UnitedHealth Group Inc. sign (Photo: Jim Mone/AP) (Photo: Jim Mone/AP)

A federal judge has deemed efforts by the New York State Department of Financial Services (DFS) to change the effects of the Affordable Care Act risk-adjustment program on the state’s health insurers as constitutional, and he dismissed a lawsuit over those efforts that was filed by units of UnitedHealth Group Inc. against the department.

U.S. District Judge John Koeltl of the Southern District of New York earlier this month granted a motion to dismiss the suit against the department, which has been defending a state regulation that seeks to modify the effects of federal ACA risk-adjustment cash transfers payments between health insurers.

Two UnitedHealth units, UnitedHealthCare of New York and Oxford Health Insurance, sued the department over the regulation in October. 

(Related: New Mexico Carrier Sues Over Feds’ ACA Risk-Adjustment Move)

The ACA risk-adjustment program requires individual major medical and small-group issuers with enrollees with low risk scores to pay cash into a common fund for each state. Fund managers at the Centers for Medicare and Medicaid Services (CMS), an arm of the U.S. Department of Health and Human Services (HHS), distribute the cash to the issuers in the state that attract enrollees with high risk scores.

The program is supposed to eliminate insurers’ financial incentive to seek out healthier, lower-risk enrollees.

The current risk-adjustment methodology was finalized in 2016.

Maria Vullo, the New York state financial services superintendent, issued an emergency regulation that let her implement a risk-adjustment program in New York if the federal program failed to address the unique needs of the state’s insured residents. The regulation gave Vullo the ability to collect up to 30% of the funds received through the federal risk-adjustment program and redistribute to funds to other insurers based on a methodology developed by the New York department.

(Related: New York to Add Emergency ACA Adjuster Adjustment)

UnitedHealthCare and Oxford asserted in their suit that the New York department did not have the authority to redistribute the federal risk-adjustment payments. The companies allege in their complaint that the state’s regulation is pre-empted by the federal program and is an unconstitutional taking of the companies’ property.

Koeltl disagreed in his decision, saying that the HHS rules give states the ability to adjust the federal program if they need to, and that the New York program is therefore neither an overstep by the New York department nor an unconstitutional taking.

“In sum, the fact that the agencies responsible for implementing the FRAP [(federal risk-adjustment program)] — HHS and CMS — have repeatedly stated that states may turn to their own authority to adjust for unintended consequences of the FRAP — and have acknowledged that there have been such unintended consequences — is strong evidence that the ACA does not preempt the 2017 [New York regulatory action],” Koeltl wrote.

The two claims were essentially rolled into one based on that argument, Koeltl said. Since the state has the authority to adjust the FRAP funds, according to him, it also has the authority to redistribute the funds, as allowed under the regulation.

Vullo said in a statement that the decision affirms the agency’s authority to regulate insurers in New York.

“DFS is pleased that the federal court has recognized the Superintendent’s authority to promulgate New York’s health insurance risk adjustment regulation, and to enforce state law through regulation to protect New York’s markets and consumers,” Vullo said. “This decision correctly upholds New York’s regulatory insurance authority, and clearly affirms that New York’s continued enforcement of New York insurance law and regulation is not preempted by federal law.”

Steven Rosenbaum, a partner at Covington & Burling, represented United and Oxford in the matter. He declined to comment when reached by phone Monday. Jon-Michael Dougherty, an associate at Covington, was also on the case.

— Read UnitedHealth Says N.Y. ACA Risk-Adjustment Program Could Be in Troubleon ThinkAdvisor.

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