Challenging the risk adjustment program.

If you’re one of the six people left who still hasn’t had enough of ACA litigation, you’re in luck. Yesterday, a health plan in Maryland sued the Centers for Medicare and Medicaid Services, arguing that it has botched the implementation of the risk adjustment program.

The risk adjustment program is one of the three R’s—reinsurance, risk adjustment, and risk corridors. Unlike the risk corridor program, which only lasts through the end of this year, the risk adjustment program is permanent.

And it’s essential. Some health plans on the exchanges will attract healthier enrollees than others. Others will attract sicker ones. Under the ACA, however, no health plan can vary its prices based on health status. Without help, plans with sicker enrollees would quickly go out of business, frustrating the market competition that the exchanges were supposed to promote.

The solution is risk adjustment. Plans with healthier-than-average enrollees are forced to pay some money into a central kitty. In turn, plans with sicker-than-average enrollees get to take some money from that kitty. The idea is to equalize actuarial risk across health plans.

If risk adjustment worked perfectly, plans would be indifferent about the health of their enrollees. But risk adjustment isn’t perfect. For one thing, it’s hard to calibrate: the risk adjusters might, for example, lowball how expensive HIV/AIDS patients are. For another thing, enrollees are classified into relatively crude categories that don’t capture all dimensions of actuarial risk. All HIV/AIDS patients, for example, might get the same bump in their risk scores, even though patients with certain attributes are predictably more challenging. If risk adjustment is blind to those attributes, health plans that enroll lots of expensive patients will get hammered while their competitors sit pretty.

Under any risk adjustment scheme, then, some plans will be winners and some will be losers. That’s where the new lawsuit comes in. Evergreen Health Cooperative thinks it’s getting the short end of the stick because of some technical choices that CMS made when it designed its risk adjustment program.

In particular, CMS only takes into account those diagnoses that are made when a patient is enrolled in the plan in question. If someone is diagnosed with diabetes before they enrolled in Evergreen, for example, they’re not classified as diabetic, even if Evergreen is paying for their insulin. Evergreen thinks that this is “arbitrary and capricious”—the sort of decision that no reasonable agency could have made.

Color me skeptical. CMS had to adopt some mechanism for classifying patients. It chose to adopt a pretty strict rule: patients are classified based on the diagnoses they receive in a given year. That rule is both under- and over-inclusive, but it has the important virtues of being easy to apply and hard to game.

Alternatively, CMS could’ve adopted a standard. Health plans could’ve been permitted to classify patients based on a holistic assessment of claims data. That’s what Evergreen wants. But while a flexible standard might be more accurate, it would be harder to apply and prone to manipulation.

The point is that there’s no obviously “right” way to go about classifying patients, which means that CMS has some room to select the approach that seems most sensible. Picking a rule instead of a standard isn’t unreasonable.

The plan’s remaining two claims look even weaker. Evergreen apparently thinks that CMS should’ve amended its risk adjustment program in light of Congress’s refusal to appropriate sufficient funds for the three-year risk corridor program. But why? Nothing in the ACA obliges the agency to adjust a permanent program to account for funding lapses in a temporary program. The tail shouldn’t wag the dog.

Evergreen also believes that CMS has made a legal mistake. The ACA says that “each State shall” be responsible for shuttling money between health plans. CMS, however, has taken on the job for those states that haven’t set up exchanges or have otherwise declined to operate a risk adjustment program. Evergreen thinks that’s unlawful.

It’s not. The ACA instructs CMS to establish rules for risk adjustment and, in so doing, explicitly cross-references portions of the ACA allowing the federal government to step into the states’ shoes when they don’t establish exchanges that meet federal guidelines. The ACA thus empowers the federal government to operate a risk adjustment program that the states either can’t or won’t run.

In short, I doubt Evergreen’s lawsuit is going anywhere. I could be wrong about that—the litigation is very young—but even the six people who still care about ACA litigation shouldn’t get too worked up about this one.


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