Investors bet Obamacare insurers will win court battle for billions in payments

Health insurers are fielding offers from specialized investors who are betting big that the U.S. Supreme Court will force HHS to fork over billions in unpaid Obamacare funds.

Insurance companies and their attorneys say they've been approached with more and more frequency by litigation funding firms and other investors as the December oral arguments approach in the lawsuits over unpaid “risk-corridor” payments, and some investors are increasingly sweetening the deals.
 
Investors offer to pay cash upfront in exchange for a significant share of the legal awards should the court rule in the insurers' favor. Litigation funders are also interested in swapping cash for a stake in the potential proceeds from cost-sharing reduction lawsuits, which are at the center of challenges pending on appeal in federal court.

Several health insurers said they declined these offers, preferring instead to collect the entire amount they believe the federal government owes them. Confidentiality agreements make it difficult to know just how many deals have gone through but insurers view these offiers as an endorsement of their legal arguments.

“We feel that this level of interest validates the strength of our claim,” said David Holmberg, CEO of Pittsburgh-based Highmark Health, the parent of insurer Highmark, which has been approached by investors but determined the offers weren’t worth pursuing. Highmark says it is owed $608.4 million in risk-corridor payments but has received only $37.3 million from the CMS.

The now-expired program was meant to help keep premiums stable by protecting health insurers from significant financial losses in the early years of the ACA exchanges. The government collected payments from insurers that did well and distributed payments to those with high losses. It didn’t work as intended, because Congress altered the program to make it budget-neutral.

Consequently, insurers received just a fraction of payments they say they were promised. Many have sued to recover those payments, which total about $12 billion. Most of the health co-ops created by the ACA shuttered, in part because they didn’t receive risk-corridor funds.

Insurers also brought lawsuits challenging the government’s failure to pay cost-sharing reduction subsidies that were intended to lower costs for low-income people who buy plans on the exchanges. A federal judge in October ordered the HHS to pay about 100 insurance plans involved in a class action a total of $1.6 billion in unpaid subsidies. The government will likely appeal the decision.

Publicly operated insurer L.A. Care Health Plan said in an emailed statement that it has been approached by several financing companies about monetizing its risk-corridor and cost-sharing reduction lawsuits, but it rejected the offers, which L.A. Care said appeared to target insurers that couldn’t afford litigation or needed immediate funds.

Maine Community Health Options CEO Kevin Lewis said most insurers involved in the risk-corridor suits, including his own, have been contacted by investors: “I’d be surprised if anyone hasn’t.”

Wisconsin-based Common Ground Healthcare Cooperative, which is the lead plaintiff in the class action over the cost-sharing reduction payments, has received emails, phone calls and even a LinkedIn message from litigation finance firms hoping to discuss investment arrangements, said CEO Cathy Mahaffey adding that she could not comment on whether she has considered or entered any deals because of confidentiality constraints. 

Security Health Plan CEO Julie Brussow likewise said a nondisclosure agreement prevented her from commenting for the story. Several insurers told Modern Healthcare they have not been approached by investors.

The interest in the Obamacare lawsuits among litigation funding firms has ebbed and flowed over the past several years according to how the courts have ruled in the various lawsuits.

Speaking on background, one attorney representing health insurers that have been approached by litigation finance firms said the offers have gotten sweeter over the last couple of years. Investors initially offered to pay about 10 cents on the dollar to buy the right to damages, and then keep all of the legal proceeds if the claim were to prevail. Later, investors began offering 25 cents on the dollar up front with an agreement to split the future damages, should there be any.

“These are lawsuits that this market sees value in and to me that’s what I see as a promising thing,” the attorney said.

Offers dried up when the U.S. Court of Appeals for the Federal Circuit last year ruled the government isn’t obligated to pay up and resurfaced this year when the U.S. Supreme Court agreed to hear several consolidated risk-corridor cases, several sources said.

Court documents regarding the liquidation of now-shuttered Land of Lincoln Health illustrate the changing interest. The Illinois co-op sued the federal government in June 2016 to recover $76 million in risk-corridor payments and went insolvent shortly after.

Illinois Insurance Department officials entered multiple agreements with Chicago-based litigation funding firm Juris Capital, in which Juris would get a portion of the legal proceeds in exchange for paying millions of dollars to Land of Lincoln, enabling it to pay for attorneys and settle provider and policyholder claims that had racked up, according to legal documents filed in the Circuit Court of Cook County, Ill.

But the larger of two deals didn’t close because Juris investors pulled their funding when a federal court in 2017 ruled against Maine Community Health Options in a related risk-corridor lawsuit. When the Supreme Court accepted Land of Lincoln’s case a few months ago, Juris reached out saying it was “now ready, willing and able” to close the deal. 

Juris will pay $28.9 million to Land of Lincoln and receive 100% of the proceeds from the lawsuit if they amount to $57.7 million or less, though it could stand to receive much more if the proceeds exceeded that amount, according to an August 2019 court order. 

Juris also invested $10.5 million in the estate of defunct co-op HealthyCT in 2017. Juris Managing Director David Desser would not say if the firm has invested in other lawsuits.

“What we do doesn’t necessarily need a public face,” he explained. “We go about our business and don’t need to scream about what we’re doing from the hilltops.”

These are big bets. While the agreements can be structured in many different ways, litigation funders typically pay money upfront to corporate clients for a share of the legal winnings down the road. But the investors risk getting nothing if the court rules unfavorably. Their clients, however, would keep the cash they received from the investors, regardless of the outcome of the case.

Despite the risks, the insurer lawsuits have drawn investors’ interest because of the potential for massive returns. Several litigation finance experts also said the legal issues are pretty straightforward in the risk-corridor cases, making it easier for investors to assess the risk and make a good guess as to how the court will rule.

They generally believe the insurers have a strong argument and doubted the Supreme Court would take the case just to affirm the federal appeals court’s ruling against the insurers.

“If you’re right on the law, you’re probably going to get your money,” one expert at a litigation funding firm said.

The funders also say interest among insurers is picking up. While small insurers and co-ops in dire need of capital were early takers of litigation finance deals, bigger insurers are coming around to litigation finance as a risk management strategy, said Andrew Cohen, a senior vice president on the investment team at Burford Capital, which describes itself as the largest provider of legal finance in the world.

“A lot of the larger insurers look at this and say, there’s a decision coming up and we are going to end up with a huge amount of recovery or zero. That is a risky situation we can mitigate. We can mitigate that risk by monetizing a part of that claim today, so we don’t end up with zero in case of a loss, and we haven’t given up entire claim in case of a win,” Cohen explained. 

Burford declined to say whether it has invested in the risk-corridor or cost-sharing reduction lawsuits.

What we’re seeing now is more movement from solvent insurers who are looking to offload some portion of their risk from what everyone expects will be a binary outcome from the Supreme Court,” added Garrett Ordower, managing director at Lake Whillans, which has made investments in the risk-corridor lawsuits.

The Supreme Court is expected to issue a decision by June 2020.

Harris Meyer contributed to this article.