The Administration announced on July 7th it would suspend collections and payments under the risk adjustment program for the 2017 benefit year. The Centers for Medicare and Medicaid Services (CMS) indicated this action was the result of a ruling issued in the United States District Court for the District of New Mexico on February 28, 2018, ordering CMS vacate the use of the statewide average premium in the risk adjustment transfer formula for the 2014 to 2018 benefit years.
The court case was filed by New Mexico Health Connections, a consumer operated and oriented plan (CO-OP), contesting items such as the use of a statewide average premium instead of carrier-specific average premiums. The case claimed the use of the statewide average premium penalized carriers offering lower premium plans, while benefiting higher premium plans. The court’s ruling found CMS had not adequately justified their assumption that the Affordable Care Act (ACA) required risk adjustment payments to carriers equal risk adjustment charges collected from carriers within each state, and therefore CMS’s decision to use the statewide average premium rather than a carrier’s own average premium in the calculation was “arbitrary and capricious.”
CMS filed a motion for reconsideration of the decision, and a reconsideration hearing was held on June 21, 2018. A ruling related to the reconsideration hearing has not yet been issued. Once a ruling is issued, further appeals could be made. Therefore, it’s unclear what, if any, adjustments will ultimately be made to collections and payments that have already been calculated for plan years 2014 to 2016.
On July 30, 2018, CMS issued a final rule related to its risk adjustment methodology for the 2017 plan year, and indicated this rule would allow them to proceed with assessing charges and making payments for that plan year, as announced in a report released on July 9, 2018. Subsequently on August 8, 2018 CMS issued a proposed rule outlining their proposal to use the statewide average premium in the risk adjustment transfer formula for the 2018 plan year, and are currently seeking public comment.
Given the court case and the public comment period, we thought it might be instructive to evaluate what could happen if each carrier’s charge or payment were recalculated by replacing the statewide average premium with the carrier’s own average premium for the market in each state, while leaving all other aspects of the formula unchanged. As noted in the final rule, this would have required a balancing item by increasing charges, reducing payments, or splitting the difference between charges and payments, since the ACA did authorize and funds were not appropriated to pay any shortfall between calculated payments and charges.
To examine the potential financial impact this type of change in methodology could have, we utilized 2016 financial experience at the carrier level for the individual market within each state, and recalculated the transfer amount for each carrier by substituting the carrier’s average premium for the statewide average premium. (We excluded Vermont and Massachusetts, which have merged individual and small group markets for purposes of risk adjustment, and eight other states for which we could not reconcile our various data sources within a reasonable tolerance.) After these exclusions, our analysis included roughly 90 percent of nationwide membership in the individual market.
As summarized in Table 1, our analysis shows carriers assessed risk adjustment charges for benefit year 2016 would generally be assessed a smaller charge under the alternate methodology, while carriers that received payments for 2016 would generally have a larger calculated payment under the alternate methodology. In total, charges paid into the risk adjustment program would be roughly $731 million less than the calculated payments received under the alternate methodology for these states.