UnitedHealth Group Inc. storefront in Queens. Photo: Michael Nagle/Bloomberg

A federal appellate court has paused a state regulation promulgated by the New York State Department of Financial Services that allows the agency to collect funds from health insurance companies and redistribute the money to insurers who may be negatively impacted by a federal risk adjustment program.

The U.S. Court of Appeals for the Second Circuit granted a motion for a preliminary injunction from UnitedHealthcare this week while the insurer appeals a decision from U.S. District Judge John Koeltl of the Southern District of New York that dismissed its lawsuit against the state in August.

The panel also put UHC's appeal on the fast track, asking that the Minnesota-based health insurer submit briefs sometime over the next two to three weeks. The state will then have 10 days to file its reply briefs with the Second Circuit, with an appeal scheduled immediately after.

UHC said in a statement on the decision that the insurer is looking forward to having its appeal of the district court's decision heard in the coming months.

“We are pleased with the court's ruling and look forward to pursuing the merits of our challenge to New York's unlawful regulation,” UHC said in the statement.

The lawsuit was over a regulation promulgated by DFS more than two years ago that allows the agency to collect funding from insurers that receive money from the federal risk adjustment program created under the Affordable Care Act, also known as Obamacare.

A risk adjustment program is designed to ensure that health insurance companies do not only seek out the healthiest, and therefore least expensive, enrollees. The program requires insurers with a larger share of healthier enrollees to pay into a common fund that is then distributed to insurers with higher claims costs from less healthy enrollees.

The regulation promulgated by DFS in 2016 allows the agency to determine whether the federal risk adjustment program will have an adverse effect on small group insurers in New York. If the agency makes that determination, the regulation requires insurers that received money from the federal program to pay into a fund managed by DFS. The agency then distributes that money to other insurers that are expected to be negatively impacted by the federal program.

United argued in its lawsuit against the regulation that DFS lacked the authority to promulgate such a rule because the federal program would, in theory, supersede it. The insurer argued that DFS was illegally attempting to seize its funds in a way that was not allowed by statute.

Koeltl disagreed in his decision dismissing the lawsuit in August, pointing to a provision of the federal risk adjustment program that allowed states to use their own authorities to adjust for unintended consequences of the payments. That's what DFS did when it created the regulation, he argued.

UHC is set to ask the Second Circuit to review the decision by Koeltl, who said the insurer failed to state a claim upon which relief can be granted. UHC is expected to argue that relief could be granted by the court if the state's regulation is determined to be unconstitutional.

That would save UHC from having to pay an estimated $65 million into the fund managed by DFS sometime in the near future. That's less than what the insurer is expected to receive in federal risk adjust payments, which is estimated to be more than $200 million.

UHC won't have to worry about that payment for at least another month while it prepares its briefs for the Second Circuit and waits for a response from the state. Second Circuit Judges John Walker Jr., Pierre Leval and Christopher Droney were on the panel that granted the injunction.

It's the second time the insurance company has asked for the regulation to be paused while it appeals Koeltl's decision. It initially asked Koeltl in September for a stay, which he denied. He said at the time that stopping the regulation could do more harm to small group insurers than UHC, which he argued had more than enough resources to foot the bill.

“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 at the time. “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.”

Neal Katyal, a partner at Hogan Lovells, and Steven Rosenbaum, a partner at Covington & Burling, are representing UHC on the appeal. Both are based in Washington, D.C. A spokesman from DFS declined to comment on the injunction.

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