“Risk Adjustment” Update
“Risk Adjustment” Update
by Christoper E. Condeluci, Principal and sole shareholder of CC Law & Policy PLLC in Washington, D.C.
- Last Saturday, HHS surprised us all with an announcement that the Department was putting “on hold” (1) any collections from carriers required to “pay into” the risk adjustment program and also (2) any risk adjustment “pay-outs” owed to carriers under the risk adjustment program. HHS explained that the suspension was due to conflicting court rulings on whether the ACA’s risk adjustment program was valid under the law.
- Analysis: In January, a District Court in Massachusetts ruled against a legal challenge to the validity of the risk adjustment program. Score 1 for ACA supporters and those carriers receiving “pay-outs” under the program, because the risk adjustment program was preserved. But, a little over a month later, a District Court in New Mexico ruled that the regulations implementing the risk adjustment program should be invalidated because HHS failed to undertake the correct “process” for justifying why the Department developed certain aspects of the risk adjustment formula. Score 1 for ACA opponents and those carriers who are required to “pay into” the program, because the risk adjustment program was essentially struck down. Below, we will talk more about the New Mexico ruling, and the “process foul” that led the court to invalidating the risk adjustment regulations. But first, let me riff a little bit on the risk adjustment program, and its impact on the individual market:
- The ACA’s risk adjustment program – and the impact the program has had on the individual market – has always flown under the radar. This is due in large part to the fact that the “formula” for determining (1) the risk adjustment “pay-outs” to carriers and (2) the amount of money carriers are required to “pay into” the risk adjustment program is so stinkin’ complicated. It is so complicated that it is difficult for most people to even talk about (so I won’t get into the nitty-gritty details of how the formula works). But I will say this: In my opinion, the risk adjustment program – and its complicated formula – has contributed to increased premiums, and the program has been detrimental to “start-up” insurance carriers and new entrants to the “individual” insurance markets (like the CO-OPs and Centene and Molina). How has the ACA’s risk adjustment program contributed to increased premiums? In mid- to late-2015, most carriers – especially those carriers who were required to “pay into” the risk adjustment program – realized that they needed to build into their premium rates a specific percentage “load” protecting the carrier from a surprise risk adjustment “charge.” In other words, carriers began to “defensively” price their premiums by adding into their rates the risk and uncertainty of having to pay a significant portion of their premium revenue “into” the risk adjustment program. Even insurance carriers who received risk adjustment “pay-outs” engaged in “defensive” pricing to mitigate the uncertainty/risk (which actually ended up further enriching the carrier because not only did they receive more premium revenue, but the carrier received a “pay-out” under the program). In the end, these increased premium rates were born by the government (in the case of the “subsidized” Exchange plans) and the consumer (in the case of people in the “un-subsidized” individual market). All because of the risk adjustment program. But you wouldn’t know it, because no one has really talked about this “defensive” pricing phenomenon. How has risk adjustment been detrimental to “start-up” insurance carriers and new entrants to the insurance markets (like the CO-OPs and Centene and Molina)? There has been a long-standing debate within the insurance industry as to whether the risk adjustment program fairly – or unfairly – treated start-up insurers and new entrants to the market. On one side of the debate was the start-ups and CO-OPs, arguing that the risk adjustment formula was tilted in such a way that those carriers that ended up insuring healthier lives (because, for example, the carriers’ premium rates were low, so as to attract consumers looking for lower-costing plans, who are often times healthy) had to pay an exceptionally high amount “into” the program. In other words, they argued, the way the formula was structured, the amount of money a carrier insuring healthier lives had to ultimately “pay into” the program skewed disproportionately higher relative to other carriers. These start-ups and CO-OPs also argued that they did not have the appropriate amount of medical and claims history that is necessary to show HHS that a particular consumer was in fact a less healthy person (which would have helped these carriers actually receive a “pay-out” under the program, or at least mitigate the amount they had to “pay into” the program). The 3rd strike for these start-ups and CO-OPs was the fact that they had very thin reserves and capital investment, and by taking away a significant amount of their premium revenue, this was akin to running these carriers out of business (who by the way, entered into the markets to inject the very competition that the drafters of the ACA and the previous Administration had wanted to encourage). On the other side of the debate was incumbent insurance carriers like the national carriers and the Blue plans. These carriers argued that the risk adjustment formula was indeed fair, and they further argued that they were the only carriers willing to insure high-risk people (and without these carriers, the ACA would not have insured as many people as the law ended up insuring). While these carriers recognized that – unlike the start-ups and CO-OPs – they did possess ample history of medical and claims utilization of their consumers, the incumbent carriers did NOT feel that this advantaged them in any way. Rather, the incumbents felt that they were simply playing by the rules that HHS had developed, and all-is-fair-in-love-and-war. I don’t say all of this to cast dispersions on the incumbent carriers out there. I know that they are doing everything they can to insure people in the individual market. But, the objective reality is that these incumbents – like the Blue plans – clearly benefited under the risk adjustment program. And, the objective reality is that the start-ups and the new entrants to the market like the CO-OPs and Centene and Molina were negatively impacted. See, for example, a list of carriers owed a risk adjustment “pay-out” for 2017, and a list of carriers required to “pay into” the program for 2017 (courtesy of some great work at Axios).
- As I mentioned above, in January, a Massachusetts District Court ruled that the ACA’s risk adjustment program – as developed by HHS through regulations – was valid under the law. The ruling came against the Massachusetts CO-OP, where the now defunct carrier claimed that the risk adjustment program was NOT properly conceived by the Department, and therefore, the program should be null-and-void. It is not surprising that the Massachusetts CO-OP brought this claim. Why? Because the risk adjustment program was the chief reason why this CO-OP shuttered (because this CO-OP was required to “pay into” the program significant amounts of its premium revenue each year since 2014). And, the Massachusetts CO-OP was hoping that the risk adjustment program would be found invalid, so the CO-OP could recoup all of the money that it felt it had unfairly paid into a program that ultimately led to its demise.
- Analysis: In New Mexico, the New Mexico CO-OP filed pretty much the same lawsuit for pretty much the same reason. That is, each year since 2014, the New Mexico CO-OP was required to “pay into” the program significant amounts. And while, unlike the Massachusetts CO-OP, the New Mexico CO-OP still survives today, this CO-OP was hoping that the risk adjustment program would be found invalid, so the CO-OP could recoup all of the money that it felt that it unfairly “paid into” the program. Unlike the Massachusetts District Court, the New Mexico District Court actually found that the risk adjustment program should be invalidated. The court’s ruling centered on one aspect of the risk adjustment formula, and the court concluded that HHS did NOT go through the appropriate “process” to fully explain why the Department developed this aspect of the formula the way that it did. What was this so-called “process foul”? In short, the previous Administration’s HHS assumed that Congress intended for the risk adjustment program to be “budget neutral.” In other words, the Obama HHS believed that the risk adjustment program should pay-for-itself and essentially be a zero-sum game, where those carriers that are required to “pay into” the program would pay in amounts that would equal the amount of money that would be “paid out” of the program. Interestingly, the New Mexico court concluded that the statute itself never directed HHS to implement the risk adjustment program in a “budget neutral” manner. Rather, the court believed that the statute left open the question that the risk adjustment program could actually be implemented and operated NOT in a “budget neutral” way. The New Mexico court went on to say that (1) because the Obama HHS did NOT fully explain “why” it assumed that the risk adjustment program should be “budget neutral” and (2) because the Department purposefully developed the risk adjustment formula to be “budget neutral” without said explanation, this meant that HHS engaged in a “process foul” that left the court no other choice but to invalidate the regulations.
Should the Risk Adjustment Program Be “Budget Neutral”? (no news story)
- YES. In my opinion, the risk adjustment program should be “budget neutral.” There are a couple of reasons justifying my conclusion:
- Analysis: While I was not directly involved in the drafting of the ACA’s risk adjustment program, I was involved enough in the process to believe that Congress always intended to the risk adjustment program to be “budget neutral.” After all, if Congress did NOT think that the risk adjustment program should be “budget neutral,” Congress would have specifically “appropriated” money or developed some sort of revenue stream to fund the risk adjustment “pay-outs.” For example, the drafters of the ACA realized that the “transitional reinsurance” program was NOT a “budget neutral” program, so to cover the cost of the reinsurance program, the drafters imposed an assessment on insurance carriers AND self-insured health plans. If the drafters thought the risk adjustment program needed money, we would have come up with a similar revenue source, or we would have created a standing “appropriation” to fund the program. But that did NOT happen. Now, I recognize that Congressional intent is NOT what it used to be, but let me give you another reason why I think the risk adjustment program should be “budget neutral”: Because the Congressional Budget Office (CBO) told us so. Say what you will about CBO (as you know, I do), BUT when CBO says something, everyone listens. And, CBO told staff that the risk adjustment program would pay-for-itself, and as a result, Congress never “appropriated” the money nor did it come up with a funding source. Does my opinion here fly in the face of the New Mexico ruling? Answer: NO. Why? Because the New Mexico court never said that the risk adjustment program could NOT be “budget neutral.” Instead, the New Mexico court simply said that the Obama HHS failed to explain why it thought the risk adjustment program should be “budget neutral,” and more specifically, the Obama HHS failed to explain why the Department developed the risk adjustment formula the way it did based on this assumption.
How Can the Trump HHS Respond to the New Mexico Court Ruling? (no news story)
- For one, this Administration can explain in regulations why it believes the risk adjustment program should be implemented and operated in a “budget neutral” manner. Interestingly, that is exactly what HHS recently said in the 2019 Notice of Benefit and Payment Parameter (NBPP) regulations. Why did HHS finally get around to explaining “why” it assumes that the risk adjustment program is “budget neutral”? Answer: Because of the New Mexico ruling. In other words, the Trump HHS cured the so-called “process foul” the New Mexico court identified.
- Analysis: BUT, such a resolution only saves the risk adjustment program going forward. That is, this Administration’s explanation as to why it believes the risk adjustment program should be implemented and operated in a “budget neutral” manner is only applicable to “pay-outs” and “pay-ins” under the risk adjustment program in 2019 and beyond. What about 2014 to 2018? Well, you are hearing a lot of policy analysts and industry stakeholders assert that this Administration can issue Interim Final Regulations (IFRs) that includes the same explanation that risk adjustment should be “budget neutral” that was included in the 2019 NBPP. And, these stakeholders further argue that this IFR should cure the “process foul” at least for 2017 and 2018 because “pay-outs” and “pay-ins” have yet to actually happen. I agree with this suggested IFR approach to save the risk adjustment program for 2017 and 2018. It’s not hard for the Trump HHS to issue this IFR in short-order. But what about 2014, 2015, and 2016? An argument can be made that there is nothing that this Administration can do to save the risk adjustment program for these years. Soooo, if the risk adjustment program is invalid for 2014, 2015, and 2016 that would mean that HHS would have to go back to the carriers that received “pay-outs,” and recoup that money. AND, repay those recouped amounts to those carriers that were required to “pay into” the program (like the Massachusetts and New Mexico CO-OPs, among others). BUT, that would be so administratively burdensome, I do not know if HHS can even recoup those amounts. And, even if HHS did recoup those amounts, insurance carriers like the Blues and others that received “pay-outs” during these years are going to immediately file lawsuits against HHS to block any attempts to claw-back the money. These carriers will also file claims against the U.S. Judgement Fund, for amounts that the Judgement Fund has never seen before. It would be a HOT MESS. That is why I could see the New Mexico court changing its ruling in part upon “reconsideration,” finding that due to administrative burdens – and for the sake of the greater good – the risk adjustment program would only be invalidated for 2017 and beyond, which gives HHS time to cure the “process foul,” and save the risk adjustment program (including the recently suspended 2017 “pay-outs” and “pay-ins”). We will just have to wait and see where the New Mexico court comes down. We won’t know until late August/early September when the New Mexico court renders its decision upon “reconsideration.” We will also have to wait and see how this Administration responds to all of the chaos that has been reigning since Saturday. Stay tuned…
Is This “Sabotage”? (no news story)
- From most of what you have heard over the past few days, you would think it is “sabotage.” That is the constant refrain I hear from the media on this. Ho-hum…
- Analysis: I do NOT believe that the decision to suspend the 2017 risk adjustment “pay-outs” and “pay-ins” was an attempt to “sabotage” the markets. If it was “sabotage,” I believe we would be hearing from the White House – and the President – about the “disaster which is Obamacare,” and praise for the New Mexico court’s ruling. But unless I have missed something, that is NOT what we are hearing. And note, the New Mexico ruling came down this past February, and we have NOT heard a peep one way or another, until this past Saturday’s suspension announcement from HHS. To me, this decision was driven by HHS’s lawyers. For example, I believe HHS’s lawyers told the Department’s Leadership that because there is a split in the litigation over whether the risk adjustment program is valid or not, the program needs to be suspended until the conflict is resolved. An argument can be made that back in February, HHS’s lawyers should have asked the New Mexico court to put a hold on the effect of its decision (i.e., put a “stay” on the decision) until the Department cured the “process foul” through, for example, an IFR. But instead, HHS’s lawyers asked the New Mexico court to “reconsider” its decision. The court agreed to such a “reconsideration,” but as stated, any subsequent decision is not expected under late August/early September. An argument can be made that at the time of the “request to reconsider” (i.e., this past February), HHS’s lawyers were not aware that the risk adjustment “pay-outs” and “pay-ins” are always announced on June 30th. Which resulted in this: HHS’s lawyers – and the Department’s Leadership – found themselves between-a-rock-and-a-hard-place because the announcement of the 2017 risk adjustment “pay-outs” and “pay-ins” must come BEFORE the New Mexico court issues any decision upon “reconsideration.” AND, because there was NO legal certainty at the time the risk adjustment “pay-outs” and “pay-ins” must be announced (i.e., by this past June 30th), HHS’s lawyers had no other choice but to advise the Department’s Leadership that a suspension must be announced instead.
- As you know, I always try to give you an objective opinion. And, I typically try to steer clear of issues that I think are purely “political.” I often decry the fact that people on both sides of the political spectrum spew rhetoric and intellectually dishonest statements. As you know, I call out both Republicans and Democrats when I believe they are making intellectually dishonest statements that have no other basis than an attempt to rile up the party’s respective political base.
- Analysis: To me, this whole talk about the Supreme Court nominee, and the fact that this nominee – should he be confirmed – is going to strike down the ACA (and therefore, take away the ACA’s pre-existing condition protections) is all a bunch of malarkey. Yes, I said it…malarkey. Really people?!? Come on!! Almost every legal scholar – including ACA opponents – do NOT believe that the recent legal challenge against the “individual mandate’s” constitutionality will ever be successful (I have said as much as well, see my attached update). Yes, maybe the characters who are behind this legal challenge get lucky, and they get the Texas District Court to rule in their favor. But it is highly unlikely that an Appeals Court would agree with this challenge, and I am firmly convinced that the Supreme Court would NEVER, EVER rule in favor of the plaintiffs and find that the individual mandate – and by extension the pre-existing condition protections – are unconstitutional. It ain’t going to happen. It just is NOT. Now, you also know that I do NOT like to talk in absolutes. But here, I am talking in absolutes. Why I am willing to break from something I try very hard to avoid? Well for one, if you look back at some of the Supreme Court nominee’s rulings, you will find a “dissent” where Judge Kavanaugh argues that the individual mandate penalty tax is just that, A TAX. Chief Justice Roberts also concluded that the individual mandate penalty tax is A TAX, which was the sole reason why Justice Roberts upheld the individual mandate as constitutional. Soooo, if the Supreme Court nominee is ever confirmed as Justice Kavanaugh, there will now be 2 Justices on the Court that think the individual mandate penalty tax is A TAX. And, while Judge Kavanaugh never had to decide whether the individual mandate penalty tax was constitutional, I do NOT believe that a Justice Kavanaugh – should he ever be asked to rule on the constitutionality of the individual mandate – would rule differently than Justice Roberts, and break from his beliefs he articulated in his prior “dissent” (he believes the individual penalty tax is A TAX). Bottom-line, the ACA’s pre-existing protections are NOT – I repeat NOT – in jeopardy on account of the new Supreme Court nominee. So I say to people, please stop saying it. Thank you in advance. My apologies to everyone for my unusually pointed comments.