Insurance co-op New Mexico Health Connections won a partial victory in its lawsuit against the federal government over the Affordable Care Act's risk-adjustment program.
U.S. District Judge James Browning in New Mexico ruled that HHS couldn't use statewide average premiums to come up with its risk-adjustment formula because the agency wrongly assumed the ACA required the program to be budget-neutral.
"HHS' justifications for using the statewide average premium instead of a plan's own premium all assume that the ACA requires risk adjustment to be budget-neutral, which is not correct," he wrote in his opinion.
However, Browning tossed the co-op's other claims challenging how the risk-adjustment program was set up.
The ACA's permanent risk-adjustment program was meant to reduce the incentive for health plans to cherry-pick healthy members. It works by shuffling money from plans with healthier-than-average members to plans with larger numbers of sicker, high-cost members. The program is based on a patient's risk score, which is determined by a person's demographic information and health condition.
But smaller, regional plans and ACA co-ops say that their membership bases look healthier than they are. One reason could be that newer insurers have limited information on their members' health status and claims history. Legacy insurers that have a wealth of patient data may have a leg up on coding. Small health plans also have far less capital than more established insurers to comfortably make large risk-adjustment payments.
New Mexico Health Connections initially sued the federal government over the risk-adjustment program in July 2016, arguing that the Obama administration implemented the program in a way that penalizes new, low-cost insurance companies, while rewarding larger legacy health plans. It argued that the risk-adjustment formula is flawed in part because it uses the statewide average premium to set the amount of payments and charges for plans.
Browning also ruled that HHS' methods of predicting the health costs of plan members, as part of the risk-adjustment formula, is reasonable, as is HHS' decision surrounding the use of data on partial-year enrollees and prescription drugs in its formula. Finally, the judge found that HHS' risk-adjustment program does not effectively eliminate bronze-level ACA plans, as New Mexico Health Connections had argued.
Health Connections said it was required to pay $6.7 million, or 21.5% of its 2014 premiums, to the risk-adjustment program that year. In 2015, Health Connections was required to pay $14.6 million, or 14.7% of its premiums that year. The co-op said the large risk-adjustment payments it was forced to make imposed a huge burden on the company.
"The flaws in CMS' formula penalize NMHC for offering low premium, high quality plans and reward its competitors, like the market-dominating BCBSNM, for keeping their prices high—an absurd distortion of Congress's clear intent to create an affordable, competitive insurance marketplace," Health Connections said in its initial 2016 complaint.
Browning's decision splits with a January federal court ruling in another risk-adjustment lawsuit brought by failed Massachusetts co-op Minuteman Health. In that case, U.S. District Judge Dennis Saylor in Massachusetts upheld HHS' authority to implement the risk-adjustment program as it did. Several other small plans and not-for-profit co-ops formed under the ACA have also sued over the risk-adjustment formula.