrality.  The program was designed to help insurers adapt to and weather short-term financial challenges as they worked to set premiums for previously uninsured individuals, hopefully to keep premiums down.  Federal regulations implementing Section 1342 reiterate the mandatory nature of the Government’s obligations to insurers (45 C.F.R. § 153.510).  Likewise, HHS, through the Centers for Medicare & Medicaid Services (“CMS”), recognized that the Risk Corridors program is not required to be budget neutral.  78 Fed. Reg. 15,473 (March 11, 2013). 

Against this backdrop, beginning in 2013 the Government extended offers for a contract that insurers could accept by selling QHPs in their States’ respective marketplaces.  In exchange, the Government promised – as required by the ACA and its  implementing regulations – that it would make full and complete Risk Corridor payments to insurers that suffered losses from 2014-16.  E.g. 45 C.F.R. Parts 144, 146-48.  By accepting these offers, insurers agreed to assume obligations mandated by the Government, including compliance with rules of conduct and testing for each type of transaction they planned to implement.  Id.

In November 2013, HHS announced a “transitional policy” to minimize plan terminations, decreeing unilaterally that health plans in individual and small group markets would not be considered non-compliant with the ACA for 2014.  This upset insurers’ expectations regarding the QHP risk pool, which they anticipated would include millions of individuals who had non-ACA-compliant plans.  The transition policy removed these individuals from the risk pool, leaving a less healthy and more expensive population than QHP issuers had reason to expect.  In response, HHS assured insurers that the risk corridor program “should help” offset unexpected losses.  The transitional policy outlived the Risk Corridors program.  In the meantime, HHS continued to recognize its commitment to “make full payments” to insurers.  See, e.g., 79 Fed. Reg. at 30,260.

Congress Restricts Risk Corridors Appropriations

Despite the mandatory terms of the ACA and the repeated commitments of HHS, Congress later sought to eviscerate the Risk Corridors program.  On December 16, 2014, Congress passed an appropriations rider that limited the pool of available Risk Corridors funds to “payments in” from insurers, and blocked CMS from using program management appropriations to reimburse insurers for losses.  Pub. L. No. 113-235 § 227, 128 Stat. 2130, 2149 (2014).  Yet Congress did not amend or repeal Section 1342 of the ACA, nor did the appropriations rider amend the Government’s Risk Corridors responsibilities.  Congress included in the same funding restriction in 2016 and 2017 appropriations riders.  Pub. L. No. 114-113 § 225, 129 Stat. 2242, 2624 (2015); Pub. L. No. 115-31 § 223, 131 Stat. 135, 543 (2016).  

As a result of Congress’s action, HHS paid insurers only a tiny fraction of the sums they were owed to offset their losses under the Risk Corridors program.  For example, for program year 2015, HHS paid out just 1.5% of the sums due.  Over the three-year life of the Risk Corridors program, HHS refused to pay insurers more than $12 billion due to them, while simultaneously acknowledging its obligation under the ACA to make full payment.  As a result of these huge shortfalls, multiple insurers have been forced to curtail their offerings, unreasonably raise premiums, and in some instances go out of business in certain States altogether.

The Risk Corridors Litigation

Reacting to the Government’s failure to reimburse them as promised, dozens of insurers filed suits against the Government in the Court of Federal Claims to recover the sums owed under ACA § 1342.  After divergent decisions in several of these cases, and after the remaining cases were stayed, the U.S. Court of Appeals for the Federal Circuit heard appeals in the cases brought by Moda Health Plan (which won in the lower court), Land of Lincoln Mutual Health Insurance Company (which lost in the lower court), and Blue Cross/Blue Shield of North Carolina (which accepted an adverse judgment in the lower court in order to appeal immediately).  By a vote of 2-1 in the Moda case, the Federal Circuit reversed and ruled in favor of the Government.  Moda Health Plan, Inc. v. United States, 892 F.3d 1311 (Fed. Cir. 2018).[1]  Promisingly for the insurers, the court first held that Section 1342 of the ACA facially obligated the Government to pay the full amount of Risk Corridors payments due, and did not contemplate the small “pro rata” payments that HHS made. The court concluded that Section 1342 is “unambiguously mandatory” and requires full payment regardless of any CBO assessment of “budget neutrality” and even despite the supposed absence of budgetary authority.


Next, however, the majority held that the riders in the appropriations bills for 2015 and 2016 repealed or suspended the Government's obligation to make any Risk Corridor payments in an amount exceeding the amount paid in by insurers. The majority concluded that the riders adequately expressed congressional intent to suspend payments, through language barring various sources of funds.  Notably, the majority recognized that Congress could subsequently reinstate an obligation to make full Risk Corridors payments, even after the program has concluded (unlikely though this is).  The majority also decided that the appropriations riders did not constitute an improper “repeal by implication” of the payment obligation in Section 1342, but only a suspension that was based on express language and need not be inferred. 

The majority also rejected an accompanying claim for breach of implied contract (and for a Taking, which was based on the presence of a contract).  Describing the Risk Corridors program as an “incentive program,” the majority found that there was not a traditional quid pro quo between insurers and the Government, nor any statement by the Government evincing an intent to form a contract.  The majority also opined that legislation and regulation themselves cannot establish the Government's intent to bind itself in a contract. 

Judge Newman filed a lengthy and detailed dissent.  She found that the Government cannot eliminate its obligations by simply restricting the sources funds that might be used to meet them.  In her view, the appropriations riders were improper repeals by implication, because the riders do not actually express an intent to repeal Section 1342 but had that practical effect.  Merely cutting off access to sources of funds, without express enacting a repeal, is legally improper, as Judge Newman explained, based on a series of historic cases.  Judge Newman also noted that Senator Marco Rubio had proposed a bill to require budget neutrality in the Risk Corridors program in 2014, but it was not enacted – providing legislative intent not to require budget neutrality.  She also observed that the appropriations riders do not state that the Government would not, and need not, meet its statutory commitments, which even the panel majority recognized were unambiguous.  Finally, Judge Newman explained, based on caselaw, that the Government cannot retroactively affect an obligation already incurred, having already induced reliance and participation in the Risk Corridors program by insurers.  As for the contract claim, Judge Newman stated that it has sufficient record support and should not be dismissed.  She ended the dissent by observing that the majority's decision “undermines the reliability of dealings with the government,” and calls into question its “reputation as a fair partner.”

The Federal Circuit later denied petitions for rehearing en banc filed by Moda and the other insurer parties, with fiery dissents from Judge Newman and Judge Wallach focusing on the credibility of the Government as a business partner.  The cases are now pending before the Supreme Court on petitions for writ of certiorari filed by the insurers, supported by a host of amicus briefs from other insurance companies, trade associations, and state governments.  The key arguments advanced by the petitioners are that: (1) the mere legislative history cited by the Federal Circuit majority is insufficient to repeal the Government’s underlying payment obligation, either “expressly, or by clear implication,” as required by substantial centuries-old precedent; (2) the divided Federal Circuit and its inconsistent application of Supreme Court precedent underscores the need for review of these cases; (3) the cases present exceptionally important questions of federal law that have a $12 billion impact on the health insurance industry, and impact all areas where the Government seeks to partner with private entities; and (4) the Federal Circuit’s decision would allow legislators to use the appropriations process as an end-run around substantive funding and policy debates.

The Government’s opposition is due on May 8, with replies to follow on or before May 22.

Importance of the Risk Corridors Litigation

The insurers’ Supreme Court petitions eloquently explain why the Risk Corridors litigation is exceptionally important.  It involves not only the Government’s effort to shirk a $12 billion commitment, but also the larger issue of the Government’s credibility as a business or contracting partner.  If not reversed, the Federal Circuit’s decision provides a framework for the Government to make feckless promises to induce reliance by private entities, and then to renege with no consequences.  Even those who disapprove of the ACA and the Risk Corridors program on policy or ideological grounds can question this state of affairs, which releases the Government from its commitments on its own unreviewable and baldly political whim.

As the $12 billion at issue suggests, the impact of the Federal Circuit’s decision on insurers and their healthcare markets has been huge.  Not only did the Government initially recognize the risks inherent in the new ACA marketplaces, it then adopted a “transitional policy”  that unilaterally increased these risks for insurers, only then to renege on its promise to reimburse losses.  As of 2016, “eighteen of twenty-four health cooperatives that were participating in the exchanges” were out of business, stripping health insurance from a million citizens.  Nicholas Bagley, Trouble on the Exchanges: Does the United States Owe Billions to Health Insurers?, 375 New Eng. J. Med. 2017, 2018 (2016).  Other insurers have withdrawn from marketplaces, or have been forced to raise premiums to extreme levels.  Moreover, the fundamental issue of the Government’s credibility extends uncertainty to all areas of public-private partnership.  If the Government can induce detrimental reliance by private parties and then simply cancel its financial commitments on political grounds, it will find fewer willing partners and will have created incentives for counterparties to demand high “risk premiums.”  The impact on the quality and  character of prospective private partners, if not sectors of the economy, could be severe.

In addition, the Federal Circuit’s endorsement of the Government’s repeal by sleight-of-hand –obscure riders in appropriations bills – is arguably inconsistent with our long-enshrined democratic and political principles.  If Government is to make grand public promises, through legislation such as the ACA, one could argue that it should be required to revise or withdraw those promises with equal fanfare, so the public can be informed and elected officials can be held politically accountable for their actions.  Otherwise we run the risk of undermining the Government’s credibility as a governing institution, as well as a business partner.

The Supreme Court has the opportunity to address these issues and correct the Federal Circuit’s decision – if not for the benefit of health insurers, then at least for the benefit of our public trust in our Government.  It will be interesting to see how – or more accurately, if – the Government attempts to substantively defend its actions in the forthcoming opposition briefs, rather than relying only on legal technicalities, as it has done to date.  No matter what arguments the Government advances, however, the Risk Corridors litigation shows that it is indeed a risky business partner.

* * *
Jason A. Levine is a litigation partner in the Washington, D.C. office of Vinson & Elkins LLP.  He also serves as a member of the Executive Committee of the Federalist Society’s Litigation Practice Group.  Mr. Levine represents plaintiffs in a “risk corridor” case pending in the Court of Federal Claims.  The views expressed here are his own.

[1] See also Blue Cross Blue Shield of N. Carolina v. United States, 729 F. App’x 939 (Fed. Cir. 2018).  The Moda decision sets out the substantive rulings of the Federal Circuit.