Opinion ID: 4468429
Heading Depth: 2
Heading Rank: 2

Heading: Agency and District Court Proceedings

Text: We present in chronological order the agency and district court proceedings leading to this appeal. As this presentation shows, the agency and court proceedings overlapped towards the end. We describe: 1. HHS’s preparation for and its conduct of the notice-andcomment proceedings that led to the 2014 risk adjustment rule; 14 2. the agency’s notice-and-comment proceedings that led to the 2015, 2016, and 2017 rules; 3. NMHC’s 2016 district court complaint; 4. the agency’s proceedings that led to the 2018 rule; 5. NMHC and HHS’s cross-motions for summary judgment and the district court’s ruling on those motions; 6. HHS’s Rule 59(e) motion challenging the district court’s summary judgment order; 7. the agency’s proceedings, in response to the district court’s summary judgment order, that led to modifications to the 2017 and 2018 rules; and 8. the district court’s denial of HHS’s Rule 59(e) motion. Notice-and-Comment Proceedings for the 2014 Rule HHS began its work on the risk adjustment program shortly after the ACA’s enactment. Before developing the details of the program, HHS promulgated a rule establishing general standards for the stabilization programs, including the risk adjustment program. 12 See Stabilization Rule, 77 Fed. Reg. at 17,220-52. 12 In the rulemaking process, HHS discussed the general features of the risk adjustment program, noting “risk adjustment is designed as a budget neutral activity.” Standards Related to Reinsurance, Risk Corridors and Risk Adjustment, 76 Fed. Reg. 41,930, 41,938 (July 15, 2011) (“Proposed Stabilization Rule”). No commenter addressed the adequacy of HHS’s explanation of either budget neutrality or the statewide average premium in this rulemaking proceeding. See id. at 41,937-40; Stabilization Rule, 77 Fed. Reg. at 17,220-52. 15 In late 2011, the Center for Consumer Information and Insurance Oversight (“CCIIO”), an agency within HHS charged with helping to implement ACA reforms, published a white paper on risk adjustment concepts to “begin the consultation process around the development of the [f]ederally-certified risk adjustment methodology developed by HHS and provide context for individuals to submit comments.” 2011 White Paper at 3; see 2014 Proposed Rule, 77 Fed. Reg. at 73,122. In a bulletin published in early 2012 (“2012 Bulletin”), HHS outlined its plan for implementing the program on behalf of a state. See 2014 Proposed Rule, 77 Fed. Reg. at 73,122. In mid-2012, HHS also hosted a public meeting to discuss the plan. See id. On December 7, 2012, HHS proposed the first risk adjustment rule for benefit year 2014. 2014 Proposed Rule, 77 Fed. Reg. at 73,118-218. It solicited and received comments for the rule and published the final rule on March 11, 2013 (“the 2014 rule”). See 2014 Final Rule, 78 Fed. Reg. at 15,410-541. We describe the foregoing in greater depth below, focusing on HHS’s decision to use the statewide average premium in a risk adjustment program where total charges would equal total payments—that is, budget neutrality.
In the 2011 White Paper, CCIIO considered four alternatives to establish a “baseline premium” for the payment transfer formula: “weighted state average premiums,” “weighted rating area average premiums,” “actuarial value-adjusted 16 weighted average premiums,” and “plans’ own premiums.” 2011 White Paper at 14. 13 Because NMHC argued only in favor of using the plans’ own premiums, we focus on HHS’s choice to use the statewide average premium over the plans’ own premiums. CCIIO noted in the 2011 White Paper that using the statewide average premium “would result in balanced payments and charges” and “could be calculated with or without adjustment.” Id. It expressed concern that using the plans’ own premiums would “create disincentives” for some plans because “the amount of charges and payments would be affected by each plan’s premiums.” Id. It explained that “[f]or plans with a sicker than average risk mix, a lower premium plan would receive less in payments than a higher premium plan, even if the two plans have the same risk level.” Id. CCIIO feared this “could create disincentives for high-risk plans to operate efficiently or set lower prices.” Id. It also noted additional calculations would be needed for all options “except for the [s]tate average,” id. at 15, meaning that using the statewide average premium would automatically make transfers net to zero whereas using plans’ own premiums would require additional adjustments. 13 The parties included only an excerpt of the 2011 White Paper in their appendices. We consider the entire 2011 White Paper because the agency relied on it in promulgating its 2014 rule and it was included in the administrative record below. See Dist. Ct. Doc. 25, Ex. A at 2. 17 CCIIO sought comments on each of the four alternatives and whether it should consider other alternatives. See id. at 16-17. It also provided an appendix with “examples to examine implications of the approaches to calculate and balance payments and charges in greater detail.” Id. at 16, 29-56.
HHS described its key findings about operating the risk adjustment program in a 2012 bulletin—an informational guidance document. U.S. Dep’t of Health & Human Servs., Bulletin on the Risk Adjustment Program: Proposed Operations by the Department of Health and Human Services, 3-5 (May 1, 2012). It emphasized how permissible plan differences affect plan premiums. Id. HHS said it would need to control these different factors to ensure “payment transfers compensate for liability differences due to health status” not for other permissible differences. Id. at 5. HHS also noted its payment methodology “need[ed] to be balanced” and acknowledged this budget-neutral design “has significant implications for the equation that is used for calculating payments.” Id.
In its proposed 2014 rule, HHS explained its decision to use the statewide average premium in the formula in a section titled “Rationales for a Transfer Methodology Based on State Average Premiums.” See 2014 Proposed Rule, 77 Fed. Reg. at 73,139. It said the statewide average premium “provides a straightforward and predictable benchmark for estimating transfers.” Id. Using the plans’ own 18 premiums “could introduce differences in premiums across plans that were not consistent with features of the plan.” Id. HHS thus sought to balance predictability with “preserving premium differences.” Id. No commenter challenged HHS’s decision to use the statewide average premium for the 2014 rule. See 2014 Final Rule, 78 Fed. Reg. at 15,430-32. Some comments supported HHS’s choice to do so. See 2014 Final Rule, 78 Fed. Reg. at 15,432. For example, HHS noted, “We received a number of comments in support of our proposal to use the [s]tate average premium as the basis for risk adjustment transfers. One commenter suggested that use of a plan’s own premium may cause unintended distortions in the transfer formula.” Id. In its responses to those comments, HHS said The goal of the payment transfer formula is, to the extent possible, to promote risk-neutral premiums. We agree with commenters that use of a plan’s own premium may cause unintended distortions in transfers. . . . We are finalizing our proposal to base the payment transfer formula on the [s]tate average premium. Id. No commenter challenged HHS’s decision to design its program as budget neutral such that transfer payments “net to zero.” See 2014 Proposed Rule, 77 Fed. Reg. at 73,139; 2014 Final Rule, 78 Fed. Reg. at 15,417-36. The risk adjustment program in the 2014 rule thus used the statewide average premium as the baseline in the formula. The rule provided that transfer payments and charges would be budget neutral, meaning HHS would not provide any additional 19 funds to pay for the transfers. The program developed in the 2014 rule became the blueprint HHS followed in promulgating the rules for the ensuing benefit years. Notice-and-Comment Proceedings for the 2015, 2016, and 2017 Rules HHS adopted a similar risk adjustment program in its 2015, 2016, and 2017 rules. Because the rules used the statewide average premium in the payment transfer formula and built upon prior proceedings, the 2015, 2016, and 2017 rules relied on the same reasoning as the 2014 rule. See 2015 Final Rule, 79 Fed. Reg. at 13,753 (“We proposed to use the [2014] methodology in 2015 . . . .”); 2016 Final Rule, 80 Fed. Reg. at 10,760 (“We proposed to continue to use the same risk adjustment methodology finalized in the 2014 [rule] . . . .”); 2017 Final Rule, 81 Fed. Reg. at 12,217 (same). a. 2015 Rule On December 2, 2013, HHS published a proposed rule for the 2015 benefit year. 2015 Proposed Rule, 78 Fed. Reg. 72,322, 72,322-92 (Dec. 2, 2013). On March 11, 2014, it published the final rule for 2015 (“the 2015 rule”). 2015 Final Rule, 79 Fed. Reg. at 13,744-843. HHS included no additional reasoning about its decision to use the statewide average premium or its budget-neutral design, see 2015 Proposed Rule, 78 Fed. Reg. at 72,322-92; 2015 Final Rule, 79 Fed. Reg. at 13,744843, and no commenter challenged either, see 2015 Final Rule, 79 Fed. Reg. at 13,744-843. 20 b. 2016 Rule On November 26, 2014, HHS published a proposed rule for the 2016 benefit year. 2016 Proposed Rule, 79 Fed. Reg. 70,674, 70,674-760 (Nov. 26, 2014). On February 27, 2015, it published the final rule for 2016 (“the 2016 rule”). 2016 Final Rule, 80 Fed. Reg. at 10,750-877. As with the 2015 rule, HHS included no additional reasoning about its decision to use the statewide average premium or its budget-neutral design, see 2016 Proposed Rule, 79 Fed. Reg. at 70,674-760; 2016 Final Rule, 80 Fed. Reg. at 10,750-877, and no commenter challenged either, see 2016 Final Rule, 80 Fed. Reg. at 10,750-877. c. 2017 Rule On December 2, 2015, HHS published a proposed rule for the 2017 benefit year. 2017 Proposed Rule, 80 Fed. Reg. 75,488, 75,488-588 (Dec. 2, 2015). HHS published the final rule for 2017 on March 8, 2016 (“the 2017 rule”). 2017 Final Rule, 81 Fed. Reg. at 12,204-352. For the first time, HHS received comments opposing its use of the statewide average premium. It reported Some commenters opposed the use of the statewide average premium because it disadvantages issuers with below average premiums. Commenters requested that 2014 and later risk adjustment transfers for all plans with below average premiums in a [s]tate be calculated using the plans’ own average premium amount or average claims cost, so that efficient plans are not penalized using the [s]tatewide average premium. Id. at 12,230. HHS responded 21 We did not propose changes to the transfer formula, and therefore, are not addressing comments that are outside the scope of this rulemaking. We may be able to evaluate geographic differences in the future if we obtain enrolleelevel data for future recalibrations—a topic that we also intend to discuss in the White Paper and at the March 31, 2016 risk adjustment conference. Id. On March 24, 2016, HHS circulated the aforementioned white paper, which assessed the formula. See 2016 White Paper at 79-101. In it, CCIIO noted it used the statewide average premium both as “a premium and a cost scaling factor.” Id. at 83. It explained Over the long run, the [s]tatewide average premium is expected to equal the [s]tatewide average cost (including allowable loading for administrative costs, surplus, and profit). The [s]tatewide premium is therefore simultaneously a premium and cost scaling factor. The [s]tatewide average premium embeds an average level of efficiency. All plans receive a risk adjustment payment or charge sufficient for a plan with average efficiency. Two other reasons that transfers are scaled by the [s]tatewide average premium, as opposed to, for example, the plan’s own premium, are: • Using the [s]tatewide average premium minimizes issuers’ ability to manipulate their transfers by adjusting their own plan premiums. • Scaling all transfers to the same premium, combined with the assumption that the factors affecting premium requirements and allowable revenue have a multiplicative relationship, obviates any further adjustment of payments and charges to ensure that 22 risk adjustment transfers for the entire market sum to zero. Id. NMHC’s District Court Complaint On July 29, 2016, NMHC sued HHS, alleging that the agency violated § 1343 of the ACA and § 706 of the APA. Dist. Ct. Doc. 1 at 43-45. 14 NMHC alleged HHS’s use of the statewide average premium in its risk adjustment program in 2014, 2015, 2016, and 2017 was “arbitrary, capricious, and unlawful.” Id. at 45. It asserted that HHS “flout[ed] Congressional intent and the express mandate of the Risk Adjustment statute.” Id. NMHC filed its amended complaint on January 12, 2017, adding a challenge to the 2018 rule. See Supp. App. at 68-69. Notice-and-Comment Proceedings for the 2018 Rule On September 6, 2016, HHS published a proposed rule for the 2018 benefit year. 2018 Proposed Rule, 81 Fed. Reg. 61,456, 61,456-536 (Sept. 6, 2016). Because the 2018 rule incorporated and built upon previous proceedings, it relied on the same reasoning as the prior rules. See 2018 Final Rule, 81 Fed. Reg. at 94,100 14 Other lawsuits challenging the risk adjustment program include Minuteman Health Inc. v. U.S. Dep’t of Health & Human Servs., 291 F. Supp. 3d 174, 202 (D. Mass. 2018) (holding HHS’s use of the statewide average premium was not arbitrary and capricious), appeal not filed; Evergreen Health Coop., Inc. v. U.S. Dep’t of Health & Human Servs., No. 16-2039 (D. Md. Jan. 31, 2017) (entering stipulated dismissal of challenge to risk adjustment program); and Ommen v. United States, No. 17-957 (Fed. Cl. July 25, 2019) (staying risk adjustment challenge pending the Supreme Court’s resolution of Moda Health Plan, Inc. v. United States, No. 18-1028 (Oct. 25, 2019)). 23 (“The payment transfer formula is unchanged from what was finalized in the 2014 [rule] . . . except with an adjustment to remove a portion of the administrative costs from the [s]tatewide average premium . . . .”). On December 22, 2016, HHS published the final rule for 2018 (“the 2018 rule”). Id. at 94,058-183. HHS noted “[a] few commenters requested that HHS use a plan’s own actual average premium instead of the [s]tatewide average premium in the transfer formula.” Id. at 94,100. HHS responded We have considered the use of a plan’s own premium instead of the [s]tatewide average premium. However, our analysis determined that this approach is likely to lead to substantial volatility in transfer results and even higher transfer charges for low-risk low-premium plans. Under such an approach, high-risk, high-premium plans would require even greater transfer payments; thus, low-risk, lowpremium plans would be required to pay in an even higher percentage of their plan-specific premiums in risk adjustment transfer charges. In other words, the use of a plan’s own premium does not reduce risk adjustment charges for low-cost and low-risk issuers, given the budget neutrality of the risk adjustment program. Id. For the first time, HHS received comments challenging the budget-neutral design of the program. HHS reported A few commenters noted that the budget neutrality of the risk adjustment program leads to inadequate compensation for enrollees’ risk and recommended a non-budget neutral risk adjustment program as with Medicare Advantage. Id. at 94,101. It responded 24 In the absence of additional funding for the HHS-operated risk adjustment program, we continue to calculate risk adjustment transfers in a budget neutral manner and note that Medicare Part D risk adjustment transfers are also calculated in a budget neutral manner. Id. Cross-Motions for Summary Judgment and District Court Order In mid-2017, both NMHC and HHS moved for summary judgment. In its motion, NMHC made several arguments, including that HHS’s use of the statewide average premium to calculate risk adjustment transfer payments was arbitrary and capricious. It asserted it was charged $6,666,798 in transfer charges for the 2014 benefit year, representing 21.5 percent of its premiums. NMHC further asserted it was charged $14,569,495.74 for the 2015 benefit year, representing 14.7 percent of its premiums. NMHC alleged these fees were debilitating because industry margins were “typically, at best, a razor thin 2% [to] 3%.” Supp. App. at 258. In its cross motion for summary judgment, HHS contended its methodology was “eminently reasonable” and “easily satisfie[d] the APA’s standard of review.” Id. at 335. The district court granted summary judgment for NMHC, finding that HHS’s use of the statewide average premium was arbitrary and capricious. NMHC I, 312 F. Supp. 3d at 1170-72. 15 It noted that, “even though both [NMHC] and HHS ostensibly 15 NMHC and HHS advanced multiple arguments. The district court rejected all of NMHC’s claims except the one we address on appeal. The court concluded: 25 filed motions for summary judgment,” “district courts reviewing agency action do not determine whether a genuine dispute as to any material fact exists, and instead engage in a substantive review of the record to determine if the agency considered relevant factors or articulated a reasoned basis for its conclusions.” Id. at 1171 (quotations and citations omitted). In reviewing the APA challenge, the district court stated the issue was “whether incorporating statewide average premiums in . . . [the] risk[]adjustment [program] is contrary to law or arbitrary and capricious.” Id. at 1170. It held that “HHS’[s] use of statewide average premiums in its risk adjustment [program] is not contrary to law, but is arbitrary and capricious.” Id. The court said, “HHS assumed, erroneously, that the ACA requires risk adjustment to be budget neutral, and all of HHS’[s] reasons for using the statewide average premium rely on that budget neutrality assumption.” Id. at 1202. It noted HHS had justified using the statewide average premium to achieve “budget neutrality and predictability.” Id. at 1209. The court said that this assumption “infect[ed]” HHS’s “analysis of the relative merits of (1) the APA waived sovereign immunity for all claims presented; (2) HHS’s approach to predicting costs for enrollees (hierarchal condition category (“HCC”) “and non-HCC eligible enrollees”) was not arbitrary and capricious; (3) HHS’s decisions regarding partial-year enrollees and the use of prescription drug data in its risk adjustment model were not arbitrary and capricious; and (4) HHS’s payment transfer formula did not ban bronze health insurance plans. NMHC I, 312 F. Supp. 3d at 1171. We do not address these rulings because NMHC did not appeal the judgment. 26 using a state’s average premium . . . instead of a plan’s own premium,” including HHS’s explanation that the statewide average premium was more predictable. Id. The district court vacated HHS’s 2014, 2015, 2016, 2017, and 2018 rules. Id. at 1170-71. It entered judgment and remanded the case to the agency for further proceedings. Id. HHS’s Rule 59(e) Motion HHS moved to alter or amend the judgment under Federal Rule of Civil Procedure 59(e). First, it argued NMHC had waived any argument that HHS acted arbitrarily and capriciously regarding the budget-neutral design of the program because no commenter had challenged budget neutrality in the 2014, 2015, 2016, or 2017 rulemaking proceedings. HHS also said it sufficiently explained its budgetneutral design when it received comments to the 2018 rule. Second, HHS contended it had not interpreted the ACA to mandate budget neutrality but rather had designed the payment transfer formula to be budget neutral because no appropriations from Congress were available for the program. Third, HHS argued that vacating the rules was not required under the APA and would be manifestly unjust. Notice-and-Comment Proceedings for the Modified 2017 and 2018 Rules While this Rule 59(e) motion was pending, HHS attempted to adjust its 2017 and 2018 rules in response to the district court’s summary judgment order. On July 7, 2018, HHS suspended risk adjustment transfers for 2017 based on the uncertainty created by this case. See N.M. Health Connections v. U.S. Dep’t of Health & Human 27 Servs. (NMHC II), 340 F. Supp. 3d 1112, 1141 (D.N.M. 2018). HHS then notified the district court that it was formulating a new interim final rule for 2017. See Dist. Ct. Doc. 78 at 1-2. On July 25, 2018, HHS sent a letter to the district court announcing it had issued a new final rule on the risk adjustment methodology for the 2017 benefit year (“the new 2017 rule”). Dist. Ct. Doc. 81 at 1. Although the new rule adopted the same methodology as prior rules, HHS “provide[d] additional explanation of the agency’s use of [the] statewide average premium in the risk adjustment payment transfer formula, as well as the risk adjustment program’s budget neutral design.” Id. at 1. In the new 2017 rule, HHS explained it chose to use the statewide average premium to “support[] the overall goal of the risk adjustment program to encourage issuers to” set premium rates “for the average risk in the applicable state market risk pool.” New 2017 Final Rule, 83 Fed. Reg. 36,456, 36,457 (July 30, 2018). HHS also noted that using the statewide average premium “avoids the creation of incentives for issuers to operate less efficiently, set higher prices, develop benefit designs or create marketing strategies to avoid high risk enrollees.” Id. HHS also explained that it chose to use a budget-neutral design for the program for several reasons. First, “Congress designed the risk adjustment program to be implemented and operated by states if they choose to do so,” and HHS could not require the states to provide funding. Id. at 36,458. Second, it noted the ACA 28 “neither authorized nor appropriated additional funding for risk adjustment payments beyond the amount of charges paid in.” Id. “Thus, as a practical matter, Congress did not give HHS discretion to implement a program that was not budget neutral.” Id. Third, “if HHS had elected to adopt a . . . methodology that was contingent on appropriations from Congress . . . that would have created uncertainty for issuers in the amount of risk adjustment payments they could expect.” Id. After issuing the new rule, HHS implemented transfer payments for the 2017 benefit year. Id. at 36,459. On August 8, 2018, HHS sent a letter to the district court announcing it had issued a new proposed rule for the 2018 benefit year. Dist. Ct. Doc. 84 at 1; see New 2018 Proposed Rule, 83 Fed. Reg. 39,644, 39,644-48 (Aug. 10, 2018). HHS noted the new rule would respond to the district court’s summary judgment decision by providing additional explanation of the agency’s use of the statewide average premium and the program’s budget-neutral design. Dist. Ct. Doc. 84 at 1-2. HHS said it had sought comments on the issues. Id. at 1. It also argued its proceedings on the 2017 and 2018 rules did not moot its Rule 59(e) motion regarding the 2014, 2015, and 2016 rules. Id. at 2. 16 16 The new 2018 final rule was promulgated on December 10, 2018, after the district court’s denial of the 59(e) motion (“the new 2018 rule”). New 2018 Final Rule, 83 Fed. Reg. 63,419, 63,419-28 (Dec. 10, 2018). HHS had received comments related to its use of the statewide average premium and the program’s budget-neutral design. Id. at 63,422-27. Its responses to those comments contained explanations similar to those outlined in its new 2017 rule. See id. 29 On August 13, 2018, NMHC filed a letter with the court, arguing HHS’s motion on Rule 59(e) “is now entirely moot as to 2017 and 2018.” Dist. Ct. Doc. 85 at 1. Denial of Rule 59(e) Motion The district court denied HHS’s Rule 59(e) motion. NMHC II, 340 F. Supp. 3d at 1121. First, it found HHS had sua sponte considered using the statewide average premium over alternatives, so the absence of comments challenging budget neutrality did not forfeit the issue. Id. at 1168. Second, it reiterated that the payment transfer formula was arbitrary and capricious because HHS had insufficiently explained the budget-neutral design of its program. Id. at 1165-66. The court claimed HHS could have relied on Congress’s “lump sum” appropriations to subsidize a non-budget-neutral formula program. Id. at 1174. Third, the court maintained vacatur was the proper remedy under the APA. Id. at 1175-84. After the denial of HHS’s Rule 59(e) motion, the agency timely appealed.