Today, a federal judge sided with the House of Representatives in a major lawsuit challenging executive branch overreach, ruling that the Obama administration has been making illegal payments to health insurance companies participating in the Affordable Care Act (ACA) exchanges. U.S. District Court Judge Rosemary Collyer found that Congress never appropriated the billions of taxpayer dollars that the administration has delivered to insurers through the ACA’s cost sharing reduction (CSR) program. Today’s decision is a victory for the rule of law. It may also give insurers pause about their future participation in the exchanges.

Illegal Payments through the ACA’s Cost Sharing Reduction Program

The issue raised by the House of Representatives lawsuit is that the executive branch cannot spend money without a congressional appropriation since Article I of the Constitution gives Congress the power of the purse. Today, Judge Collyer agreed, writing “Paying out [cost-sharing subsidies] without an appropriation violates the Constitution. Congress is the only source for such an appropriation, and no public money can be spent without one.”

In addition to the clear language of the ACA, the House’s suit argued that the White House was aware that there was not a permanent appropriation for this program when the administration asked Congress to fund the program in its fiscal year 2014 budget request. Congress did not appropriate the funding but the administration funded the program anyway. The non-partisan Congressional Research Service also studied the issue and concluded that there is not a permanent funding stream for the CSR payments and that “it appears…that funds for these payments are intended to be made…through annual appropriations.”

The size of the illegal payments is substantial. In 2014, these payments totaled $2.8 billion. Given premium and enrollment increases in 2015, they will likely be about 50% higher, which means that the administration, through the CSR program, has unlawfully delivered upwards of $7 billion to insurers participating in the exchanges during the last two years.

ACA Plans Unattractive Without Cost Sharing Reduction Payments

With its new mandates and regulations, the ACA significantly raised the price of individual market health insurance. In fact, individual health insurance spending per enrollee increased nearly 70% from 2013 to 2015—with most of this increase the result of the ACA’s mandates and regulations. In order to induce people to buy the more expensive coverage, the ACA contained two types of subsidies—premium tax credits and the CSR payments.

The premium tax credits reduce people’s out-of-pocket premiums and are generally available to people with income between 100% and 400% of the federal poverty level (FPL), which equals $11,880 this year. These credits were placed in the Internal Revenue Code. The Treasury Department cuts monthly checks directly to insurers on enrollees’ behalf. The credits phase out as income increases as about $1,000 of additional income decreases the amount of the credit by $150.

The CSR payments are additional subsidies for people with income below 250% of the FPL. These payments effectively make plans more generous by reducing deductibles, cost-sharing amounts, and out-of-pocket limits. In technical terms, the CSR payments increase the actuarial value of plans—the approximate percentage of an average person’s health care expenses that the plan covers. For people who select a silver plan (actuarial value of 70%), the CSR payments increase the plan’s actuarial value to 94% for those with income between 100% and 150% of the FPL, to 87% for those with income between 150% and 200% of the FPL, and to 73% for those with income between 200% and 250% of the FPL.

People below 200% of the FPL have been able to buy deeply discounted insurance (because of the premium tax credit) that carries relatively low deductibles and cost-sharing amounts (because of the illegal CSR payments). As I have written about before, enrollment data reveals that the insurance available through the exchanges is not attractive to people who are relatively young and healthy and who earn more than about 200% of the FPL. Two-thirds of exchange enrollees have income below 200% of the FPL.

The unattractiveness of exchanges plans to people who do not quality for the large subsidies has proven surprising to many of the law’s proponents. For example, just last year, the Urban Institute projected that 39% of enrollees would have income above 300% of the FPL. In fact, 2016 enrollment data show that only 12% of enrollees have income above this amount.

While today’s legal decision is a victory for the rule of law and checks executive branch overreach, it is also a reminder of one of the ACA’s central problems. People generally do not value the insurance mandated by the ACA unless they receive extremely large subsidies for it.