The ACA is going back to SCOTUS next year

Big news: SCOTUS is taking up the ACA risk corridors case. GOP's decision to stymie that program arguably did the most damage to the ACA marketplaces. https://t.co/VeMRcd5MYn

— Bob Herman (@bobjherman) June 24, 2019

The Affordable Care Act is heading back to the Supreme Court for next session.

But this is case will not rule on the constitutionality of a bananapants lawsuit from Texas saying that Congress truly meant to repeal the ACA when they made the mandate penalty a zero dollar penalty. That case is still percolating. Instead, this is a case about the risk corridors that weren’t paid out from 2014-2016.

The fundamental question at issue is where does the “full faith and credit” of the United States end when Congress wants “take backsies?”

Nick Bagley of the University of Michigan Law School has been bird dogging this case as a matter of administrative and appropriations law. He has a great summary at The Incidental Economist:

In a surprise, the Supreme Court agreed this morning to hear cases arising out of the risk corridor mess. At issue is $12 billion in federal money, and the case’s outcome will hinge on what Congress meant when it placed limits on the use of appropriated funds in an effort to sabotage the Affordable Care Act.

The Federal Circuit held that Congress, in placing those limits, qualified an earlier promise made in the ACA to make risk corridor payments to insurers that lost big on the exchanges. As I’ve explained many times, I think that decision is wrong. We’ll see if the Supreme Court agrees….

I will let the lawyers lawyer. The relevant question I can poke at is what does this mean for premiums and plan offerings going forward?

Not much or a lot is the short answer. It depends on how the cash is attributed to the balance sheets.

The risk corridors were put in place as a temporary measure for 2014-2016. Insurers were being asked to price for a brand new market with unknown characteristics. There was a massive variance in defensible projections of what the market would look like and how high premiums were needed to cover claims. The risk corridors were protection for insurers and the federal government if there were large oopsies. If the insurers overpriced, the federal government would collect money from the insurers. If they underpriced as a class, insurers would be paid by the federal government for some of their losses. The risk corridors were variance minimizing policy. Variance minimization is very attractive to insurers and their actuaries.

Insurers took massive losses in 2014-2016 on the individual market. By the end of 2014, insurers were owed $2.87 billion in risk corridor payments while other insurers had only paid in $362 million dollars from excess profitability. Originally, the risk corridors could be topped up by federal funds if needed. However the Cromnibus budget bill passed in December 2014 required that the risk corridors be self-funding so that left insurers eating a $2.5 billion hit for 2014. Overall, there is about $12 billion dollars in losses under dispute.

Some of the losses were due to bad projection. However, I think the market structure of the second least expensive Silver plan as the benchmark for price linked subsidies created a Winner’s Curse where the most optimistic projection of reality determined the market structure.

@larry_levitt @sangerkatz @USCBO Does the benchmark plan subsidy set up creates Winners Curse situations? Least realistic bids win

— David Anderson (@bjdickmayhew) March 31, 2016

I also think that insurers overestimated how sticky the profitable parts of the population would be and underestimated how sticky the high cost patients would be. I also think that at least some insurers intended to use the risk corridor funds as part of their marketing budget.

But that is ancient history.

Let’s assume the insurers win a full judgement in their favor and the US judgement fund starts cutting $12 billion dollars worth of checks a month after the decision.

There are two classes of insurers to consider; the living and the dead.

For insurers that are still an ongoing concern, not much happens. it depends on how the cash falls on the balance sheet. If the cash of an award is attributed to the years where the risk corridor losses were accrued, not much happens. For example, my former employer, UPMC Health Plan is owed over $60 million dollars for just 2016 losses. If they get a $60 million check in the spring of 2020, the accountants have to re-adjust the 2016 books and that is about it. A $60 million swing may affect bonus and perhaps Medical Loss Ratios. It is a lump sum windfall that does nothing to alter future decision making. At the smallest and most thinly capitalized surviving insurers, a lump sum windfall may rebuild capital reserves from low to high levels which may have incremental downward pressure on future premiums, but that is a bank shot of a move.

Update 1 However, risk corridor money has been treated on a cash basis. This means that an insurer that received 12.3% of the 2014 obligation in 2015 put that money onto their 2015 books instead of their 2014 books. If this holds, then there would be a huge bolus of money hitting 2020 books and thus hitting the 2018-2020, 2019-2021, and 2020-2022 MLR calculations without any underlying claims. This would significantly flow back to current year consumers as larger rebates and lower premiums. ( End Update 1)

Insurers that survived the risk-corridor massacre will see the repayment as an opportunity for hookers, blow and MLR rebates.

Insurers that folded due to risk corridor non-payment have had their assets and oligations combed over already. The risk corridor receivable is a very low current value receivable. If the insurers win their case, that asset increases substantially in value. It becomes a huge windfall for whomever controls that asset. It won’t change the offerings of a dead insurer.

Now if the government wins the case, nothing changes from today. Insurers that are still an ongoing concern have already written off their risk corridor receivables. If the Supreme Court splits the baby and orders payment for 2014 only or 2014 and 2015 as insurers signed 2015 contracts before the Cromnibus was passed, the logic of a full win applies.

So from a consumer’s perspective, this case may matter depending on how the cash hits balance sheets. If the payments are hitting the balance sheets as new, current year revenue, premiums will be lower in 2021 to avoid large MLR rebates. If the payments in an insurer win are hitting the accrued years, it is irrelevant going forward.

It is important to define the full faith and credit of the United States and to see if there is a “no take backsies” logic.