The “Risk corridors” litigation is an example of how monetization capital can enable businesses to continue to serve their customers and manage balance sheet risk.
Case studies are rare in legal finance due to the confidential nature of transactions, but they are particularly helpful to in-house lawyers as they consider how legal finance could benefit their businesses. Burford’s financing of several health insurers in the risk corridors litigation is a rare public example.
The background of the risk corridors litigation
The “risk corridors program” was created under the US Affordable Care Act (ACA), often called “Obamacare”. To incentivize health insurers to participate in state health exchanges where potentially higher-risk individuals could buy standardized health insurance regardless of preexisting conditions, the ACA risk corridors program provided assurance that the US government would repay insurers if their expenses exceeded a threshold; conversely, if an insurer’s revenues exceeded that threshold, the insurer would pay a portion to the government.
However, the ACA did not provide funds for risk corridor payments to insurers and later appropriations legislation prohibited the use of funds for this purpose. This effectively capped payments to insurers at the amount of payments received by the government from insurers, long after insurers had begun setting up and operating health exchanges in reliance on the risk corridors program. For use year 2014, the government collected just $362 million from insurers with surpluses but owed $2.8 billion to insurers with expenses over the threshold; by 2016 the cumulative shortfall amounted to $12.6 billion.
The impact was devastating to insurers, with many forced into liquidation and others struggling to stay in business and carry on insuring customers. With the government refusing to pay, insurers and liquidators turned to the courts.
Monetization of these claims provided liquidity and risk transfer solutions
Burford’s team developed an early and robust understanding of the situation—the legislation, the government’s statements, the caselaw and the damages. Based on that understanding, in June 2016 we committed $30 million to a non-profit healthcare co-op which needed our capital to keep operating given accrued and expected risk corridors shortfalls totaling almost $100 million.
Without Burford’s capital, the non-profit healthcare co-op would have not been able to satisfy its regulatory capital requirements and would have been in jeopardy of having to close. Our financing was approved—indeed, endorsed as a lifeline—by the state insurance regulators.
We continued to follow the litigation closely—and to craft liquidity and risk transfer solutions for the insurance industry as the litigation progressed and encountered various legal and duration challenges, as well as a change of administration.
We remained confident in the fundamental strength of the case, and in 2017 we provided additional capital, via monetization transactions, to insurers and liquidators overseeing insurers that had been forced out of business. As distinct from fees and expenses financing used to pay lawyers, monetization provides immediate liquidity as a non-recourse advance against expected payments from pending claims and awards, and in the case of risk corridors clients, Burford’s non-recourse investment provided working capital that was used in a range of business critical ways. For example, our capital enabled various clients to complete business combinations, return cash to state guaranty funds as part of liquidations, and stay in operation. Because the capital was provided on a non-recourse basis, the insurers were not exposed to any downside risk if the matters resolved unsuccessfully.
The claims proceeded through the US Court of Federal Claims, and from November 2016 to June 2017, the courts found in every case that the government had an obligation to pay the insurers, though with varying conclusions on timing. All the cases were appealed to the Federal Circuit (the relevant appellate court), and in June 2018, a three-judge panel decided against the insurers.
Notwithstanding the Federal Circuit’s decision, we remained confident in our interpretation of the law and the rights of the insurers. In June 2019 the US Supreme Court granted review.
The role of case monitoring
In monitoring the progress of a case, the team at Burford devotes significant resources to monitoring our investments. Although legal finance is provided on a passive basis—Burford does not control litigation settlement strategy and decision-making, except in very rare circumstances when agreed in advance by the client—we offer significant value beyond capital during case monitoring.
For the risk corridors litigation, we followed the progress of the case very closely, offered our thoughts and perspectives to counsel, observed moots, offered comments on briefs and attended public oral arguments—including at the Supreme Court. As always, clients could take or leave our advice.
Financing led to a successful resolution for our clients and Burford
The Supreme Court heard the case in December 2019 and issued its decision in April 2020: An 8-to-1 win for the insurers, holding that the government was obligated to pay, that no later statements or budgetary actions affected that obligation, and that payment was required without delay. The Court held:
“These holdings reflect a principle as old as the Nation itself: The Government should honor its obligations. Soon after ratification, Alexander Hamilton stressed this insight as a cornerstone of fiscal policy. “States,” he wrote, “who observe their engagements … are respected and trusted: while the reverse is the fate of those … who pursue an opposite conduct.” … Centuries later, this Court’s case law still concurs.”1
Overall, it was an outstanding result for Burford and more importantly our clients. To name one example, our first risk corridor client had been facing insolvency in 2016. With our financing, they were able to stay in business and expand, and they’ve continued to insure more than 25,000 individuals. Our capital enabled our clients to continue to serve their customers and to manage their balance sheet risk by monetizing valid claims and sharing risk with Burford.
1 Maine Cmty. Health Options et al v. United States