On December 31, 2019, a 3-0 panel of the United States Court of Appeals for the Tenth Circuit upheld the methodology adopted by HHS to administer the risk adjustment program under the Affordable Care Act (ACA). See New Mexico Health Connections v. U.S. Department of Health & Human Services et al., No. 18-2186 (10th Cir. 2019).
The ACA’s permanent risk adjustment program, designed to discourage insurers from cherry-picking healthier enrollees over sicker patients, transfers funds from non-grandfathered plans with healthier enrollees in the individual and small group markets to non-grandfathered plans with enrollees who are less healthy. Section 1343 of the ACA directs HHS to develop standards for this program, and several insurers challenged parts of HHS’s formula, particularly taking issue with HHS’s decision to base transfers on statewide average premiums—rather than each plan’s premium—in its risk adjustment formula.
These insurers have argued that the use of a statewide average premium disadvantages smaller, newer, and lower-priced health plans in favor of larger ones. New Mexico Health Connections (NMHC), a CO-OP in New Mexico, brought this challenge in district court. The district court ruled that the formula was arbitrary and capricious, striking it down for the years 2014 to 2018 until HHS could justify its rationale for adopting a budget-neutral risk adjustment program. See New Mexico Health Connections v. United States Department of Health and Human Services et al., No. 1:2016cv00878 – Doc. 55(D.N.M. 2018). This determination resulted in the Trump administration’s immediate suspension of about $10.4 billion in risk adjustment payments in the summer of 2018.
The Tenth Circuit, however, disagreed with the district court, and concluded on December 31, 2019 that HHS’s use of the statewide average premium was not arbitrary or capricious, that the risk adjustment program must be budget neutral, and that HHS should have been given more deference. Judge Scott Matheson wrote that HHS acted reasonably in using a formula that relied on the statewide average premium, stating that courts “cannot second guess an agency’s rulemaking decision when it provided reasons for its chosen course of action.”
The ruling reinstates HHS’s risk adjustment methodology and means that HHS need not take additional action to justify its methodology for 2014 through 2016. Risk adjustment payments based on the methodology will continue without disruption. Because HHS had subsequently issued new rules covering the 2017 and 2018 methodologies, the challenges over the rules for those years are moot.
