Article written by Grace-Marie Turner and Doug Badger, as seen in Hartfor on May 23, 2016

The Obama Administration is unlawfully diverting billions of dollars from taxpayers to insurance companies that sell Obamacare policies.

That is the conclusion reached in a legal opinion letter released today by former Ambassador and White House Counsel Boyden Gray.

Mr. Gray’s letter reinforces the conclusion of legal experts at the nonpartisan Congressional Research Service who found that the administration’s actions “would appear to be in conflict with the plain text” of the Obamacare statute.

Mr. Gray’s letter documents how the Centers for Medicare and Medicaid Services is diverting $3.5 billion that it was legally obliged to remit to the Treasury and instead providing it to sponsors of Obamacare policies to compensate them for medical expenses of high-cost policyholders.

This unlawful diversion is occurring through the Transitional Reinsurance Program (TRP), established to smooth out losses for insurance companies selling Obamacare policies in the individual market. The TRP compensates these insurers for the costs of large medical claims incurred by their customers. CMS picked up the entire cost of medical claims between $45,000 and $250,000 for individuals enrolled in Obamacare individual policies in 2014, relieving insurers of the burden of paying these high medical bills.

The money for the TRP comes from an annual assessment on all individual and group insurance policy holders—primarily people with employer-based coverage—of $63 in 2014, $44 in 2015 and $27 in 2016.  In addition to financing the TRP program, the Affordable Care Act (ACA) requires CMS to remit $5 billion of these collections to Treasury.

When these collections came up $3.5 billion short over the first two years, CMS made a fateful and unlawful decision: the agency decided to fleece taxpayers in order to pay insurers.

According to the Gray legal opinion letter, “by the time the books close on TRP for the 2014 and 2015 benefit years at the end of 2016, reinsurance-eligible issuers will likely have received 98% of expected payments ($15.6 billion out of an expected $16 billion), whereas Treasury will likely have received only 12% of expected payments ($495 million out of an expected $4 billion).”

“The HHS allocation scheme prioritizing payments to reinsurance-eligible issuers over payments to Treasury violates the ACA,” Gray concludes.

HHS initially issued regulations that would provide taxpayers with their legal share of the reinsurance taxes, but it quickly changed course to put taxpayers last in line for funding. In a March 2014 rulemaking, CMS said Treasury would get its share of the funds even if collections fell short. But 10 days later, the agency reversed its position and said, essentially, it would stiff the taxpayer if there was a shortfall.

Which is just what it is doing. Unlawfully, as Gray’s legal opinion demonstrates.

The administration is flatfooted in its defense. Acting CMS Administrator Andy Slavitt testified before the House Energy and Commerce Subcommittee on Oversight on April 15 but was at a loss to explain why the agency changed its rules so swiftly and dramatically.

Gray explains that HHS failed to set the tax rate at a level that would produce the required revenue, saying “the ACA requires the implementation of a collection methodology” to produce the $5 billion owed to Treasury. “Congress,” he emphasizes, “did not make contributions for payments to Treasury ‘secondary’ to contributions for payments to reinsurance-eligible insurers.”

Gray’s letter references multiple legal precedents to demonstrate that CMS does not have any leeway to ignore this statutory language, as it has done. “[T]he statute does not use ‘permissive language’ with respect to collections for payments to Treasury,” his letter says. In addition, “HHS’s prioritization scheme is not a permissible interpretation of the law. None of the rationales HHS has offered in support of its prioritization scheme withstand textual scrutiny.”

“Congress specifically protected Treasury’s share of each contribution, declaring that it ‘may not be used’ for payments to reinsurance-eligible issuers,” the letter declares.

The ACA requires the administration to remit a total of $5 billion of its reinsurance tax collections to the Treasury, reserving the rest for reinsurance subsidies. The administration chose to bilk the taxpayers to keep health insurers in the game, even as the billions of dollars they are receiving through the TRP and other subsidies subsidies are inadequate to stem their losses for coverage they are offering in the Obamacare exchanges.

University of Houston Prof. Seth Chandler sums it in Forbes: “It’s a scheme in which the Obama administration collected less in taxes from health insurers (mostly off the Exchanges) than they were required to do under the Affordable Care Act, created a plan to pay insurers selling policies on the Exchange considerably more than originally projected, and stiffed the United States Treasury on the money it was supposed to receive from the taxes.”

Congress and the courts are rapidly losing patience with the agency’s pattern of malfeasance.  In a separate but related case, a federal judge earlier this month ruled that CMS was unlawfully providing billions of dollars in cost-sharing subsidies to insurers, spending money that Congress did not appropriate.

Last week, the House Energy and Commerce Committee moved one step closer to issuing a subpoena to CMS to obtain documents explaining how the agency came to adopt its unlawful approach to the TRP program. Senator Ben Sasse (R-NE) has introduced a bill to address the agency’s actions.

The walls are closing in on CMS’s lawlessness.

Key arguments in the legal opinion letter from Boyden Gray & Associates

Boyden Gray’s letter analyzes five key areas in which the administration’s justification for its actions involving reinsurance fails legal tests:

  1. The ACA requires HHS to implement a collection methodology that fully finances the transitional reinsurance program, rendering irrelevant its silence with regard to allocation of insufficient collections.
  2. None of HHS’s rationales for prioritizing payments to reinsurance-eligible issuers over payments to Treasury withstand scrutiny. A) the statute does not use “permissive language” for payments to Treasury; and B) HHS distorts the ACA’s text by asserting that collections for payments to Treasury are secondary because they are to “be collected ‘in addition to’” contributions for payments to reinsurance-eligible issuers.
  3. The Secretary does not have “general authority” to “design the method for determining the contribution amounts” that go “toward reinsurance payments.”
  4. HHS’s reliance on the ACA’s policy goals of market certainty and premium stabilization to justify its prioritization scheme impermissibly ignores the act’s competing policy goal of protecting the federal fisc.
  5. HHS’s use of notice-and-comment to adopt its regulations prioritizing payments to reinsurance-eligible issuers does not render them lawful.