Can insurers sue to recover cost-sharing money?

Murray-Alexander is going nowhere. Senator Collins insists that passing the bipartisan legislation, which would restore cost-sharing payments for two years, is a condition of her vote on the pending tax bill. But she appears willing to accept airy promises that Senate leadership will make the bill a priority.

Never mind that House Republicans have no intention of passing the bill and that Democrats have ruled out cooperating if the individual mandate is repealed. Never mind, too, that the Democrats’ threat is credible: they don’t stand to gain much if the bill is passed. By and large, insurers have already adjusted to the loss of the cost-sharing subsidies.

How exactly have they adjusted? Most states instructed insurers to anticipate the withdrawal of the cost-sharing payments and to concentrate the resulting premium hikes on silver plans. Because the ACA caps the premiums that people receiving subsidies have to pay for insurance, those price spikes won’t harm most exchange customers. To the contrary, most are better off. Premium subsidies increase as the price of silver plans go up, so gold and bronze plans—whose premiums won’t increase on account of the funding cut-off—are more affordable than they otherwise would be.

In other words, “silver loading” has mitigated much of the fallout from the loss of the cost-sharing subsidies. If Congress appropriated the cost-sharing money now, it’d be a windfall for insurers. Why should Democrats throw their support behind a bill that won’t stabilize the markets and would give the Republicans cover for repealing the mandate?

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If I’m right that Murray-Alexander is a dead man walking, the cost-sharing money won’t be appropriated for 2018. That, in turn, gives rise to an interesting legal question.

As I first pointed out back in 2015, insurers can sue in the Court of Federal Claims to recover their cost-sharing payments. It’s a simple lawsuit: insurers were promised some money; the federal government reneged; and the insurers want damages on account of the breach. The payment of court-ordered damages can come out of the Judgment Fund, even without an appropriation to make the payments in the normal course.

The law is clear; the lawsuit practically writes itself. Insurers should have no trouble recovering the money owed for the last months of 2017—about $1 billion. But what about the money owed for 2018 and beyond?

As a first cut, it seems that insurers should still be able to recover. In a typical breach of contract claim, the courts aim to put a non-breaching party in the same position it would have been in if the breaching party had kept its promise. Here, Congress promised to reimburse insurers for giving their low-income customers a discount on out-of-pocket payments. Insurers are still giving those customers a discount, but the government has refused to pay.

The proper measure of expectation damages, then, is the full amount of promised reimbursement. That amount will continue to accrue for every month that Congress refuses to appropriate the money. If that’s right, the question isn’t whether Congress will pay the cost-sharing payments. It’s when.

But matters may not be so simple. In measuring damages, the Court of Federal Claims will also inquire into mitigation—a principle that might be familiar to you if you’ve ever thought about breaking a lease on an apartment. Although your landlord can sue you for any rent owed for the months remaining on the lease, he also has a duty to find a new tenant. If he does, you only have to compensate your landlord for the time that the apartment was empty. The landlord has mitigated his losses.

The same principle should kick in here. Silver loading has allowed insurers to sidestep most of the harm associated with the loss of the cost-sharing subsidies. Insurers haven’t hemorrhaged customers; instead, they’ve adapted. Indeed, some insurers are better off now than they were before: as premium subsidies increase, they’ll get more customers signing up for their gold and bronze plans.

In short, insurers have mitigated a large part of their losses. Giving them the full amount of the cost-sharing money wouldn’t put them in the same position they would have been in if the federal government adhered to its promise. It would give them a windfall. Contract law doesn’t require the courts to make contracting parties even better off than they would have been in the absence of a breach.

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That doesn’t mean that insurers will lose. The default rule is still that insurers should be paid what they were promised, and the onus is on the government to prove that they’ve mitigated their losses. That’s not an easy burden to discharge: 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. The factual inquiries will be demanding.

My tentative sense, however, is that insurers shouldn’t be too bullish about recovery. One reason can be found in Murray-Alexander itself. As currently written, the bill would require state insurance commissioners to develop plans to provide rebates to customers and the federal government. Why? Because funding the cost-sharing payments for 2018 would otherwise give insurers a huge windfall.

Allowing insurers to recover their money in court would give them an identical windfall. The courts aren’t likely to stand for that.