WASHINGTON -- The federal government will stop making risk adjustment payments to health insurers that have sicker-than-average patients, raising the specter of more premium increases by insurers to make up for the shortfall.
"We are very discouraged by the new market disruption brought about by the decision to freeze risk adjustment payments," America's Health Insurance Plans, a trade group for health insurers, said in a statement. "This decision comes at a critical time when insurance providers are developing premiums for 2019 and states are reviewing rates ... It will create more market uncertainty and increase premiums for many health plans -- putting a heavier burden on small businesses and consumers, and reducing coverage options. And costs for taxpayers will rise as the federal government spends more on premium subsidies."
The payment stoppage, first announced Saturday by the Centers for Medicare & Medicaid Services (CMS), came about because of federal court decisions about the payments, which reimburse health insurers who sell individual or small-group policies both inside and outside the Affordable Care Act's health insurance exchanges. Health plans whose enrollees are healthier than average pay into the risk adjustment program, which then spreads the funds among plans with less healthy enrollees.
First, in January, the U.S. District Court for the District of Massachusetts ruled against a health insurance co-op that had sued over the risk adjustment formula. Judge Dennis Saylor held that the Department of Health and Human Services (HHS) was within its rights to set up the risk adjustment program. "In substance, the Court concludes that HHS acted within the bounds of its authority, even when the consequences of its choices may not always have been optimal," Saylor wrote.
But in late February, the U.S. District Court for the District of New Mexico invalidated the payments, ruling in a case involving a New Mexico co-op that the use of statewide average premium data to calculate the payments was invalid. "The Court concludes that ... HHS' use of statewide average premiums in its risk adjustment methodology is not contrary to law, but is arbitrary and capricious," wrote Judge James O. Browning.
CMS administrator Seema Verma said in the statement that she was "disappointed" by the New Mexico ruling. "As a result of this litigation, billions of dollars in risk adjustment payments and collections are now on hold," she said. "CMS has asked the court to reconsider its ruling, and hopes for a prompt resolution that allows CMS to prevent more adverse impacts on Americans who receive their insurance in the individual and small group markets."
"The New Mexico district court's ruling currently bars CMS from collecting or making payments under the current methodology, which uses the statewide average premium," the press release continued. "This aspect of the risk adjustment methodology was promulgated as part of a regulation first issued by the Obama administration in 2013. CMS will provide additional guidance shortly on how it will handle other issues relating to risk adjustment payments."
Withholding the payments will have both short-term and long-term effects, according to Edwin Park, JD, of Georgetown University. In the short term, "[the] potentially large financial hit on insurers expecting to receive [risk adjustment] payments, [will be] incorporated into their past & current premiums. [This] could affect 2019 premiums & marketplace participation," he wrote on Twitter.
In the long term, he pointed out, "[the] purpose of ACA risk adjustment is to discourage insurers from cherry-picking [the] healthy by compensating them for sicker-than-average enrollees & charging them if they enroll healthier-than-average ... Without ACA risk adjustment or [with] uncertainty about its continued application, this could lead insurers to do more discriminatory benefit design & marketing to attract [the] healthy, as they wouldn't have to pay into [risk adjustment] system."
There may be a remedy at hand, however, according to Katie Keith, JD, MPH, a consultant who contributes to a blog on the Affordable Care Act in Health Affairs. In addition to challenging the New Mexico case's outcome, "CMS could also issue an interim final rule to justify its rationale for using a statewide average premium and operating the risk adjustment program as budget neutral, thus remedying the deficiency cited by the New Mexico federal court," she wrote in a blog post.
"Although he set aside a part of the risk adjustment formula, Judge Browning noted that HHS may have strong policy reasons for requiring budget neutrality and that the agency could justify this policy if it believed it was a worthy goal to pursue," Keith wrote. "HHS could address the court's concern by more clearly laying out its budget neutrality justification in notice-and-comment rulemaking."
On Monday, CMS released its report on risk adjustment payments for the 2017 benefit year. The payment program "functioned smoothly," CMS said, although the number of insurers participating in the program dropped from 767 in 2016 to 654 in 2017. "Nationwide, the absolute value of total risk adjustment transfers across markets was about 8% of total premiums, slightly decreased from 9% of total premiums in the 2016 benefit year," the report said.