Aug, 21, 2020

Partial Win for Insurers in Cost-sharing Reduction Litigation: Implications for State Insurance Regulation

Sabrina Corlette, Georgetown University Center on Health Insurance Reforms

On August 14, 2020, the Court of Appeals for the Federal Circuit affirmed a lower court ruling that the federal government is liable to insurers selling marketplace health plans for the loss of cost-sharing reduction (CSR) reimbursements mandated under the Affordable Care Act (ACA). However, the court determined that the federal government could reduce the damages it owes to insurers because most successfully mitigated their losses through a practice called silver loading.

Brief Background

The ACA provides two types of financial assistance to eligible consumers who purchase health plans through the health insurance marketplace. The government provides premium tax credits to help lower premiums for individuals under 400 percent of the federal poverty line, while the law requires insurers to offer CSR plans with lower deductibles, co-payments, and/or coinsurance for those up to 250 percent of poverty. Until October 2017, the federal government reimbursed insurers directly for the extra cost of offering CSR plans. However, shortly after the U.S. Senate failed in multiple attempts to repeal the ACA, the administration announced a series of initiatives to roll back and undermine the law through executive branch action. One of these was a decision to cut off CSR reimbursements to insurers.

This decision was estimated to cost insurers $8 billion in lost revenue in 2018 alone. Coming as late in the year that it did, there was no time for insurers to recover those losses by increasing premiums for 2017. However, many state insurance departments devised workarounds to limit the harm of the decision in 2018 and beyond. The most common approach is called “silver loading.” At that time, 30 states required or allowed insurers to increase premiums solely for silver-level marketplace health plans. This enabled insurers to recover their losses, but also, because the ACA’s premium tax credits are tied to silver-plan premiums, ensured that consumers eligible for subsidies would get larger ones, giving them more buying power. It also helped protect higher income consumers from the CSR-related price hike, by making available bronze and gold and off-marketplace plans that didn’t include the price increase.

Insurers in a minority of states spread the CSR-related premium increase either across all their individual market silver plans (on- and off-marketplace) or across all metal levels (bronze, silver, gold and platinum). While this approach protected insurers from losses, it meant that unsubsidized consumers less able to dodge premium increases attributable to the loss of CSRs. However, by 2019, insurers in only three states were continuing to apply the CSR load across all plan metal levels.

The Appeals Court Ruling

The appellate court held that the government “violated its obligation to make cost-sharing reduction payments” to insurers and that “the obligation is enforceable through a damages action in the [Claims Court]…” However, the court found that the total amount of damages should be reduced by the extra amount in premium tax credits that the government paid insurers thanks to silver loading. The court noted: “Here, each insurer mitigated the effects of the government’s breach by applying for increased premiums and, as a result, received additional premium tax credits in 2018 as a direct result of the government’s nonpayment of cost-sharing reduction reimbursements.”  

The court has remanded the cases to the Claims Court to determine the amount of additional premium tax credit insurers have received as a result of the silver loading strategy. Noting that this would be a “fact intensive” exercise, the appeals court laid out three principles to guide the Claims Court’s determination:

  • To the extent insurers increased premiums due to other, non-CSR-related factors (such as concerns about higher provider prices or a smaller, sicker risk pool), any increase in premium tax credits due to those factors should be discounted.
  • In some cases, insurers increased premiums across all the metal levels, not just silver. Just as with insurers that silver loaded, any increase in premium tax credits associated with these broad-based rate increases should be counted against the damages owed to the insurers. (However, the court expressly declined to rule on whether any extra premium tax credits received from Bronze or Gold plans due to silver loading should be included in the calculation; this will be up to the Claims Court to decide).
  • Each insurer will bear the “burden of proof” to demonstrate what its damages are, on net. The court notes that the state-level rate review process

For a more detailed summary of the litigation and its policy context, see Katie Keith’s Health Affairs blog.

Looking Forward

Assuming neither party appeals the court’s decision or seeks an en banc review, the process in the Claims Court to determine the amount of damages owed to each insurer will be a long one and should have no impact on 2021 premium rates. As of 2019, an analysis found that insurers in all states except for the District of Columbia* have increased premiums to reflect their CSR losses, primarily through silver loading. This means the government is unlikely to owe most insurers for any CSR losses after 2017.

Silver loading is likely to continue. The federal government has considered a ban on silver loading, but Congress prohibited them from doing so for 2021, at least. It is also unlikely in the short-term that Congress will appropriate the funds for cost-sharing reduction reimbursements. Going forward, it will be incumbent on state insurance regulators to continue to advise insurers about appropriate mechanisms to mitigate their CSR losses and maintain a level playing field, while protecting consumers from unnecessary rate increases.

*Because D.C. has a state-funded coverage program (D.C. Healthcare Alliance) for low-income individuals, the impact of the loss of CSR reimbursements has been nominal for insurers.