Busted: GAO Finds Payments To Insurers Under Affordable Care Act Are Illegal

Forbes – by Seth Chandler

The General Accountability Office, the government’s non-partisan watchdog agency, issued a ruling today holding that the Obama administration’s diversion of billions of dollars from the United States Treasury to insurers selling individual policies on the ACA Exchanges was illegal. The GAO joins the Congressional Research Service, another non-partisan agency, in finding that these payments, which the Obama administration has insisted are lawful, are in fact completely unauthorized and inappropriate. For what it is worth, the GAO opinion is also largely consistent with views I have expressed on several occasions (here and here).

Here’s what GAO concluded after 12 pages of careful legal analysis about section 1341 of the Affordable Care Act and the behavior of Health and Human Services (HHS):

In light of the foregoing analysis, we conclude that HHS lacks authority to ignore the statute’s directive to deposit amounts from collections under the transitional reinsurance program to the Treasury and instead make deposits in the Treasury only if its collections reach the amounts for reinsurance payments specified in section 1341. The agency is not authorized to prioritize collections in this manner. The agency must give effect to the extent possible to all of section 1341, and, to do so, is required to collect and deposit amounts for the Treasury, regardless of whether its collections fall short of the amounts specified in statute for reinsurance payments. HHS may not use amounts collected for the Treasury to make reinsurance payments.

The GAO ruling could result in yet more trouble for insurer’s selling policies on the Exchange and criminal investigations of those who authorized the illegal payments. The Obama administration has already spent $16.2 billion on the program for 2014 and 2015 and another $5 billion is scheduled to be spent in 2016, at which point the program is supposed to expire. Of the money spent thus far, only $500 million (3.1%) has been sent to the Treasury; 96.9% has been sent to insurers. Under the GAO’s interpretation of the law (section 1341 of the Affordable Care Act), no matter what amount the government collected for this program, 20% of the total belongs to the Treasury. The GAO found that the language of the statute was crystal clear and that the Obama administration’s efforts to get around that language were “unpersuasive” and “internally inconsistent.” (That’s legalese for nonsense). Thus, insurers may have an obligation to return $2.74 billion to the federal government for 2014 and 2015. That’s about 17.4% of what insurers received during that time frame. Moreover, insurers may be getting considerably less than they hoped for in 2016.

Getting the Money Back

To the extent insurers have to give money back, three things can be said.  First, a reimbursement requirement (which could be met partly by withholding any 2016 reinsurance obligations until the repayment obligation was met) will genuinely hurt insurers already struggling with the ACA. Insurers collected  roughly $92 billion in premiums in 2014 and 2015 for policies sold in the individual market on the Exchanges. Most lost a good deal of money even without any reimbursement obligation. On average, reinsurance payments amount to about 20.2% of premium revenue for 2014. So, if each insurer has to refund 17.4% of their reinsurance money, that will mean a loss of roughly 3.5% of their premiums for 2014.  For 2015, it looks like reinsurance payments will have been about 13% of premium revenues, so a 17.4% refund obligation means a 2.3% hit on premiums for that year. For both years, that’s a significant hit for insurers, many of whom are already unhappy and struggling with the ACA.

Second, insurers and the public should hold CMS squarely responsible for the problem. CMS is the part of HHS that runs the reinsurance program. There would be no problem if CMS had simply collected the correct amount of money set forth in the ACA. The reason there is a problem is that CMS, either through stupidity or a belief thought that it would get away with it, collected too little money from the broad group of health insurers that the ACA obligated to pay into the system; CMS then decided to give almost all of it (not just 80%) to insurance companies selling policies on the Exchange. While conceivably there is an excuse for CMS getting it wrong in 2014 when it was new at the game — although a supplemental assessment would have fixed the problem — there is no excuse for CMS making exactly the same “mistake” in 2015, when it knew what its 2014 experience was looking like. And, of course, there’s no excuse for the “oops I did it again” of using similar assessment methodology in 2016.

Third, insurers are not only going to fight with the federal government about this, they are going to fight among themselves. The GAO says the money should be paid pro rata.  But does that mean pro rata by year (16.7%/83.3% for the Treasury/Exchange insurers in 2014, 25%/75% for Treasury/Exchange insurers in 2015 and 20%/80% for the Treasury/Exchange insurers in 2016)? Or does it mean pro rata over the lifetime of the program — 20% for the Treasury and 80% for insurers? It matters. If you are an insurer in the market only in 2015, you want it pro rata by year so that you would get 20% of whatever was collected in 2015.  On the other hand, if you were an insurer in the market only in 2014, you want it pro rata over the lifetime of the program so that you get 20% of whatever was collected. It gets very messy and the numbers involved are large enough to hire fancy lawyers to duke it out.

And there are two other possibilities. Just as CMS changed the reinsurance programs mid year to make them juicier for insurers — raising the attachment point and increasing the reimbursement rate — perhaps CMS could go back and undo the changes to something like what it originally planned.  This would result in insurers receiving less money. The refunds would not be a uniform percent but would very from insurer to insurer. If this is done, expect some insurers to be happier than others.

Alternatively, CMS might make a supplemental assessment on insurers for 2014 and 2015 so that the amount they collected equalled the amount they were supposed to collect. In many ways this is the simplest solution: health insurers selling policies on the Exchanges don’t have to give back any money. The broader world of health insurers who are taxed, however, to pay for the reinsurance program are likely to protest this idea, however, as it will mean a modest retroactive tax increase (perhaps something like $10 per member per year). Although in the past this idea of a supplemental assessment has been scorned as requiring all sorts of elaborate rule making, perhaps it looks a lot more attractive now that the GAO has joined the list of those saying that CMS’ prior behavior was illegal.

Holding people responsible

As with others who have looked at the statute, the GAO did not find the issue involved here particularly difficult.  The statute simply does not authorize CMS to give essentially all of the money collected under this program to insurers selling health insurance on the Exchanges.  It’s not much more lawful than giving taxpayer money to one’s friends. There are, as I have noted, criminal prohibitions against unauthorized spending of government funds. And while, of course, people should not go to prison for a mistaken payment of a few dollars over a genuine misunderstanding of a confusing law, this case is different: (1) we are talking about billions of dollars and (2) there is no plausible reading of the law that would authorize CMS to do what it did. A phony legal opinion that a first year law student could see through should not stand as a defense.

Moreover, there are some bad cosmetics that may increase interest in an investigation.  The CMS administrator while this money was being distributed, Marilyn Tavenner, left her job at CMS only to be hired promptly thereafter as President and CEO of America’s Health Insurance Plans (AHIP), the leading trade lobbying from for large American health insurers.  As others have noted (see also here), simply taking the job at AHIP with a huge salary may not be illegal so long as Ms. Tavenner has avoided any direct lobbying on reinsurance topics — the revolving door rules are intricate indeed.  But, frankly, it stinks.

Conclusion

What happens next?  In part that depends on the election.  I am not holding my breath until the Obama administration during its final few months seeks to obtain reimbursement from insurers for the money wrongfully paid to them. That may take a more vigorous Congress and, conceivably, a president less eager to burnish President Obama’s legacy. My hope, though, is that some of President Obama (or possibly President Hillary Clinton’s) supporters would have the courage to stand up to their friends and recognize that precedents of lawlessness in government appropriations can have unintended consequences. If the executive branch under President Obama can divert money to insurers to keep a federal program afloat, what prevents another President from diverting money to construction companies to build a wall?  In my opinion, the President, whoever that may be, would be smart to direct a supplemental assessment on insurers and at least try to make the problem go away.

If the Executive branch does not make any supplemental assessments on insurers, the current CMS Administrator Andrew Slavitt does need to really worry about his own personal liability.  An “advice of counsel” defense to a charge of embezzling government money doesn’t work as well where there is an unambiguous opinion of the General Accounting Office and the Congressional Research Service (not to mention my own work) letting him know that it is flatly illegal to continuing to shortchange the Treasury and make full payments to insurers.  If Administrator Slavitt agrees with this point and indicates that transitional reinsurance payments will be reduced for 2016, that is one more unhappy event in what is proving a very bad year for the Affordable Care Act.

Note

There is one area in which the GAO and I disagree. The GAO says the proper remedy if there is not enough money is for it to be distributed pro rata: 20% to the Treasury, 80% to insurers. I have suggested that the property remedy is for the Treasury to have priority, being paid in full, and for the remainder to go to insurers, although I will want to look carefully at GAO’s precedents to see if it might have a better argument. But neither of the GAO nor I believe that what the Obama administration is doing — putting insurers completely ahead of insurers — can be justified under the statute. So, while there may be some ambiguity in the statute, CMS should not be able to exploit that fact to do the one thing the statute clearly does not call for.  Nor should any ambiguity on that fine point of remedy serve as a defense in a criminal case.

Addendum

HHS responded this afternoon  to the GAO report:

“CMS has implemented the Transitional Reinsurance Program lawfully and in a transparent manner, and strongly disagrees with today’s GAO opinion,” an HHS spokesman says. “This critical program, which expires this year, helps to reduce premiums for consumers. CMS laid out its approach to implementing the reinsurance program, including describing the legal rationale, through regulations that involved a public notice-and-comment process.”

The views expressed herein are in my own and do not necessarily reflect those of the University of Houston.

http://www.forbes.com/sites/theapothecary/2016/09/29/busted-gao-finds-payments-to-insurers-under-affordable-care-act-are-illegal/#2317ef5347db