Opinion ID: 4468429
Heading Depth: 2
Heading Rank: 1

Heading: The ACA’s Risk Adjustment Program

Text: Purpose Congress included the risk adjustment program in the ACA to stabilize health insurance premiums, encourage health insurers to provide plans on the exchanges, and discourage insurers from eluding enrollment of sicker individuals. See 2014 Final Rule, 78 Fed. Reg. 15,410, 15,411 (Mar. 11, 2013), amended by 2014 Final Rule, 78 Fed. Reg. 65,046 (Oct. 20, 2013). The roles of “premiums” and “risk” in the health insurance market inform this purpose. Enrollees pay premiums to receive health insurance coverage. Insurers set their premiums “based on the anticipated revenue needs for their enrolled population.” Ctr. for Consumer Info. & Ins. Oversight, Risk Adjustment Implementation Issues, 13 (Sept. 12, 2011) (“2011 White Paper”). Premiums differ from one plan to another for various reasons, including different estimated health care needs of each plan’s enrollees and the potential costs for those needs. See John Kautter et. al., Affordable Care Act Risk Adjustment: Overview, Context, and Challenges, 4 Medicare & Medicaid Res. Rev. 1, 5 6 (2014) (“Kautter Article”). Premiums also reflect a plan’s benefits and efficiency. See id. at 3. In setting insurance premiums, health insurers consider the risk of loss they might face from providing coverage to their enrollees. Risk is the probability that an insured event will occur, requiring the insurer to pay for it. 7 Among other sources of risk, the ACA reforms have exposed insurers to risk of financial loss due to adverse selection, which occurs when individuals who anticipate high health care needs are more likely to purchase coverage than those who anticipate low health care needs. See Stabilization Rule, 77 Fed. Reg. at 17,221. This can result in “a health plan having higher costs than anticipated.” Id. Before the ACA, insurers could limit their risk by adjusting premiums based on the age, gender, and health status of their enrollees. See Katherine M. Kehres, Cong. Research Serv., R45334, The Patient Protection and Affordable Care Act’s Risk Adjustment Program: Frequently Asked Questions ii (Oct. 4, 2018) (“CRS Report”). They also “could deny coverage if an individual represented too much risk.” Id. at 3. The ACA changed that. It forbids insurers from refusing to cover individuals with preexisting conditions and from “set[ting] premiums based on 7 “In health insurance parlance, ‘risk’ sometimes means simply ‘cost,’ with the implication that the realization of healthcare cost for an individual is uncertain.” Thomas G. McGuire & Richard C. van Kleef, Risk Sharing, in Risk Adjustment, Risk Sharing, and Premium Regulation in Health Insurance Markets 105 (Thomas G. McGuire & Richard C. van Kleef eds., 2018). 7 gender or health status.” Id. at 1. An insurer “that enrolls a larger proportion of sicker (i.e., high-risk) enrollees than other plans in the market would [therefore] need to charge” a higher premium to be financially viable. Id. at 7. The risk adjustment program aims to (1) reduce an insurer’s incentive to enroll only low-risk individuals, (2) encourage insurers to stay in the market, and (3) enable insurers to set premiums based on plan design and benefits rather than the health risk of enrollees in the plan. See id. at ii, 1, 7. It seeks to mitigate the impact of these reforms by subsidizing certain insurers for covering high-risk individuals without compensating them for other plan differences included in the price of their premiums. See Kautter Article at 3; Purva H. Rawal, The Affordable Care Act 161 (2016). HHS devised a formula that calculates “payment transfers . . . to help cover [plans’] actual risk exposure beyond the premiums the plans” can charge under the ACA. 2014 Final Rule, 78 Fed. Reg. at 15,430. Statutory Basis Section 1343 of the ACA established the risk adjustment program. See id. at 15,415. Codified at 42 U.S.C. § 18063, the statute provides: (a) In general (1) Low actuarial risk plans Using the criteria and methods developed under subsection (b), each State shall assess a charge on health plans and health insurance issuers (with respect to health insurance coverage) described in subsection (c) if the actuarial risk of the enrollees of such plans or coverage for a year is less 8 than the average actuarial risk of all enrollees in all plans or coverage in such State for such year that are not selfinsured group health plans (which are subject to the provisions of the Employee Retirement Income Security Act of 1974). (2) High actuarial risk plans Using the criteria and methods developed under subsection (b), each State shall provide a payment to health plans and health insurance issuers (with respect to health insurance coverage) described in subsection (c) if the actuarial risk of the enrollees of such plans or coverage for a year is greater than the average actuarial risk of all enrollees in all plans and coverage in such State for such year that are not self-insured group health plans (which are subject to the provisions of the Employee Retirement Income Security Act of 1974). (b) Criteria and methods The Secretary, in consultation with States, shall establish criteria and methods to be used in carrying out the risk adjustment activities under this section. The Secretary may utilize criteria and methods similar to the criteria and methods utilized under part C or D of title XVIII of the Social Security Act. Such criteria and methods shall be included in the standards and requirements the Secretary prescribes under section 18041 of this title. (c) Scope A health plan or a health insurance issuer is described in this subsection if such health plan or health insurance issuer provides coverage in the individual or small group market within the State. This subsection shall not apply to a grandfathered health plan or the issuer of a grandfathered health plan with respect to that plan. 9 The ACA directed the Secretary of HHS, in consultation with the states, to “establish criteria and methods” to implement this program. 42 U.S.C. § 18063(b). A state can carry out its own approved program or HHS will do so on its behalf. See 45 C.F.R. § 153.310(a). Only Massachusetts has managed its own program, but it ceased doing so in the 2017 benefit year. HHS has always managed New Mexico’s program and currently operates the program in all states. The statute does not authorize any legislatively appropriated funding for this program. Compare 42 U.S.C. § 18063 (not authorizing appropriations for ACA’s risk adjustment program) with id. § 18042(g) (authorizing appropriations in ACA to provide loans to qualified health insurance issuers). Mechanics HHS implemented the risk adjustment program on behalf of states through rules promulgated in separate notice-and-comment proceedings for the 2014, 2015, 2016, 2017, and 2018 benefit years. 8 Each succeeding rule employed the same methodology as the previous rules. See 2015 Final Rule, 79 Fed. Reg. 13,744, 13,753 (Mar. 11, 2014) (“We proposed to use the [2014] methodology in 2015 . . . .”); 2016 Final Rule, 80 Fed. Reg. 10,750, 10,760 (Feb. 27, 2015), corrected by 2016 Final Rule, 80 Fed. Reg. 38,652 (July 7, 2015) (“We proposed to continue to 8 As used in the risk adjustment program, a “‘benefit year’ means a calendar year for which a health plan provides coverage for health benefits.” 45 C.F.R. § 155.20. 10 use the same risk adjustment methodology finalized in the 2014 [rule] . . . .”); 2017 Final Rule, 81 Fed. Reg. 12,204, 12,217 (Mar. 8, 2016) (same); 2018 Final Rule, 81 Fed. Reg. 94,058, 94,100 (Dec. 22, 2016) (“The payment transfer formula is unchanged from what was finalized in the 2014 [rule] . . . .”). To implement the program, HHS took the following steps for each benefit year: 1. Published a proposed rule approximately one year before the applicable benefit year and, after a public comment period, published the final rule a few months later so insurers could rely on it to price their plans. See Supp. App. at 330; 45 C.F.R. § 153.100; id. § 153.320(b). 2. Collected enrollment and claims data from insurers. See 45 C.F.R. § 153.70; see also CRS Report at 7. 3. Calculated a “risk score,” which estimated the cost of each enrollee in each plan based on that person’s age, sex, and diagnoses. See, e.g., Ctr. for Consumer Info. & Ins. Oversight, HHS-Operated Risk Adjustment Methodology Meeting, 5-6 (Mar. 24, 2016) (“2016 White Paper”); 9 CRS Report at 7. 4. Averaged the individual risk scores to calculate a “plan liability” risk score, which estimated an insurer’s costs for each of its plans. See 2016 White Paper at 5-6, 11; see also Kautter Article at 8; CRS Report at 7. HHS applied this step to each plan offered by an insurer. 10 9 The 2016 White Paper is not included in the appendices on appeal. We consider it, however, because it was included in the administrative record before the district court. See Dist. Ct. Doc. 25, Ex. A at 4. 10 The risk adjustment program calculates charges and payments on a plan-byplan basis. See 42 U.S.C. § 18063. Because a health insurer could offer multiple plans, it could be paid for some plans and charged for others. See, e.g., Ctrs. for 11 5. Calculated how much plans would be charged or paid by applying to each plan a payment transfer formula, which included an estimated premium based on the “plan liability” risk score and other plan-specific cost factors (such as benefit design). See 2014 Final Rule, 78 Fed. Reg. at 15,417, 15,431; 2016 White Paper at 6, 11; see also Kautter Article at 8. 6. Published the risk adjustment transfers, collected charges from insurers that covered healthier enrollees, and paid insurers who covered sicker enrollees. See 45 C.F.R. § 153.310; see also CRS Report at 8. Payment Transfer Formula and Statewide Average Premium The payment transfer formula referred to in step 5 is the focus of this case. 11 The basic concept is that a plan’s transfer is the difference between (1) its estimated premium Medicare & Medicaid Servs., Summary Report on Permanent Risk Adjustment Transfers for the 2018 Benefit Year, 13-33 (June 28, 2019), https://perma.cc/J9D99G7S. 11 As first published in the 2014 Final Rule (and later incorporated in the 2015, 2016, 2017, and 2018 rules), the formula was: 2014 Final Rule, 78 Fed. Reg. at 15,431. 12 given the health risk of its enrollees and (2) its estimated premium without the risk. See 2014 Final Rule, 78 Fed. Reg. at 15,430; see also Gregory C. Pope et al., Risk Transfer Formula for Individual and Small Group Markets Under the Affordable Care Act, 4 Medicare & Medicaid Res. Rev. 3 (2014) (“Pope Article”). “Both of these premium estimates are based on the [s]tate average premium.” 2014 Final Rule, 78 Fed. Reg. at 15,430. The 2014 Final Rule distilled the formula as follows: See id. at 15,431. If the transfer number is positive, a plan receives a payment. See 2016 White Paper at 11. If it is negative, a plan is charged. See id. “Transfers are intended to bridge the gap between these two premium estimates.” 2014 Final Rule, 78 Fed. Reg. at 15,430. The transfers compensate health insurance plans for covering less healthy enrollees while preserving permissible premium differences. 2016 White Paper at 11. The risk adjustment rules made modest changes over the years. See 2016 White Paper at 31-34. For the purposes of the APA challenge here, the program did not materially change from 2014 to 2018. We therefore rely on the description of the program stated in the 2014 Final Rule. 13 HHS performed these calculations for every plan offered by every insurer in the state and then used the results to determine which insurers would be charged and how much, and which insurers would be paid and how much. See 2014 Final Rule, 78 Fed. Reg. at 15,431-32. The total amount charged minus the total paid by HHS “net[ted] to zero.” Id. at 15,516. NMHC challenged only one aspect of this program: HHS’s use of the statewide average premium rather than each plan’s own premium in its payment transfer formula. See Aplee. Br. at 19. The former is an average of all the applicable health insurance premiums in a state. See 2014 Proposed Rule, 77 Fed. Reg. 73,118, 73,126 (Dec. 7, 2012); 2014 Final Rule, 78 Fed. Reg. at 15,431-32. The latter would be the premiums that the plans set themselves. HHS uses the statewide average premium in the formula to convert the prior calculations into a dollar amount that equals the transfer charge or payment. See 2016 White Paper at 81.