The Legal Precedent for Contract by Conduct in the Public/Private Realm Doesn’t Support a Contract Here

Moda Health Plan, Inc. is one of dozens of insurers who sued when the Health and Human Services Department (HHS) failed to reimburse them for losses incurred as a result of participation in the healthcare marketplace set up by the Affordable Care Act (ACA). The Court of Federal Claims (COFC), and later the Federal Circuit, were tasked with determining whether there had been a contract by conduct set up between the Government and insurers. Despite success at the COFC, the Federal Circuit eventually denied Moda’s case. The case serves as a cautionary tale for companies considering entering into similar Government programs. 

ACA’s Attempt to Mitigate Risk

At the beginning of the implementation of the Affordable Care Act, it wasn’t clear how many Americans were going to sign up for medical insurance through the healthcare marketplace, and how extensive their medical needs would be. Thus, it was hard for insurers to figure out what the premiums should be for the contracts.

To counteract the potential risk, Congress set up “risk corridors.” In the risk corridors, if an insurer set their premiums too high and made a profit as a result, they would have to refund some of that profit to HHS. Conversely, if they set their premiums too low and thus suffered a loss, HHS would reimburse some of that loss. The risk corridors both encouraged health insurers to participate in the exchanges, and discouraged them from overpricing their policies.

 

The Appearance of a Quid Pro Quo

Although insurers participating in the exchanges set up by ACA held no formal contract with the Government, industry generally interpreted the agreement as a quid pro quo. But there were many more losses than gains in ACA, and the Government was faced with how to fund a $12B shortfall.

Although appropriations had been available to reimburse the insurers, the Republican majority in both the House and Senate sought to roll back ACA. As such, Congress added a rider that prohibiting the use of appropriated funds (starting with FY2014) to pay amounts due under risk corridors. The move essentially halted payments to insurers. Moda was one such insurer, to whom HHS owed around $210M. Given their belief that participation in ACA had constituted a contract by conduct, they took their case to the COFC.

 

Moda Argues There Was a Contract by Conduct

Moda fortified their case using two arguments. First, they argued that the statute required the payment, which was a feasible position under case law. Second (and more pertinent here), they argued that even if the statute didn’t require payment, they had formed a contract by conduct.

You see, usually a statue isn’t the basis for a contract. But sometimes, when you have a statute and implementing regulations, coupled with conduct by the Government or a private party, the parties can form a contract. That is, if the arrangement meets the usual tests of offer and acceptance, etc., conduct might give rise to a contract. Moda argued that the agency’s conduct, particularly how it induced companies to offer plans on the exchanges, met this test.

Furthermore, Moda pointed out that there was a change in Government policy that impacted the money insurers made. The changes allowed individuals who already had health plans to keep those plans during the implementation of ACA, rather than having them drop the health plans and move to the exchanges. Those people who already had health plans tended to be healthier, and were therefore more profitable for insurers. In doing so, HHS made it more likely that insurers were going to come up short in covering their own costs. As such, Moda felt that the conduct of the parties here, along with the statute and the regulations, was sufficient to create a contract.

 

The Legal Precedent for Contract by Conduct in the Public/Private Realm Doesn’t Hold Here

Moda relied on a 1957 case under which the COFC found that the Government entered a contract by conduct with a uranium miner. In 1948 at the dawn of the atomic age, the Government had promised that for 10 years, it would pay a specific price for certain uranium mined in the US. The offer was intended to encourage companies to mine uranium and provide it to the Government. When payments by the Government weren’t always forthcoming, at least one aggrieved company went to the COFC. The COFC found that there was indeed a contract based on the conduct of the parties and the program that Congress had set up.

Moda won the first round at the COFC. However, on appeal two judges at the Federal Circuit ruled for the Government. Specifically, they found that words like “offer” that show intent to form a contract weren’t used, unlike the 1957 case. The third judge had a very pointed dissent in which she indicated that this situation looked like a quid pro quo, but she was in the minority.

 

What Companies Who Enter Government Programs Need to Know

Moda’s protest at the Federal Circuit serves, unfortunately, as a cautionary tale for companies participating in Government programs. That is, if you enter a Government program, you are accepting a political risk that the ground rules will be changed later on. Your ability to get compensation for your investment could be restricted when it’s hard to show an obligation on the part of the Government to live up to its original promises.

This case has implications throughout the spectrum of public/private cooperation in Government programs. If the Government sets up a program to, for example, encourage space exploration, those who enter it will have to worry about whether or not the Government will follow through on its promises once priorities change.

 

Moda Health Plan, Inc. v. US, 17-1994, June 14, 2018

For more on this case, listen to my interview on Federal News Radio’s “Federal Drive with Tom Temin.”

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