What Will Follow Last Week's Federal Circuit Court Decisions in Land of Lincoln and Moda Health?

Insurance Law Alert

June 21, 2018

Cynthia J. Borrelli

Cynthia J. Borrelli


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On June 14, 2018, the United States Circuit Court of Appeals for the Federal Circuit ruled in two cases against health insurers, claiming that the government failed to satisfy the full amount of its payment obligations under a so-called Risk Corridor Program established by the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, 124 Stat. 119 (2010) (codified at 42 U.S.C. §§18001 et seq.) (the “ACA”), and implementing regulations promulgated by the United States Department of Health and Human Services (“HHS”). The Court ruled that the insurers’ claims were not sustainable on either statutory or contractual grounds. In the first case, MODA Health Plans, Inc. v. United States, (2017-1994), the Federal Circuit Court’s ruling reversed the Court of Federal Claims which had entered judgment for the insurer on both grounds.  In Land of Lincoln v. United States, (2017-1224) the Federal Court of Claims had ruled against the insurer. The insurer appealed on grounds similar to those articulated by MODA Health Plans, and the Federal Circuit Court affirmed the lower court, ruled against the insurer and followed its analysis in MODA Health.

The Fate of the Risk Corridors Program


At issue in both MODA Health and Land of Lincoln was the 3-year so-called “risk corridors” program described in the ACA. The two cases also address whether the funds were properly appropriated to HHS and the Centers for Medicare and Medicaid Services (“CMS”) within HHS for the fiscal years during which the program in question operated. As the ACA reform programs took hold, it soon became clear that federal government protection in the form of the risk corridor payments was in question. In February of 2014, HHS had proposed adjustments to account for the transitional policy, but before HHS had finalized its adjustments to the risk corridor payments, Congress requested that the Government Accountability Office (“GAO”) determine what sources of funds could be used to make any payments in furtherance of the risk corridor program. See Dep’t of Health and Human Services-Risk Corridor Program (“GAO Report”), B-32563, 2014 WL 4825237, at *1 (Comp. Gen. Sep. 30, 2014) (noting request).

The GAO identified two potential sources of funding and appropriations and concluded that language in the CMS program management appropriation for FY 2014 could encompass payments to health plans under the risk corridor program. Accordingly, a lump sum appropriation would have been available for making those payments. However, because the government appropriations acts were considered non-permanent legislation, the GAO clarified that its analysis regarding the lump sum appropriation and use fees “would need to be included in the CMS PM appropriation for FY 2015” in order to be available to make any risk corridor payments in FY 2015. Id.

In December of 2014, Congress passed its appropriations for HHS for FY 2015 but expressly failed to appropriate funds relating to risk corridors. Given the failure to appropriate funds, CMS declined to make risk corridor payments, which led to an onslaught of lawsuits, including not only those instituted by Land of Lincoln and MODA Health, but by multiple other insurers who filed actions alleging similar claims with mixed results from the Court of Federal Claims. See, e.g., Molina Health Care of Cal., Inc. v. United States, 133 Fed. Cl. 14 (2017) (ruling for the insurer); Me. Cmty. Health Options v. United States, 133 Fed. Cl. 1 (2017) (ruling for the government).

Continued Litigation For MODA Health & Land of Lincoln?

Although the Land of Lincoln and MODA Health decisions resolve a split in the lower courts, the decisions could be reviewed by the full Federal Circuit Court or by the United States Supreme Court.

The Illinois State Department of Insurance, the regulatory authority charged with oversight of Land of Lincoln, now in liquidation proceedings, plans to pursue further litigation to secure more than $70 million the Department believes the federal government owes the defunct health insurer.  http://www.chicagotribune.com/business/ct-biz-land-of-lincoln-appeal-0616-story.html  The State has requested a re-hearing in the case which was decided by a three judge panel. In filing a request for a re-hearing before the Federal Circuit, the Department contends that the Court’s decision is inconsistent with existing precedent. If the Department is successful on behalf of Land of Lincoln at re-hearing, any risk corridor payments recovered could be used to pay the remaining debts of the insolvent insurer’s estate in accordance with the priority of liquidation statutes under Illinois State insurance laws.  To date, MODA Health is reportedly still assessing its litigation strategy.

The Fate of the ACA’s CO-OPs


Since 2014, when the government failed to make appropriations to fund the risk corridor programs, the vast majority of the states’ CO-OP insurers (Consumer Operated and Oriented Plans) created by the ACA have been placed in insurance insolvency proceedings. Some authorities believe that result was inevitable. In his testimony before the Investigating Subcommittee of the Senate Committee for Homeland Security and Government Affairs, Scott Harrington, PhD and professor at the Wharton School of Business at the University of Pennsylvania, stated that “many if not most of the major players involved in the formation, funding, and operation of CO-OPs significantly underestimated the challenges and risks of launching new health insurance companies in 2014.”  
https://www.hsgac.senate.gov/subcommittees/investigations/hearings/review-of-the-affordable-care-act-health-insurance-co-op-program

The fact that the CO-OPs were initially funded with federal loans (characterized under many state insurance laws as surplus relief notes and thus carried as assets on the CO-OPs’ balance sheets) and were expected to be supported in part with the risk corridor payments which were not made, was nothing less than a recipe for financial disaster. According to Subcommittee Chair Senator Bob Portman (R. Ohio), the collapse of the first twelve CO-OPs created under the ACA caused more than 700,000 people to abruptly lose their health insurance coverage and scatter into the marketplace to locate replacement coverage. The data analyzed by the Subcommittee reflected that more than $700 million in unpaid CO-OP medical claims to doctors and hospitals remained unpaid with respect to those members. As time passed and risk corridor payments were not made, CO-OP insolvencies continued, all to the detriment of their members and medical providers.

Is There a Future for Health Care Reform Under the ACA?

In the face of market availability and access shortages for the U.S. health insurance buying public the federal government created the ACA, a cornerstone of which was the CO-OP program. The CO-OP program was funded in part by the risk corridor program, the funding for which the government failed to make adequate appropriation. In the face of all of these inadequacies, the United States judicial system has ruled in favor of the government leaving both the insurers and the members they were created to protect with no recourse.  Thus, last week’s Federal Circuit Court of Appeals Decisions have done little to restore faith in health insurance consumers that the 2010 health insurance reform has any lasting credibility or likelihood to increase access to healthcare or the availability of insurance coverage.