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July 9, 2018

CMS suspends risk-adjustment payments to exchange insurers

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    CMS on Saturday announced that it is freezing billions of dollars in payments expected to be made to exchange insurers under the Affordable Care Act's (ACA) risk-adjustment program, citing a federal judge's ruling that the agency's formula for calculating the payments is flawed.


    The risk-adjustment program is a permanent program created under the ACA that redistributes funds from exchange insurers with lower-risk enrollees to those with higher-risk enrollees in an effort to encourage insurers to enroll a balance of healthy and sick consumers.

    Insurers' risk-adjustment payments are determined based on an insurer's risk score, which takes into account enrollees' demographics and health conditions, as well as how the company performed in the past, which could indicate how much risk the insurer has taken on.

    Minuteman Health of Massachusetts and New Mexico Health Connections, cooperative health plans (co-ops) created under the ACA, in 2016 filed lawsuits challenging CMS' risk adjustment payment formula.

    In January, a federal judge in the U.S. District Court of Massachusetts upheld CMS' risk adjustment payment formula, ruling that the formula is fair. However, a federal judge in the U.S. District Court of New Mexico in February ruled that CMS' risk adjustment payment formula was flawed, calling it "arbitrary and capricious."

    CMS freezes risk-adjustment payments

    CMS in a release said, "The New Mexico district court's ruling currently bars CMS from collecting or making [risk-adjustment] payments under the current methodology, which uses the statewide average premium." As a result, CMS said it is freezing calculated risk-adjustment collections and payments for the 2017 coverage year, which total $10.4 billion.

    CMS Administrator Seema Verma said the agency was "disappointed by the [New Mexico] court's recent ruling" and "has asked the court to reconsider." She said CMS "hopes for a prompt resolution that allows [the agency] to prevent more adverse impacts on [U.S. residents] who receive their insurance in the individual and small group markets."

    Insurers, advocates say move could rile exchange market

    Several observers, health insurers, and advocacy groups raised concerns over CMS' decision to suspend the risk-adjustment payments, saying it could have negative effects on the exchange market.

    Deep Banerjee, an analyst with S&P Global Ratings, said CMS abruptly freezing the risk-adjustment payments "would be a big hit to [insurers'] financial position," because many insurers already had entered estimates of the … risk-adjustment payments as receivables in their books as part of their 2017 business.

    Eric Hillenbrand, a managing director at the consultancy AlixPartners, said, "This is occurring right at the time of year that [insurers] are making decisions about whether to participate in the exchanges and what premiums to charge if they do. This will affect their thinking on both of those decisions."

    America's Health Insurance Plans (AHIP) said it was "very discouraged by the new market disruption brought about by the decision to freeze risk adjustment payments." The group said, "This decision comes at a critical time when insurance providers are developing premiums for 2019 and states are reviewing rates." AHIP said suspending the payments "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."

    Rep. Frank Pallone (D-NJ), the ranking member on the House Energy and Commerce Committee, said CMS' move violates the ACA, which he said directs the federal government to make the payments. "By refusing to make risk adjustment payments, the … administration is breaking the law. This is a malicious and intentional attack on our health care system and on Americans' access to health insurance, plain, and simple."

    However, Andy Slavitt, who served as acting CMS administrator under former President Barack Obama's administration, on Twitter wrote, "Since the funds will eventually be paid, no insurers should withdraw or overreact in the meantime. The administration should react and address quickly so as not to precipitate a crisis."

    Martin Hickey, who founded New Mexico Health Connections, defended CMS' move. "The risk adjustment formula was extremely biased in favor of large, established insurers and discriminated against new and small insurers, including co-ops like ours," he said. Hickey added, "People spin the administration's decision as [President] Trump trying to do harm, but it's exactly the opposite. That will increase competition, and competition will help keep prices down" (Armour/Wilde Mathews, Wall Street Journal, 7/7; Goldstein, Washington Post, 7/7; Herman/Owens, "Vitals," Axios, 7/9; Pear, New York Times, 7/7; Becker/O'Donnell, Reuters, 7/8; Politico, 7/8; CMS release, 7/7; Slavitt tweet, 7/7).

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