The Final Rule. In a Final Rule posted by CMS last Tuesday, July 24, 2018, CMS announced that $10.4 billion in “risk adjustment transfers” (“Risk Transfers”) for benefit year 2017 (as calculated pursuant to the Affordable Care Act’s Risk Adjustment Program (the “Risk Program”)) would be distributed to eligible exchange-participating insurers in September, 2018. The Final Rule adopts the previously published methodology for the 2017 benefit year with additional explanation. CMS says that it intends to issue a new proposed rule on the risk adjustment methodology for the 2018 benefit year.

Why was the Final Rule met with an audible sigh of relief from a multitude of Affordable Care Act (“ACA”) stakeholders? Just two weeks ago it looked like the Risk Transfers, which many consider crucial to the stability of the ACA, the exchanges, and eligible exchange-participating insurers, might not be made at all.

The Suspension. On July 9, 2018, Press Release, CMS announced that the Risk Transfers, which were originally intended for distribution this fall, were being suspended until the resolution of pending appeals to a February 28, 2018 ruling (the “NM Ruling”) out of the United States District Court for the District of New Mexico (N.M. Health Connections v. United States Department of Health and Human Services, et al., No. 16-0878, D. N.M., 2018 U.S. Dist. LEXIS 32908). According to the NM Ruling, the Risk Program’s “risk adjustment transfer formula” (the “Risk Formula”) that is used to calculate Risk Program transfer amounts – and, in particular, CMS’s use of the statewide average premium as a part of the Risk Formula – was “arbitrary and capricious.” Therefore, the District Court vacated the use of the Risk Formula for benefit years 2014 through 2018.

In contrast to CMS’s “we have no choice” position, numerous stakeholders asserted that CMS’s suspension of the Risk Transfers was another example of the Trump Administration’s efforts to administratively cripple the ACA without the participation of the Legislative Branch. This belief was, in significant part, based upon the following:

1. 1. The suspension was avoidable. On January 18, 2018, approximately one month prior to the issuance of the NM Ruling, the United States District Court for the District of Massachusetts (Minuteman Health Inc. v. United States Department of Health and Human Services, et al., No. 16-11570, D. Mass., 2018 U.S. Dist. LEXIS 14727) ruled that CMS acted within its authority in promulgating the Risk Program and the Risk Formula based on the statewide average premium (the “MA Ruling”). In light of the conflict between the NM Ruling and the MA Ruling, critics of the suspension concluded that there was, in fact, a choice to be made – the Trump Administration could (i) follow the MA Ruling to avoid the detrimental impacts that could have resulted from the suspension, or (ii) follow the NM Ruling and, in turn, suspend the Risk Transfers. The Trump Administration chose the latter, and, according to its critics, continued its efforts to destabilize/kill the ACA.
   2. The suspension was timed to provide maximum harm to the ACA. Many noted that the Press Release was issued at the same time that ACA-participating insurers were deciding whether to participate on the exchanges in 2019 and, if they were going to participate, setting their benefit packages and premium levels for the 2019 plan year. As a result, many critics argued that the suspension was perfectly timed to impact such decisions and potentially have significant negative impacts on the number of participating insurers and the level of premiums for 2019.
      In an article published in The New York Times on the same day as the Press Release (“Health Insurers Warn of Market Turmoil as Trump Suspends Billions in Payments,” by Robert Pear, NYT, July 7, 2018), Justine G. Handelman, a senior vice president of the Blue Cross and Blue Shield Association, was quoted as saying that, “Any action to stop disbursements under the risk adjustment program will significantly increase 2019 premiums for millions of individuals and small-business owners, and could result in far fewer health plan choices…. It will undermine Americans’ access to affordable care, particularly for those who need medical care the most.” Similar concerns were voiced by Brad Woodhouse, the director of Protect Our Care, an advocacy group that supports the ACA and the Program. As quoted in the same NYT article, “The Trump administration just keeps pushing their destructive repeal-and-sabotage agenda, no matter the cost to the American people…. Following through with this latest act of sabotage could raise rates for all consumers even more.”

Looking Forward. As CMS promulgated the Final Rule at breakneck speed, our review of the Final Rule is ongoing. While it is premature to assess the full impact of the Final Rule at this time, we nevertheless must question whether the Final Rule will restore confidence in the ACA exchange market and (i) encourage participating insurers to continue with the exchanges; (ii) attract new insurers to the exchanges; and (iii) avoid the significant premium increases that were predicted for 2019 and beyond.

The Exchanges. Many insurers expressed concern about the significant negative financial impact they would suffer if Risk Payments were not distributed in the fall; some anticipated having to leave the exchanges if they did not receive the Risk Payments. In fact, the 2017 risk adjustment summary shows that there was a net-reduction in the number of participating insurers in 2017. Further reductions have been reported during this year.^[1] As the New York Times reports, the decision to suspend the risk adjustment payments was driven by officials at the White House and the Justice Department.^[2] While CMS responded quickly to resume risk-adjustment payments, it is unclear whether CMS’ implementation of the Final Rule will alleviate all of the fears of insurers participating in the ACA healthcare exchanges.

The Premium Rates. CMS explained that issuance of the Final Rule to resume risk adjustment payments was made, at least in part, because CMS noted there would be “a serious risk” that insurers would substantially increase premiums in 2019 to make up for the loss of such risk adjustment payments^[3]. Qualified Health Plans (“QHPs”) seeking to participate in the ACA’s healthcare exchanges for 2019 were required to submit their initial premium rates yesterday, July 25, 2018. Any changes to the initial QHP applications must be made by August 22, 2018. Accordingly, there is only a small window for insurers participating in the healthcare exchanges to fully analyze the impact of the Final Rule, as well as the uncertainty caused by CMS’ recent actions, and modify premium rates, accordingly.^[4]

*Dhara Waghela is a summer associate at Sheppard Mullin.

[1] Breaking it Down: CMS Reinstates ACA Risk Adjustment Payments, by Rebecca Darnall, Verscend, July 25, 2018

[2] Trump Administration, in Reversal, Will Resume Risk Payments to Health Insurers, by Robert Pear, New York Times, July 24, 2018.

[3] Trump Administration, in Reversal, Will Resume Risk Payments to Health Insurers, by Robert Pear, New York Times, July 24, 2018.

[4] 2019 Letter to Issuers in the Federally-facilitated Exchanges, by CMS, April 9, 2018.