A federal appeals court earlier this week upheld the HHS' methodology for running the Affordable Care Act risk-adjustment program, which will hurt small insurers that have argued the program is flawed and favors larger companies with more claims experience.
The three-judge panel of the 10th U.S. Circuit Court of Appeals on Dec. 31 reversed a lower court decision that struck down part of the ACA risk-adjustment methodology. The appeals court found that the "HHS acted reasonably" in coming up with the formula used to calculate charges and payments to health insurers under the program. It also told the District Court to vacate its judgment on other aspects of the challenge that are now moot.
The decision ensures risk-adjustment payments based on the current methodology will continue, which is good news for well-established companies, including many Blue Cross and Blue Shield affiliates.
"It's certainly a victory for the status quo, which has tended to benefit large insurers at the expense of smaller insurers," Katie Keith, a Georgetown University law professor who tracks ACA litigation, said in an email.
The permanent risk-adjustment program shuffles money from plans with healthier-than-average members to plans with sicker, high-cost members. It is meant to discourage insurers from cherry-picking healthy enrollees.
Health insurance co-op New Mexico Health Connections, which was charged millions of dollars under the program, sued the federal government in 2016 over the risk-adjustment formula's use of the statewide average premium to calculate charges and payments from 2014 to 2018. It argued the methodology penalized new, low-cost plans.
U.S. District Judge James Browning sided with New Mexico Health Connections in March 2018. Browning ruled that HHS' use of the statewide average premium was arbitrary and capricious because it didn't explain its reasoning and based its rationale on the incorrect assumption that the risk-adjustment program had to be budget-neutral.
HHS subsequently halted $10.4 billion in risk-adjustment payments for 2017 until it issued new rulemaking that explained its use of statewide average premiums over health plans' own premiums and the program's budget-neutral design.
The 10th Circuit felt differently.
"The administrative record is replete with reasoned explanations for why HHS chose to use the statewide average premium in its formula," Judge Scott Matheson wrote in the opinion.
He pointed to a 2011 white paper that HHS relied on when it first proposed its risk-adjustment methodology. He said HHS explained during the rulemaking process that using the statewide average premium would help it "promote risk-neutral premiums" and create "a straightforward and predictable benchmark for estimating transfers." No commenters challenged the use of the statewide average premium in the 2014, 2015 and 2016 rules, he noted.
The 10th Circuit further found that HHS acted reasonably in using a budget-neutral program design.
"The administrative record shows HHS would have designed its program to be budget neutral even if it had used the plans' own premiums rather than the statewide average premium in its formula," Matheson wrote.
Moreover, he said the budget-neutral design was not a choice but a necessity given Congress did not appropriate money for the risk-adjustment program.
The 10th Circuit reversed the District Court's summary judgment ruling for New Mexico Health Connections for the 2014, 2015 and 2016 HHS rules. But it said the challenges regarding the 2017 and 2018 rules are moot because HHS issued new rules for those years that better explained its methodology. It remanded the challenges to those rules back to the District Court to vacate its judgment and dismiss.
Marlene Baca, CEO of New Mexico Health Connections, said Thursday she is disappointed in the court's decision but hasn't yet determined how the co-op will respond. Keith noted in a blog post that the co-op could appeal to the U.S. Supreme Court, but it's unclear if the high court would agree to hear the case.
"We still feel very strongly on the reasons why we did initially file this lawsuit, but we'll be working with our board of directors to make the final decision on our next steps," Baca said.
Meanwhile, the Blue Cross and Blue Shield Association said the decision would ensure stable health insurance coverage for Americans.
"Risk-adjustment balances the cost of care between healthy Americans and those with significant medical needs and is working as intended. Its smooth operation is vital to ensure access to a broad range of coverage options for millions of individuals and small businesses," Kris Haltmeyer, the Blues association's vice president of legislative and regulatory policy, wrote in an emailed comment.
Blue Cross and Blue Shield companies historically have been big risk-adjustment program winners. Combined, the Blues companies, including Anthem, are slated to receive $2.5 billion in risk-adjustment payments for the individual market and another $567.4 million for the small-group market for 2018.