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Ruling on cost-sharing subsidies could rattle insurers in midst of rate-setting

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Another bombshell could soon drop on the Affordable Care Act insurance exchange market, and it might come at a highly vulnerable moment for the health care reform law.

Rosemary Collyer, U.S. District Judge for the District of Columbia, is expected to soon issue her ruling in U.S. House of Representatives v. Burwell, a case in which House Republicans claim the Obama administration is illegally funding the ACA's cost-sharing subsidies without a congressional appropriation.

If, as some legal observers believe is possible or even likely, the George W. Bush-nominated Judge Collyer decides against the administration, it would further rattle insurers who are facing multiple difficulties in the exchange business. UnitedHealth Group Inc. announced last week that it was pulling out of most exchanges because of its financial losses. Such a ruling would be a shock, even though it surely would be appealed, and the case could ultimately reach the U.S. Supreme Court.

Legal briefs in the case were filed in January, and observers say the ruling is already overdue.

“I suspect it would be a pretty big perceived risk, and (insurers') stocks would be negatively affected,” said Jeffrey Loo, a health care equity analyst at S&P Capital IQ.

If Judge Collyer — who previously startled experts by finding that the plaintiffs had standing to sue over a political dispute — rules that the funding of the subsidies is illegal, it would inject major uncertainty into the market just as insurers and their actuaries are calculating 2017 premiums for the individual and small-group markets. Insurers have to file their rates for plans sold on the federal insurance exchange by May 11. Most state rate-filing deadlines also are in May, including deadlines for big states such as California, Florida, New York and Texas, although some state deadlines fall in April or June.

“It would create more volatility, and it would thin out the chances of (the exchange business) being a profitable program for insurers,” said David Axene, president of Axene Health Partners, a consulting and actuary firm.

“I worry that (Collyer) will release her decision right as the plans are filing their 2017 rates and further upset an already worried market,” said Tim Jost, an emeritus law professor at Washington and Lee University who supports the ACA.

Judge Collyer increased speculation that she will find the subsidy funding illegal when she recently overruled the administration's assertion of federal oversight of MetLife Inc., blasting regulators for using a process she called “fatally flawed.”

The MetLife ruling “indicates a lack of deference to the administration,” Mr. Jost said.

Under the ACA, the federal government is projected to spend $175 billion over 10 years to reduce deductibles, co-pays and coinsurance costs for people with incomes under 250% of the poverty level who enroll in silver plans. The law states that health plans must reduce cost-sharing for those enrollees, and that HHS must pay plans for the value of the cost reductions.

Nearly 60% of exchange plan members receive cost-sharing reductions through silver plans. Without the subsidies, the exchange plans' high deductibles and cost sharing would make health care unaffordable for many low-income people, and some likely would drop coverage.

A January report by the Urban Institute projected that if the government is required to halt its payments to insurers for the cost-sharing reductions, insurers would boost their premiums for silver plans by an average of $1,040 and exchange enrollment would decrease by 1 million people. Depending on the timing, insurers “may leave the marketplaces in response to the continued litigation and associated policy changes, the lack of predictability such changes create, and the costs such changes impose on insurers,” the authors wrote.

Mr. Axene said if the House v. Burwell ruling causes premiums to go up, some healthier people would drop coverage, while sicker people would find ways to keep their coverage, creating a more expensive enrolled population.

A ruling that would block the federal subsidy payments would come on top of a number of other tough challenges insurers and the exchanges face in 2017, Mr. Axene said. Those include sicker-than-expected enrollees, rising prescription drug costs, the termination of the federal-reinsurance and risk-corridor programs that buffer plans against high-cost enrollees, and insurance industry concerns that the CMS' risk-adjustment program is hurting them more than it's helping. Mr. Axene predicted that combination of factors could cause insurers to seek premium increases of 15% or more.

“Everyone is frantically running around trying to produce rates,” Mr. Axene said. “I'm not sure (the House v. Burwell case) is what people are really worried about. But it's another thing eroding the effectiveness of the program.”

Harris Meyer writes for Modern Healthcare, a sister publication of Business Insurance.