Millions of Americans who were able to obtain health insurance as a result of the Patient Protection and Affordable Care Act (“ACA” or “Obamacare”) are waiting to learn the extent to which Congress and the new administration will repeal, replace, or do something else with the ACA. At the same time, Government contracts lawyers are watching a group of ACA-related lawsuits being litigated at the Court of Federal Claims and the Federal Circuit. The cases involve “risk corridors,” which the ACA implemented to entice insurers to enter healthcare exchanges by reducing downside risk if, among other possibilities, enrollment did not meet projections. After the ACA was implemented (and control of the Legislative branch had shifted), Congress effectively defunded the ACA’s risk corridors (i.e., reduced necessary appropriations), leaving the Department of Health and Human Services (“HHS”) without sufficient funds to pay participating insurers. So far, approximately 20 of those companies have sued and are pursuing damages claims based on the Government’s failure to make promised payments.

Last November, the Court of Federal Claims issued its first merits ruling in one of the ACA risk corridor cases, Land of Lincoln Mutual Health Insurance v. U.S. Judge Lettow’s opinion in that case rejected the plaintiff’s claims based on “statutory entitlement,” breach of contract, and Fifth Amendment taking theories. A decision in a second case, Moda Health Plan v. U.S., was issued late last week by Judge Wheeler—who ruled in that plaintiff’s favor. In Moda Health, the court held that the relevant ACA provision “requires full annual payments to insurers” and, alternatively, that the Government’s non-payment constituted a breach of the implied-in-fact contract with the insurer.

How the current administration and Congress will change ACA—and the American healthcare system—is anybody’s guess. The ACA-related cases before the Court of Federal Claims are not getting the same amount of press as potential changes to the healthcare reform law, but they address important legal and financial consequences of the long-running policy dispute over the ACA. The cases raise complex legal issues that should be of substantial interest to Government contracts lawyers and practitioners before the Court of Federal Claims and the Federal Circuit.

The ACA included a risk corridor program to protect the companies from potential losses associated with entering new markets because of concerns that insurers would hesitate to the devote resources necessary to enter the healthcare exchanges. However, Congress did not appropriate funds for the risk corridors program. Instead, section 1342 of the ACA specified that the risk corridors would function by limiting the maximum profits participating plans could earn from an exchange, and required HHS to effectively transfer profits above a certain threshold to companies with losses, pursuant to a specified formula.

Before the risk corridors went into effect, HHS issued a series of proposed rules (and other regulatory materials) explaining how the corridors would work. In a proposed rule from July 15, 2011, HHS included an “impact analysis” in which it recognized that the Congressional Budget Office (“CBO”) had not formally scored the risk corridors but had made projections concerning their viability and “assumed collections [from profitable participants] would equal payments to plans in the aggregate.” In short (and as they were described in later regulatory materials), the risk corridors were supposed to be “budget neutral[],” i.e., not require appropriated funds.

Needless to say, HHS’ plan to operate the risk corridors by transferring sufficient funds in a budget-neutral manner did not work out as planned. The number of highly profitable participants was insufficient to cover the losses experienced by other participant-insurers. The insurers that experienced losses demanded payments promised by the risk corridor program. As HHS did not have funds from profitable participants or congressional appropriations, the Government has vigorously resisted the insurers’ demands, both in its dealings with the companies and in court.

Both the Land of Lincoln and Moda Health opinions begin with extensive discussions of the court’s jurisdiction to consider these claims and whether the claims are ripe. Both opinions conclude that the court has jurisdiction under the Tucker Act because the plaintiffs allege claims based on a money-mandating statutory provision—section 1342’s provision that HHS “shall pay” qualifying plans that experience allowable costs—and make at least “non-frivolous assertion[s]” that they are entitled to relief under that law. The court also found that the plaintiffs had sufficiently alleged breaches of an express or implied-in-fact contract. In addition, the claims are ripe because they allege that payments for two of the (three) years at issue are “presently due.” (Notably, in a third case in which the court has not yet issued a merits ruling, Health Republic Ins. v. U.S., Judge Sweeney reached the same conclusions regarding jurisdiction and ripeness.)

Statutory Entitlement

The ACA delegated to the HHS Secretary the authority to “establish and administer a program of risk corridors for calendar years 2014, 2015, and 2016. Section 1342(b)(1) of the law provided that if a qualified health plan reports allowable costs for “any plan year” that sufficiently exceed the plan’s target amount, “the Secretary shall pay to the plan” a specified percentage of those costs. One of the questions at the heart of the plaintiffs’ statutory entitlement claim is whether the ACA’s “shall pay” language creates an enforceable right for damages if HHS cannot or does not pay.

The Court of Federal Claims recent decision in Moda Health held that the ACA’s section 1342 “requires annual risk corridor payments” to insurers such as the plaintiff. When discussing ripeness, the Court referenced Judge Sweeney’s Health Republic decision with respect to the statute establishing the risk corridor program “‘for calendar years 2014, 2015, and 2016,’ rather than for ‘calendar years 2014 through 2016,’” and mandating that HHS calculate “‘payments in’ and ‘payments out’ of the program on the basis of insurers’ costs in ‘any plan year,’ not over the life of the program.” The court recognized that these references were not dispositive but “tend to suggest that Congress wanted HHS to make annual payments.” The court also addressed the risk corridor program that was included as part of the Medicare Part D prescription drug program, on which the ACA’s program was based. Although the provisions of the ACA and the Medicare Part D program “are worded differently,” the court concluded that those differences “do not mean [that the ACA’s] Section 1342 rejected an annual payment structure” (which was implemented in Part D).

On the merits, the Moda Health decision explains that the ACA’s section 1342 “is not budget-neutral on its face.” To the contrary, the statute’s “shall pay” language requires that the Secretary pay amounts “tied to each respective plan’s ratio of costs to premiums collected.” With respect to the differing Medicare Part D and ACA risk corridor language, Judge Wheeler concluded that the ACA’s “shall pay” language constitutes “stronger payment language” than Medicare Part D’s “shall establish a risk corridor” requirement, bolstering the conclusion that payment is mandatory. And the Moda Health decision parses HHS’ regulatory pronouncements and appropriations riders, and explains why they “did not vitiate HHS’ statutory duty to make risk corridors payments.”

In Land of Lincoln, Judge Lettow analyzed the same legislative and regulatory materials addressed in Judge Wheeler’s Moda Health opinion and came to opposite conclusions. The Land of Lincoln opinion explained that “[a]lthough [section] 1342(b)(1) contemplates that qualified health plans will be reporting costs on an annual basis via the phrase ‘any plan year,’ that arrangement reflects the year-by-year transitory aspect of the temporary risk-corridors program.” The court continued: “[t]he ‘[p]ayments out’ and ‘[p]ayments in’ methodology in Subsection 1342(b) governs the amounts that HHS must pay to and receive from health plans, but it does not establish when these payments are to be made.” In addition, the statute’s requirement that the Secretary “‘shall establish and administer’ the program ‘for calendar years 2014, 2015, and 2016,’ . . . does not specify the timing of the various payments over those three years.”

The Land of Lincoln opinion relies on a Government Accountability Office (“GAO”) report, which recognized that the ACA, “by its terms, did not enact an appropriation to make the payments specified in Section 1342(b).” Although the CBO had provided revenue and spending estimates related to the risk corridors, “it omitted any budgetary estimate for the risk-corridors program,” undercutting the notion that an appropriation had been made—or that “payments out” of the risk pools were otherwise mandatory absent sufficient “payments in.” Unlike Moda Health, Judge Lettow also rejected the plaintiff’s reliance on the risk corridor provision in the Medicare Part D prescription drug legislation. The Land of Lincoln opinion explained that although the “two programs share many similarities, they are not identical.” Most important, “the Medicare Program explicitly provides for authorization of appropriations” to fund the risk corridors while the ACA omitted such language; similarly, “the Medicare Program specifically requires that ‘[f]or each plan year,’ the Secretary shall establish a risk corridor,’” but Congress omitted the “for each plan year” mandate in the ACA.

Breach of Implied-in-Fact Contract

The Moda Health and Land of Lincoln decisions also differed on the question of whether an enforceable implied-in-fact contract had been formed by the insurers’ participation in the risk corridor program. Judge Wheeler ruled in favor of the plaintiff on this issue (as he had with respect to the statutory entitlement question). The Moda Health decision recognized that that the “Government does not intend to bind itself in contract whenever it creates a statutory or regulatory incentive program.” However, after reviewing relevant precedent, Judge Wheeler explained that “statutes and regulations show the Government’s intent to contract if they have the following implicit structure: if you participate in this program and follow its rules, we promise you will receive a specific incentive.” The court concluded that the ACA reflected the Government’s intent to enter into contracts with insurers, constituted an offer on the part of the Government to enter into unilateral contracts with insurers, and reflected its promise to make risk corridor payments in exchange for insurers’ performance. The court held that Moda Health accepted the Government’s offer—and formed a contract—by participating in the risk corridor program.

The court’s Land of Lincoln decision again analyzed most of the same statutory and regulatory materials addressed by Moda Health but found the plaintiff’s contract-related arguments unconvincing. Land of Lincoln parsed the specific obligations in the contract materials with which the insurer agreed and determined that the “plain language of the agreements does not indicate any contractual commitment on behalf of HHS to make risk-corridor payments.” For instance, in one of the agreements on which plaintiff relied, HHS agreed to “implement systems and processes” to incorporate the insurer-plaintiff in the program. But the court explained that this provision must be read in the context of the agreement in which it is found, a “Data Services Hub Web Services” contract. The court ruled that the Government’s agreement to assist the insurer-participant with using the government internet platform cannot be transformed into an obligation to make risk corridor payments. Judge Lettow also rejected the assertion that the ACA’s section 1342 or the implementing regulations “provided any express or explicitly intent on behalf of the government to enter into a contract with qualified health insurers” that would support a finding of an implied-in-fact contract. (The Land of Lincoln opinion also rejected the plaintiff’s takings count.)

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Land of Lincoln was decided last November and is now on appeal to the Federal Circuit. As explained above, the Court of Federal Claims has generated extensive opinions in Land of Lincoln and Moda Health that analyze much the same statutory and regulatory materials and reach starkly different conclusions regarding the legal ramifications of congressional efforts to defund initiatives undertaken by the Obama administration. It will be interesting to see how the appeals court addresses these issues.