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Minuteman Health, Inc. v. United States Department of Health and Human Services

United States District Court, D. Massachusetts

January 30, 2018

MINUTEMAN HEALTH, INC., Plaintiff,
v.
UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES, et al., Defendants.

          MEMORANDUM AND ORDER ON PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND DEFENDANTS' CROSS-MOTION FOR SUMMARY JUDGEMENT

          F. DENNIS SAYLOR, IV UNITED STATES DISTRICT JUDGE.

         This is an action brought under the Administrative Procedure Act (“APA”) challenging certain regulations promulgated by the Department of Health and Human Services (“HHS”) under the Patient Protection and Affordable Care Act (“ACA”), Pub. L. No. 111-148, 124 Stat. 119 (2010).

         Minuteman Health, Inc. is a nonprofit health-insurance provider that offered plans in Massachusetts in 2014, and in both Massachusetts and New Hampshire from 2015 to 2017. In 2014, it was required under HHS and Massachusetts regulations implementing the ACA's risk-adjustment program to pay 71% of its gross premium revenues to the program. In 2015, it was required to pay 40% of its New Hampshire revenues and 39% of its Massachusetts revenues. Perhaps unsurprisingly, it was not able to survive the loss of such a huge percentage of its revenues. It is now in receivership and is not offering plans to subscribers.

         In substance, Minuteman challenges the HHS regulations that forced it to make those large transfer payments. It contends that the regulations at issue (1) were arbitrary and capricious, and therefore in violation of the APA, 5 U.S.C. § 706, and (2) were beyond HHS's statutory authority because they contravene the statute providing for risk adjustment, 42 U.S.C. § 18063.

         The issues posed in this lawsuit are far from simple. The ACA is a notoriously complex statute, health insurance is notoriously difficult to administer effectively, and the federal healthcare bureaucracy is notoriously cumbersome. The implementation of the statute and its regulations can hardly be called an unqualified success, and it appears to have triggered a host of unintended consequences. But the role of this Court is not to sit in judgment on the wisdom of the law, nor is it to judge the actions of HHS with the benefit of hindsight. Rather, it is to consider this specific challenge to certain regulations implemented under the act by HHS, and to analyze that challenge according to a specific legal framework: in essence, to determine whether HHS acted arbitrarily or unreasonably based on the record before it at the relevant time.

         The essential facts are not disputed, and both parties have cross-moved for summary judgment. In substance, the Court concludes that HHS acted within the bounds of its authority, even when the consequences of its choices may not always have been optimal. Accordingly, and for the reasons set forth below, defendant's motion will be granted and plaintiff's motion will be denied.

         I. Background

         A. Factual Background

         1. The Patient Protection and Affordable Care Act

         The ACA was passed to regulate health insurance in the United States. Among other things, it “bars insurers from taking a person's health into account when deciding whether to sell health insurance or how much to charge”; “requires each person to maintain insurance coverage or make a payment to the Internal Revenue Service”; and “gives tax credits to certain people to make insurance more affordable.” King v. Burwell, 135 S.Ct. 2480, 2485 (2015).

         Congress recognized, however, that prohibiting insurers from denying coverage to individuals based on their health status, combined with insurers' lack of knowledge of the health status of the anticipated new enrollees, would create a substantial risk of premium volatility. To alleviate the effects of that uncertainty, the ACA established three premium-stabilization programs, colloquially known as the “3Rs”: the reinsurance, risk-corridors, and risk-adjustment programs. See generally 42 U.S.C. §§ 18061-18063.[1] While reinsurance and risk corridors were temporary programs meant to stabilize premiums in the first few years of the ACA's implementation and have now been discontinued, the risk-adjustment program, which is the subject of this litigation, is permanent. See Standards Related to Reinsurance, Risk Corridors, and Risk Adjustment, 77 Fed. Reg. 17, 220, 17, 221 (Mar. 23, 2012) (“Premium Stabilization Rule”); see 42 U.S.C. §§ 18061(b)(1)(A), 18062(a), 18063.

         The goal of the risk-adjustment program is to spread the costs of covering higher-risk members across insurers throughout a given state, thereby reducing incentives for insurers to engage in “risk-avoidance” techniques, such as designing or marketing their plans in ways that tend to attract healthier individuals, who cost less to insure. Mark A. Hall, Risk Adjustment Under the Affordable Care Act: Issues and Options¸ 20 Kan. J.L. & Pub. Pol'y 222, 224 (2011). In broad terms, it requires issuers with healthier members to pay into the program, which in turn provides subsidies to issuers with less-healthy members.

         The key provisions of the statute are contained within a single, short section. It provides that “each State shall assess a charge on health plans and health insurance issuers . . . 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, ” and, correspondingly, “each State shall provide a payment to health plans and health insurance issuers . . . if the actuarial risk of the enrollees of such plans or coverage for a year is greater than the average actuarial risk of all enrollees in all plans and coverage in such State for such year that are not self-insured group health plans.” 42 U.S.C. § 18063(a) (emphases added).

         Congress delegated to HHS the responsibility for administering many of the programs under the ACA, including the risk-adjustment program. See Id. § 18063(b) (“The Secretary [of Health and Human Services], in consultation with States, shall establish criteria and methods to be used in carrying out the risk-adjustment activities under this section.”).[2] Under the ACA, HHS was to promulgate overarching standards for the risk-adjustment program, and the states would operate the program independently within those guidelines. See 42 U.S.C. § 18041(c); 45 C.F.R. § 153.310. The statutory scheme allowed HHS to operate the program on behalf of any state that chose not to do so. 45 C.F.R. § 153.310(a)(2); see 42 U.S.C. §§ 18041(c)(1), 18063. In practice, the vast majority of states opted from the beginning to allow HHS to administer the program. The only state to run its own program was Massachusetts, and even Massachusetts ceded responsibility to HHS beginning in the 2017 benefit year. See HHS Notice of Benefit and Payment Parameters for 2014, 78 Fed. Reg. 15, 410, 15, 439 (Mar. 11, 2013) (“2014 Final Rule”); HHS Notice of Benefit and Payment Parameters for 2017, 81 Fed. Reg. 12, 204, 12, 230 (Mar. 8, 2016) (“2017 Final Rule”).

         Other parts of the ACA relevant to this action include the Consumer Operated and Oriented Plan Program (the “CO-OP” program), 42 U.S.C. § 18042, and the actuarial categorization of plans on the Health Benefit Exchanges, Id. § 18022(d).

         The CO-OP program, among other things, makes loans available to “qualified nonprofit health-insurance issuers” in order to encourage new entrants and bolster competition in the health-insurance market. Id. § 18042(b)(1); (Pl. Mem. in Supp. Summ. J. Ex. 11); see also 42 U.S.C. § 18042(c)(4) (“[A]ny profits made by the organization are required to be used to lower premiums, to improve benefits, or for other programs intended to improve the quality of health care delivered to its members.”). CO-OP loan applicants must submit business plans to HHS, which, if approved, are incorporated into the final loan agreement. (Pl. Mem. in Supp. Summ. J. Exs. 11, 12). Congress appropriated $6 billion in the ACA to assist the launch of the CO-OP program. 42 U.S.C. § 18042(g).

         The Health Benefit Exchanges are state-run insurance marketplaces created by the ACA to facilitate consumer choice and competition. 42 U.S.C. §§ 18031-18033. To allow consumers to compare products more easily, health plans sold on the exchanges are regulated in various ways. Id. §§ 18021-18024. Most relevant here, health plans sold on the exchanges are categorized as either catastrophic plans, which are only available to certain groups of enrollees, or one of four “metal levels”: platinum, gold, silver, or bronze. Id. § 18022(d), (e). The metal levels correspond to the actuarial value of the plan-that is, the percentage of the full actuarial value of the benefits provided under the plan that the plan will actually cover. A platinum plan has an actuarial value of 90%, gold 80%, silver 70%, and bronze 60%. Id. § 18022(d).

         2. Risk-Adjustment Methodology

         As described by HHS, the risk-adjustment program “is intended to provide payments to health-insurance issuers that attract higher-risk populations, such as those with chronic conditions, and eliminate incentives for issuers to avoid higher-risk enrollees.” Program Integrity: Exchange, Premium Stabilization Programs, and Market Standards; Amendments to the HHS Notice of Benefit and Payment Parameters for 2014, 78 Fed. Reg. 65, 046, 65, 048 (Oct. 30, 2013). “The risk-adjustment program is intended to reduce or eliminate premium differences between plans based solely on expectations of favorable or unfavorable risk selection or choices by higher-risk enrollees in the individual and small-group market. [It] also serves to level the playing field inside and outside of the Exchange, reducing the potential for excessive premium growth or instability within the Exchange.” Premium Stabilization Rule, 77 Fed. Reg. at 17, 230. “Risk-adjustment transfers are intended to reduce the impact of risk selection on premiums while preserving premium differences related to other cost factors, such as the actuarial value, local patterns of utilization and care delivery, local differences in the cost of doing business, and, within limits established by the Affordable Care Act, the age of the enrollee.” HHS Notice of Benefit and Payment Parameters for 2014, 77 Fed. Reg. 73, 118, 73, 139 (Dec. 7, 2012) (“2014 Proposed Rule”). “The risk-adjustment methodology proposed in the proposed rule, which HHS would use when operating risk adjustment on behalf of a State, is based on the premise that premiums should reflect the differences in plan benefits and plan efficiency, not the health status of the enrolled population.” 2014 Final Rule, 78 Fed. Reg. at 15, 417.

         a. Procedure

         HHS sets the risk-adjustment formula in advance of each benefit year through a notice- and-comment rulemaking process. See 45 C.F.R. §§ 153.100(b)-(c), 153.320. Although HHS goes through separate rulemakings for each benefit year, since 2014, the inaugural year of the program, “the record for each Annual Benefit Rule incorporates the records for each of the preceding Annual Benefit Rules.” (See Index to the Rulemaking Record at 3, n.2). HHS sets the parameters ahead of the applicable benefit year, with the intention that insurers will be able to rely on the methodology to price their plans appropriately. Standards Related to Reinsurance, Risk Corridors and Risk Adjustment, 76 Fed. Reg. 41, 930, 41, 932-33 (July 15, 2011) (proposed rule); see also HHS Notice of Benefit and Payment Parameters 2018, 81 Fed. Reg. 94, 058, 94, 702 (Dec. 22, 2016) (“2018 Final Rule”) (explaining the importance of setting rules ahead of time and describing comments supporting that practice).

         To initiate the rulemaking process, HHS publishes a proposed Notice of Benefit and Payment Parameters (“NBPP”), including a proposed risk-adjustment formula, in November or December of the year two years prior to the applicable benefit year-thus, for example, for the 2014 benefit year, HHS issued the proposed NBPP on December 7, 2012. 2014 Proposed Rule, 77 Fed. Reg. 73, 118. The public then has an opportunity to comment on the proposed rule. The final rule is published in February or March of the year prior to the applicable benefit year-for example, the final rule for the 2014 benefit year was published on March 11, 2013. 2014 Final Rule, 78 Fed. Reg. 15, 410.[3]

         In addition to the final rule setting out the detailed parameters of the risk-adjustment formula, HHS published additional materials and sought public comment in other ways prior to the first year of the program. First, on September 12, 2011, the CMS Center for Consumer Information and Oversight published a white paper titled “Risk Adjustment Implementation Issues.” The white paper explained that “[c]omments sent in response . . . will inform the HHS-developed Federally-certified risk-adjustment methodology, which will be released as part of a Federal Payment Notice that will appear in the Federal Register, and will include a draft notice and a comment period before the notice (and methodology) are finalized. Responses to the white paper may be submitted on an ongoing basis in advance of the draft notice, slated for Fall 2012.” (Def. Mot. for Summ. J. Ex. B at 3-4). Second, following a notice of proposed rulemaking and a comment period, HHS published a rule titled “Standards Related to Reinsurance, Risk Corridors and Risk Adjustment” on March 23, 2012, which promulgated regulations now codified at 45 C.F.R. Part 153. The regulations included definitions, provisions concerning administration of the program as between HHS and the states, and an outline of the components of the risk-adjustment methodology to be included in the forthcoming NBPP. Premium Stabilization Rule, 77 Fed. Reg. 17, 220; see 45 C.F.R. §§ 153.20, 153.320.[4] Third, on May 1, 2012, HHS published a bulletin outlining its intended approach to administering risk adjustment on behalf of a state that chooses not to run its own program. (A.R. 634-45).[5] Fourth, on May 7 and 8, 2012, HHS hosted a public meeting to discuss that approach. 2014 Final Rule, 78 Fed. Reg. at 15, 414.

         b. Initial 2014 Rule

         The original methodology embodied in the 2014 Benefit Rule is generally as follows. First, the actuarial risk of each enrollee is measured. That figure is calculated through a “risk-adjustment model” that uses demographic and diagnostic data to determine the average predicted relative cost of insuring an enrollee. 2014 Final Rule, 78 Fed. Reg. at 15, 419. Second, risk scores for each enrollee in a plan are aggregated to determine an overall “plan average risk score, ” or “plan liability risk score.” Id. at 15, 432. Third, a “transfer formula” compares each plan within a state insurance market to the average in order to determine risk-adjustment charges (billed to those insurers whose predicted costs are lower than the state average) and risk-adjustment payments (received by those insurers whose predicted costs are higher than the state average). 2014 Proposed Rule, 77 Fed. Reg. at 73, 139; 2014 Final Rule, 78 Fed. Reg. at 15, 431.

         Since 2011, when the planning for the 2014 benefit year began, HHS has treated the risk-adjustment program as “self-funded” or “budget-neutral, ” meaning that money collected from low-risk plans is the only source of funding for the payments to high-risk plans. (Def. Mot. for Summ. J. Ex. B at 13-16). Its transfer formula is accordingly designed so that the charges to plans with healthier members will equal the payments to plans with less-healthy members.

         According to HHS, “[t]he risk-adjustment methodology addresses three considerations: (1) the newly insured population; (2) plan metal levels and permissible rating variation; and (3) the need for inter-plan transfers that net to zero. . . . Transfers depend not only on a plan's average risk score, but also on its plan-specific cost factors relative to the average of these factors within a risk pool within a state.” 2014 Final Rule, 78 Fed. Reg. at 15, 417. The rule “[a]djusts payment transfers for plan metal level, geographic rating area, induced demand, and age rating, so that transfers reflect health risk and not other cost differences.” Id.

         More specifically, the risk-adjustment model calculates the relative actuarial risk of each enrollee as follows.[6] The model starts with demographic data, and assigns a numerical coefficient based on an individual's age and sex. 2014 Final Rule, 78 Fed. Reg. at 15, 422-23 & tbl.2. Then, diagnostic data are incorporated using a hierarchical condition category (“HCC”) classification system, based on, but different from, Medicare's HCC system. 2014 Proposed Rule, 77 Fed. Reg. at 73, 128-29. HHS assigns numerical coefficients for each HCC, which “represent the predicted relative incremental expenditures” for that HCC. Id. at 73, 130. If an individual has multiple unrelated diagnoses, those coefficients are summed (HCCs do not accumulate for related diagnoses; rather, the individual is assigned the highest HCC in a given category for which he or she meets the criteria). Id. at 73, 128; 2014 Final Rule, 78 Fed. Reg. at 15, 422.

         The model uses diagnostic data from the same benefit year for which it is calculating risk-adjustment transfers in assigning HCCs to enrollees, in what is known as a “concurrent” model. 2014 Proposed Rule, 77 Fed. Reg. at 73, 127-28; 2014 Final Rule, 78 Fed. Reg. at 15, 417, 15, 419-20. This is in contrast to a “prospective” model, where the individual's documented diagnoses for past years are used to estimate his or her risk for the upcoming benefit year. 2014 Proposed Rule, 77 Fed. Reg. at 73, 127-28. According to HHS, while the prospective model more closely approximates how insurers set their rates, a concurrent model is “better able to handle changes in enrollment than a prospective model because individuals newly enrolling in health plans may not have prior data available that can be used in risk adjustment.” Id.; (see Def. Mot. for Summ. J. Ex. B at 6-7).

         To calculate the demographic and HCC numerical coefficients, HHS started with a database containing enrollee-specific clinical utilization and expenditures relating to more than 500 million claims from approximately 100 commercial health-insurance payers covering individuals living in all states, aged 0-64. 2014 Proposed Rule, 77 Fed. Reg. at 73, 127. It used that data to calculate expenditures for each enrollee and adjusted the figure for metal level to arrive at a predicted plan liability for an enrollee with a given age, sex, HCC, and coverage level. Id. That data was then fed into a statistical regression to calculate the coefficients, which “represent the predicted relative incremental expenditures for each category or HCC.” Id. at 73, 130.

         The sum of the demographic coefficient and the diagnostic coefficient(s) was then multiplied by a cost-sharing reduction (“CSR”) adjustment factor. The CSR adjustment factor is designed to account for “increased plan liability due to increased utilization of health care services” by certain low-income and/or Native American enrollees who are eligible for premium subsidies. 2014 Final Rule, 78 Fed. Reg. at 15, 421-22 & tbl.1; see 2014 Proposed Rule, 77 Fed. Reg. at 73, 138; see also 42 U.S.C. § 18071. The resulting figure is an enrollee's “individual risk score.” (Hearing Tr. 60:7-22); see 2014 Proposed Rule, 77 Fed. Reg. at 73, 139.

         The plan average risk score is essentially a member month-weighted average of the individual risk scores of the enrollees of a given plan, slightly modified to account for the rule that only three children can count toward the build-up of family rates.[7] It is calculated by summing the products of each enrollee's risk score and the number of months that enrollee was enrolled in the plan, and dividing that sum by the sum of the number of months each billable member was enrolled in the plan, where billable members exclude children who do not count towards family rates. 2014 Final Rule, 78 Fed. Reg. at 15, 432.

         “Conceptually, the goal of payment transfers is to provide plans with payments to help cover their actual risk exposure beyond the premiums the plans would charge reflecting allowable rating and their applicable cost factors. In other words, payments would help cover excess actuarial risk due to risk selection.” 2014 Final Rule, 78 Fed. Reg. at 15, 430. Accordingly, HHS set a given plan's transfer amount to equal the difference between two estimated premiums, which can be thought of as ideal premiums that a plan would charge to perfectly cover its expenditures and margins: (1) the estimated premium for that plan with enrollees it has, who may represent greater- or less-than-average actuarial risk (the premium with risk selection), and (2) the estimated premium for that plan with enrollees of average risk (the premium without risk selection), such that the transfer is positive when the plan has greater-than-average risk and negative when the plan has less-than-average risk. 2014 Final Rule, 78 Fed. Reg. at 15, 430.

         In order to get from a plan's risk score-a number representing the cost of providing care to the plan's risk-selected enrollees relative to the cost of providing that same level of care to enrollees with average risk-to a dollar figure representing the estimated premium, HHS chose to use the statewide average premium as a conversion factor. 2014 Proposed Rule, 77 Fed. Reg. at 73, 139; 2014 Final Rule, 78 Fed. Reg. at 15, 432. The average premium of a given plan is “based on the total premiums assessed to enrollees, including the portion of premiums that are attributable to administrative costs.” 2014 Proposed Rule, 77 Fed. Reg. at 73, 142. The statewide average premium is “calculated as the enrollment-weighted mean of all plan average premiums of risk-adjustment covered plans in the applicable risk pool in the applicable market in the State.” Id.; see 2014 Final Rule, 78 Fed. Reg. at 15, 431-32. Thus, both of the estimated premiums in the transfer formula are based on the statewide average premium, which is one of several multipliers making up each term.

         HHS, however, also wanted to ensure that transfers would not “reflect liability differences attributed to cost factors other than risk selection.” 2014 Final Rule, 78 Fed. Reg. at 15, 431; see 2014 Proposed Rule, 77 Fed. Reg. at 73, 139 (“Risk-adjustment transfers are intended to reduce the impact of risk selection on premiums while preserving premium differences related to other cost factors, such as the actuarial value, local patterns of utilization and care delivery, local differences in the cost of doing business, and, within limits established by the Affordable Care Act, the age of the enrollee.”). Therefore, in calculating the estimated premiums, it included a series of “premium-adjustment terms, ” detailed below, which (like the numbers assigned in the risk-adjustment model) are “relative measures that compare how plans differ from the market average with respect to the cost factors.” 2014 Final Rule, 78 Fed. Reg. at 15, 430-31.

         To calculate the estimated premium for a given plan with risk selection, the formula multiplies the plan's liability risk score by two premium-adjustment terms: an “induced-demand” factor and a “geographic-cost” factor. Id. at 15, 431. The induced-demand factor is meant to “reflect[] differences in enrollee spending patterns attributable to differences in the generosity of plan benefits (as opposed to risk selection)”-in other words, a person with a more generous plan might consume more health care than the same person in a less generous plan. 2014 Proposed Rule, 77 Fed. Reg. at 73, 143. The geographic-cost factor accounts for differences in plan costs across geographic areas to prevent transfers from “subsidiz[ing] high-risk plans in high-cost areas at the expense of low-risk plans in low-cost areas.” Id. at 73, 144. The resulting product is then normalized for the plan's share of overall state enrollment (such that the “‘normalized' term would average to 1.0, ” id. at 73, 141) and multiplied by the statewide average premium to arrive at a dollar figure, id.; 2014 Final Rule, 78 Fed. Reg. at 15, 431.

         To calculate the estimated premium for that plan, assuming it had enrollees of average risk, the transfer formula multiplies the same induced-demand and geographic-cost factors described above by two more premium-adjustment factors: a plan's “allowable-rating factor” and the actuarial value of the plan's metal level. The allowable-rating factor accounts for the fact that issuers are allowed to charge enrollees different premiums based on their age (within limits). 2014 Proposed Rule, 77 Fed. Reg. at 73, 142-43; 2014 Final Rule, 78 Fed. Reg. at 15, 433. The actuarial value of the plan “account[s] for relative differences between a plan's [actuarial value] and the market average [actuarial value].” 2014 Proposed Rule, 77 Fed. Reg. at 73, 140.[8] “The [actuarial-value] adjustment helps to achieve the goal of compensating plans for risk selection while allowing other determinants of premiums-including the generosity of plan benefits-to be reflected in premiums.” Id. at 73, 142. As for the estimated premium with risk selection, the resulting product is normalized for the plan's share of statewide enrollment and then multiplied by the statewide average premium. 2014 Proposed Rule, 77 Fed. Reg. at 73, 141; 2014 Final Rule, 78 Fed. Reg. at 15, 431.

         The output of the payment-transfer formula is a “per member per month . . . transfer amount for a plan within a rating area.” 2014 Final Rule, 78 Fed. Reg. at 15, 431. That amount is then multiplied by the plan's “billable member months, ” defined as the number of months during the risk-adjustment period that each billable member (excluding children who do not count towards family rates) is enrolled in the plan, to arrive at the plan's total risk adjustment for a given rating area. Id. at 15, 431-32.

         c. Changes to the 2014 Rule

         Since 2014, HHS has maintained a position supporting model stability, and has elected not to rework the program's overarching methodology. See 2014 Final Rule, 78 Fed. Reg. at 15, 418 (“Though we anticipate making future adjustments to the model, we seek to balance stakeholders' desire for a stable model in the initial years with introducing model improvements as additional data becomes available.”); HHS Notice of Benefit and Payment Parameters for 2015, 79 Fed. Reg. 13, 744, 13, 753 (Mar. 11, 2014) (“2015 Final Rule”) (“We believe it is important to maintain model stability in implementing the risk-adjustment methodology in the initial years of risk adjustment, and therefore do not intend to recalibrate the model in the initial years.”); HHS Notice of Benefit and Payment Parameters for 2016, 79 Fed. Reg. 70, 674, 70, 684 (Nov. 26, 2014) (“2016 Proposed Rule”) (“We propose to continue to use the same risk-adjustment methodology finalized in the 2014 Payment Notice, with changes to reflect more current data . . . .”). However, there have been smaller, incremental adjustments over time.

         Health plans are required to submit their risk-adjustment data to HHS by April 30 of the year following the benefit year. 45 C.F.R. § 153.730. HHS announces the transfer amounts by June 30. Id. § 153.310. Because of that schedule, and because HHS publishes its final rule in the early spring of the year prior to the applicable benefit year, by the time the 2014 results were available on June 30, 2015, the benefit rules for 2015 and 2016 had already been set to be largely the same as the 2014 Final Rule. See 2015 Final Rule, 79 Fed. Reg. 13, 744 (Mar. 11, 2014); HHS Notice of Benefit and Payment Parameters for 2016, 80 Fed. Reg. 10, 750 (Feb. 27, 2015) (“2016 Final Rule”).[9]

         After the 2014 results were calculated, HHS proposed to update the model to include preventative-care costs in the 2017 rule and sought comment on how the risk-adjustment methodology could more accurately account for partial-year enrollees. HHS Notice of Benefit and Payment Parameters for 2017, 80 Fed. Reg. 75, 488, 75, 499-500 (Dec. 2, 2015) (“2017 Proposed Rule”). The final rule, published March 6, 2016, incorporated an adjustment for preventative-care costs and indicated that HHS would further explore adjustments for partial-year enrollees. 2017 Final Rule, 81 Fed. Reg. at 12, 218-20. Later that month, HHS published a lengthy discussion paper and held a public meeting to discuss possible modifications to the risk-adjustment methodology, including adjustments for partial-year enrollment. (Def. Mot. for Summ. J. Ex. C (dated Mar. 31, 2016)); see 2017 Final Rule, 81 Fed. Reg. at 12, 216, 12, 220. Following the conference, HHS announced in a June 2016 press release that it would incorporate an adjustment for partial-year enrollment for the 2017 benefit year, and it finalized that adjustment in December 2016, as part of the 2018 Final Rule. 2018 Final Rule, 81 Fed. Reg. at 94, 071-74. The 2018 Final Rule also stated that HHS

did not propose to, and [is] not changing, the risk-adjustment methodology for the 2014, 2015, and 2016 benefit years. As these benefit years have already begun, we could not implement such a change prior to the applicable benefit year or provide advance notice to permit issuers to incorporate the applicable benefit year's risk-adjustment methodology in their rate setting. However, for the 2017 benefit year, we provided advance notice to issuers prior to rate setting, and believe an adjustment for partial-year enrollees will better compensate issuers with higher than average partial-year enrollees.

Id. at 94, 073.

         The 2018 Final Rule made additional changes to take effect beginning in the 2018 benefit year. HHS began to use pharmaceutical data to assign a limited number of HCCs. Id. at 94, 074-76. It also “reduce[d] the Statewide average premium in the risk-adjustment transfer formula by 14 percent to account for the proportion of administrative costs that do not vary with claims.” Id. at 94, 099-100.

         3.Minuteman Health

         Plaintiff Minuteman Health, Inc. was created under the CO-OP program. (Pl. Mem. in Supp. Summ. J. Ex. 10 ¶¶ 28-29). HHS approved Minuteman's business plan and signed a loan agreement funding its initial formation in Massachusetts in August 2012. It signed an amendment in November 2013 allowing it to expand into New Hampshire. (Id. Ex. 10 ¶ 28).

         Minuteman offered health plans in Massachusetts starting in 2014, the first year the ACA came into effect, and entered the New Hampshire market in 2015. (Id. Ex. 10 ¶ 31). Its goal was to provide affordable health insurance in the individual and small-group markets by contracting with high-quality, low-cost health-care providers and excluding high-priced hospital systems from its network. (Id. Ex. 10 ¶¶ 12, 24-26). Minuteman priced its premiums significantly lower than many other issuers in the Massachusetts and New Hampshire markets. (Id. Ex. 10 ¶¶ 32-34).

         In all the benefit years at issue here for which results are available, Minuteman's enrollees have collectively been healthier than average, and Minuteman has accordingly been required to pay into the risk-adjustment program. For the 2014 benefit year, Minuteman was required to pay 71% of its gross premium revenue into the risk-adjustment program. (Pl. Reply in Supp. Summ. J. Ex. M-25 pt. 2 at 11). For the 2015 benefit year, Minuteman was required to pay 40% of its gross New Hampshire premium revenue to the risk-adjustment program, and 39% ($6, 110, 676) of its gross Massachusetts premium revenue. (Pl. Mem. in Supp. Summ. J. Ex. 13 at 5).

         The payment of such huge amounts-up to 71% of its gross revenue-has had a deleterious effect on Minuteman's business. Minuteman is now in receivership and will not be offering plans for the 2018 benefit year. (Hearing Tr. 3:21-4:4; Pl. Opp'n to Mot. to Strike Ex. A).

         B. Procedural Background

         Minuteman filed the complaint in this action on July 29, 2016. The amended complaint asserts one count for “Violations of Section 1343 of the ACA and the APA, 5 U.S.C. § 706.” (Am. Compl. ¶¶ 208-15). It alleges that “[t]he Risk-Adjustment methodology developed and implemented by CMS, at the direction of HHS, is arbitrary, capricious, and unlawful” and that “HHS and CMS have gone beyond the bounds of their statutory directive, injecting unauthorized factors into the Risk-Adjustment methodology, and failing to create a methodology that effects the directive of Congress.” (Id. ¶ 215).

         The parties have cross-moved for summary judgment. At the summary-judgment hearing, Minuteman dropped its challenge to the 2018 benefit rule. (Hearing Tr. 3:23-4:4). The government then filed a motion to strike all materials related to the 2018 benefit year (and certain other materials never presented to the agency in any benefit year) as materials that are outside the record.

         II. Standard of Review

         Summary judgment is ordinarily appropriate when the pleadings and evidence show that “there is no genuine dispute as to any material fact and [that] the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). However, in cases involving review of agency action under the APA, the traditional Rule 56 standard does not apply due to the limited role of a court in reviewing the administrative record. See Int'l Junior Coll. of Bus. & Tech., Inc. v. Duncan, 802 F.3d 99, 106 (1st Cir.2015) (“The summary judgment ‘rubric' also ‘has a special twist in the administrative law context.'” (quoting Associated Fisheries of Me., Inc. v. Daley, 127 F.3d 104, 109 (1st Cir. 1997))). Rather, when administrative action is challenged under the APA “[s]ummary judgment . . . serves as the mechanism for deciding, as a matter of law, whether the agency action is supported by the administrative record and otherwise consistent with the APA standard of review.” Coe v. McHugh, 968 F.Supp.2d 237, 240 (D.D.C. 2013); S. Shore Hosp., Inc. v. Thompson, 308 F.3d 91, 97-98 (1st Cir. 2002) (“That the parties brought the issues forward on cross-motions for summary judgment is not significant; substance must prevail over form, and the fact remains that the parties have presented this matter as a case stated[] on a fully developed administrative record.”).

         The Administrative Procedure Act provides that a reviewing court should “hold unlawful and set aside agency action, findings, and conclusions found to be . . . arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law, ” or “in excess of statutory jurisdiction, authority, or limitations, or short of statutory right.” 5 U.S.C. § 706.

         In Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), the Supreme Court established a two-step analysis for reviewing an agency's construction of a statute that it administers. Id. at 842-43. The analysis begins with “whether Congress has directly spoken to the precise question at issue.” If Congress's intent is clear, “the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.” Id. at 842-43. “[I]f the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute.” Id. at 843. If Congress has explicitly left a gap for the agency to fill, the agency's interpretation is “given controlling weight unless [it is] arbitrary, capricious, or manifestly contrary to the statute.” Id. at 843-44; see also Household Credit Servs., Inc. v. Pfennig, 541 U.S. 232, 239 (2004).

         Under the second step, the agency's construction is accorded substantial deference. Chevron, 467 U.S. at 844; see also United States v. Mead Corp., 533 U.S. 218, 227-28 (2001). “This broad deference is all the more warranted when . . . the regulation concerns ‘a complex and highly technical regulatory program, ' in which the identification and classification of relevant ‘criteria necessarily require significant expertise and entail the exercise of judgment grounded in policy concerns.'” Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994) (quoting Pauley v. BethEnergy Mines, Inc., 501 U.S. 680, 697 (1991)). The court should not simply substitute its judgment for that of the agency. See Mead, 533 U.S. at 229 (“[A] reviewing court has no business rejecting an agency's exercise of its generally conferred authority to resolve a particular statutory ambiguity simply because the agency's chosen resolution seems unwise.”).

         In determining whether agency action is arbitrary and capricious under the APA, the court must examine the evidence relied on by the agency and the reasons given for its decision. The agency is required to “examine the relevant data and articulate a satisfactory explanation for its action including a ‘rational connection between the facts found and the choice made.'” Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) (quoting Burlington Truck Lines v. United States, 371 U.S. 156, 168 (1962)); see Citizens Awareness Network, Inc. v. United States, 391 F.3d 338, 351-52 (1st Cir. 2004). “Normally, an agency rule would be arbitrary and capricious if the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.” State Farm, 463 U.S. at 43.

         Under the APA, an agency is required to respond to “relevant” and “significant” comments raised in the rulemaking process. Public Citizen, Inc. v. Fed. Aviation Admin., 988 F.2d 186, 197 (D.C. Cir. 1993). But this requirement is not “particularly demanding.” Id. “[I]t is settled that ‘the agency [is not required] to discuss every item of fact or opinion included in the submissions made to it in informal rulemaking.'” Id. (second alteration in original) (quoting Auto. Parts & Accessories Ass'n v. Boyd, 407 F.2d 330, 338 (D.C. Cir. 1968)). “Instead, the agency's response to public comments need only ‘enable [the reviewing court] to see what major issues of policy were ventilated . . . and why the agency reacted to them as it did.'” Id. (citing Auto. Parts, 407 F.2d at 335); see also Del. Dep't of Nat. Res. & Envtl. Control v. Envtl. Prot. Agency, 785 F.3d 1, 15 (D.C. Cir. 2015). “[C]omments which themselves are purely speculative and do not disclose the factual or policy basis on which they rest require no response.” Home Box Office, Inc. v. Fed. Commc'ns Comm'n, 567 F.2d 9, 35 n.58 (D.C. Cir. 1977).

         A court reviewing agency action must judge that action by the reasons given by the agency; it is not permitted to supply its own reasoned basis not present in the administrative record. Bowman Transp. Inc. v. Arkansas-Best Freight Sys., Inc., 419 U.S. 281, 285-86 (1974) (“[W]e may not supply a reasoned basis for the agency's action that the agency itself has not given . . . .” (citing Sec. & Exch. Comm'n v. Chenery Corp., 332 U.S. 194, 196 (1947))); Sec. & Exch. Comm'n v. Chenery, 318 U.S. 80, 87-88 (1943) (“The grounds upon which an administrative order must be judged are those upon which the record discloses that its action was based.”). Additionally, the agency's action may only be judged against the information available to the agency at the time-namely, the materials in the administrative record. Camp v. Pitts, 411 U.S. 138, 142 (1973). The reviewing court may, however “uphold a decision of less than ideal clarity if the agency's path may be reasonably discerned.” Bowman Transp., 419 U.S. at 286; see Encino Motorcars, LLC v. Navarro, 136 S.Ct. 2117, 2125 (2016).

         III. Analysis

         A. Motion to Strike

         HHS has moved to strike all materials relating to the 2018 benefit year on the ground that it is “black-letter administrative law” that an agency action can only be judged on the materials before it at the time it made its decision. See Hill Dermaceuticals, Inc. v. Food & Drug Admin., 709 F.3d 44, 47 (D.C. Cir. 2013); Massachusetts v. Hayes, 691 F.2d 57, 60 (1st Cir. 1982) (“‘Simple fairness to those who are engaged in the tasks of administration, and to litigants, requires as a general rule that courts should not topple over administrative decisions unless the administrative body not only has erred but has erred against objection made at the time appropriate under its practice.'” (quoting United States v. L.A. Tucker Truck Lines, 344 U.S. 33, 37 (1952))); Bradley v. Weinberger, 483 F.2d 410, 414-15 (1st Cir. 1973) (citing Citizens to Pres. Overton Park, Inc. v. Volpe, 401 U.S. 402, 420 (1971)).

         Plaintiff's principal response is simply to contend that “except for discrimination against bronze plans, all of Minuteman's challenges to the 2014-2017 rules were raised either by Minuteman, by other commenters, or by the agency itself during the relevant rulemaking proceedings for those years, and are thus preserved for judicial review.” (Pl. Opp'n to Mot. to Strike at 3). But even if true, that does not mean that this Court may judge the actions of the agency in 2014-2017 based on the content of the comments made in 2018; it can only do so based on what was before the agency at the relevant time. Therefore, while the existence of prior comments raising similar issues may provide the ...


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