Does the risk corridor program have a fatal technical flaw?

For now, the fight over whether the ACA’s risk corridor program is a “bailout” has subsided. The threat to repeal the program was never very credible, especially after CBO estimated in February that it would net the federal government $8 billion. But a little-noticed memo from the Congressional Research Service (CRS) has flagged a different threat to the program—one with real potential to destabilize the exchanges.

It has to do with appropriations. The Constitution states that “[n]o Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” That constitutional exhortation is backed up by a statute, known as the Antideficiency Act, that prohibits federal officers from spending any money “exceeding an amount available in an appropriation or fund.” All of which is to say that Congress must pass a law appropriating funds before the executive branch can dip into the federal Treasury.

The trouble is that the risk corridor program lacks any appropriations language. That won’t matter for exchange insurers that have lower medical costs than they anticipated . They’ll still be on the hook for making risk corridor payments—payments that, according to CBO, will amount to about $16 billion over the three-year life of the program. But the lack of an appropriation could matter a lot for insurers with heftier-than-expected costs. In CRS’s view, HHS cannot pay them the $8 billion they’re set to receive through the program.*

In a normal political environment, this wouldn’t be a big deal. Because no payments are due until 2015, Congress still has plenty of time to appropriate the funds. But this isn’t a normal political environment, and the next Congress may resist spending money on a program that Republicans—who will almost certainly retain control of the House—have decried as a bailout. Should Congress fail to appropriate the needed funds, the administration will come under intense pressure to find a workaround. (Sound familiar?)

If it comes to that, my hunch is that the administration will read the ACA to establish a “revolving fund” for the risk corridor program. As explained in the “Red Book”— GAO’s bible of appropriations law—an agency that gets money from an outside source normally has to deposit that money in the federal treasury. Nothing comes out of the treasury without an appropriations statute. An agency with a revolving fund, however, can deposit receipts into the fund and then draw on those receipts as necessary to carry out the fund’s purposes. The risk corridor program, for example, could use the $16 billion that it receives from insurers to cover the $8 billion that it owes.

The challenge for the administration is the principle, spelled out in the Red Book, that “agencies have no authority to administratively establish revolving funds.” Congress must establish them by statute, and must do so pretty explicitly. As CRS sees it, §1342 of the ACA, which establishes the risk corridor program, doesn’t live up to the Red Book’s demanding standards.

The executive branch isn’t bound by that conclusion, however, and I think CRS is too dismissive of the possibility of reading §1342 to establish a revolving fund. The reason, oddly enough, involves Medicare Part D. In the ACA, Congress didn’t specify how the risk corridor program should be administered. It did say, however, that the program “shall be based on” the risk corridor program established under Part D. And guess what? Part D’s risk corridor program operates through a revolving fund called the “Medicare Prescription Drug Account.”

If the Part D program works through a revolving fund, a risk corridor program “based on” the Part D program should arguably work through the same kind of fund. That’s especially so given §1342’s subsequent references to “payments in” and “payments out.” In and out of … what? It’s possible that Congress meant payments in and out of the treasury, but the more natural inference, given the cross-reference to Part D, is that payments go “in” and come “out” of a revolving fund. After all, a revolving fund allows an agency “to finance a cycle of businesslike operations through amounts received by the fund.” The risk corridor program is designed to operate on just those “businesslike” lines.

To be clear, I doubt this interpretation would satisfy GAO, much less the House Appropriations Committee. You have to squint pretty hard to find an appropriation in §1342. But if push comes to shove, could the administration “get to yes” on whether it has the legal authority to make risk corridor payments? I think it probably could.

* UPDATE: In response to an HHS rule changing the risk corridor methodology to make the payments budget-neutral, CBO revised its estimates in mid-April. The risk corridor program is now expected to pay out $9 billion to insurers and get $9 billion in return (h/t Yevgeniy Feyman and Loren Adler).


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