Bailout or key to stable market? Health insurers sue for 'risk corridor' funds

Three health insurers with Minnesota operations are suing the federal government to recover at least $195 million in losses connected to struggling markets under the federal health law.

Blue Cross and Blue Shield of Minnesota, Medica and Sanford Health are among roughly 20 insurers across the country that have filed lawsuits over the lack of payouts in what's known as the "risk corridors" program.

Created by the federal Affordable Care Act, the program was one of three financial safety nets designed to entice insurers into competing in the individual market despite uncertainties with the ACA.

Republicans in Congress have balked at funding the program, calling it an industry "bailout." The experience has made insurers cautious about whether they'll continue to compete in health law markets where significant uncertainties remain, said Deep Banerjee, an analyst with S&P Global Ratings.

"This is not a small amount of money," Banerjee said. "The more of these twists and turns that come into the marketplace, the less chance of this market itself becoming stable in the near term."

The Affordable Care Act drove fundamental changes starting in 2014 to the individual market, where self-employed people and those who don't get coverage from their employer buy health insurance. Among other things, the health law prohibited health insurers from denying coverage to people based on preexisting health conditions.

Recognizing that the individual market would be very different in 2014, the ACA included three programs to help cover financial losses for health plans, including risk corridors. The idea was the programs would help stabilize premiums by giving carriers protection if they guessed wrong in setting prices for what the health law calls qualified health plans (QHPs).

During the first year of major health law changes in 2014, insurers saw a lot of red ink overall. Insurers paid in $362 million to the program, while carriers facing losses sought $2.87 billion in payments.

The mismatch continued for 2015. In March, the actuarial firm Milliman reported that the cumulative risk corridor payment shortfall for the two-year period was $8.3 billion.

At issue in the lawsuits is whether the government is required to make up the difference.

In an October filing, Eagan-based Blue Cross and Blue Shield of Minnesota argued the federal government had specifically admitted its obligation to pay. What's more, Blue Cross cited a 2013 notice from the government saying risk corridor payments would be made without regard to the balance of payments and receipts in the program.

"[Blue Cross] decided to become a QHP issuer based in part on the commitment to make full risk corridor payments annually … regardless of whether risk corridor payments to QHPs are actually greater than risk corridor charges collected from QHPs for a particular calendar year," the insurer argued.

In one such case last year, the federal government argued that an Illinois insurer was premature in seeking full payment. That's because the risk corridor program extends over a three-year period, so final balances aren't yet known. What's more, the Justice Department argued the ACA itself doesn't require risk corridor payments beyond the collections from other insurers.

"Even if that intent were unclear when the Affordable Care Act was enacted in 2010, Congress removed any ambiguity when it enacted annual appropriations laws for fiscal years 2015 and 2016 that prohibited HHS from paying risk corridors amounts from appropriated funds other than collections," the Justice Department argued in a court filing.

ACA critics spearheaded those congressional actions blocking payments, arguing taxpayers shouldn't be on the hook for the losses. Health law backers decried the moves as borderline sabotage, since they prompted insurers to increase premiums and consider leaving markets.

The federal government implemented a risk corridors program during the Bush administration when launching the Medicare Part D prescription drug benefit. Whereas there was a specific appropriation in law to provide federal funding for the Part D risk corridors in the event of a shortfall, that wasn't the case with the ACA, argued Doug Badger, a senior fellow with the Galen Institute, a conservative think tank in Virginia.

"What they didn't write in was the ability to use taxpayer money to make insurers whole for their losses," Badger said. He added via e-mail: "Only in early 2014 … when insurers began to recognize the magnitude of their miscalculation did they begin to construct the narrative that they were entitled to shift their losses to the taxpayers."

Blue Cross, Minnetonka-based Medica and South Dakota-based Sanford Health Plan all have filed lawsuits over risk corridors in the past six months, with Blue Cross alone estimating it's owed about $180 million. Medica says it's owed at least $7.6 million, while Sanford is seeking more than $8 million.

Also in the legal mix is a class-action lawsuit that might ultimately include Golden Valley-based PreferredOne and Bloomington-based HealthPartners.

Tim Jost, an emeritus professor at the Washington and Lee University School of Law, said the lack of full payments under risk corridors has been "one of the biggest factors destabilizing the individual insurance market."

Christopher Snowbeck • 612-673-4744