Appeals court upholds methodology for ACA risk adjustment 

Affordable Care Act
An appeals court has weighed in on ACA risk adjustment. (Getty/zimmytws)

A federal appeals court this week upheld the Affordable Care Act’s methodology for risk adjustment, reversing a lower court decision on the matter. 

The Tenth Circuit said (PDF) that a New Mexico District Court’s determination that the risk adjustment approach is “arbitrary and capricious” is invalid, and also rendered moot legal challenges to risk adjustment in 2017 and 2018. 

The goal of the program is to prevent insurers on the ACA’s exchanges from cherry-picking healthier patients and eschewing sicker ones. For states operating on Healthcare.gov, the government will redistribute funds from non-grandfathered plans with healthier members to plans with sicker members. 

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States that operate their own exchanges have the option of using risk adjustment, though none currently do. 

RELATED: CMS releases new risk adjustment amounts after factoring in validation 

The feds use statewide average premiums to calculate risk adjustment. 

Several insurers, in particular, smaller consumer-oriented and operated plans (CO-OPs), challenged the methodology and alleged that it favored larger insurers. New Mexico Health Connections, one such CO-OP, sued in August 2016 over the approach, and the District Court sided with them, saying the methodology is “arbitrary and capricious.” 

The Department of Health and Human Services appealed the ruling in December 2018

The circuit court determined that HHS appropriately justified the methodology they used and that it did not need to further justify the “budget neutrality” of its approach. The court added that rules for risk adjustment in 2017 and 2018 superseded concerns with prior rulemaking, rendering legal concerns moot. 

New Mexico Health Connections could choose to request that the full Tenth Circuit hear the case again, or appeal it to Supreme Court. 

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