Health Reform WK-EDGE HHS’ risk-adjustment calculation, while harmful to some, didn’t violate law
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Wednesday, February 14, 2018

HHS’ risk-adjustment calculation, while harmful to some, didn’t violate law

By Jeffrey H. Brochin, J.D.

HHS’ use of a statewide average premium methodology to implement the risk-adjustment program—one of three premium-stabilization programs under the Patient Protection and Affordable Care Act (ACA) (P. L. 111-148)—was neither unreasonable nor arbitrary and capricious, a federal district court in Massachusetts ruled. The regulations did not violate the Administrative Procedure Act, nor did they contravene the statute providing for risk adjustment (42 U.S.C. §18063) despite the fact that they resulted in a provider paying 71 percent of its gross revenues into the program causing the company to go into receivership (Minuteman Health, Inc. v. HHS, January 30, 2018,Saylor, F.).

Background: Congress delegated to HHS the responsibility for administering many of the programs under the ACA including the risk-adjustment program. HHS promulgated overarching standards for the risk-adjustment program and the statutory scheme allowed HHS to operate the program on behalf of any state that chose not to do so. The majority of states in fact opted to have HHS administer the program. Under the ACA’s Consumer Operated and Oriented Plan (CO-OP) program, loans were made available to qualified nonprofit health-insurance issuers in order to encourage new entrants and to bolster competition in the health-insurance market.

Minuteman Health, Inc. (Minuteman) was created under the CO-OP program. HHS approved Minuteman’s business plan and funded its initial formation in Massachusetts in August 2012 and its subsequent expansion into New Hampshire in November 2013. HHS’ application of the statewide average premium method in calculating Minuteman’s risk-adjustment contributions for the 2014 benefit year resulted in Minuteman being required to pay 71 percent of its gross premium revenue into the risk-adjustment program. The company went into receivership, and subsequently challenged HHS’ use of the statewide average premium method in court.

Risk-adjustment methodology. HHS set the risk-adjustment formula in advance of each benefit year through a notice-and-comment rulemaking process. For the 2014 benefit year, HHS issued the proposed Notice of Benefit and Payment Parameters (NBPP), including a proposed risk-adjustment formula, on December 7, 2012. The plan’s average risk score relied on a month-weighted average of the individual risk scores of the enrollees of a given plan, and was calculated by summing the products of each enrollee’s risk score and the number of months that the enrollee was enrolled in the plan, and dividing that sum by the sum of the number of months each billable member was enrolled in the plan. Conceptually, the goal was to provide plans with payments to help cover their actual risk exposure beyond the premiums the plans would charge reflecting allowable rating and their applicable cost factors. Accordingly, HHS set a given plan’s transfer amount to equal the difference between two estimated premiums.

Minuteman’s challenges. Minuteman challenged the HHS regulations that forced it to make its large transfer payments contending that the regulations (1) were arbitrary and capricious in violation of the APA; and (2) were beyond HHS’ statutory authority because they contravened the statute providing for risk adjustment. Specifically, the CO-OP claimed that HHS’ risk-adjustment methodology was flawed in multiple ways.

No flaw in risk-adjustment methodology. By 2017, the use of statewide average premium had resulted in serious problems, and the court stressed that it might have been prudent for HHS to address those comments directly: at some point, if an agency’s rules have become obviously unreasonable or unworkable, the agency surely has some obligation to reconsider its actions, or at least respond to comments. However, in the instant case, HHS had already considered alternatives to using the statewide average premium, and the comments did not raise any concerns that HHS had not considered before; the agency merely pointed out that a plan whose premiums are well below a state’s average will find that its risk-adjustment charge is inflated. HHS was aware of that aspect of its methodology at least as early as 2011, and had decided that other considerations prevailed to justify its choice.

Accordingly, the court found that it was not unreasonable or irrational for HHS to use the statewide average premium in the first instance. Because the 2017 comments raised nothing new, HHS was not required to re-justify its choice. Therefore, the continued use of the statewide average premium was not arbitrary or unreasonable under the circumstances.

The case is Civ. Action No. 16-11570-FDS.

Attorneys: Barak B. Bassman (Pepper Hamilton LLP) for Minuteman Health, Inc. Matthew JB Lawrence, U.S. Department of Justice, for U.S. Department of Health and Human Services and Centers for Medicare & Medicaid Services.

Companies: Minuteman Health, Inc.; U.S. Department of Health and Human Services; Centers for Medicare & Medicaid Services

Cases: CaseDecisions NewsFeed AgencyNews InsurerNews MassachusettsNews

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