(CN) – A New Mexico-based health care provider won a partial but significant legal victory against the federal government Thursday, after a federal judge ruled the Department of Health and Human Services used flawed formulas to shift money from big insurers to small ones.
U.S. District Court James Browning ruled the department failed to use appropriate formulas when deciding how much money to redistribute from large insurers to small insurers such as Health Connection, which operates in the state of New Mexico.
“HHS assumed, erroneously, that the [Affordable Care Act] requires risk adjustment to be budget-neutral, and all of HHS’ reasons for using the statewide average premium rely on that budget neutrality assumption,” Browning wrote in an 83-page ruling, referring to Health and Human Services by its acronym.
The decision figures to have broad implications for the implementation of the Affordable Care Act throughout all 50 states, although President Barack Obama’s landmark health care legislation already faces near-constant dismantlement efforts by President Donald Trump and the Republican-controlled Congress.
The dispute between Health Connections, a smaller insurance company, and the federal government focuses on a specific aspect of the Affordable Care Act where the federal government uses a specific formula to decide how much money is taken from the large insurance companies like Anthem and given to smaller mom-and-pop operations.
Health Connections said the formula favors the larger operations for a number of reasons, including that it relies on a state average of premiums.
State averages are less affected by the share of healthy or sick customers than by cost-control decisions, such as overhead management, negotiating lower prices with doctors and hospitals and other aspects outside the purview of the formula.
Furthermore, Health Connections argued taking state averages is unfair because larger insurance companies have higher priced premiums and are therefore in control of manipulating state averages and skewing the methodologies and ultimately hurting the smaller insurance outfits.
Health Connections said the formula should be conducted by taking the average premium of each insurer operating within a state, not on a statewide basis.
The department pushed back, arguing statewide averages are important because of a budget-neutral provision and the method is more straightforward and predictable.
Browning shot holes in the department’s budget-neutral rationale, meaning it will have to revisit how it applies its risk redistribution formulas based on the complaints of Health Connections.
“The court, accordingly, sets aside and vacates HHS’ action as to the statewide average premium rules and remands the case to the agency for further proceedings,” Browning wrote.
While not illegal, Browning said the department’s practices were arbitrary and capricious under the Administrative Procedure Act.
In a statement issued Thursday, Health Connections CEO Martin Hickey called the ruling a victory and said the company hopes it will no longer be unnecessarily penalized by the formulas.
The exact financial implications of the ruling on Health Connections, New Mexico and the broader market, remains unclear.