The ACA employs a mechanism known as risk adjustment that is designed to transfer money from successful insurers in a state to those who suffered a loss in the same state. As you could probably guess, the number of insurers that are profiting is far outweighed by those who have suffered losses. In response, HHS decided to break the law by pooling together insurers nationwide, regardless of state lines. This is illegal.

42 USC 42 U.S.C. § 18063(a) provides that risk adjustment must be performed separately within each state.

Using the criteria and methods developed under subsection (b), each State shall assess a charge on health plans and health insurance issuers (with respect to health insurance coverage) described in subsection (c) if the actuarial risk of the enrollees of such plans or coverage for a year is less than the average actuarial risk of all enrollees in all plans or coverage in such State for such year that are not self-insured group health plans (which are subject to the provisions of the Employee Retirement Income Security Act of 1974).

Section (c) clarifies that “such plans” refer to plans “within the state.”

A health plan or a health insurance issuer is described in this subsection if such health plan or health insurance issuer provides coverage in the individual or small group market within the State. This subsection shall not apply to a grandfathered health plan or the issuer of a grandfathered health plan with respect to that plan.

Despite the awful flashbacks to “such” in King v. Burwell, this statute seems to leave little doubt that risk assurance operates within a give state, even if the Secretary steps into the role. Or as Seth Chandler explains:

In plain English, the “such plans” that form one part of the comparison are plans sold in the state levying the charge. And the plans to which the “such plans” are to be compared are the other plans (with an ERISA exception) sold within “such State,” i.e. the state levying the charge. Charges are not to be based on plans and health insurance issuers providing coverage in other states. The laws says each state is a self-contained unit. . . . .

The key point here, though, is that the statute in question, section 1343 of the ACA (42 U.S.C. § 18063), calls for risk adjustment to be conducted on the state level. Even to the extent it permits the Secretary of HHS to step in and conduct risk adjustment on behalf of states, it requires that any redistribution be done at the state level, not on a national basis. Congress did not pass a bill that used risk adjustment to let states with high medical costs tax states that had gotten their act together.

Alas, in March, HHS announced that it would simply ignore the lines around each state, and treat risk-adjustment as a national program. Why? Because it was more “effective.”

In considering this change to the model, we are considering a uniform adjustment across State markets across the country, since such a pooling would be most effective in reducing the impact of extreme high cost outliers. We recognize that creating a uniform pool of high cost enrollees, by risk pool or market, could result in some States or geographic areas subsidizing issuers with high-cost enrollees in other States or markets. We note that while this adjustment would occur in a uniform manner across States and markets, we would continue to calculate risk adjustment risk scores and transfers using the recalibrated, truncated model in a risk pool in a market in a State.

Doing so rewards insurers in more expensive states while punishing insurers in cheaper states. For example, Chandler notes:

The proposal means that an insurer in, say, Utah or Georgia or Texas or Arizona, who, say, has none of these extremely expensive cases ends up paying for the claims of an insurer in Massachusetts, Connecticut, Maine or Delaware who has a bunch. (Medical expenses in Massachusetts are about 84% higher than in Utah.)

Regardless of whether it is “effective,” it is illegal.

What CMS seems to have forgotten or chosen to ignore, however, is that the statute does not permit it to charge insurers in Utah for costs incurred by insurers in Massachusetts. Congress chose to make Risk Adjustment work on a state by state basis. Claims incurred by out-of-state insurers can not legally form the basis for a Risk Adjustment assessment. It doesn’t matter that the tax may be small. Lawlessness is lawlessness.

In a new 465-page notice, dumped on Friday afternoon, HHS has adopted the multi-state risk adjustment methodology. Does it offer any discussion of the textual limitations of the statute? Of course not. Remarkably, it justifies this action by citing the Netherlands!?

Comment: One commenter suggested that the proposed multi-State concept would destabilize some insurance markets and contradicts the Affordable Care Act’s intention to have the risk adjustment, reinsurance, and risk corridors programs be State-based.

Response: The Secretary has broad discretion under the statute to implement the risk adjustment program, and we note that other risk adjustment programs, such as the risk adjustment model used in the Netherlands,32 have incorporated similar approaches.

32 Van Kleef, R. C. and R. van Vliet (2012), “Improving Risk Equalization Using Multiple-Year High Cost as a Health Indicator,” Medical Care 50(2): 140-144.

This is absolutely insane. Chandler says it better than I could:

Sorry, HHS, but a document on risk adjustment in the Netherlands has no bearing on issues of federalism in the United States. It certainly has no authority to override the clear language of an American statute. And, yes, the Secretary does have broad discretion under the statute to implement the risk adjustment program, but not discretion to implement it in clear violation of the terms of the statute. What the response lacks is even the slightest legal theory under which it is lawful for the Secretary to extract funds from insurers in one state based on operations there and give it to insurers in another state based on operations in the second state. That’s not discretion, that’s lawlessness.

But wait, there’s more. Buried on page 368 is a notice that the usual 60-day period before rules become final is being waived. As a result, the rule will take effect on January 17, 2017–three days before the inauguration. Why?

HHS has determined that implementation of these changes beginning early in 2017 is important for issuer confidence. Issuer confidence is necessary to maintain robust issuer participation in and competition on the Exchanges and to encourage affordability of coverage for enrollees and the continuity of care that is supported by the continued availability of plans on the Exchanges. We believe that the later effective date for the 2017 Payment Notice added to issuers’ uncertainty in preparing their products for the 2017 benefit year, which may have led to uncertainty in the market and may have resulted in premium increases. We are seeking a shorter effective date in order to allow issuers ample time to prepare for the 2018 benefit year and help stabilize the Exchanges for issuers and consumers. We also believe consumers’ confidence in the Exchanges is especially important this time of year when they are making enrollment decisions, with Open Enrollment in the individual market ongoing and the Medicare General Enrollment period about to begin on January 1. Stakeholders, including States and issuers, have also requested that this rule become effective earlier in order to establish rates for 2018 in a timely fashion. Therefore, a 60-day delay in the effective date would be contrary to the public interest. We have therefore determined that the rule will become effective on January 17, 2017. 

 

Fortunately for the rule of law, unlike many other illegal executive actions–where insurance companies receive money that should otherwise remain in the U.S. Treasury–this action will create winners and losers. Insurers in states that are going to suffer greater-than-expected losses will notice this highway robbery, and will have standing to sue. I hope they do.

Utter and complete lawlessness.