The Protracted Battle over Obamacare: Supreme Court Rules in Favor of Healthcare Insurers under the Affordable Care Act

By Alexander Masotto, J.D. and M.B.A. expected in May 2021, Southern Methodist University

On April 27, 2020, the United States Supreme Court ruled in an 8-1 decision in favor of four health insurance companies, recognizing their right to sue the federal government for hundreds of millions of dollars in unpaid subsidies under the Patient Protection and Affordable Care Act (ACA).[i] The majority opinion, authored by Justice Sonia Sotomayor, reversed the judgments of the United States Court of Appeals for the Federal Circuit and held the insurers could sue the government to recover on its obligation to pay under the ACA.[ii] The majority noted, “These holdings reflect a principle as old as the Nation itself: The Government should honor its obligations.”[iii] This article briefly explains the background of the case, its impact on health insurance companies and American society, and the ongoing political turmoil in relation to the ACA or “Obamacare.”

In 2010, Congress enacted the ACA to help provide health insurance to struggling American populations by “providing tax credits to help people buy insurance and establishing online marketplaces where insurers could sell plans.”[iv] However, this insurance marketplace was “mired in controversy and partisan debate in 2014.”[v] To persuade health insurers to enter the marketplace, Congress created several programs to offset risk including a “risk corridor” program.[vi] The risk corridor program was a “temporary framework meant to compensate insurers for unexpectedly unprofitable plans during the marketplaces’ first three years.”[vii] Insurers are particularly hesitant to enter new markets, because they most likely do not have enough information to set an appropriate premium.[viii] Thus, “[t]he goal of risk corridors was to persuade risk-averse insurers to participate in the new health insurance marketplaces to offer a new product to a new population with uncertain prospects.”[ix]

Under the temporary risk corridor program, insurers were meant to share both profits and losses for three years (2014–2016). “Plans with profits above a certain threshold would pay the Government, while plans with losses below that threshold would receive payments from the Government.”[x] In the opinion, the most important issue dealt with language in Section 1342 of the ACA, providing that the “eligible profit plans ‘shall pay’ the Secretary of the Department of Health and Human Services (HHS), while the Secretary ‘shall pay’ the eligible unprofitable plans.”[xi] Interestingly enough, “both the Obama and Trump administrations had argued that the provision at issue means the government has no obligation to pay.”[xii]

Nevertheless, the program’s first year in 2014 suffered a deficit of about $2.5 billion.[xiii] “Profitable plans owed the Government $362 million, while the Government owed unprofitable plans $2.87 billion.”[xiv] Further, the next two years also resulted in a deficit, tallying the financial carnage to over $12 billion.[xv] Essentially, insurers missed the mark at setting appropriate premiums by strongly underestimating the health of their new customers.[xvi] While the insurers continued to lose money, the Government refused to reimburse the insurers that suffered extreme losses. This was due to a Republican-majority Congress that attached appropriation bills each year (2014–16) for the Centers for Medicare and Medicaid services (CMS), that included riders that “prohibited the use of funds for risk-corridor payments.”[xvii] Although the risk corridors statute did not require the program to be budget neutral, the riders suspended “the Government payments to unprofitable plans ‘beyond the sum of payments’ it collected from profitable plans.”[xviii] In effect, insurers received only a limited portion of reimbursements, because the costs racked up by insurance companies vastly exceeded the contributions made.[xix] For example, “[t]he new co-op serving 80,000 customers in Iowa and Nebraska—nearly eight times the enrollment it had expected, got $16 million to cover $140 million in claims.”[xx] In turn, many smaller insurers and nonprofit insurance cooperatives experienced an unsustainable loss that forced them to shut their doors, while other insurers ultimately decided to stop offering coverage on the exchanges.[xxi]

Additionally, the ACA mandated insurance companies to set their premiums based on a “community rating.”[xxii] This may have played a key role in the deficit dilemma. The “community rating” allows health insurers to consider only a person’s age, family size, tobacco use, and location of residence when determining premium rates, leaving out arguably the most important factor, a person’s medical history. [xxiii] The late Uwe Reinhardt, a prominent scholar in healthcare economics and former codirector of the Griswold Center for Economic Policy Studies at Princeton University, stated “issuing community-rated premiums is ‘unnatural’ for big insurance companies because it forces insurers to issue policies to very ill people at premiums far below the expected costs of providing care for the insured.”[xxiv] On top of this, a considerable amount of young, healthy Americans chose to forgo health insurance, leaving a massive divide along the health spectrum between those who chose to opt in or out of coverage.[xxv] In due time, as the number of individuals forgoing health insurance increased, community-rated premiums systematically rose, generating more expensive risk pools.[xxvi] “Fewer healthy people participated in the exchanges than anticipated, leading to larger financial losses than many insurers expected.”[xxvii] However, these insurers assumed that the government would bear the risk through the risk corridor program and pay back their respective losses.[xxviii] Hence, health insurers were caught between a rock and a hard place when the government refused to pay.[xxix]

Sitting empty-handed, a group of insurers (including Moda Health Plan Inc, Blue Cross and Blue Shield of North Carolina, Maine Community Health Options, and Land of Lincoln Mutual Health Insurance Company) brought suit against the United States Government under the Tucker Act in response to Congress refusing to appropriate the money owed from 2014 to 2016.[xxx] In its holding, the Supreme Court handed a significant loss to the government, concluding that: (1) the Government was required to reimburse insurers for their losses under Section 1342 of the ACA; (2) Congress did not impliedly repeal or suspend the Government obligation to reimburse the insurers when it passed the appropriation riders prohibiting the use of funds for risk-corridor payments; and (3) the insurers properly relied on the Tucker Act when they brought suit in the Court of Federal Claims.[xxxi] The lone dissenter, Justice Samuel Alito, did not believe that Congress gave insurance companies the right to sue.[xxxii] Notably, Justice Alito believes that this decision “has the effect of providing a massive bailout for insurance companies that took a calculated risk and lost.”[xxxiii] With an especially in-depth analysis including “statutory construction, past precedent and the relative rarity of the use ‘shall pay’ language in a statute,”[xxxiv] the majority reasoned that public businesses would essentially never wish to engage in business with the federal government if the United States failed to live up to its promises.[xxxv] For support, Justice Sotomayor utilized a historical approach at the end of her opinion by quoting fiscal-minded Alexander Hamilton, who stated “States who observe their engagements … are respected and trusted: while the reverse is the fate of those … who pursue an opposite conduct.”[xxxvi]

Maine Community signals the end to another battle in the ongoing Obamacare war. Republicans have opposed Obamacare since its enaction in 2010.[xxxvii] Marco Rubio, leading the attempt to either undermine or repeal Obamacare in its entirety, stated in 2015 to his Republican leadership, “So far, we’ve succeeded in stopping the Obama administration from bailing out healthcare companies under Obamacare, and it’s critical that Congress once again stand with taxpayers to stop any taxpayer bailout of health insurers from happening.”[xxxviii] However, the Supreme Court found for the health insurers, crushing the GOP’s hopes of sabotaging Obamacare, and essentially eradicating the appropriation riders. While this “ruling doesn’t affect the ongoing operations of Obamacare,”[xxxix] the Supreme Court has yet to decide another GOP charge against the ACA later this year.[xl]

Yet Obamacare remains popular. Obamacare “has enabled millions of Americans, including those with pre-existing conditions, to obtain medical insurance and medical coverage for the first time.”[xli] Obamacare may have its flaws, but it has provided health care to Americans who need it the most.[xlii] Matt Eyles, president of America’s Health Insurance Plans, stated, “We appreciate that today’s Supreme Court 8-1 decision ensures that the federal government honors the obligations it made for services the private sector already delivered.”[xliii] Professor Thomas W. Mayo at the SMU Dedman School of Law was more blunt: “The GOP’s on-going assault on the ACA ever since 2010 is shameless and beneath contempt. If the Court had allowed the government to renege on its deal with the insurance companies, it could have set healthcare reform back by a generation.”[xliv] In turn, if the Government left insurers to bleed out, the average American seeking coverage would be affected. In the United States, the median disposable family income is only roughly $54,000.[xlv] The late Dr. Reinhardt noted that the median disposable income is simply insufficient to cover the costs of complex medicine.[xlvi] The average hard-working American undoubtedly benefits from healthcare coverage, and the ACA could use further revision to find an appropriate balance among the those seeking healthcare coverage, the federal government, and health insurers. In the meantime, the Supreme Court’s sound and almost unanimous conclusion the federal government “shall pay” is a step in the right direction.[xlvii]

In conclusion, the significance of Maine Community marks a notable win for four health insurance companies under arguably one of the most controversial laws passed by Congress. Because Congress committed itself to pay by statute, the federal government is obligated to make good on that commitment and will be held to such a standard in the future. U.S. health policy will continue to be debated in the midst of the Republicans’ continued attempt to repeal the ACA on one side and the Democrats’ dedicated defense of the Act on the other. Hopefully, both sides of the aisle can reach some middle ground in the near future to revise the ACA so that it works better for Americans as a whole. It remains to be seen how the health insurers will allocate their $12 billion recovery. In particular, Maine Health insurer will receive a healthy sum of about $59 million from the federal government.[xlviii] Larry Levitt, an executive vice president for the Kaiser Family Foundation believes that the compensation is merely “an infusion of cash for insurers.”[xlix] While the infusion may make it possible for health insurers to lower their premiums for 2021, Mr. Levitt thought it unlikely.[l]

[i] Maine Community Health Options v. United States, 140 S. Ct. 1308, 1318–19 (2020).

[ii] Id. at 1319.

[iii] Id. at 1331.

[iv] Id. at 1315.

[v] Mark E. Rust & Daniel P. Albers, U.S. Supreme Court Holds Federal Government Accountable for ACA Promises, National Law Review, Apr. 29, 2020, https://www.natlawreview.com/article/us-supreme-court-holds-federal-government-accountable-aca-promises.

[vi] Maine Community, 140 S. Ct. at 1315.

[vii] Id.

[viii] Cynthia Cox, Ashley Semanskee, Gary Claxton, & Larry Levitt, Explaining Health Care Reform: Risk Adjustment, Reinsurance, and Risk Corridors, KKF, https://www.kff.org/health-reform/issue-brief/explaining-health-care-reform-risk-adjustment-reinsurance-and-risk-corridors/.

[ix] Katie Keith, Supreme Court Rules that Insurers are Entitled to Risk Corridor Payments: What the Court Said and What Happens Next, Health Affairs, https://www.healthaffairs.org/do/10.1377/hblog20200427.34146/full/.

[x] Maine Community, 140 S. Ct. at 1316 (citing The Patient Protection and Affordable Care Act, § 1342(b), 124 Stat. 211).

[xi] Id. at 1315.

[xii] Mark Sherman, Court Rules Insurers can Collect $12B under Health Care Law, AP News, https://apnews.com/cbfbac80822093470ff8fa3738ceb731.

[xiii] Maine Community, 140 S. Ct. at 1315.

[xiv] Id.

[xv] See id.

[xvi] See Ariane de Vogue, Insurers can Sue to Collect Billions in Obamacare dispute, Supreme Court Rules, CNN Politics, https://www.cnn.com/2020/04/27/politics/supreme-court-affordable-care-act-insurance-payments/index.html.

[xvii] See Amy Howe, Opinion Analysis: Decisive Win for Health Insurers Seeking Compensation for ACA Losses, Scotus Blog, https://www.scotusblog.com/case-files/cases/maine-community-health-options-v-united-states/.

[xviii] Maine Community, 140 S. Ct. at 1318.

[xix] See Ariane de Vogue, Insurers can Sue to Collect Billions in Obamacare dispute, Supreme Court Rules, CNN Politics, https://www.cnn.com/2020/04/27/politics/supreme-court-affordable-care-act-insurance-payments/index.html.

[xx] Michael Hiltzik, Column: Supreme Court overturns key GOP Sabotage of Obamacare, Granting Insurers $12 Billion, Yahoo Finance, https://finance.yahoo.com/news/column-supreme-court-just-overturned-171631208.html.

[xxi] See id.; See e.g., Melissa Quinn, After Expanding Under Obamacare, This 123-Year Old Insurance Company Is Closing Its Doors, The Daily Signal, https://www.dailysignal.com/2015/05/04/after-expanding-under-obamacare-this-123-year-old-insurance-company-is-closing-its-doors/ (Wisconsin-based insurer closes down in response to losing millions of dollars under the ACA); See also, Brent Kendall, Supreme Court Rules Government Must Pay Under Affordable Care Act Program, Wall Street Journal, https://www.wsj.com/articles/supreme-court-rules-government-must-pay-insurers-under-affordable-care-act-program-11587997064 (“Some nonprofit insurance cooperatives folded when they didn’t receive risk-corridor payments they were expecting, including Land of Lincoln.”).

[xxii] See Justin Giovannelli, Q&A: Community Rating & Adjusted Community Rating Under the ACA, American Health Line, https://www.americanhealthline.com/analysis-and-insight/question-and-answer/q-and-a-community-rating.

[xxiii] Id.

[xxiv] See Uwe Reinhardt, Why Are Private Health Insurers Losing Money on Obamacare?, Jama Network, https://jamanetwork.com/journals/jama/fullarticle/2565273?resultClick=1.

[xxv] See id.

[xxvi] See id.

[xxvii] Brent Kendall, Supreme Court Rules Government Must Pay Under Affordable Care Act Program, Wall Street Journal, https://www.wsj.com/articles/supreme-court-rules-government-must-pay-insurers-under-affordable-care-act-program-11587997064.

[xxviii] See Cynthia Cox, Ashley Semanskee, Gary Claxton, & Larry Levitt, Explaining Health Care Reform: Risk Adjustment, Reinsurance, and Risk Corridors, KKF, https://www.kff.org/health-reform/issue-brief/explaining-health-care-reform-risk-adjustment-reinsurance-and-risk-corridors/.

[xxix] Maine Community, 140 S. Ct. at 1315.

[xxx] See id. at 1318; see also, Lawrence Hurley, Supreme Court Tells U.S. Government to Pay Insurers $12 Billion under Obamacare, Reuters, https://www.reuters.com/article/us-usa-court-obamacare/u-s-supreme-court-rules-for-insurers-over-12-billion-obamacare-claims-idUSKCN2291Y3.

[xxxi] Maine Community, 140 S. Ct. at 1319–31.

[xxxii] See id. at 1333 (Alito J., Dissenting.).

[xxxiii] Id. at 1332 (Alito J., Dissenting.).

[xxxiv] Mark E. Rust & Daniel P. Albers, U.S. Supreme Court Holds Federal Government Accountable for ACA Promises, National Law Review, https://www.natlawreview.com/article/us-supreme-court-holds-federal-government-accountable-aca-promises.

[xxxv] See Maine Community, 140 S. Ct. at 1331.

[xxxvi] Id.

[xxxvii] See Michael Hiltzik, Column: Supreme Court overturns key GOP Sabotage of Obamacare, Granting Insurers $12 Billion, Yahoo Finance, https://finance.yahoo.com/news/column-supreme-court-just-overturned-171631208.html.

[xxxviii] Marco Rubio, Letter to Senate Majority, November 24, 2015, https://www.rubio.senate.gov/public/_cache/files/34875e7c-25c1-4055-8a1d-82f973c8e93a/395AF80FA38F770DDFB148C266F89B3B.bailouts-letter-to-gop-leadership-11-24-15.pdf.

[xxxix] See Greg Stohr, Supreme Court Backs Insurers on $12 Billion in Obamacare Payments, Bloomberg, https://www.bloomberg.com/news/articles/2020-04-27/top-court-backs-insurers-on-12-billion-in-obamacare-payments.

[xl] See Michael Hiltzik, Column: Supreme Court overturns key GOP Sabotage of Obamacare, Granting Insurers $12 Billion, Yahoo Finance, https://finance.yahoo.com/news/column-supreme-court-just-overturned-171631208.html.

[xli] Nina Totenberg, Supreme Court to Government: Pay Obamacare Insurers, NPR, https://www.npr.org/2020/04/27/846750295/supreme-court-to-government-pay-obamacare-insurers.

[xlii] See Uwe Reinhardt, Why Are Private Health Insurers Losing Money on Obamacare?, Jama Network, https://jamanetwork.com/journals/jama/fullarticle/2565273?resultClick=1.

[xliii] Greg Stohr, Supreme Court Backs Insurers on $12 Billion in Obamacare Payments, Bloomberg, https://www.bloomberg.com/news/articles/2020-04-27/top-court-backs-insurers-on-12-billion-in-obamacare-payments.

[xliv] E-mail from Thomas W. Mayo, Professor & Altshuler University Teaching Professor, SMU Dedman School of Law, Adjunct Professor, Internal Medicine, UT-Southwestern Medical School, Of Counsel, Haynes and Boone, LLP. (April 29, 2020, 21:50 CST) (on file with author).

[xlv] See Uwe Reinhardt, Why Are Private Health Insurers Losing Money on Obamacare?, Jama Network, https://jamanetwork.com/journals/jama/fullarticle/2565273?resultClick=1.

[xlvi] See id.

[xlvii] Maine Community, 140 S. Ct. at 1321.

[xlviii] Mary Anne Pazanowski, Maine Insurer Gets $59 Million to End Obamacare Case (Corrected), Bloomberg Law, https://www.bloomberglaw.com/document/X20H6S7S000000?bna_news_filter=health-law-and-business&jcsearch=BNA%252000000172e243d2b4a173ffe73a900001#jcite.

[xlix] Adam Liptak, Supreme Court Rules for Insurers in $12 Billion Obamacare Case, NY Times, https://www.nytimes.com/2020/04/27/us/supreme-court-obamacare-insurance.html.

[l] See id.