A legal technicality could shake up the Medicare Advantage Star Ratings program, force the Centers for Medicare and Medicaid Services to redo scores across the insurance industry and complicate the contracting process for next year.
A federal judge ruled Monday that CMS violated the Administrative Procedure Act of 1946 when it modified how star ratings are calculated in 2022. Although the U.S. District Court for the District of Columbia decision only directly applies to the plaintiff, SCAN Health Plan, it may trigger seismic shocks across Medicare Advantage.
Related: SCAN wins Medicare Advantage star ratings lawsuit against CMS
CMS may have to revisit star ratings across the industry, pay out millions more in bonuses and issue last-minute guidance about how it will assess quality, said Nate Lucena, chief strategy and analytics officer at Rex Wallace Consulting, which advise insurers on star ratings. And if CMS were to redo scores for the current plan year, it may need to give insurers additional time to submit new contract bids for 2025, he said.
“It really does open up the floodgates for what other payers are going to seek from CMS,” Lucena said.
Elevance Health, Zing Health and Hometown Health Plan, a division of Reno, Nevada-based Renown Health, have filed similar legal challenges to the Star Ratings methodology.
What is SCAN v. HHS?
SCAN Health Plan's lawsuit rested not so much on the contents of the CMS regulation that altered the Star Ratings program but on how the agency went about making it.
In 2020, CMS announced it would introduce a new tool called the Tukey Outer Fence Outlier Deletion Method to smooth over statistical anomalies in quality data.
But the agency failed to include these provisions in a proposed rule published in 2022. CMS then restored the language in a different regulation published later that year. The agency finalized that rule in 2023 and implemented the new system for the 2024 plan year.
According to SCAN Health Plan — and Judge Carl Nichols — that broke the Administrative Procedure Act, which is designed to ensure federal agencies abide by rulemaking standards, including providing the public opportunities to comment on proposals.
The new policy caused SCAN Health Plan's star ratings to dip below the four-stars-out-of-five threshold required to secure quality bonuses, costing the company more than $250 million, the plaintiff alleged.
SCAN Health Plan CEO Dr. Sachin Jain said he expects CMS will recalculate its scores and allocate the money.
"This ruling will have significant implications for us and our ability to deliver the benefits we want," said Jain, who held positions at CMS and the Health and Human Services Department under President Barack Obama.
CMS, which declined to comment, may appeal the ruling. HHS did not respond to interview requests.
What does it mean for the competitive landscape?
If CMS raises SCAN Health Plan's scores and provides bonuses that would enable it to offer better benefits, lower premiums or both, the company would be in a better competitive position.
Alignment Health, for example, has emphasized its higher star ratings as an advantage over rivals such as SCAN Health Plan, which operates in the same geographic areas, Scott Fidel, managing director at the investment bank Stephens, wrote in a note to investors Tuesday.
“This could impede Alignment’s anticipated opportunity to grab share from SCAN for 2025,” Fidel wrote.
Alignment Health did not respond to an interview request.
How did Star Ratings change?
CMS sought to restrain the Star Ratings program after high scores proliferated and bonus payouts ballooned. The agency identified the Tukey method as a way to account for statistical outliers and better assess comparative quality.
These quality ratings are on a curve, so eliminating outliers depressed scores across the sector. More than half of Medicare Advantage contracts rated at least 4.5 last year received lower scores this year as a result, said Dwight Pattison, a consultant at Quality Performance Advantage. High-performing insurers were most impacted, he said.
How will other insurers react?
“There's a weird, celebratory feeling in the industry right now," Pattison said. "Insurers had felt punished by CMS."
SCAN Health Plan's victory is likely to spur other Medicare Advantage carriers to seek relief, said Andrew Bell, a senior manager at ProspHire, an insurance consulting company. "I've already had a couple of clients reach out this morning to rerun numbers and take a closer look at some of this,” he said.
And although Nichols did not rule on SCAN Health Plan's complaint that CMS erroneously included data on the insurer's call centers in its quality review, other carriers may see that as another avenue for legal or regulatory action.
In March, Elevance Health announced that CMS agreed to dispense an additional $190 million in Star Ratings bonuses after the insurer questioned how the agency factored in its call center services.
What happens to other Star Ratings lawsuits?
The pending cases from Elevance Health, Zing Health and Hometown Health Plan may now be moot, said Sean Creighton, a managing director at the consulting company Avalere.
"Once one is decided, it's decided. The other ones will be dismissed," said Creighton, who was a CMS official from 2000 to 2015. "There's no point in piling on. CMS has got the message."
Nevertheless, Elevance Health submitted a brief Tuesday in its case drawing attention to the SCAN Health Plan ruling. “The same result should issue here,” the company wrote. The insurer did not respond to interview requests.
The Elevance Health and Zing Health cases are at the same federal court as the SCAN Health Plan lawsuit, but before different judges. The U.S. District Court for the District of Nevada is considering the Hometown Health Plan complaint.
What does CMS do next?
Unless CMS appeals and the ruling is stayed, it will have to scrap Tukey and revert to its previous methodology, Creighton said. The agency would need to issue a new regulation that retains Tukey for the 2025 plan year and beyond, he said. That would create an opening for future lawsuits, however, he said.
“If you lose the appeal, then you still have all the consequences of the plans having built something into their bids, and their planned benefit packages, and that doesn't come to pass," Creighton said. "That doesn't seem terribly wise.”
