Obamacare “Sue & Settle” To Bail Out Insurance Companies?

June 3rd, 2016

Today, Blue Cross and Blue Shield of North Carolina sued the Obama administration, claiming that they were owed $130 million through Obamacare’s so-called “risk corridors.” The government would only pay 12.6% of the money the insurer claimed.  Highmark brought a similar suit last month, claiming it only received $27 million out of the $223 million it was owed. Both suits make virtually identical allegations, and were filed by the same lawyers from Reed Smith in the Court of Federal Claims. Health Republic Insurance filed a similar complaint in February, seeking class action status. It were represented by Quinn Emanuel.

Since their inception, the “risk corridors,” known as “insurance company bailouts” have been extremely unpopular. In 2014 and 2015, Congress blocked HHS from paying these funds from CMS’s permanent appropriation. (President Obama signed that budget into law). As a result, HHS lacked the funds to pay the insurance companies their full amount due. According to one of the complaints, in 2014 there were only $2.9 billion in losses, and only $.4 billion was actually paid.

If the Court of Federal Claims (an Article I court) rules in favor of the insurance companies, and awards them the hundreds of millions of dollars they seek, those amounts would come out of the judgment fund. This is a permanently appropriated fund that, for all intents and purposes, is unlimited. In other words, even if Congress expressly deprives the Executive of funding for the risk corridors, if the insurance companies receive a favorable court ruling, the government can pay out that amount through the judgment fund.

DOJ’s response to the the Health Republic Insurance case is due on June 24. I am paying very close attention to what DOJ does here, because I fear this may be an instance of “sue and settle”–or more precisely, “sue and pay.”

“Sue and settle,” roughly stated, is a practice whereby a regulated entity sues a federal agency, knowing full well that the agency agrees with the nature of the suit. As a result, the parties “settle,” and reach favorable terms behind their closed doors. The court then approves the consent decree, which often contains terms that are not authorized by the agency’s underlying statutory authority. With a final court decree in hand, the agency then has a new source of authority. For example, in recent years environmental groups have sued the EPA, and they reached settlements that required the issuance of new environmental  regulations. There is no real adversarial nature to the suit. The Chamber of Commerce released a report analyzing this practice, as did the Senate Environmental Works Committee.

If the Obama administration agrees that the insurance companies deserve the money they seek, they may not challenge the complaint. The Obama administration has every interest in the insurance companies being compensated for the losses they suffered under Obamacare, to prevent them from leaving the market. This way, they can reach a settlement, which the court can approve. With a consent decree in hand, the insurance companies can be paid out of the permanently-appropriated judgment fund. In this sense, through some non-adversarial litigation, the Obama administration can bypass the fact that Congress deliberately did not appropriate funds for the risk corridors.

I haven’t studied this closely, but the House may seek to intervene in the Court of Federal claims to defend their institutional prerogatives over the power of the purse. If Congress does not appropriate a budget for an item, that item cannot be funded. The judgment fund should not be used as a backdoor to bypass this constraint.

Future Congress should amend 31 U.S.C. § 1304, which creates the judgment act, to exclude these sorts of cases where a regulated entity seeks payments that were not appropriated by Congress. That is, if Congress creates a statutory obligation to pay a certain amount of money, and then decides not to fund that request, the regulated entity should not be able to obtain the money from the permanently-appropriated judgment fund. The funding for such a suit should come from another source, that has tighter appropriation controls. If they do not follow this path, and the “Sue and pay” approach gains traction, I can see future administrations using this process to further undercut the constraints imposed by the appropriations clause.