Health Reform WK-EDGE HHS explains methodology for statewide average premium under Affordable Care Act
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Friday, December 14, 2018

HHS explains methodology for statewide average premium under Affordable Care Act

By Brian Craig J.D.

A final rule providing additional explanation for the methodology on the use of statewide average premium for the 2018 benefit year in a budget-neutral manner under the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) was issued by HHS. Following a federal district court decision in February 2018 that vacated the use of statewide average premium in the HHS-operated risk adjustment methodology for the 2014 through 2018 benefit years because HHS failed to adequately explain its methodology, HHS proposed further explanations to the methodology. The final rule maintains stability and ensures predictability of pricing in a budget neutral framework because issuers relied on the 2018 HHS-operated risk adjustment methodology (Final rule, 83 FR 63419, December 10, 2018).

Court decision on inadequate methodology. On February 28, 2018, in a suit brought by the health insurance issuer New Mexico Health Connections, the federal district court in New Mexico vacated the use of statewide average premium in the HHS-operated risk adjustment methodology for the 2014 through 2018 benefit years (see Risk adjustment regs don’t require budget neutrality, March 7, 2018). The district court reasoned that HHS had not adequately explained its decision to adopt a methodology that used statewide average premium as the cost-scaling factor to ensure that the amount collected from issuers equals the amount of payments made to issuers for the applicable benefit year. The methodology at issue maintains the budget neutrality of the HHS-operated risk adjustment program under the ACA.

HHS response to comments. In response to the district court decision, HHS proposed a rule on August 10, 2018 concerning the adoption of the 2018 benefit year HHS operated risk adjustment methodology (see With a twist; ACA risk adjustment program for 2018 benefit year, August 15, 2018). Commenters were overwhelmingly in favor of finalizing the rule as proposed. Many commenters stated that by finalizing this rule as proposed, HHS provides an additional explanation regarding the operation of the program in a budget-neutral manner and the use of statewide average premium for the 2018 benefit year consistent with the decision of the district court. Commentators also supported the proposed rule citing the risk of substantial instability to the exchanges and individual and small group and merged market risk pools. HHS agreed with the commenters that calculating transfers based on a plan’s own premium without an additional funding source to ensure full payment of risk adjustment payment amounts would create premium instability.

While the commentators overwhelmingly supported the proposed rule, some commentators did not agree with the HHS proposal. One commenter stated that the program has been highly effective at reducing loss-ratios and ensuring that issuers can operate efficiently, without concern for significant swings in risk from year to year. Although some commenters requested refinements to ensure that the methodology does not unintentionally harm smaller, newer, or innovative issuers, a different commenter noted that the results for all prior benefit years of the risk adjustment program do not support the assertion that the risk adjustment methodology undermines small health plans. A few commenters stated that use of statewide average premium to scale risk adjustment transfers tends to penalize issuers with efficient care management and lower premiums and rewards issuers for raising rates.

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