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A Review of the Affordable Care Act at 10 Years, Part 3: Market Reforms and Risk Adjustment

This post is the third installment in our blog series looking back the Affordable Care Act (ACA) and the 10 years since it was passed. We will cover the ACA's market reforms, including the establishment of essential health benefits, as well as risk adjustment and other programs designed to mitigate some of the financial risk that insurance companies would face as a result of a potential influx of individuals with pre-existing conditions into the marketplaces. 

The ACA’s Market Reforms

The ACA’s market reforms established federal requirements for many types of private health insurance.  These reforms do not apply uniformly across the different market segments, and a decision by the Obama Administration to “grandfather,” or exempt, certain existing plans from these requirements has made the process of determining how each of the market reforms applies more complicated.  Generally, plans offered on the group and individual markets must comply with nearly all of the applicable market rules, while plans in the large group market are exempt from certain requirements such as guaranteed renewability, ratings restrictions, and coverage of essential health benefits.  While Mintz has written extensively about many ACA market reforms, here we'll focus on the essential health benefits requirements.[28] 

Essential Health Benefits

Prior to the ACA, there was no federal uniform standard for what types of benefits a health plan had to provide.  Insurance is primarily regulated at the state level – the result of the McCarran-Ferguson Act, a 1945 law providing that Congressional legislation that does not expressly purport to regulate the business of insurance does not supersede state insurance laws.  As such, coverage mandates can vary significantly from state to state.[29] 

In some cases, this patchwork regulatory scheme has allowed states the flexibility to experiment with mandating coverage for novel services, such as the flood of state laws over the last decade mandating that plans cover autism services such as applied behavioral analysis (ABA) therapy.  In contrast, a lack of federal standards has historically resulted in sparse coverage options for certain markets, an issue that was most acute in the small and individual markets prior to the enactment of the ACA.  In 2011, just two years before the marketplaces were slated to begin operating, HHS reported that 62% of individuals and families who purchased their own health insurance did not have coverage for maternity services.[30]  Further, 34% lacked coverage for substance abuse services, 18% for mental health services, and 9% for prescription drugs.[31]   

To address this concern, the ACA established the ten categories of services known as “essential health benefits” (EHB), which all plans in the small and individual markets must cover, whether offered on or off the health insurance marketplaces established by the ACA.  EHB include mental health services, hospitalization, emergency services, and mental health and substance abuse services.[32] 

While the ACA broadly identified these categories, the law left most of the details – such as the specific services in each category that a plan would be required to cover – to regulation.  Instead of setting uniform federal standards, HHS issued a final rule in 2011 allowing states to select a “benchmark plan,” which would be used as the standard by which all non-grandfathered plans in the small and individual markets are compared against to ensure that they meet the EHB requirement.[33]  The initial regulations for EHB allowed states to select a benchmark plan from the following options: the largest small group market plan in the state, the state employee health benefit plan, any of the largest three national Federal Employees Health Benefits Program (FEHBP) plan options, or the largest commercial HMO.[34] 

The EHB requirements have faced criticism for several reasons, with some patient-advocacy groups arguing that the benchmark selection standards failed to ensure sufficient coverage for necessary care.  Meanwhile, various provider advocacy organizations such as the American Medical Association (AMA) have argued for increased state flexibility in selecting benchmark plans, reasoning that rigid coverage requirements may increase premiums.[35]  As we wrote in 2018, HHS has more recently sought to offer states greater flexibility by allowing them to select benchmark plans of set benefits for any specific benchmark category based on other states.  States may also now select a benchmark plan from the “typical employ plan,” which states have the power to define and determine.

Association Health Plans

In the aftermath of the Trump Administration’s unsuccessful attempts to fully repeal the ACA via legislation in 2017, President Trump issued an Executive Order directing the Department of Labor (DOL) to expand access to coverage by allowing more employers to form Association Health Plans (AHPs).  As defined by the subsequent DOL final rule in 2018 – which Mintz’s Employment, Labor, and Benefits team wrote about in a series of posts – AHPs are group health plans that employer groups and associations offer to provide health insurance coverage for employees.  AHPs predate the ACA by decades, and while the law did not outlaw them, it did not afford these plans any special exemptions from the ACA’s other market rules such as guaranteed issue and EHB.  Accordingly, AHP coverage purchased by individuals or small employers was regulated in the same way as any other plan in the small and individual markets. 

Due to a pre-existing regulatory exception, however, AHPs established or maintained by ‘‘bona fide groups or associations’’ were regulated as single multi-employer ERISA plans, and thus subject to the more lenient market rules for the large group market (and, because of ERISA pre-emption, exempt from state insurance regulations).[36]  As described in more detail in the Association Health Plan Perspectives series, the DOL had previously interpreted this exception very narrowly, resulting in most AHPs falling under the more robust small and individual market rules.  The DOL’s final rule in 2018 essentially made it easier for AHPs to qualify as single multi-employer ERISA plans.

While some have applauded the Administration’s new policy towards AHPs as a way to reduce premiums – these plans are often cheaper than plans subject to the ACA’s market requirements – others have alleged that the policy would lead to more “junk” plans with limited coverage and pull health healthy patients from the individual market, resulting in adverse selection in the exchanges.[37]  In the summer of 2018, several Democratic attorneys generals jointly sued the DOL, arguing that the final rule violated the Administrative Procedures Act.  In March 2019, the U.S. District Court for the District of Columbia invalidated the final regulations.[38]  That case was immediately appealed to the D.C. Circuit, which held oral arguments in November 2019.  A decision in that case is expected soon.

The Three R’s: Risk Adjustment, Risk Corridors, Reinsurance 

A significant concern during the initial years of the ACA’s implementation was that the immediate influx of individuals with pre-existing conditions into the marketplaces would lead to market failures such as adverse selection and risk selection.  Individuals with pre-existing conditions tend to be sicker and have higher medical costs.  They were also more likely to purchase insurance in the individual exchanges, especially in the early years when the tax penalty for not having insurance was very low.   

In response, the ACA included three programs designed to mitigate some of the financial risk that insurance companies offering marketplace plans would face: reinsurance and risk corridors, which were temporary programs that ran from 2014 to 2016, and risk adjustment, which is permanent feature of the marketplaces.  Together, these programs are often referred to as the “Three Rs.” The reinsurance program compensated insurers for enrollees with high medical costs, while the risk corridors limited the losses and gains that insurers would incur beyond a certain allowable range to mitigate premium increases.  From 2014 to 2016, the risk corridors program required profitable insurers to pay funds into the program and used these funds to subsidize insurers with higher medical claims.  The ACA’s permanent risk adjustment program redistributes funds based on the relative risks of a plan’s enrollees, reallocating money from insurers with plans filled with lower-risk enrollees to plans with higher risk enrollees.  Risk adjustment is meant to mitigate adverse selection and risk selection issues in the individual and small group markets for plans both inside and outside of the exchange. 

The use of the three programs as a mechanism to stabilize the insurance markets is modelled partly after Medicare Part D.  While both Part D and the ACA’s marketplaces include the Three Rs, however, the respective programs differ in several important respects.  For one, all three programs are a permanent feature of Part D.  Further, the ACA’s permanent risk adjustment model is retrospective, or “concurrent,” meaning claims data from a given time is used to assess the relative risk for the same period.  In contrast, Medicare’s model is prospective, meaning it uses historical claims data to predict the future risk of the population. 

Over the last six years, the ACA's risk corridors and risk adjustment programs have been the subject of significant controversy and litigation.  These programs have received less attention relative to the high-profile challenges to and attempts to repeal the ACA, likely a result of their complexity.  Nonetheless, these programs, in particular risk adjustment, are extremely important to ensuring properly functioning health insurance markets.

Litigation over the Risk Corridors and Risk Adjustment Programs     

Risk Corridors 

The source of conflict surrounding the risk corridors program primarily concerned legislative drafting. Both the Spending Clause of the Constitution and the Anti-Deficiency Act prohibit federal agencies from making payments without a “valid appropriation,” which requires both a directive to pay and a clearly specified source of funds. However, the statutory language authorizing the risk corridors program lacks a specified source of funds.

As we previously wrote, despite the lack of funding source in the statutory authorization, HHS still managed to administer the program using a workaround.  HHS had the authority under the President’s fiscal year budget to collect “user fees” to carry out miscellaneous responsibilities. By classifying payments into the risk corridors program (i.e., risk corridors receipts) as “user fees,” HHS was able to administer the program.  In the years preceding 2014, the risk corridors became a target for Republican lawmakers, who argued that the program was essentially a “bail out” for insurers.  In 2015, Senator Marco Rubio inserted a provision restricting HHS from transferring non-program specific payments to fund the risk corridors program, essentially forcing the program to be budget neutral. While this measure did not restrict HHS from making payments to fund the program, it severely handicapped HHS’s ability to finance the risk corridors payments fully if payments into the program were less than the obligations to pay.  The practical effect of budget neutrality was that between 2014 and 2016, an estimated 12.3 billion in risk corridor receipts were never paid out to insurers.

In response, several health insurers sued the federal government based on various theories, the most prominent being that Congressional riders restricting the program as budget neutral did not vitiate the federal government’s statutory duty to make full risk corridors payments to plans.  Initially, plans had some success in challenging the risk corridors payments.  In 2016 and 2017, judges in the U.S. Court of Federal Claims issued conflicting rulings on the permissibility of administering the program as budget neutral.[39]  After consolidating these two cases on appeal, however, the U.S. Court of Appeals for the Federal Circuit upheld HHS’s administration of the program as budget neutral.  In June 2019, the Supreme Court granted certiorari to a consolidated appeal from a trio of health insurers.  The Court heard oral arguments in the case, now captioned Maine Community Health Options v. United States, in December 2019.  A decision is forthcoming.  

Risk Adjustment

The purpose of risk adjustment is to stop insurers from structuring benefits, cost sharing, and other plan components in order to attract a disproportionate share of healthy individuals with low volume of expected medical claims.  To further this goal, the ACA’s risk adjustment program transfers funds from plans with lower-risk enrollees (i.e., younger and healthier individuals) to plans with higher-risk enrollees (i.e., older and sicker individuals).  HHS created a methodology to estimate the financial risk of a plan’s enrollees, known as an individual risk score, using demographic data, claims for medical diagnoses, and other factors.  A plan’s individual risk scores are then averaged across all its enrollees to calculate an average risk score. Plans with low average risk scores are supposed to pay into the program, and plans with high average risk scores receive payments from the program.

As we have previously written, administration of the program has been the source of significant scrutiny, particularly in the government’s use of statewide average premium.  Statewide average premium is the calculation of the average premium in the applicable exchange marketplace.  HHS’s risk adjustment methodology compares this number to a plan’s average risk score to determine risk adjustment payments to plans.  Similar to the statutory language authorizing risk corridors, the ACA’s risk adjustment provisions lacked a funding source.  Consequently, HHS decided to administer the program as budget-neutral, restricting payments to insurers from exceeding payments into the program.  For complex reasons (detailed in the aforementioned blog post), HHS decided to use statewide average premium, instead of a given plan’s actual premium, as a way to allocate transfer payments through the program.

In the aggregate, plans appear to have generally approved of statewide average premium.  However, some smaller plans as well as plans established through the ACA’s Consumer Operated and Oriented Plan Program, known as CO-OP plans, have argued that the use of a statewide average premium penalizes plans that keep premiums low through smaller payments to providers, management of enrollees’ medical care, and reduced administrative costs.  Several plans sued the federal government, challenging both the use of the statewide average premium as well as HHS’ decision to administer the program as budget neutral.  Although a district court judge in Massachusetts rejected the arguments of a plan bringing such a challenge in early 2018, shortly thereafter, a district court judge in New Mexico ruled that application of statewide average premium was arbitrary and capricious because HHS had failed to provide adequate justification for administering the program as budget neutral.[40]  The Tenth Circuit Court of Appeals later reversed the New Mexico ruling, holding that HHS’ decision to administer the risk adjustment program as budget neutral was permissible. 

We will conclude this blog series tomorrow with our final post, which will cover alternative payment and delivery models, as well as what might be next for the ACA. 

[28] These market reforms include, but are not limited to, requirements that plans must accept each applicant that agrees to the terms and conditions of the health insurance (guaranteed issue), prohibitions on plans basing eligibility or coverage on health status (nondiscrimination), prohibitions on retroactive cancellation of medical coverage (prohibitions on rescissions), requiring the use of adjusted or modified community rating rules to determine premiums (ratings restrictions ), and plans must cover certain benefits categories (essential health benefits).  

[29] 15 U.S.C. §§ 1011-1015.

[30] Office of the Ass’t Sec’y for Planning and Eval, HHS, Essential Health Benefits: Individual Market Coverage (Dec. 16, 2011).

[31] Id.

[32] The EHBs include the following ten service categories: 1) ambulatory patient services, 2) emergency service, 3) hospitalization, 4) pregnancy, maternity, and newborn care, 5) mental health and substance use disorder services, including behavioral health treatment, 6) prescription drugs, 7) rehabilitative and habilitative, services and devices, 8) laboratory services, 9) preventive and wellness services and chronic disease management, and 10) pediatric services, including oral and vision care.

[33] Patient Protection and Affordable Care Act; Standards Related to Essential Health Benefits, Actuarial Value, and Accreditation. 78 Fed. Reg. 12834 (Feb. 15, 2013).

[34]78 Fed. Reg. 12840

[35] Letter from Carly Meyers, Attorney Fellow, and Silvia Yee, Senior Staff Attorney, Disability Rights Education & Defense Fund, to Seema Verma, CMS, Nov. 27, 2019

[36] Alden J. Bianchi, Department of Labor Issues Final Association Heath Plans Regulations, 46(7) Tax Mgmt Comp Planning J. 115 (2018).

[37] See Robert Gebelhoff, Experts hated this Trump health-care policy. So far, they’re wrong. Wash. Post (Feb. 1, 2019),

[38] New York v. United States Dep’t of Labor, CV 18-1714 (D.D.C. Mar. 28, 2019).

[39] Land of Lincoln Mutual Health Insurance Co. v. U.S., 129 Fed. Cl. 81 (2016); Moda Health Plan Inc. v. U.S., 130 Fed. Cl. 436 (2017).

[40] Minuteman Health, Inc. v. United States Department of Health and Human Services et al., No. 1:16-cv-11570 (D. Mass. Jan. 30, 2018); New Mexico Health Connections et al. v. U.S. Department of Health and Human Services et al., No. 1:16-cv-00878-JB-JHR (D.N.M. Feb. 28, 2018).

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Xavier represents clients in the health care and life sciences fields on health care regulatory and fraud and abuse matters. He also handles Medicare and Medicaid reimbursement issues in transactions and business arrangements.