On Saturday, July 7, 2018, the Centers for Medicare & Medicaid Services (CMS) announced the suspension of risk adjustment payments for the 2017 benefit year until the resolution of risk adjustment litigation following the decision in New Mexico Health Connections v. United States Department of Health and Human Services et al., in the United States District Court for the District of New Mexico (No.1:16-cv-00878). CMS seeks a “quick resolution,” but in the meantime approximately $10.4 billion in risk adjustment payments will be held. This adds additional uncertainty to individual and small group markets. Insurers are in the process of setting rates for the 2019 benefit year. America’s Health Insurance Plans and the Blue Cross Blue Shield Association promptly released statements critical of the Trump Administration’s decision to freeze risk adjustment payments.
Congress in the Affordable Care Act (ACA) created three premium stabilization programs: risk corridors, reinsurance, and risk adjustment. The risk corridors and reinsurance programs were temporary programs. The risk adjustment program, created by section 1343 of the ACA, is a permanent program that applies to non-grandfathered plans in the individual and small group insurance markets, both inside and outside of the marketplace. The purpose of risk adjustment is to distribute risk evenly by transferring funds from plans with healthier participants to funds with less healthy participants, thus discouraging insurers from cherry picking healthier enrollees over less healthy enrollees. The HHS risk adjustment methodology is based on the premise that premiums should reflect the differences in plan benefits, quality, and efficiency, and not the health status of their enrollees. See 78 Fed. Reg. 15409 (March 11, 2013).
States operating their own Exchanges may establish their own risk adjustment program or allow the federal government to run the program. If a state chooses not to operate an exchange, it must use the federal risk adjustment model. While Massachusetts operated their own risk adjustment program in the first years of the Exchange, HHS presently operates risk adjustment programs in all states.
CMS released the annual Summary Report on Permanent Risk Adjustment Transfers for the 2017 Benefit Year on July 9, 2019. The report stated that for the 2017 benefit year the absolute value of total risk adjustment transfers across markets was 8 percent of total premiums. CMS reaffirmed that:
The permanent risk adjustment program is working as intended by more evenly spreading the financial risk borne by issuers that enrolled higher-risk individuals, thereby protecting issuers products that serve all types of consumers.
As in past years, CMS determined that a strong correlation exists between the amount of paid claims and risk adjustment transfers.
II. Split in Federal District Courts
Two federal district courts have heard challenges to the HHS risk adjustment methodology, reaching opposite conclusions. In both cases the insurers alleged that CMS’ implementation of the methodology was arbitrary and capricious.
In Minuteman Health Inc. v. HHS (Civ. Action No. 16-11570-FDS), the Federal District Court for the District of Massachusetts granted summary judgment in favor of the government. Judge Saylor held that the use of the statewide average premium in the risk adjustment transfer formula was not arbitrary and capricious, noting that HHS considered several other options in detail before making a rational decision. In response to the plaintiff’s contention that the statute does not require risk adjustment programs to be budget neutral and therefore the assumption of budget-neutrality is unreasonable and arbitrary, the court countered that the statute does not prohibit budget-neutrality. The court found that “showing that there are other ways a budget-neutral program might have been achieved is not a showing that what HHS actually did was unreasonable or arbitrary.”
Furthermore, HHS did not fail to adequately explain its decision in assuming budget-neutrality when designing its risk adjustment program. The court found no evidence that there was any significant comment that HHS failed to address, and “HHS considered the effects of non-budget-neutral methodologies and rationally chose to operate a budget-neutral program.” Relative predictability and rational consideration of the options were sufficient reasons for using the statewide average premium in the risk adjustment calculation.
ii. New Mexico
In New Mexico Health Connections, the Court held that while risk adjustment based on budget neutrality is not unlawful, the use of the statewide average premium was arbitrary and capricious. Judge Browning found that HHS’ justification incorrectly assumed that the ACA requires risk adjustment to be budget neutral. Because HHS never made this explicit determination and simply assumed that the ACA required budget neutrality, the court found HHS’ use of statewide average premiums to be arbitrary and capricious.
However, the court went on to say that this could simply be remedied by HHS determining on the record that budget neutrality is a worthy policy goal. The court acknowledged the policy implications, stating “there may be excellent policy reasons for making the risk adjustment plan budget neutral.” According to the court, the lack of an explicit statement linking budget neutrality to a specific policy goal, such as preventing plans from avoiding high risk enrollees, prevents HHS from using public policy as a justification for the use of statewide average premiums.
III. Next Steps and Implications
CMS filed a Motion to Alter Judgment in the New Mexico Health Connections case and a hearing was held on June 21, 2018. A decision is expected shortly. There is speculation that CMS may issue an interim final rule with a more robust explanation for why risk adjustment was implemented in a budget neutral manner and to support the use of statewide average premium. Others have noted that instead of delaying risk adjustment payments, the Department of Justice could have filed a notice of appeal and sought a stay pending appeal. The CMS press release states that CMS will soon provide additional guidance on how it will handle “other issues relating to risk adjustment payments, including EDGE server data collection operations, appeals of 2017 risk adjustment amounts.” It also notes that statewide average premium was part of a regulation first issued by the Obama administration, despite the fact that the Trump administration has now implemented the same approach in two annual Payment Notice rulemakings. In the Notice of Benefit and Payment Parameters for 2019 (HL Pulse summary here) CMS provided the type of robust explanation in support of budget neutrality and the use of the statewide average premium that Judge Browning found to be necessary.
Depending on how long the 2017 payments are frozen, some insurers may be more negatively affected than others; larger insurers that are due risk adjustment payments potentially face major losses if the 2017 payments are cancelled. Insurers with healthier enrollees may benefit from not having to make anticipated risk adjustment payments and having a greater amount of cash on hand. While the decision to suspend payments has created additional uncertainty for insurers, it is not expected to affect insurer decisions about whether to offer plans for the 2019 benefit year. In part, this is the result of the additional support provided in the preamble of the 2019 Payment Notice final rule published in April.
*Special thanks to Rachel Park for assistance in preparing this post.