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Case number 201292 Conway versus US.

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Ms.

[00:00:06] Speaker 03:
Klein, please proceed.

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Thank you, Your Honor.

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Alisa Klein for the government.

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There's no dispute that the Insurer Colorado Health owed HHS money for the 2015 year under the Affordable Care Act's risk adjustment program.

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And I'd like to make two basic points.

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is that a state has no more authority to prevent HHS from collecting a risk adjustment charge from an insurer that became insolvent and went out of business than a state would have from an insurer that is still in business, still functioning.

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And the second is that a state has no more authority to interfere with HHS collection

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of a risk adjustment charge via netting, then it would have simply to tell an insurer not to pay an invoice.

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Going to go back to the first point because I believe a misunderstanding on that point may have been the reason for the trial court's error below.

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Under the McCarran-Ferguson statute, Congress saved state laws enacted for the purpose of regulating the business of insurance.

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and it saved them from preemption by general acts of Congress.

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In the fave case on which the plaintiff heavily relies, the only question was, was the state law enacted for the purpose of regulating the business of insurance?

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And it was a hard question that had generated a circuit split because the insurer had gone out of business and was in liquidation.

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And the Supreme Court nonetheless said,

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still regulating the liquidation, the distribution of assets, can be regarded as the regulation of the business of insurance for purposes of McCarran-Ferguson.

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But that was peripheral.

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The core is the regulation of the ongoing business of insurance.

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And the reason that none of this matters here is because the Affordable Care Act specifically relates to the business of insurance.

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And the Karen Ferguson Act's reverse preemption provision by its terms is not implicated when as here you have a statute like the Affordable Care Act that specifically relates to the business of insurance.

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So the only question was the particular mechanism by which HHS collected Colorado Health's risk adjustment payment for the 2015 benefit year.

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And what it did was applying a netting regulation promulgated under the Affordable Care Act.

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Instead of collecting a sum of money from Colorado Health under the risk adjustment program and making a separate payment under the Affordable Care Act's reinsurance program, HHS netted out the two, which meant that Colorado Health wasn't entitled to any payments.

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And then that enabled HHS.

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Council, this is such more.

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If Colorado actually had a no netting statute, no netting statute across the board, not just contract cases, not just insurance cases, but a no netting statute, would HHS have been permitted to adopt a netting regulation and would that netting regulation, well, they would have been permitted to adopt it, but would that netting regulation then have trumped or preempted the Colorado statute?

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Yes, on both points.

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The Affordable Care Act specifically contemplated that HHS would administer various Affordable Care Act programs, including on behalf of states, and specifically delegated authority to HHS to take such actions as necessary to implement those provisions.

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And as this court has recognized in various cases, such as Contreras and Doe, that we cited in our brief,

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That's a broad grant of authority for HHS to fill gaps as consistent with the statutory policies.

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And a valid ACA regulation preempts contrary state law as illustrated by the Second Circuit's decision recently in United Healthcare and the older Eighth Circuit's decision in the St.

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Louis case.

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The more recent second.

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This is Judge Chen.

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The question I have about the nature of this netting regulation and its origins is that it appears from the Federal Register notice to emanate from the desire for convenience and efficiency.

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And it's more like a payment mechanism convenience, much more than that than some implementation

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some core criteria, core substantive criteria of the Affordable Care Act whether it's actually coming up with some methodology related to risk adjustment or reinsurance which was much more what that second circuit case as well as the eighth circuit case seemed to me about.

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I didn't see anything in the federal register notice that discussed the need for a netting regulation beyond

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mere administrative convenience.

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Am I missing something in how the netting regulation was justified by HHS?

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Well, let me unpack what is meant by efficiency, which is I think the term that HHS used when it issued the netting regulation.

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If you just think about the risk adjustment program by itself,

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there are a huge number of payment transfers that HHS has to make every year, roughly $5 billion worth of payment transfers every year.

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And that's just risk adjustment.

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And as the tense circuit explained in the New Mexico Health Connections case, these transfers happen very quickly year after year to stabilize the insurers that are entitled to the funds to help them continue to operate.

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So in this context,

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The efficiency of distributing the risk adjustment, or it could be reinsurance funds, is part and parcel of the purpose of the program, which is to stabilize insurers that are entitled to those payments.

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But as I understand the Federal Register notice, I understand there's maybe billions of transactions going on, and so the idea behind the netting regulation is, okay, instead of two billion transactions, we'll just do one billion transactions because we'll have this netting.

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still have a billion transactions?

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Well, it is absolutely still quite burdensome for HHS.

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And so it's not surprising that every state is relying on HHS to administer its risk adjustment and reassurance programs.

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But that doesn't make it any less important that HHS be able to use every tool at its disposal to expeditiously collect and distribute these billions and billions of dollars that insurers count on for their own

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But I also want to go back to the basic question, which is netting is one tool HHS uses to collect the risk adjustment or other charges that insurers owe under the Affordable Care Act.

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But if HHS had simply sent an invoice to an insurer,

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a state has no authority to tell the insurer, don't pay, pay less, pay later.

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If the insurer is in an insolvency proceeding, doesn't the state have to follow state insolvency law which in this case prioritizes

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the creditors that are coming after money.

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So while the state doesn't say don't pay the government, the state does say first pay out all the claimants, i.e.

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the insured, well actually first pay the administrative overhead charges, second pay out the claimants, the insured, then pay the government.

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Isn't that totally fairly within the purview of state insolvency law?

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Not.

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when as here it's preempted by the Affordable Care Act, by a statute that specifically regulates the business of insurance.

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That's why when I was talking about the Karen Ferguson Act, there's no doubt that states generally regulate liquidation, establish priority, et cetera.

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And it's established that if you just had a general federal statute.

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So you're telling me your position, the government's position now, is so much further than I understood it to be.

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because you're telling me the government's position is if a debt is owed under the ACA, then it trumps insolvency law entirely.

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Not just the government's allowed to do netting, but even if there's nothing to net against, if a debt is owed, the government becomes the first creditor entitled to top priority simply because this is an ACA transaction and it trumps state insolvency law, which otherwise makes

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the government, the third collector in line.

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That's correct.

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Now here, of course, the court only needs to address netting because there were debts to net.

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However, if you look at the plain terms of the McCarran-Ferguson Act, all that matters is that the Affordable Care Act and its provisions specifically relate to the business of insurance.

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So the reason that the Supreme Court's decision in fave is totally off the table here

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is because we have the Affordable Care Act establishing the insurers substantive risk adjustment payment obligation.

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Okay.

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Thank you, Ms.

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Klein.

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Let's hear from opposing counsel.

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May I please the court?

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Cliff Elgarten for Michael Conway, the Colorado Insurance Commissioner and the liquidator of the Colorado Health Insurance Cooperative.

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In our view, Judge Hurtling had this exactly right in his decision below.

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And frankly, the government's arguments, I had not fully appreciated them until I started reading their letters, seem to be directed at something entirely different than what was held or what was explained in this case.

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The government thinks its debts are not subject to state insolvency law, and that's simply wrong.

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It is fully subject to insolvency law and bankruptcy law.

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The controlling decision in this case is really the 1979 decision of the Supreme Court in Kimball Foods, because it

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provides the controlling framework for deciding all collections of federal debts, federal lien law.

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The bottom line here on the collection of federal debt, in any case involving insolvency or priority, whether it is insurance or otherwise, and that's why McCarran is fairly irrelevant here, the bottom line is that the collection of federal debt, unless there is a federal statute that provides a priority,

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or creates a limitation.

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The federal debt is subject to the same priority rules, the same limitations as applied to any other creditor.

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Those priority rules can be from federal bankruptcy law when federal bankruptcy law applies or state insolvency or priority law for the cases that are outside of federal bankruptcy.

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In fact, for the 100 years, when there was no federal bankruptcy law, it was always state insolvency and priority law that applied.

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except when the federal priority statute or federal lien statutes applied.

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The Supreme court's decisions in Kimball foods talk about the primacy of state law here.

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And third, it clearly indicate that when the federal priority statute doesn't apply, the federal debt is subject to state law.

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And we cited to you in our letter of November 11th, we cited it to the government, the Cook County versus national bank case,

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Uh, from eight, from the 18 eighties, the United States versus Oklahoma case from the 1920s and the New York guaranteed trust case from 1930 point to the fact that applicable insolvency law comes into play immediately for the collection of federal debt.

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And those cases lead up to the Kimball foods case in 79 and they've been 1993.

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So if there is an applicable federal statute addressing insolvency or priority, then the federal priority statute prevails, of course.

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But if there is no priority statute, the mere fact that government is the plaintiff doesn't win the case for them.

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What was the case for them is they have to submit to the state insolvency law.

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So I'd like to focus a moment, a little more on preemption and there, which seems to be the nature of their argument, but I do want to cover just for a moment at the end.

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If, uh, if I'm reminded that I have two minutes, the cruise case and the government's arguments that they threw in, uh, under, under the claims courts, jurisdictional statutes, those weren't raised by the government below in any form.

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And I would like to tie up that loose end at the end.

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So I'm going to try to do that.

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But let me go back to preemption.

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The government's arguments missed the most basic aspects of the legal framework here.

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The priority statute that ordinarily gives federal debts a priority that allows them to take set offs.

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doesn't apply here.

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We know that.

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That was the only significance of McCarran-Ferguson because it knocks out the priority statute.

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Beyond that, nobody relies on McCarran until we get way down into the standards for preemption.

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Nothing in the ACA or the netting rule, however, purports to expand the government's creditor rights in an insolvency or bankruptcy.

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Federal law does not touch that issue once we've knocked out

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the priority statute.

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Therefore, there is no conflict with state laws on this point.

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Therefore, there's no preemption.

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That's true as a matter of basic legal principles and as a matter of unbroken precedent.

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And the precedents are the ones I cited earlier.

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Legal principle first.

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The United States, like any party owed money, has statutory and common law rights to recoveries.

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And it has

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innumerable self-help and legal remedies, just as I would as a private party.

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Let's say a contract says, or the ACA says, Mr. Elgarten, you owe someone or you owe the government $100.

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The government could attach my assets, it can garnish my wages, it can seize my accounts, it could execute on liens.

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But for centuries, all those rights and remedies, all such substantive rights and remedies draw the line at insolvency.

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Why?

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Because insolvency and priority law deal with a different subject matter.

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They deal with the situation where there's more than one creditor that has a meritorious claim on somebody.

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And the debtor does not have enough money to go around.

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That's why we have insolvency law.

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That's why we have priority law.

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That's why we have bankruptcy law.

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So the government could adjudicate its claims to its heart content.

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It could ordinarily take set off, but it all stops.

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at the point of insolvency because insolvency law answers the question of who wins, who gets priority, how money is to be divided when there is not enough money to go around to satisfy every legal obligation.

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And that is the only issue here.

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Who gets this money?

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The policyholders who bought the health insurance, who get a priority on the Colorado insurance liquidation law,

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or the federal government for all of its claims.

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The government is now telling us that the government always wins in an insolvency case, I guess in a bankruptcy case.

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But Fabe says the policyholders appropriately come first because the priority statute that would allow the government to win all the time

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doesn't apply.

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So the government is spending a lot of time jousting with arguments that weren't part of Judge Hirtland's decision and are not part of our decision.

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We know what kind of statute it would take to create a priority or to allow a set off.

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The federal super priority statute has been in effect for over 200 years.

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That is such a law.

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It's part of the Debt Collection Act.

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And that's where the government gets its priority, and it's right to take set-offs to its heart delight.

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But it doesn't apply here.

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When it filed a proof-of-claim, I think that's where it was going, by claiming that it had a priority.

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Mr. Eller, let me ask you something, just to make sure I understand your position.

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Suppose the netting regulation had been in the statute itself, in the ACA.

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Do you think this would be a different case?

[00:17:46] Speaker 01:
No, because the netting statute, I would interpret as going to what the ordinary rights of a creditor are outside of bankruptcy.

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It doesn't really have to be in this.

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Yes, go on.

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My next question, suppose that netting statute, this assumed netting statute specifically said with respect to liquidation or otherwise.

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absolutely would apply absolutely would apply that is the point here it doesn't say that and it really looks just like yes it looks just like the common law right of uh nanny which every every party could net to its heart's delight outside of bankruptcy but it can't once there is an insolvency and i would point the court to the historic cook county bank case which we cited in our november 11th

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letter that's 107 US 445 where they say exactly that to say the United States you could have set off all you want but once there's a bankruptcy you're subject to all the special limitations

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on set-off that apply in bankruptcy.

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Matter of fact, the right of set-off, I think we all understand, is a basic, the right of limiting set-off, is a right that comes into play only when you're in the insolvency setting, because it is a protection of priorities.

[00:19:09] Speaker 01:
As a matter of fact, some of the cases, including the Supreme Court cases, specifically say set-off is a form of priority.

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That's what they say.

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I'd point to Gold Star Liquors,

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or as a case which says it in exactly that same way.

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By the way, the government did point to a case where there was a statute.

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Uh, they had it in their reply brief where there was a federal statute that did seek, even in the absence of the priority rule, um, excuse me, the super priority statute to create the kind of, um,

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priority that exists here.

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The Rhode Island Guarantee Fund was a case where the federal statute specifically, just as you asked Judge Bryson, dealt with the priority of federal liens.

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And it said, well, the federal statute applies.

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It deals with priorities.

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Of course it's going to preempt the state law, but none of that has to do with what takes place in an insolvency when the government does not have a statute that deals with priority, does not have a statute that creates it.

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And to respond to a question, Judge Chen asked my colleague,

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The netting regulation is purely of the same form as all administrative set-off regulations are, and the same as the common law right of set-off.

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It is a convenience mechanism that always applies except when you get to insolvency.

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And when you reach insolvency, at the time the government learns of the insolvency, it becomes subject to those rules, those ordinary creditor prerogatives.

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including the ordinary right of set off or netting halt when insolvency begins.

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And that is the holding the, so literally the holding at four 53 of the Cook County bank case.

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So that's what the controlling circumstance here is.

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And, um, and you know, really when you get right down to it, the controlling issue, as I said, was the one that judge hurtling reaches at the end, the lean statutes that were being, uh, construed,

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in Kimball Foods really face the same question.

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There are two parties with conflicting claims on a piece of property.

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There's a state lean and a federal lean.

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Kimball Foods actually says all of these issues of collection of federal money

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are federal issues.

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However, they say you look to the state rule of decision to decide those issues.

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And the United States is always subject to the applicable insolvency law.

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If it was in bankruptcy law, there are a couple of limitations on how they could assert their right of set off.

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One is the mutuality rule.

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There's another one about timing.

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And in a insurance insolvency that has been accepted from the federal bankruptcy law and has been left to the States, just like lean law in Kimball foods.

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And there you look to the applicable state law to decide what the outcome is.

[00:22:29] Speaker 01:
I said, I wanted to turn, um, just comment on the Proust case and the government citation of, um,

[00:22:37] Speaker 01:
uh... the claims court's jurisdictional statutes and uh... they cite thirty one u s c thirty seven twenty eight what those statutes say and mean is the government has a right to assert a set off and there is certainly jurisdiction to consider the counterclaims or the set off in the claims court that's why we what we are here that is the general rule in all courts if the trustee in an ordinary bankruptcy goes into a court

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that has jurisdiction and asserts a claim, the debtor may raise a set off any claim he has against the bankrupt and the court ordinarily issues only one judgment for the difference.

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Many cases say that the Baker versus Gold seal liquors is one.

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That's a Supreme Court case in 74.

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But the ability to assert the argument of the set off doesn't mean you win.

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What determines whether you win is a substantive right and that substantive right includes

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the applicable insolvency law, whether it is federal bankruptcy law, when that applies, or state priority law, when that applies.

[00:23:47] Speaker 01:
Why the government, and this is why I wanted to raise the issue, the government pointed to an offhand observation in Pruce, and that's what I wanted to comment on.

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The government is all excited about Pruce because Pruce said in passing, when it was holding that jurisdiction lies to assert a counterclaim,

[00:24:06] Speaker 01:
It said in passing that if the government had pursued its counterclaim in bankruptcy court, it might only be paid a small portion of the distribution.

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In other words, there could be a different result depending on whether you're in the claims court or in the bankruptcy court.

[00:24:22] Speaker 01:
But that offhand observation, it was really only a comment, not even a dictum.

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about what might happen in federal bankruptcy court, that was simply not briefed and was simply wrong.

[00:24:31] Speaker 01:
The same substantive law applies in whatever form we're litigating.

[00:24:35] Speaker 01:
That's actually what the holding of Kimball Pooch is.

[00:24:39] Speaker 01:
Whatever jurisdiction you're ruling, federal law applies, but federal law may look to state law.

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You don't get one outcome in one court and one in the other.

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And you can know Pooch is wrong because you know that if, in that case, when the government asserted its counterclaim, it really wasn't a set off,

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There was no affirmative claim that was still there.

[00:25:00] Speaker 01:
If the government got a judgment for its money, it would still have to go back to the bankruptcy court to collect.

[00:25:06] Speaker 01:
And then it would be subject to the priority law or the priority rules that apply in the bankruptcy court.

[00:25:13] Speaker 01:
Well, that happened to be federal bankruptcy court that was at issue in Proust.

[00:25:18] Speaker 01:
Here it is different.

[00:25:20] Speaker 01:
We are excluded from federal bankruptcy court and therefore the insolvency law that applies is the law that, um, comes into place where you have to go, uh, excuse me, when, uh, um, a matter is excluded.

[00:25:35] Speaker 01:
Does that mean I have two minutes?

[00:25:37] Speaker 03:
No, that's your time.

[00:25:39] Speaker 01:
Okay.

[00:25:40] Speaker 01:
Well then I'm concluded.

[00:25:41] Speaker 01:
Thank you very much, your honor.

[00:25:42] Speaker 03:
Okay.

[00:25:43] Speaker 03:
Ms.

[00:25:43] Speaker 03:
Fine, you have some rebuttal time.

[00:25:45] Speaker 04:
Thank you.

[00:25:46] Speaker 04:
I'm picking up on judge Bryson's question.

[00:25:49] Speaker 04:
The premise of the other side's argument is that the Affordable Care Act's substantive risk adjustment provision that's codified at 42 USC 18063 implicitly excludes insurers that go out of business that are in liquidation.

[00:26:07] Speaker 04:
It's wrong, that premise is wrong under the plain terms of 18.063.

[00:26:12] Speaker 04:
If you look at subpart C, where Congress defined the scope, who's covered by the risk adjustment program, it's any health plan that provides coverage in the individual or small group market within the state.

[00:26:27] Speaker 04:
The only statutory exception

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being for grandfathered plans, which are plans that are not subject to the ACA's community rating and guaranteed issue reforms and other market reforms.

[00:26:40] Speaker 04:
And this makes perfect sense because if you had an implicit exception for a defunct insurer, the consequence would be that the defunct insurer would be siphoning off risk adjustment funds that are designed to stabilize the surviving insurers.

[00:26:59] Speaker 04:
As I said in the opening, the whole point of the risk adjustment and other stabilization programs is to stabilize the market of the insurers that are actually in business.

[00:27:11] Speaker 04:
So almost nothing that was just said bears on our argument here because the substantive risk adjustment charge is dictated by the substantive provisions of the ACA.

[00:27:26] Speaker 04:
I could go on and talk about the separate federal common law point, but that's an independent basis for preemption here that is derived from long standing Supreme Court recognition that the government has the same set off rights of other creditors and has to follow the procedures for set offs.

[00:27:45] Speaker 04:
But the right does not vary from state to state.

[00:27:48] Speaker 04:
It's not dependent upon the idiosyncrasies of a particular state law.

[00:27:54] Speaker 03:
And so, as Judge Keeney noted... Counsel, I'm going to cut you off.

[00:27:58] Speaker 03:
You didn't raise the federal common law point in your opening.

[00:28:01] Speaker 03:
Your opposing counsel didn't have an opportunity to address it.

[00:28:03] Speaker 03:
I'm not going to let you go any further in rebuttal.

[00:28:05] Speaker 03:
I understood your argument today.

[00:28:06] Speaker 03:
Yeah, I understood, Your Honor.

[00:28:07] Speaker 03:
Thank you.

[00:28:08] Speaker 03:
I thank both counsel.

[00:28:09] Speaker 03:
The case is taken under subject.

[00:28:10] Speaker 02:
Could I just very quickly, a question just for clarification.

[00:28:14] Speaker 02:
Ms.

[00:28:15] Speaker 02:
Klein, when you were making the argument out about the ACA provision on preemption, that depends, I take it, on your assertion that the netting regulation is treated as if it has the same status as a statutory provision, right?

[00:28:36] Speaker 04:
Not exactly, because recall I said even if HHS sends an invoice to the insurer,

[00:28:43] Speaker 04:
there's no exception because the insurer is insolvent.

[00:28:47] Speaker 04:
So here, it happens to rely on netting, but our argument doesn't depend on that.

[00:28:53] Speaker 02:
So you think that even if we were to conclude that the statute in the ACA that refers to the statute itself, even if we were to conclude that that did not include the netting regulation,

[00:29:13] Speaker 02:
you would still prevail, so you don't need that statute in effect.

[00:29:18] Speaker 02:
Correct, Your Honor.

[00:29:19] Speaker 02:
All right.

[00:29:19] Speaker 02:
So, well, okay.

[00:29:22] Speaker 02:
Okay.

[00:29:22] Speaker 03:
I thank both counsels.

[00:29:23] Speaker 03:
The case is taken under submission.