The United States Court of Appeals for the Tenth Circuit has reversed a district court decision that found flaws in the Department of Health & Human Services’ (HHS) risk adjustment formula. The decision is a blow to small insurers, particularly the New Mexico co-op that argued in a lawsuit that the way the federal government implemented the Affordable Care Act risk adjustment program “brutally penalizes new innovative, low-cost insurance companies and flouts Congress’ intent in enacting the ACA.”
The court decision, first reported by Katie Keith in the Health Affairs Blog, was passed down on Dec. 31, 2019. The three-judge panel disagreed with a previous ruling by the district court in New Mexico that struck down the use of the statewide average premium in the payment transfer formula for the 2014-2018 benefit years. The latest ruling reinstates HHS’ risk adjustment methodology for 2014 through 2016. The panel determined that the challenges over the rules for 2017 and 2018 methodologies are moot because HHS issued new rules for those benefit years.
It’s unclear whether this will be the final say in the legal saga. As Keith noted in her detailed report of the case, New Mexico Health Connections, the consumer operated and oriented (cooperative) health plan that brought the 2016 lawsuit, could request that the entire Tenth Circuit rehear the case or appeal it directly to the Supreme Court. The co-op has yet to comment on the latest ruling.
Under the ACA, the risk adjustment program is meant to compensate insurers in the individual and small group markets who have sicker enrollees and therefore have higher medical costs. The risk adjustment program transfers funds from plans with relatively low-risk enrollees to plans that have higher-risk enrollees. The formula should spread the financial risk across the markets and allow insurers to compete with one another based on price, efficiency, and service quality.
The ACA tasks HHS with developing the formula to determine the payment transfers between plans. But the co-op objected to the methodology to base the redistribution of funds on the average statewide premium instead of each plan’s premium. The co-op has argued that the formula is unfair because its enrollees in the individual insurance market were slightly sicker than the state average and its small group market enrollees were only one percent healthier than the state average. Under the federal government’s formula, the co-op would owe millions of dollars, not because it has healthier members but because its small group premiums were 22 percent below the state average. The co-op said it was being penalized for lowering prices to small businesses and consumers and making healthcare more affordable.
In February 2018 a U.S. District Court vacated the use of the statewide average premium in the payment transfer formula for the 2014-2018 benefit years. HHS then temporarily froze payments in July, but weeks later reversed its decision under pressure from stakeholders who worried insurers would have to withdraw from the markets without the payments. That reversal was part of an emergency final rule that included the existing methodology to resume payments for the 2017 benefit year. The agency proposed a similar rule for the 2018 payments.
Although the co-op’s suit challenged the HHS assumption that the risk adjustment program must be budget neutral and its use of the statewide average premiums in the payment transfer formula, Kevin Mowll, executive director of the RISE Association, said there was a larger issue at the root of the case: the design of the “public option” scenario in the design of the ACA marketplace itself.
“This lawsuit was perhaps the last whimper from those unfortunate health plans spawned by the ACA legislation whose destinies were blighted from the very beginning,” Mowll said. “That is because they were conceived as quasi-public option plans. But they were set up for failure with their proverbial hands tied behind their backs, sent out into the competitive marketplace hobbled by restrictions on their funding sources (inadequate seed money from the federal government) and denied access to industry talent and experience. They were viewed as hedges against the potentially opportunistic moves feared from for-profit plans, but they were disadvantaged from the very start when 23 of them began operations. By 2017, there were only four remaining.”
Mowll pointed to a post on Ballotpedia that referenced an American Enterprise Institute study that summarizes the reasons for the failure of the co-op plans in the ACA marketplace. Among those reasons: the co-ops didn’t know how to price their premiums; they priced the premiums so low that they didn’t cover medical costs; they had to lease networks of physicians and facilities from other insurance companies, which drove up costs; and the money from temporary risk corridors was less than expected.
“The reason it is important to learn from this experiment is that there is much talk about Medicare For All right now as a solution to our lack of a comprehensive, universal coverage for health insurance in America,” Mowll said. “Some of the models proposed rely on the introduction of public options in their formulas. Given the rueful experiences of the co-ops under the ACA program, we should think very carefully about why they were created, how they were set up, and how they came crashing down so quickly and so decisively.”
Mowll noted that there are other models for public options that have fared quite well, for example LA Care in Los Angeles County, which as more than two million members. “It is important to learn why and how the LA Care model is successful in comparison with the ACA marketplace co-op model if we have any serious thoughts about resurrecting public option scenarios in future health policy designs,” he said.