The Trump administration’s attempt to dismantle Obamacare could end up backfiring and result in the federal government paying tens of billions of dollars in double payments to insurance companies.
That possibility became more likely this week after the US Court of Federal Claims certified a class-action lawsuit against the government.
On the surface, the case is simple: Last year the White House announced it was doing away with an Obamacare subsidy to insurers known as cost-sharing reduction payments, or CSRs, which help cover the cost of insuring low-income Americans. Insurers argue that they are legally owed CSRs under the Affordable Care Act and want back payments, while the government says it has the right to renege on them, arguing that the payments are illegal and a waste of taxpayer money. President Donald Trump and other Republicans frequently refer to CSRs as a "bailout" to the already-powerful insurance industry.
But what makes the case so unusual is that the insurance industry is suing for subsidies that, in large part, they didn’t actually lose out on.
CSRs were designed to bring premiums down for patients. When the White House killed the payments, states and insurance companies worked together to game the system. Through a method known as “silver loading,” they tweaked insurance plans so that other federal subsidies would cover the loss of CSRs.
For states and the insurance industry, it was a win-win. Insurers got their money, and the states protected their citizens from projected premium increases of 20%. But for the federal government, the class-action lawsuit could lead to massive losses. If the insurers win their case, the government could owe them billions of dollars in CSR back-payments, even though the insurance companies didn’t incur all of those costs.
“[The insurance companies have] got an extremely strong case,” University of Michigan law professor Nicholas Bagley told BuzzFeed News. “The promise is quite clear, and the failure to make payments is quite clear.”
In a blog post, Bagley laid out why this week’s ruling was potentially disastrous for the government. Essentially, Judge Margaret Sweeney ruled that if the government owes CSR payments to the insurers, it is irrelevant whether the industry got the money through other means.
That opens the door to the worst-case scenario for the Trump administration. Rather than cracking down on insurance companies, as they said they would, the administration’s tinkering with Obamacare could result in insurers receiving billions of dollars in extra money.
Exactly how much extra money is at stake depends on how long the court case takes to settle. Last year the insurance industry lost out on about $2 billion in CSRs after the White House canceled the program.
For 2018, the industry was projected to receive $10 billion in CSRs, with that number steadily rising each year. But because of silver loading, the maneuver used by insurers and states, the insurance industry was able to make up for most of that $10 billion. If the courts look at what the industry actually lost out on, it would be a much smaller amount. But if the courts rule that other subsidies are irrelevant, as Judge Sweeney suggested in certifying the class action, the industry could be in for a paycheck of at least $10 billion for each year the court case takes to resolve.
That would put pressure on Congress to step in, but so far Democrats and Republicans have been unable to agree on a bill to tackle the problems facing Obamacare.
CSRs were designed to subsidize the cost of covering lower-income patients on Obamacare, and applied to all forms of individual insurance plans: gold, silver, bronze, and platinum. In theory, when CSRs were taken away, costs should have risen across the board.
So insurers turned to silver loading. With the blessing of state regulators, they loaded all of the increased costs onto silver plans. That’s because silver plans are the only ones used to calculate a different federal subsidy for low-to-medium income people. Essentially, by raising the cost of silver plans, insurers also increased subsidies for everyone.
It wasn’t a perfect fix — higher-income people with silver plans are not subsidized and faced major cost increases. But in most states, insurers found ways to shift those people onto other plans at roughly the same cost.
The result has been a year of stable Obamacare markets, albeit one where consumers are still paying higher costs than necessary because Congress has not passed a bill to stabilize the markets.
The federal government can still appeal the Court of Federal Claims ruling. Asked for comment, Justice Department officials said they are reviewing the case and would get back to BuzzFeed News.