This is going to be nerdier than normal.
TLDR: Expect more lawyers/lawsuits and expect business models to change
A New Mexico Co-op filed a lawsuit against the Department of Health and Human Services alleging that the entire ACA risk adjustment methodology was arbirtary and capricious. My thought was that the suit was mostly sour grapes as the co-op had adequate time to react to the rules and health insurance is tough.
A federal judge disagreed with me on one part and ruled in favor of the co-op on the arbitrary and capricious nature of the use of statewide average premiums for risk adjustment purposes.
A federal judge has sided with New Mexico Health Connections in risk adjustment lawsuit, ruling that HHS formula for determining payments is “arbitrary and capricious” Billions of dollars at stake; appeal seems likely ($) https://t.co/UvUgk67eBW
— Paul Demko (@pauldemko) March 1, 2018
The Court concludes that: (i) the APA waives the United States’ sovereign immunity for
Health Connections’ claims; (ii) incorporating statewide average premiums in HHS’ riskadjustment formula is not contrary to law, but it is arbitrary and capricious, because the
administrative record indicates that HHS assumed, erroneously, that the ACA requires risk
adjustment to be budget neutral, and all of HHS’ reasons for using the statewide average
premium rely on that budget neutrality assumption; (iii) HHS’ methods of predicting healthcare costs for HCC and non-HCC patients is not arbitrary and capricious; (iv) HHS’ risk-adjustment practices regarding partial-year enrollees and prescription-drug data are not arbitrary and capricious; and (v) HHS’ risk-adjustment formula does not effectively eliminate bronze-level health-insurance plans. The Court, accordingly, sets aside and vacates HHS’ action as to the statewide average premium rules and remands the case to the agency for further proceedings….
II. HHS’ USE OF STATEWIDE AVERAGE PREMIUMS IS NOT CONTRARY TO
LAW, BUT IS ARBITRARY AND CAPRICIOUS…..
I am not a lawyer, so keep that in mind. The judge found the decision to for HHS assume that risk adjustment had to be budget neutral and therefore using state wide average premiums to be a legal chain of choices but that the underlying assumption of budget neutrality was nowhere explicitly commanded in the law and thus the logic chain is arbitrary. HHS has to reconsider its rule making and explain exactly why it chooses its budget neutrality assumption or not choose it and then from there justify the relevant benchmark premium decision.
HHS has two choices. They can explain why they assume budget neutrality is a good core assumption, invite comment and notice, respond to comments and then finalize new risk adjustment formulas, or they can adopt non-budget neutral assumptions and then adopt insurer average premiums as part of the risk adjustment process.
Statewide average premium rules have shaped the individual market in a significant manner. This is the core of several companies business strategies such as Centene. Low cost insurers could craft narrow networks that pay their hospitals and doctors near Medicaid rates while also designing their benefit structures to appeal to low risk buyers and be repellent to high risk buyers. High risk buyers often needed broader or more expensive networks and they would go to national or regional carriers with more expensive networks and premiums.
Since the low cost insurer had most of the healthy people in the state, the low cost insurers would have significant influence on the eventual average premium. Even as low cost insurers with very healthy populations paid out a significant fraction of their gross premium as risk adjustment charges, they were still under-compensating the insurers with broad networks and sick populations for the care of the sick. This creates a dynamic where it is very difficult for a broad network insurer to compete in a region of a state where there is a very large low cost insurer. If there is a clear geographic divide, the high cost carrier can increase their premiums to account for the insufficient risk adjustment. If there is competition, the high cost insurer that is the appropriate payer for high need patients is in financial trouble.
Now if HHS decides to use individual insurer average premium as the risk adjustment multiplier, this dynamic changes. Insurers with comparatively healthy populations will still send money to HHS. If their premiums are lower than state wide premiums, they will send less money then they do now. Insurers with higher than state average premiums and highly morbid populations will receive more money in risk adjustment. In that scenario, it is likely that the insurance markets in states with a low cost, high RA outflow insurer could make a high cost, highly morbid, high RA inflow insurer far more viable.
The big challenge to changing the basis of the ACA risk adjustment process is money. If HHS was to adopt individual insurer average premium methodologies, it is likely to not be budget neutral. In some states, HHS could collect more money than it disburses and in other states it is highly likely to disburse far more money than it collects. How does that get funded or would insurers be forced to line up at the Court of Federal Claims every summer and file suit?