U.S. District Judge John Koeltl of the Southern District of New York. Photo: Rick Kopstein/ALM

A federal judge has denied a demand from a health insurer that would prevent New York state regulators from redistributing federal risk adjustment funds to other insurers while the dismissal of their lawsuit against the state is appealed.

U.S. District Judge John Koeltl of the Southern District of New York said in a decision that a potential $65 million loss to United HealthCare is such a small fraction of its revenues that it may bear the cost of the regulation. He reasoned that without the rule, harm done to the insurance market may be greater.

The decision means the insurance company will likely have to pay that amount to the state in the coming weeks unless the U.S. Court of Appeals for the Second Circuit decides differently.

“The plaintiffs imply that no harm other than mere delay would result,” Koeltl wrote. “These entities—the ones that the 2017 [regulation] is intended to benefit—would continue to be harmed by the [federal risk adjustment program] methodology while not accruing the benefits accorded to them by the 2017 [regulation].”

Koeltl also said United was unlikely to succeed in its appeal of his decision dismissing their lawsuit in August, which is currently being reviewed by the Second Circuit.

Steven Rosenbaum, a partner at Covington & Burling, represented UHC in the case. He declined to comment on Koeltl's decision when reached by phone on Tuesday. A spokeswoman for UHC said in a statement that they are now planning to ask the Second Circuit for an injunction pending a decision on their appeal.

“We respectfully disagree with the court's decision and are appealing,” the spokeswoman said.

The company sued DFS last year for promulgating a regulation that allowed the agency to redistribute a portion of federal funds from the federal risk adjustment program that was implemented in New York by the U.S. Department of Health and Human Services.

A risk adjustment program requires insurers with healthier, and therefore less expensive, enrollees to pay into a common fund that is then distributed to insurers with less healthy, and therefore more expensive, enrollees. It's designed to prevent insurers from seeking out only the healthiest customers.

The federal program, or FRAP, was created as part of the Affordable Care Act. HHS developed the risk adjustment methodology for states under the program, which was finalized in 2016.

DFS issued an emergency regulation that year that allowed the agency to implement a risk adjustment program in New York if the federal program does not address the unique needs of the state's insured. The rule allows the agency to collect up to 30 percent of the funds received through FRAP and redistribute them to other insurers based on a methodology created by the state.

UHC claimed in its lawsuit last year that DFS unlawfully usurped the federal program through its regulation. The insurer argued that the rule amounted to an unconstitutional taking of their property in the form of FRAP funds.

Koeltl said in his decision dismissing the lawsuit in August that the HHS rules allow states to modify the federal program if they need to adapt it for their state's insurance market. Since the state is allowed to adjust the funding, according to HHS, it also has the authority to reallocate funds, Koeltl said.

UHC moved to appeal his decision and asked for a preliminary injunction less than two weeks later. It said in its filing that even if DFS wins the case on appeal to the Second Circuit, the worst harm done would be a delay in their payment to the agency.

An injunction would also allow it to save money it may not be able to recoup, United said. The company argued that it would have no legal avenue to recoup the funds taken by the state if it wins on appeal because the Eleventh Amendment prevents a federal court from ordering the state to refund money taken unlawfully after the fact.

Koeltl did not care much for those arguments in his decision. He briefly addressed the argument about the Eleventh Amendment and seemed to suggest the company could explore litigation in state court to recoup the funds, though he said that was not an option he could speak to.

Instead, he addressed the state's argument that United has more than enough money to balance the cost of the lost FRAP funding.

“The defendant points out that a potential $65 million dollar loss is a fraction of Oxford Health Insurance's anticipated 2017 total Federal Risk Adjustment receivable, which will be greater than $200 million,” Koeltl wrote. “And $65 million is but a small fraction of UnitedHealth Group's reported 2016 operating revenues, which totaled more than $184 billion. That potential loss is more than offset by the harm to the small insurance market in New York state if the state program is enjoined.”

UHC will have to pay the estimated $65 million within 10 days of receiving an invoice from the state, or when it receives its FRAP funds in October, whichever happens first. A decision from the Second Circuit granting a preliminary injunction could prevent the payment, but it's unclear if that will come before the funds are sought by the state.

Assistant Attorney General Kelly Munkwitz is the lead attorney on the case for the state.

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