Health Reform WK-EDGE Reversal upholds use of statewide average premium in risk adjustments
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Tuesday, January 14, 2020

Reversal upholds use of statewide average premium in risk adjustments

By Rebecca Mayo, J.D.

A circuit court reversed a district court ruling that HHS’s use of the statewide average premium in the risk adjustment program payment transfer formula was arbitrary and capricious.

While HHS could have explained more fully why it developed the risk adjustment program to be budget neutral, HHS’s actions did not violate the arbitrary and capricious standard, according to the Tenth Circuit. The appellate court found that HHS had acted reasonably in choosing the methodology it used in calculating risk adjustment payments. The district court ruling vacating the final rules that implemented the program was reversed (New Mexico Health Connections v. HHS, December 31, 2019, Matheson, S.).

Final rules. The increase in individuals seeking health insurance through the Patient Protection and Affordable Care Act (ACA) led to concerns about insurers’ ability to predict health care costs and price health insurance premiums. To spread the risk of enrollees who might need more health care than others, the ACA included a risk adjustment program to transfer funds from plans with healthier enrollees to plans with sicker enrollees. Thus, HHS was tasked with developing a formula to calculate how much each insurer would be charged or paid in each state. The Center for Consumer Information and Insurance Oversite (CCIIO), an agency within HHS charged with helping to implement ACA reforms, published a white paper on risk adjustment concepts. The white paper considered four alternatives to establish a baseline premium for the payment transfer formula and found that using the statewide average premium would be budget neutral and provide a stable, predictable methodology.

After soliciting comments and holding a public meeting, HHS proposed the first risk adjustment rule for benefit year 2014. Under the 2014 rule, the payment transfer formula was the difference between the estimated premium given the health risk of its enrollees and the estimated premium without the risk. Both premium estimates were based on the state’s average premium. In every rule following the 2014 rule, the methodology was the same as the previous rules.

Challenge. New Mexico Health Connections (NMHC) sued HHS, alleging that HHS’s use of the statewide average premium in its risk adjustment program in 2014 through 2018 was arbitrary, capricious, and unlawful. NMHC asserted that it was charged a transfer charge that represented 21.5 percent of its premiums in the 2014 benefit year and 14.7 percent of its premiums in the 2015 benefit year, which was debilitating because industry margins were typically two percent to three percent at best. It argued that HHS should have used the plans’ own premiums rather than the statewide average premium in its formula.

The district court granted summary judgement for NMHC, finding that the use of statewide average premiums in the risk adjustment program was arbitrary and capricious because HHS failed to explain why the agency chose to use the statewide average premium in its program. According to the court, HHS assumed, erroneously, that the ACA required the risk adjustment to be budget neutral and all of HHS’s reasons for using the statewide average premium relied on that budget neutrality assumption. The district court vacated the final rules and remanded the case to the agency for further proceeding.

Decision. The Tenth Circuit found that despite NMHC’s assertions otherwise, the administrative record was replete with reasoned explanations for why HHS chose to use the statewide average premium in its formula. HHS researched how to implement the program before promulgating the 2014 rule. The white paper identified four alternatives for the formula, described the benefits and drawbacks of each, and invited the public to comment on them. HHS relied on the research from the white paper when it promulgated the 2014 rule and made references to the white paper research in the proposed rule. HHS considered the relevant factors, weighed risks and benefits, and articulated satisfactory explanations for its decision in the administrative record, and therefore acted reasonably in choosing to use the statewide average premium.

Additionally, while the ACA neither forbid nor required budget neutrality, the court noted that the administrative record showed that HHS would have designed the program to be budget neutral even if it had used the plans’ own premiums rather than the statewide average premium in its formula. The statute that created the program lacked any funding authorizations, therefore budget neutrality was a product of funding constraints rather than a policy goal. The APA requires that an agency explain its decision when the agency exercises discretion. The circuit court held that there was no exercise of discretion to explain, where HHS lacked the funding to design the risk adjustment program in any way other than budget neutral.

The case is No. 18-2186.

Attorneys: Barak A. Bassman, Leah Greenberg Katz, Marc D. Machlin and Sara Richman (Pepper Hamilton LLP) and Nancy R. Long (Long, Komer & Associates, P.A.) for New Mexico Health Connections. Alisa Beth Klein, James R. Powers and Joshua Revesz, U.S. Department of Justice, for U.S. Department of Health & Human Services, Centers for Medicare and Medicaid Services, Alex M. Azar, II and Seema Verma.

Companies: New Mexico Health Connections; U.S. Department of Health & Human Services; Centers for Medicare and Medicaid Services

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