United States District Court, D. Massachusetts
MEMORANDUM AND ORDER ON PLAINTIFF'S MOTION FOR
SUMMARY JUDGMENT AND DEFENDANTS' CROSS-MOTION FOR SUMMARY
DENNIS SAYLOR, IV UNITED STATES DISTRICT JUDGE.
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).
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
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.
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.
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.
The Patient Protection and Affordable Care Act
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).
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. 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.
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.
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).
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.”). 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
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).
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).
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).
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.
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).
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.
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. 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). 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.
Initial 2014 Rule
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.
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
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
specifically, the risk-adjustment model calculates the
relative actuarial risk of each enrollee as
follows. 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.
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).
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.
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.
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. 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.
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.
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
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
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
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. “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.
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,
Changes to the 2014 Rule
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.
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
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.
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.
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 ¶
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
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).
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).
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).
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.
Standard of Review
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.”).
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.
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).
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
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.
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.
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).
Motion to Strike
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)).
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