A U.S. District Court judge has denied the federal government’s request to reconsider a prior ruling that found flaws in the Department of Health and Human Services’ risk adjustment formula. But this doesn’t mean the court case is over.
A U.S. District Court judge has denied the federal government’s request to reconsider a prior ruling that found flaws in the Department of Health and Human Services’ (HHS) risk adjustment formula.
Judge James O. Browning of the U.S. District Court for the District of New Mexico issued the ruling on Oct. 19 stating the court stands by its initial determination that a part of the HHS risk adjustment formula is “arbitrary and capricious and that vacating the formula and remanding to HHS for further consideration is the appropriate remedy.”
But this doesn’t mean the court case is over. Health Affairs, which first reported the news about the ruling, said HHS will likely appeal the ruling because its risk adjustment formula was upheld in a separate case heard in a federal district court in Massachusetts.
The goal of risk adjustment is 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 relatively high-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 risk adjustment program saga
Under the Affordable Care Act, HHS is tasked with developing the formula to determine the payment transfers between plans. But some insurers object to its decision to base the redistribution of funds on the average statewide premium instead of each plan’s premium. The agency maintains that it adopted statewide average premiums because the risk adjustment program must be budget neutral. In 2016, New Mexico Health Connections, a consumer operated and oriented (cooperative) health plan, filed a lawsuit, claiming that the way the federal government implemented the risk adjustment program “brutally penalizes new, innovative, low-cost insurance companies.”
Browning ruled earlier this year that HHS must vacate the use of statewide average premiums in its risk adjustment methodology for the 2014-2018 benefit years. As a result, the Centers for Medicare & Medicaid Services (CMS) initially suspended more than $10 billion in payments for the 2017 benefit year. It then reversed course and via an emergency regulation, moved ahead with plans to restore risk adjustment payments using statewide average premiums for the 2017 year and via proposed rule for the 2018 plan year.
New Mexico Health Connections, one of four co-ops that remain out of the 23 created by the Affordable Care Act, has filed another lawsuit, challenging the latest CMS decision, as well as an immediate motion for a summary judgment, asking the court to strike down the CMS emergency rule because the agency rolled it out without a period for public comment.
The co-op believes 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’s being penalized for lowering prices to small businesses and consumers and making healthcare more affordable.
“The risk adjustment formula puts small, new, and lower-priced health plans at a disadvantage,” Marlene C. Baca, CEO of the co-op, said in a written statement this summer. The formula, she said, penalizes any type of plan that tries to be innovative.
“If we have improved medical management or health outcomes, that should then lower premiums. Instead, the formula really hurts the consumers we serve … because it is so unpredictable and because it does inflate the members’ premium,” she said.