Various smaller health insurance issuers have challenged the risk-adjustment program under the Patient Protection and Affordable Care Act (ACA), alleging, among other things, that its underlying methodology favors larger insurers. Last week the Fifth Circuit issued an opinion in one of those cases, affirming the lower court’s rulings in favor of the United States Department of Health and Human Services (HHS) and its administration of the risk-adjustment program. See Vista Health Plan, Inc. v. United States Dep’t of Health & Hum. Servs., No. 20-50963, 2022 WL 807554, at *1 (5th Cir. Mar. 17, 2022).

The Risk-Adjustment Program

HHS implements a risk-adjustment program under the ACA in states that choose not to implement the program themselves. The risk-adjustment program is designed to redistribute actuarial risk among health insurance issuers so that sicker-than-average individuals can obtain affordable healthcare. To effectuate the program, HHS created a three-step risk-adjustment methodology:

• First, for each individual enrolled in an insurer’s plan, an actuarial risk score is computed using demographic and diagnostic data to determine the predicted cost of insuring that enrollee (see 2014 Final Rule, 78 Fed. Reg. 15,411 (March 11, 2013));

• Second, the risk scores for each enrollee in a plan are aggregated to determine the plan’s average risk score (see id. at 15,432); and

• Third, a plan’s risk score is multiplied by the statewide average premium, yielding the dollar amount that a given insurer will pay as a charge or receive as a payment, for that plan for that year (see id.).

In February 2018, a district court in New Mexico vacated HHS’s risk-adjustment rules for benefit years 2014 through 2018 to the extent the rules relied on the third step of HHS’s methodology. New Mexico Health Connections v. United States Dep’t of Health & Human Servs., 312 F. Supp. 3d 1164, 1211 (D.N.M. 2018). HHS responded by stating it would not collect or pay specified risk adjustment amounts, but would issue additional guidance in the near future. Then, in July 2018, HHS announced it would republish the previously adopted risk-adjustment rule for the 2017 benefit year. And for the 2018 benefit year, HHS promulgated a new rule in December 2018. 2018 Final Rule, 83 Fed. Reg. 63,419 (December 10, 2018).

The Dispute and Appeal

Once the new rules were published, Vista Health Plan, Inc., a small Texas health insurer (Vista Health), was assessed risk-adjustment fees exceeding its premium revenue, causing the company to cease operations. More specifically, for 2017, Vista Health ’s first full year of business, HHS assessed risk-adjustment charges of over $4.3 million, accounting for over 50% of its premium revenue for that year. And for 2018, Vista Health’s second year participating in the ACA marketplaces, HHS assessed risk-adjustment charges over $8 million, approximately 57% of the year’s premium revenue. The 2017 risk-adjustment-charge invoice caused Vista Health to be placed under supervision by the Texas Department of Insurance (TDI) at the beginning of 2018, and, by the end of the year, TDI directed Vista Health to stop selling policies.

In September of 2018, Vista Health and its parent, Vista Service Corporation, (collectively, Vista) filed suit against HHS, HHS Secretary Alex Azar, the Centers for Medicare and Medicaid Services (CMS), and CMS Administrator Seema Verma (collectively, the HHS Defendants), challenging the risk-adjustment program and the repromulgation of the 2017 and 2018 Final Rules through what the Fifth Circuit referred to as a “somewhat scattershot complaint.”

Two years later, in September of 2020, the district court granted summary judgment for the HHS Defendants on eight of nine claims asserted by Vista, remanding the only remaining due process claim to HHS. Vista Health Plan, Inc. v. United States Dep’t of Health & Hum. Servs., No. 1:18-CV-824-LY, 2020 WL 6380206, at *4 (W.D. Tex. Sept. 21, 2020).

In April of 2021, Vista appealed the lower court’s determination on the HHS Defendants’ summary judgment motion, specifically disputing the following five points:

Issue 1: The district court’s determination that the 2017 and 2018 Final Rules were not impermissibly retroactive;

Issue 2: The district court’s determination that the 2017 Final Rule should not be vacated because any failure to comply with notice-and-comment procedures amounted to harmless error;

Issue 3: The district court’s determination that HHS’s interpretation of 42 US Code § 18063 directs HHS to calculate relative risk faced by insurers with potentially diverse populations, was entitled to Chevron deference, and that the third step of HHS’s risk-adjustment methodology was neither arbitrary nor capricious;

Issue 4: The adequacy of the district court’s determination concerning rate adjustment charge issues, including rational basis and disproportionate impact matters, considering that the lower court “‘bas[ed] its decision on the HHS’s existing rule making record’ instead of an agency adjudication record”; and

Issue 5: The district court’s determination that HHS’s risk adjustment charges for 2017 and 2018 did not amount to regulatory takings was improper because the lower court did not take into account “the factual basis for” the claim.

In the opinion issued last week, the Fifth Circuit responded to Vista’s appeal as follows:

Response to Issue 1: With respect to the issue of retroactivity, the Fifth Circuit determined that “the mere fact that a statute, or, as here, an agency regulation, ‘draws upon antecedent facts for its operation’ does not render it retroactive. Instead, the relevant inquiry is whether the regulation is retroactive in effect. Accordingly, Vista’s argument that the rules were impermissibly retroactive because they were promulgated either after or towards the very end of their respective benefit years is insufficient to establish improper retroactivity under our precedent.”

Response to Issue 2: With respect to the issue of notice-and-comment non-compliance, the Fifth Circuit upheld the lower court’s ruling that “it is apparent that ‘Vista’s injury lies with the risk-adjustment program’s existence, not HHS’s deficient administrative procedure regarding the New 2017 Final rule,” which thereby extinguishes “Vista’s detrimental reliance argument.”

Response to Issue 3: With respect to the issue related to HHS’s risk-adjustment methodology, the Fifth Circuit upheld the lower court’s ruling that HHS’s interpretation of 42 US Code § 18063 is entitled to Chevron deference because Congress delegated development of the methodology to HHS, which prompts courts to adopt “a deferential standard of review” giving “considerable weight to HHS’s judgment.”

Response to Issue 4: With respect to the issue concerning the lower court’s reliance on agency adjudication records, the Fifth Circuit determined Vista abandoned the issue by not presenting anything to support its position, and in any event, finding Vista would be estopped from objecting to the record because it stipulated to its adequacy.

Response to Issue 5: With respect to the issue concerning the regulatory taking claim, the Fifth Circuit upheld the lower court’s determination because, contrary to Vista’s contentions, “the district court considered Vista’s representation that the takings claim was ripe for summary judgment” and “Vista had notice and opportunity to respond”.

Accordingly, the Fifth Circuit affirmed the lower court’s rulings, leaving Vista with nothing but the single due process claim the lower court remanded to HHS. Vista Health Plan, Inc., No. 20-50963, 2022 WL 807554, at *1 (5th Cir. Mar. 17, 2022).

Although the Fifth Circuit’s opinion does not provide an in-depth analysis of the methodologies underlying the risk adjustment program, it does provide some guidance on substantive issues like retroactivity and the significant deference given to regulators with respect to their statutory implementation efforts.