In yesterday’s post, I canvassed the latest decisions from the Court of Federal Claims in the fight over whether insurers can recover cost-sharing payments. Three different judges have now concluded—rightly, in my view—that the United States has breached its payment obligation and must pay damages.
The harder question is how to calculate those damages. Should insurers gets every penny of the cost-sharing payments? Or have they mitigated their damages by silver-loading? On that question, Judge Sweeney sided with the insurers: mitigation will play no role in the damages calculation. Judges Wheeler and Kaplan echoed her analysis, though they’ve left room to reconsider.
Judge Sweeney’s decision is especially noteworthy because, in April of last year, she certified a class comprising every single insurer in the country that sold an exchange plan in 2017 and 2018. The judge has asked for the parties to get back to her by February 28 with a joint report on what class members are owed. She’ll then enter a final judgment—likely totaling in the billions. The United States is almost certain to appeal.
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All three judges center their mitigation analysis on congressional intent. Here’s Judge Sweeney: “That insurers and states discovered a way to mitigate the insurers’ losses from the government’s failure to make cost-sharing reduction payments does not mean that Congress intended this result.”
I think that’s a mistake. Congressional intent matters in deciding whether an obligation exists in the first place. But mitigation is about the proper measure of damages for breach of that obligation. That’s a question of contract law, not congressional intent.
Judge Sweeney also argues that insurers could have engaged in silver-loading even if the cost-sharing payments hadn’t been stopped. In that counterfactual world, insurers would have received both enhanced premium tax credits and cost-sharing payments, but no one would say they received a “double recovery.” For Judge Sweeney, that means there’s nothing wrong with double-dipping, and thus no role for mitigation.
This is clever, but it’s also mistaken. Contract damages are meant to restore a plaintiff to the position that she would have been in had a breach never occurred. Before the cost-sharing payments were stopped, insurers weren’t silver-loading, and there’s no reason to think they would have adopted the practice. (If they had tried, HHS would probably have said it was unlawful.) Damages should be measured with reference to what insurers would have done if cost-sharing payments had never been cut off—not some hypothetical world in which insurers silver-loaded and still received cost-sharing payments.
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Maybe I’m wrong about this; I’m open to persuasion. But if the judges’ legal arguments are as fragile as I think they are, what explains their reluctance to take mitigation into account?
Consider the practical challenges. It’s hard to know what the world would have looked like if the cost-sharing payments had been made, so it’s hard to know whether any given insurer is better off or worse off now that they’ve been terminated. Many insurers will doubtless claim that they lost market share because they couldn’t cope as effectively with silver-loading as their competitors. Others will say that ending the cost-sharing payments drove some of their customers away, silver-loading notwithstanding. Insurers in states that silver-loaded may claim they’ve been harmed more than insurers in states that went for the full silver-switcheroo. Some of those claims will be true; others, not so much. And the right measure of damages will vary from state to state and insurer to insurer.
It’ll be a huge mess. And it’s not like the court can decide the mitigation question once and move on. The Court of Federal Claims would have to undertake a demanding inquiry for every single insurer on the exchanges—not once, but for each and every year until Congress fixes this mess. Can you really blame the judges if they’re reluctant to take on that Sisyphean task?
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On appeal, the Federal Circuit will be sensitive to those practical concerns. But it will also worry about insurers getting a windfall if they recover the full amount of cost-sharing subsidies. I’d bet the appeals court will hold that the United States breached its payment obligation, but that it should still have a chance to demonstrate that insurers have mitigated their damages.
How the Court of Federal Claims will cope with that instruction is another question. In a healthier political climate, Congress might relieve the court of its burden by entering into a global settlement with insurers to resolve these claims. But we don’t have a healthy political climate, and in any event cutting billion-dollar checks to insurers isn’t a political winner. Which means the lower court may have its work cut out for it. Expect delays.
It’s also possible, though I don’t know how likely it is, that the Federal Circuit will just declare that insurers have fully mitigated their damages, at least in the 43 states that adopted silver loading in 2018. As a matter of raw economics, that’s almost certainly too simplistic a picture: ending the cost-sharing subsidies, and switching to silver-loading, surely harmed some insurers relative to the baseline. But maybe the problems of proof are so daunting that a rough-and-ready solution like that makes sense.
We’ll see. I haven’t even touched on other complications associated with the latest rulings: Is the Trump administration willing to tap the Judgment Fund for tens of billions of dollars to pay insurers? Would Congress intervene to foreclose the Judgment Fund from paying? If payment is made, would the rules governing medical loss ratios require insurers to pay damages back to their enrollees?
Maybe most importantly, does Congress appreciate the risks here? Every year that the cost-sharing obligation stays on the books, the United States is accruing roughly $12 billion in potential liability. Congress could and should stop the bleeding: there’s no reason at all to funnel money to insurers that have adjusted to a world without cost-sharing payments. But there’s a big gap between what Congress should do—and what it will do.
