New Mex. Health Connections v. U.S. Dep't of Health & Human Servs.

• Decision Date: 31 December 2019
• Docket Number: No. 18-2186,18-2186
• Citation: 946 F.3d 1138
• Parties: NEW MEXICO HEALTH CONNECTIONS, a New Mexico non-profit 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.
• Court: U.S. Court of Appeals — Tenth Circuit

946 F.3d 1138

NEW MEXICO HEALTH CONNECTIONS, a New Mexico non-profit 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.

No. 18-2186

United States Court of Appeals, Tenth Circuit.

FILED December 31, 2019

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.

946 F.3d 1144

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, 132 S.Ct. 2566, 183 L.Ed.2d 450 (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

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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-Appellants⁵ 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.

946 F.3d 1146

A. The ACA’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

946 F.3d 1147

transfers ... to help cover [plans’] actual risk exposure beyond the premiums the...