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New Mexico Health Connections v. United States Department of Health & Human Services

United States Court of Appeals, Tenth Circuit

December 31, 2019

NEW MEXICO HEALTH CONNECTIONS, a New Mexico nonprofit corporation, Plaintiff-Appellee,
v.
UNITED STATES DEPARTMENT OF HEALTH & HUMAN SERVICES; CENTERS FOR MEDICARE AND MEDICAID SERVICES; ALEX M. AZAR, II, Secretary of the United States Department of Health and Human Services, in his official capacity; SEEMA VERMA, Administrator for the Centers for Medicare and Medicaid Services, in her official capacity, Defendants-Appellants. AMERICA'S HEALTH INSURANCE PLANS; BLUE CROSS BLUE SHIELD ASSOCIATION, Amicus-Curiae.

          Appeal from the United States District Court for the District of New Mexico (D.C. No. 1:16-CV-00878-JB-JHR)

          Joshua Revesz, U.S. Department of Justice, Washington, D.C. (Joseph H. Hunt, Assistant Attorney General, John C. Anderson, United States Attorney, Alisa B. Klein, U.S. Department of Justice, Washington, D.C.; Robert P. Charrow, General Counsel, Kelly M. Cleary, Deputy General Counsel, H. Antony Lim, Jullia Callahan Bradley, Attorneys, U.S. Department of Health & Human Services, Washington D.C., with him on the briefs), for Defendants - Appellants.

          Barak A. Bassman, Pepper Hamilton LLP, Philadelphia, Pennsylvania (Sara B. Richman, Leah Greenberg Katz, Pepper Hamilton LLP, Philadelphia, Pennsylvania; Marc D. Machlin, Pepper Hamilton LLP, Washington, D.C.; Nancy R. Long, Long, Komer & Associates, P.A., Santa Fe, New Mexico, with him on the brief), for Plaintiff - Appellee.

          Julie Simon Miller, Thomas M. Palumbo, America's Health Insurance Plans, Washington, D.C.; W. Scott Nehs, Blue Cross Blue Shield Association, Chicago, Illinois; Pratik A. Shah, Z.W. Julius Chen, Akin Gump Strauss Hauer & Feld LLP, Washington, D.C., filed an amicus curiae brief on behalf of Amici Curiae.

          Before LUCERO, HARTZ, and MATHESON, Circuit Judges.

          MATHESON, CIRCUIT JUDGE.

         In 2010, Congress passed the Patient Protection and Affordable Care Act ("ACA") to "increase the number of Americans covered by health insurance and decrease the cost of health care." Nat'l Fed'n of Indep. Bus. v. Sebelius, 567 U.S. 519, 538 (2012); see ACA, Pub. L. No. 111-148, 124 Stat. 119 (2010) (codified primarily in title 42 of U.S.C.). Among its reforms, the ACA required private health insurers to provide coverage for individuals regardless of their gender or health status, including preexisting conditions. See 42 U.S.C. §§ 300gg-3, 300gg-4. It also established "[h]ealth [b]enefit [e]xchanges" where individuals and small groups can purchase health insurance. Id. § 18031(b)(1).[1]

         Congress anticipated these reforms might hamper the ability of insurers to predict health care costs and to price health insurance premiums as more individuals sought health insurance. See Standards Related to Reinsurance, Risk Corridors and Risk Adjustment, 77 Fed. Reg. 17, 220, 17, 221 (Mar. 23, 2012) (codified at 45 C.F.R. pt. 153) ("Stabilization Rule"). It also anticipated insurers might refuse to provide insurance plans on the exchanges if they could not reasonably estimate their potential costs. See id.[2]

         To spread the risk of enrolling people who might need more health care than others, Congress established a risk adjustment program for the individual and small group health insurance markets. See 42 U.S.C. § 18063.[3] The program transfers funds from plans with healthier enrollees to plans with sicker enrollees. A goal of the program is to discourage insurers from avoiding enrollment of sicker enrollees.[4]

         Congress tasked the Department of Health and Human Services ("HHS") with designing and implementing this risk adjustment program with the states. Id. § 18063(b). HHS developed a formula to calculate how much each insurer would be charged or paid in each state. The formula relied on the "statewide average premium"-the average of all applicable premiums insureds pay to health insurers in a state-to calculate charges and payments.

         Plaintiff-Appellee New Mexico Health Connections ("NMHC"), an insurer that was required to pay charges under the program, sued the HHS Defendants-Appellants[5]under the Administrative Procedure Act ("APA"). NMHC alleged that HHS's use of the statewide average premium to calculate charges and payments in New Mexico from 2014 through 2018 was arbitrary and capricious.[6]

         The district court granted summary judgment to NMHC, holding that HHS violated the APA by failing to explain why the agency chose to use the statewide average premium in its program. See N.M. Health Connections v. U.S. Dep't of Health & Human Servs. (NMHC I), 312 F.Supp.3d 1164, 1207-13 (D.N.M. 2018). The court faulted HHS for "erroneously read[ing] the ACA's risk adjustment provisions to require" budget neutrality, which "infect[ed] [HHS's] 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." Id. at 1209. It remanded to the agency and vacated the 2014, 2015, 2016, 2017, and 2018 rules that implemented the program. After the district court denied HHS's motion to alter or amend judgment under Federal Rule of Civil Procedure 59(e), HHS appealed.

         Exercising jurisdiction under 28 U.S.C. § 1291:

1. We hold NMHC's claims regarding the 2017 and 2018 rules are moot, so we remand to the district court to vacate its judgment on those claims and dismiss them as moot.
2. We reverse the district court's grant of summary judgment to NMHC as to the 2014, 2015, and 2016 rules. HHS acted reasonably in explaining why it used the statewide average premium in the formula.

         Because we reverse the district court on its summary judgment ruling in favor of NMHC, we need not address the denial of HHS's Rule 59(e) motion.

         I. BACKGROUND

         This section describes the ACA's risk adjustment program and summarizes the factual and procedural history of the case. A. The A CA 's Risk Adjustment Program

         1. Purpose

         Congress included the risk adjustment program in the ACA to stabilize health insurance premiums, encourage health insurers to provide plans on the exchanges, and discourage insurers from eluding enrollment of sicker individuals. See 2014 Final Rule, 78 Fed. Reg. 15, 410, 15, 411 (Mar. 11, 2013), amended by 2014 Final Rule, 78 Fed. Reg. 65, 046 (Oct. 20, 2013). The roles of "premiums" and "risk" in the health insurance market inform this purpose.

         Enrollees pay premiums to receive health insurance coverage. Insurers set their premiums "based on the anticipated revenue needs for their enrolled population." Ctr. for Consumer Info. & Ins. Oversight, Risk Adjustment Implementation Issues, 13 (Sept. 12, 2011) ("2011 White Paper"). Premiums differ from one plan to another for various reasons, including different estimated health care needs of each plan's enrollees and the potential costs for those needs. See John Kautter et. al., Affordable Care Act Risk Adjustment: Overview, Context, and Challenges, 4 Medicare & Medicaid Res. Rev. 1, 5 (2014) ("Kautter Article"). Premiums also reflect a plan's benefits and efficiency. See id. at 3.

         In setting insurance premiums, health insurers consider the risk of loss they might face from providing coverage to their enrollees. Risk is the probability that an insured event will occur, requiring the insurer to pay for it.[7] Among other sources of risk, the ACA reforms have exposed insurers to risk of financial loss due to adverse selection, which occurs when individuals who anticipate high health care needs are more likely to purchase coverage than those who anticipate low health care needs. See Stabilization Rule, 77 Fed. Reg. at 17, 221. This can result in "a health plan having higher costs than anticipated." Id.

         Before the ACA, insurers could limit their risk by adjusting premiums based on the age, gender, and health status of their enrollees. See Katherine M. Kehres, Cong. Research Serv., R45334, The Patient Protection and Affordable Care Act's Risk Adjustment Program: Frequently Asked Questions ii (Oct. 4, 2018) ("CRS Report"). They also "could deny coverage if an individual represented too much risk." Id. at 3. The ACA changed that. It forbids insurers from refusing to cover individuals with preexisting conditions and from "set[ting] premiums based on gender or health status." Id. at 1. An insurer "that enrolls a larger proportion of sicker (i.e., high-risk) enrollees than other plans in the market would [therefore] need to charge" a higher premium to be financially viable. Id. at 7.

         The risk adjustment program aims to (1) reduce an insurer's incentive to enroll only low-risk individuals, (2) encourage insurers to stay in the market, and (3) enable insurers to set premiums based on plan design and benefits rather than the health risk of enrollees in the plan. See id. at ii, 1, 7. It seeks to mitigate the impact of these reforms by subsidizing certain insurers for covering high-risk individuals without compensating them for other plan differences included in the price of their premiums. See Kautter Article at 3; Purva H. Rawal, The Affordable Care Act 161 (2016). HHS devised a formula that calculates "payment transfers . . . to help cover [plans'] actual risk exposure beyond the premiums the plans" can charge under the ACA. 2014 Final Rule, 78 Fed. Reg. at 15, 430.

         2. Statutory Basis

         Section 1343 of the ACA established the risk adjustment program. See id. at 15, 415. Codified at 42 U.S.C. § 18063, the statute provides:

(a) In general
(1) Low actuarial risk plans
Using the criteria and methods developed under subsection (b), each State shall assess a charge on health plans and health insurance issuers (with respect to health insurance coverage) described in subsection (c) if the actuarial risk of the enrollees of such plans or coverage for a year is less than the average actuarial risk of all enrollees in all plans or coverage in such State for such year that are not self-insured group health plans (which are subject to the provisions of the Employee Retirement Income Security Act of 1974).
(2) High actuarial risk plans
Using the criteria and methods developed under subsection (b), each State shall provide a payment to health plans and health insurance issuers (with respect to health insurance coverage) described in subsection (c) if the actuarial risk of the enrollees of such plans or coverage for a year is greater than the average actuarial risk of all enrollees in all plans and coverage in such State for such year that are not self-insured group health plans (which are subject to the provisions of the Employee Retirement Income Security Act of 1974).
(b) Criteria and methods
The Secretary, in consultation with States, shall establish criteria and methods to be used in carrying out the risk adjustment activities under this section. The Secretary may utilize criteria and methods similar to the criteria and methods utilized under part C or D of title XVIII of the Social Security Act. Such criteria and methods shall be included in the standards and requirements the Secretary prescribes under section 18041 of this title.
(c) Scope
A health plan or a health insurance issuer is described in this subsection if such health plan or health insurance issuer provides coverage in the individual or small group market within the State. This subsection shall not apply to a grandfathered health plan or the issuer of a grandfathered health plan with respect to that plan.

         The ACA directed the Secretary of HHS, in consultation with the states, to "establish criteria and methods" to implement this program. 42 U.S.C. § 18063(b). A state can carry out its own approved program or HHS will do so on its behalf. See 45 C.F.R. § 153.310(a). Only Massachusetts has managed its own program, but it ceased doing so in the 2017 benefit year. HHS has always managed New Mexico's program and currently operates the program in all states.

         The statute does not authorize any legislatively appropriated funding for this program. Compare 42 U.S.C. § 18063 (not authorizing appropriations for ACA's risk adjustment program) with id. § 18042(g) (authorizing appropriations in ACA to provide loans to qualified health insurance issuers).

         3. Mechanics

         HHS implemented the risk adjustment program on behalf of states through rules promulgated in separate notice-and-comment proceedings for the 2014, 2015, 2016, 2017, and 2018 benefit years.[8] Each succeeding rule employed the same methodology as the previous rules. See 2015 Final Rule, 79 Fed. Reg. 13, 744, 13, 753 (Mar. 11, 2014) ("We proposed to use the [2014] methodology in 2015 . . . ."); 2016 Final Rule, 80 Fed. Reg. 10, 750, 10, 760 (Feb. 27, 2015), corrected by 2016 Final Rule, 80 Fed. Reg. 38, 652 (July 7, 2015) ("We proposed to continue to use the same risk adjustment methodology finalized in the 2014 [rule] . . . ."); 2017 Final Rule, 81 Fed. Reg. 12, 204, 12, 217 (Mar. 8, 2016) (same); 2018 Final Rule, 81 Fed. Reg. 94, 058, 94, 100 (Dec. 22, 2016) ("The payment transfer formula is unchanged from what was finalized in the 2014 [rule] . . . .").

         To implement the program, HHS took the following steps for each benefit year:

1. Published a proposed rule approximately one year before the applicable benefit year and, after a public comment period, published the final rule a few months later so insurers could rely on it to price their plans. See Supp. App. at 330; 45 C.F.R. § 153.100; id. § 153.320(b).
2. Collected enrollment and claims data from insurers. See 45 C.F.R. § 153.70; see also CRS Report at 7.
3. Calculated a "risk score," which estimated the cost of each enrollee in each plan based on that person's age, sex, and diagnoses. See, e.g., Ctr. for Consumer Info. & Ins. Oversight, HHS-Operated Risk Adjustment Methodology Meeting, 5-6 (Mar. 24, 2016) ("2016 White Paper");[9] CRS Report at 7.
4. Averaged the individual risk scores to calculate a "plan liability" risk score, which estimated an insurer's costs for each of its plans. See 2016 White Paper at 5-6, 11; see also Kautter Article at 8; CRS Report at 7. HHS applied this step to each plan offered by an insurer.[10]
5. Calculated how much plans would be charged or paid by applying to each plan a payment transfer formula, which included an estimated premium based on the "plan liability" risk score and other plan-specific cost factors (such as benefit design). See 2014 Final Rule, 78 Fed. Reg. at 15, 417, 15, 431; 2016 White Paper at 6, 11; see also Kautter Article at 8.
6. Published the risk adjustment transfers, collected charges from insurers that covered healthier enrollees, and paid insurers who covered sicker enrollees. See 45 C.F.R. § 153.310; see also CRS Report at 8.

         4. Payment Transfer Formula and Statewide Average Premium

         The payment transfer formula referred to in step 5 is the focus of this case.[11] The basic concept is that a plan's transfer is the difference between (1) its estimated premium given the health risk of its enrollees and (2) its estimated premium without the risk. See 2014 Final Rule, 78 Fed. Reg. at 15, 430; see also Gregory C. Pope et al., Risk Transfer Formula for Individual and Small Group Markets Under the Affordable Care Act, 4 Medicare & Medicaid Res. Rev. 3 (2014) ("Pope Article"). "Both of these premium estimates are based on the [s]tate average premium." 2014 Final Rule, 78 Fed. Reg. at 15, 430. The 2014 Final Rule distilled the formula as follows:

         (Image Omitted.)

         See id. at 15, 431.

         If the transfer number is positive, a plan receives a payment. See 2016 White Paper at 11. If it is negative, a plan is charged. See id. "Transfers are intended to bridge the gap between these two premium estimates." 2014 Final Rule, 78 Fed. Reg. at 15, 430. The transfers compensate health insurance plans for covering less healthy enrollees while preserving permissible premium differences. 2016 White Paper at 11.

         HHS performed these calculations for every plan offered by every insurer in the state and then used the results to determine which insurers would be charged and how much, and which insurers would be paid and how much. See 2014 Final Rule, 78 Fed. Reg. at 15, 431-32. The total amount charged minus the total paid by HHS "net[ted] to zero." Id. at 15, 516.

         NMHC challenged only one aspect of this program: HHS's use of the statewide average premium rather than each plan's own premium in its payment transfer formula. See Aplee. Br. at 19. The former is an average of all the applicable health insurance premiums in a state. See 2014 Proposed Rule, 77 Fed. Reg. 73, 118, 73, 126 (Dec. 7, 2012); 2014 Final Rule, 78 Fed. Reg. at 15, 431-32. The latter would be the premiums that the plans set themselves. HHS uses the statewide average premium in the formula to convert the prior calculations into a dollar amount that equals the transfer charge or payment. See 2016 White Paper at 81.

         B. Agency and District Court Proceedings

         We present in chronological order the agency and district court proceedings leading to this appeal. As this presentation shows, the agency and court proceedings overlapped towards the end.

         We describe:

1. HHS's preparation for and its conduct of the notice-and-comment proceedings that led to the 2014 risk adjustment rule;
2. the agency's notice-and-comment proceedings that led to the 2015, 2016, and 2017 rules;
3. NMHC's 2016 district court complaint;
4. the agency's proceedings that led to the 2018 rule;
5. NMHC and HHS's cross-motions for summary judgment and the district court's ruling on those motions;
6. HHS's Rule 59(e) motion challenging the district court's summary judgment order;
7. the agency's proceedings, in response to the district court's summary judgment order, that led to modifications to the 2017 and 2018 rules; and 8. the district court's denial of HHS's Rule 59(e) motion.

         1. Notice-and-Comment Proceedings for the 2014 Rule

         HHS began its work on the risk adjustment program shortly after the ACA's enactment. Before developing the details of the program, HHS promulgated a rule establishing general standards for the stabilization programs, including the risk adjustment program.[12] See Stabilization Rule, 77 Fed. Reg. at 17, 220-52.

         In late 2011, the Center for Consumer Information and Insurance Oversight ("CCIIO"), an agency within HHS charged with helping to implement ACA reforms, published a white paper on risk adjustment concepts to "begin the consultation process around the development of the [f]ederally-certified risk adjustment methodology developed by HHS and provide context for individuals to submit comments." 2011 White Paper at 3; see 2014 Proposed Rule, 77 Fed. Reg. at 73, 122. In a bulletin published in early 2012 ("2012 Bulletin"), HHS outlined its plan for implementing the program on behalf of a state. See 2014 Proposed Rule, 77 Fed. Reg. at 73, 122. In mid-2012, HHS also hosted a public meeting to discuss the plan. See id.

         On December 7, 2012, HHS proposed the first risk adjustment rule for benefit year 2014. 2014 Proposed Rule, 77 Fed. Reg. at 73, 118-218. It solicited and received comments for the rule and published the final rule on March 11, 2013 ("the 2014 rule"). See 2014 Final Rule, 78 Fed. Reg. at 15, 410-541.

         We describe the foregoing in greater depth below, focusing on HHS's decision to use the statewide average premium in a risk adjustment program where total charges would equal total payments-that is, budget neutrality.

         a. 201 ...


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