The risk-adjustment program is a permanent program created under the Affordable Care Act 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. CMS determined whether insurers would pay into or receive payments from the program based on an insurer's risk score, which took 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.
However, two cooperative health plans (co-ops) 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." The judge ruled CMS could no longer use that formula because HHS had not adequately explained the methodology behind it.
In response to the New Mexico ruling, CMS in early July announced that it was freezing a total of $10.4 billion in risk-adjustment payments that were expected to be made to exchange insurers for the 2017 coverage year. 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."
However, CMS later in July released a final rule to reinstate the payments. CMS said the final rule "reissues, with additional explanation, the risk adjustment methodology" the agency had used to calculate exchange insurers' risk adjustment payments for the 2017 coverage year. CMS said the "final rule provides a fuller explanation supporting the 2017 risk adjustment methodology, consistent with the [New Mexico] judge's request, and allows [CMS] to resume the risk adjustment program without delay."
But CMS noted that the New Mexico court "vacated" the methodology the agency intended to use to calculate exchange insurers' risk-adjustment payments for the 2018 coverage year. As such, CMS said it would "issue a Notice of Proposed Rulemaking … to propose and solicit comment" on how the agency should calculate 2018 risk-adjustment payments.
CMS proposes rule for 2018 risk adjustment payments
CMS said under the proposed rule it intends "to adopt the risk adjustment methodology that HHS previously established for the 2018 benefit year which uses the statewide average premium in the payment transfer formula." CMS said, "This proposed rule further explains the justification for utilizing statewide average premium in the calculation of risk adjustment transfers, and expands on the reasoning behind operating the HHS-operated risk adjustment program in a budget-neutral manner."
CMS said it expects to pay a total of $4.8 billion in risk adjustment payments to exchange insurers for the 2018 coverage year under the proposed methodology. The agency is seeking public comments on the proposed rule until Sept. 7.
CMS Administrator Seema Verma said the "proposed rule continues [the agency's] effort to help stabilize the individual and small group markets." She added, "Our goal has been, and will continue to be, to stabilize the market and provide American consumers with more affordable health coverage options" (Morse, Healthcare Finance News, 8/8; Lotven, Inside Health Policy, 8/8 [subscription required]; Diamond, "Pulse," Politico, 8/9; CMS release, 8/8; CMS proposed rule, 8/8).
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