Tenth Circuit Court Upholds HHS Risk Adjustment Calculations

January 06, 2020 - The Tenth Circuit Court of Appeals determined that the rules HHS used to calculate 2014 through 2018 risk adjustments were neither arbitrary nor capricious.

In order to help healthcare payers predict potential costs on the state health insurance marketplaces, HHS created a risk adjustment program that uses funds from the premiums of healthier individuals on the exchange to cover the costs of sick individuals. Risk adjustment is also designed to support the ACA’s protections for individuals with pre-existing conditions. The program has caused tension among payers.

As described in the Tenth Circuit’s decision, HHS calculates how much each healthcare payer must pay into the risk pool using the risk adjustment formula that uses “the average of all applicable premiums insureds pay to health insurers in a state.”

The Tenth Circuit made clear that, based on precedent, it must be “very deferential” to the agency’s policies and standards in this process and could only set aside a rule if it was contradictory to the Administrative Procedure Act (APA).

There are four lawful ways to determine whether an agency has shown partiality. A risk adjustment rule may be discounted if it:

• Skips assessing an element of the issue its actions intend to fix in its analyses
• Explains its actions in such a way that contradicts the evidence or is not possible
• Does not draw its decision or solution from the pertinent information
• Commits a “clear error of judgment”

“Where the agency has failed to provide even that minimal level of analysis, its action is arbitrary and capricious,” the court warned, quoting from a previous decision.

The Tenth Circuit characterized its task as “narrow” insofar as it simply needed to determine whether HHS had conducted a comprehensive analysis of all factors when coming up with its risk adjustment calculation and to test the connections between the evidence and the HHS decision. However, the implications were momentous.

Striking down risk adjustment could affect future legal battles over the ACA, not the least of which being the ACA repeal lawsuit which has proceeded to the Supreme Court.

The district court had ruled risk adjustment as arbitrary and capricious because it failed to prove budget neutrality. In the Tenth Circuit, the argument, as advanced by New Mexico Health Connections (NMHC), evolved to descry the statewide average premium itself as arbitrary and capricious.

The Tenth Circuit did not find HHS to be wrong in its assumption that budget neutrality was necessary for risk adjustment. Whereas the district court found HHS lacking in its logic for budget neutrality—which ultimately led it to base risk adjustment on statewide average premiums instead of plans’ premiums—the Tenth Circuit said that HHS decision was not founded on policy rationale but on actual budget constraints. 

Therefore, the agency did not need to provide a regulatory reason for making the rule budget neutral because it had no choice but to make it budget neutral.

Neither did the Tenth Circuit find that HHS had been lacking in its rationale for the statewide average premium.

HHS considered four alternatives to the risk adjustment program, laid out in a Center for Consumer Information and Insurance Oversight (CCIIO) white paper. HHS stated that it found these alternatives too ambiguous. In comparison to models that were based on weighted state average premiums, plans’ premiums, or other methods, HHS considered the state average premium more predictable and simplistic.

The risk adjustment controversy became especially heated when CMS withheld $10.4 billion from hundreds of payers as the result of the district court’s ruling in 2018.

As litigation continued, CMS pointed to 2018 risk adjustment data as proof that the risk adjustment calculation was accurate and promised to release the holdback amounts for benefit year 2018 regardless of what the courts decided.

NMHC has expressed in the past that it finds the current risk adjustment calculation to be biased towards larger payers.

“We contend that the emergency regulation continues a risk adjustment formula that disadvantages small, new, and lower-priced health plans in favor of their larger, more expensive competitors,” Marlene C. Baca, NMHC chief executive officer, said in a written statement quoted in the Albuquerque Journal when the organization decided to pursue litigation in 2018.