Insight Center: News

Pepper Hamilton Successfully Challenges Affordable Care Act Risk Adjustment Formula

Firm represented New Mexico Health Connections in groundbreaking federal case that vacated Department of Health and Human Services regulations

Pepper Hamilton Successfully Challenges Affordable Care Act Risk Adjustment Formula

Pepper Hamilton won a significant victory on behalf of its client New Mexico Health Connections when the U.S. District Court for the District of New Mexico vacated the risk adjustment formula used by the U.S. Department of Health and Human Services for health plans offered on Affordable Care Act exchanges. The court’s Feb. 28 decision overturns an HHS policy that penalized innovative, affordable health insurance companies, resulting in less competition and higher premiums for consumers.

A multidisciplinary Pepper team, led by partner Barak A. Bassman, argued that HHS’s risk adjustment formula was arbitrary and capricious under the Administrative Procedure Act because, among other deficiencies, it used statewide average premiums instead of each plan’s own premium in calculating risk adjustment transfer payments. This effectively punished smaller, innovative insurers that sought to lower premiums for customers below statewide averages, and subjected those insurers to untenable risk adjustment payments that amounted to significant percentages of their premium revenue.

In holding that the formula was arbitrary and capricious, the district court rejected HHS’s argument that the formula was justified because the ACA requires risk adjustment to be budget neutral. The court agreed with the Pepper team’s argument that the statute includes no such requirement. and vacated all HHS risk adjustment regulations dating back to 2014. The agency may now appeal the decision or propose a new regulation through the notice-and-comment process.

“The purpose of the ACA is to ensure all Americans have access to affordable, quality health insurance, which is exactly what New Mexico Health Connections has been providing since its inception,” Mr. Bassman said. “The risk adjustment formula undermined that goal. With this decision, the court acknowledged that the formula was arbitrary and capricious. We look forward to advocating for our client as HHS considers its next steps.”

Dr. Martin Hickey, former CEO of New Mexico Health Connections, said in a statement that the ruling “is a victory for New Mexicans insured under Exchange health plans. The risk adjustment formula unfairly penalized health plans that effectively managed care and therefore lowered costs, as NMHC consistently has.”

In addition to Mr. Bassman, the Pepper team included partners Marc D. Machlin and Sara B. Richman and associates Leah Greenberg Katz, Benjamin J. Eichel and Janine P. Yaniak.

About New Mexico Health Connections           

New Mexico Health Connections is a physician-led health plan committed to keeping New Mexicans healthy. Started in 2012 as one of the original 24 CO-OPs created by the Affordable Care Act, NMHC is available on both the individual and small business health insurance exchanges through the commercial market. For more information, visit mynmhc.org.

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