By Jeffrey H. Brochin, J.D.
The New York Department of Financial Services’ (DFS) risk adjustment methodology that deviated from the federal risk adjustment methodology developed by HHS was never submitted to HHS for approval as required by the ACA and HHS regulations, and was in direct and positive conflict with the federal regulation.
A federal appeals court in New York has reversed the decision of the district court that dismissed a lawsuit filed by United Healthcare of New York, Inc. (United Healthcare) against DFS that challenged DFS’s risk adjustment methodology. The state agency was required to obtain approval of HHS officials before finalizing the emergency regulation—which they failed to do—and the state regulation was therefore pre-empted by the provisions of the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) as well as HHS regulations (United Healthcare of New York, Inc., v. Lacewell, July 20, 2020, Lohier, R.).
Federal risk adjustment program. Under the ACA, the federal risk adjustment program collected amounts from insurers whose plans had lower-risk enrollees (enrollees who were healthier than average) and used those funds to pay insurers whose plans had higher-risk enrollees. UnitedHealthcare of New York expected to receive significant payments in 2017 under the federal risk adjustment program. However, in 2017 DFS drafted its own emergency regulation version of the risk adjustment program that would have significantly reduced the amount of risk adjustment funding to which United Healthcare was entitled under the federal program. They filed suit against DFS claiming that the ACA and HHS regulations preempted the DFS methodology, but the district court dismissed their lawsuit and the instant appeal followed.
Requirement of HHS approval. In 2010 Congress directed the Secretary of HHS to issue regulations setting standards for the establishment of risk adjustment programs, and in 2012, HHS promulgated regulations for establishing risk adjustment methodologies and programs in the individual and small-group health insurance markets. The regulations defined ‘risk adjustment methodology’ as the risk adjustment model, the calculation of plan average actuarial risk, and the calculation of payments and charges. Of significance to the instant appeal was the provision that any risk adjustment methodology used by a state, or HHS on behalf of the state, must be a federally certified risk adjustment methodology. A state methodology could become federally certified in one of two ways: either as a methodology developed by HHS, or, a methodology submitted by a state and reviewed and certified by HHS.
Allegations of HHS approval. DFS contended that in August 2016, before promulgating the emergency regulation, DFS participated in a call with HHS officials, during which DFS informed HHS that New York was exploring the possibility of ‘reducing the magnitude of the federal risk adjustment transfers’, after HHS had administered the ACA-Risk Adjustment and released final results. HHS officials purportedly expressed support for the proposed action. Id. A month later, DFS participated in a second call with HHS, during which DFS summarized for HHS the form and content of the specific emergency regulation and the state authority for the proposed regulation. Again, according to DFS, HHS raised no objection to DFS's regulation and the use of state authority to reduce the magnitude of the transfers caused by ACA-Risk Adjustment.
‘Direct and positive’ conflict. The district court had held that the Takings Clause claim under the 5th Amendment, and the extraction claim both failed because they were merely derivative of the underlying preemption claim which the district court rejected. The appeals court began its review by noting that there exists a presumption that federal law does not preempt state law, and that presumption is especially strong when Congress legislates in a field traditionally occupied by the states. However, the court may find preemption only if the conflict between state law and federal policy is so ‘direct and positive’ that the two acts cannot be reconciled or consistently stand together.
The New York regulation promulgated by DFS would have significantly reduced the federal risk adjustment transfers calculated by the federal risk adjustment methodology for the 2017 plan year, and therefore it conflicted with both the applicable provisions of the ACA and HHS’s implementing regulations. Furthermore, regardless of conflict, HHS had to approve whatever program the state chose to put in place, and the ‘unavoidable implication’ of the ACA’s risk adjustment framework was that a state may not enforce its own risk adjustment methodology without obtaining HHS’s approval. The ACA did not permit a state to run a risk adjustment program but then modify the federal methodology as it saw fit without first obtaining federal approval.
Based on the foregoing, the appeals court reversed the district court’s dismissal of United Healthcare’s complaint, and remanded the matter for further proceedings.
The case is No. 18-2583.
Attorneys: Neal Kumar Katyal (Hogan Lovells [US] LLP) and Steven Rosenbaum (Covington & Burling LLP) for UnitedHealthcare of New York, Inc. and Oxford Health Insurance, Inc. Matthew William Grieco, Office of the Attorney General, for Linda A. Lacewell.
Companies: UnitedHealthcare of New York, Inc.; Oxford Health Insurance, Inc.
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