New Mexico CO-OP earns favorable ruling in risk-adjustment lawsuit against HHS

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U.S. District Court Judge James Browning ruled on Thursday that HHS failed to create appropriate formulas for risk management because it was working under the assumption that it needed to develop a budget-neutral approach. He dismissed other claims made by Health Connections. (Image: Getty/Ellenmck)

A small New Mexico insurer earned a partial court victory in its spat with the Department of Health and Human Services over the agency's risk-adjustment formula, a ruling that could have implications for how the Affordable Care Act's rules are applied in other states. 

RELATED: Two more CO-OPs sue over risk adjustment program

New Mexico Health Connections, a consumer operated and oriented plan (CO-OP), sued HHS, accusing the agency of using flawed formulas for risk adjustment that favored larger insurers. The ACA's risk-adjustment provisions aim to prevent insurers from the practice of risk selection—or seeking out lower-risk enrollees. Health Connections said that the formula HHS uses is flawed because it's based on an average of state premiums, which it said larger payers can manipulate by raising their rates.   

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RELATED: Special Report—8 ways to fix the Affordable Care Act 

U.S. District Court Judge James Browning ruled (PDF) on Thursday that HHS failed to create appropriate formulas for risk management because it was working under the assumption that it needed to develop a budget-neutral approach. He dismissed other claims made by Health Connections.

Browning ruled that HHS' practices were not illegal but should be re-examined and potentially reworked as they are "arbitrary and capricious."

"That HHS erroneously reads the ACA's risk adjustment provisions to require risk adjustment payments equal risk adjustment charges infects its analysis of the relative merits of using a state's average premium when calculating risk adjustment transfers instead of using a plan's own premium," Browning wrote. 

Health Connections' former CEO Martin Hickey called the ruling a victory, and told the Albuquerque Journal that the CO-OP is still "trying to parse through the judgement and figure out what it all means." 

RELATED: Risk adjustment, reinsurance 'working as intended,' CMS says 

Browning's ruling could significantly impact how HHS manages the risk-adjustment program across all 50 states if it makes major changes to its current formula. HHS argued that basing risk-adjustment rates on state premium averages, in addition to being budget neutral, is the more straightforward method. 

Hickey didn't explicitly say if he had heard from other insurers about the ruling, just that "things are heating up." 

New Mexico Health Connections is not the only CO-OP to sue HHS over its risk-adjustment program. Maryland-based Evergreen Health argued that the program is "dangerously flawed," and a suit from Massachusetts CO-OP Minutemen Health echoed Health Connections' concerns. 

Some insurers have fared better than others in the program; Aetna, for example, paid nearly $1 billion into the program between 2014 and 2016, but is among the 10 insurers who receive the most back. On the other hand, higher-than-expected contributions to the risk-adjustment program have contributed to Molina Healthcare's financial struggles on the ACA exchanges.