By Rebecca Mayo, J.D.
The use of statewide average premium costs to determine a health insurance issuer’s risk-adjustment payment or charge is not contrary to law, but was arbitrary and capricious. A health insurance issuer’s claim that high risk-adjustment charges were effectively eliminating bronze-level plans in the health insurance marketplace was rejected; however, the judge agreed that the methodology for calculating those charges needed to be revisited (New Mexico Health Connections v. HHS, February 28, 2018, Browning, J.).
Risk-adjustment. The Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) created programs to ameliorate the financial risks of requiring insurers to accept unhealthy individuals and prohibiting them from charging the rates necessary to pay for their coverage. Under one such program, each state assesses a charge on insurers if the actuarial risk of their enrollees for a year is less than the average actuarial risk of all enrollees in all plans or coverage in such state for such year. Likewise, each state provides a payment to insurers if the actuarial risk of their enrollees is greater than the average actuarial risk of all enrollees in all plans and coverage in such state for such year. This program is intended to provide increased payments to health insurance issuers that attract higher-risk populations.
The risk adjustment methodology predicts plan liability for an enrollee based on that person’s age, sex, and diagnoses, producing an individual risk score. The health plan’s average risk score is calculated by averaging its enrollees’ individual risk scores with each individual risk score weighted by the number of months the individual was enrolled in the plan. HHS then calculates the risk adjustment payment or charge using factors such as the state average premium cost and plan-cost factors other than the plan’s average risk score. HHS’ reasoning for including these factors in the calculations is to more accurately measure and distribute the costs of insuring all individuals in a risk pool and to keep the program budget neutral.
The complaint. The issuer is a Consumer Operated and Oriented Plan (CO-OP) program participant who began enrolling members in 2013 and providing coverage in 2014. The issuer has offered since its inception the lowest- or second-lowest cost health insurance plan in New Mexico and serves many unhealthy enrollees due to the high prevalence of Hepatitis C in New Mexico. For 2014, most small health-insurance companies were required to pay over ten percent of their premiums as risk-adjustment charges. The issuer was assessed a risk-adjustment charge which was equal to 21.5 percent of its 2014 premiums and in 2015 was assessed a charge equal to 14.7 percent of its premiums. The issuer argues that these high risk-adjustment changes have forced several CO-OP program participants to close their doors.
The issuer filed a complaint against HHS arguing that using the state average premium when calculating adjustment transfer payments exceeds HHS’ authority under the ACA, is arbitrary and capricious, and effectively eliminates bronze level plans. The issuer further argued that the use of the diagnoses in calculating the individual risk score, the exclusion of partial year enrollees and use of prescription drug data were arbitrary and capricious decisions. The issuer asked the court to enter an order vacating HHS’ risk adjustment regulations for the years 2014-2018, and order HHS to revise its regulations consistent with the Court’s judgement.
Risk adjustment regulations. The court found that the ACA does not clearly require risk adjustment payments to be based solely on actuarial risk and instead commands HHS, in consultation with states, to establish a criteria and methods to be used in carrying out the risk adjustment activities, which implies there should be more to the method than pure actuarial risk. Further, the ACA neither requires nor forbids budget neutrality, and although HHS promulgated its risk adjustment regulations under the erroneous belief that risk adjustment must be budget neutral, the regulations are not contrary to law.
While the court agreed that the regulations were not contrary to law, it held that the regulations were arbitrary and capricious. HHS’ rational for the risk adjustment methodology rests on the belief that the program had to be budget neutral, however HHS does not provide an independent policy reason for requiring budget neutrality. This erroneous assumption infects HHS’ analysis because if budget neutrality is not required, the methodology could use a plan’s own premium instead of a state’s average premium without imposing a balancing adjustment. There may be policy reasons for making the risk-adjustment plan budget neutral, however HHS did not articulate any public policy decision, only the decision to comply with a supposed statutory requirement. Therefore, the decision to include state average premiums in the risk adjustment methodology was arbitrary and capricious.
Other claims. The court held that sovereign immunity was waived because the issuer’s claims were not for monetary relief, even though Monterey relief may result. The claim is also not barred as a contract with the federal government because it instead arises under the ACA and HHS regulations. The court also held that HHS’ decisions to use diagnoses in the individual risk score, the exclusion of partial year enrollees and use of prescription drug data were not arbitrary and capricious decisions. Finally, the court held that the risk adjustment formula does not effectively eliminate bronze level plans.
The case is No. CIV 16-0878 JB/JHR.
Attorneys: Barak A. Bassman (Pepper Hamilton, LLP) and Nancy Ruth Long (Long Komer & Associates, PA) for New Mexico Health Connections. Arjun Garg, U.S. Department of Justice, for U.S. Department of Health and Human Services and Centers for Medicare and Medicaid Services.
Companies: U.S. Department of Health and Human Services; Centers for Medicare and Medicaid Services; New Mexico Health Connections
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