New Mexico Health Connections v. HHS, 946 F.3d 1138

Background

The Affordable Care Act established a permanent risk-adjustment program to transfer funds from plans with healthier enrollees to plans with sicker enrollees; HHS was instructed to set criteria and methods.
HHS implemented annual risk-adjustment rules (2014–2018) that used a statewide average premium as the baseline in the transfer formula and designed the program to be budget-neutral (transfers net to zero).
New Mexico Health Connections (NMHC) sued under the APA, alleging HHS’s use of the statewide average premium (and related reliance on budget neutrality) was arbitrary and capricious; the district court granted summary judgment for NMHC and vacated the 2014–2018 rules.
HHS appealed; while its Rule 59(e) motion was pending it issued revised 2017 and 2018 rules adding explanatory material about the statewide average premium and budget neutrality.
The Tenth Circuit: (1) held NMHC’s challenges to the original 2017 and 2018 rules are moot and remanded those claims for dismissal, and (2) reversed the district court as to the 2014–2016 rules, concluding HHS adequately explained the use of the statewide average premium and reasonably designed the program as budget neutral given the lack of appropriations.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether HHS’s use of the statewide average premium in the transfer formula was arbitrary and capricious	NMHC: use of statewide average is unsupported by the administrative record; HHS should have used each plan’s own premium	HHS: the record (2011 White Paper and rulemaking) explains choice — predictability, avoids distortions/manipulation, preserves premium differences, and avoids complex balancing adjustments	Reversed district court; HHS’s explanations in the administrative record were adequate and the choice was reasonable for 2014–2016
Whether HHS was required to justify the program’s budget-neutral design	NMHC: HHS premised its rationale on budget neutrality without statutory mandate or sufficient explanation	HHS: budget neutrality was compelled by practical funding constraints — statute provided no appropriation and HHS lacked authority to fund net payments	HHS acted reasonably; budget neutrality was a permissible consequence of the funding structure and not arbitrary
Mootness of challenges to the original 2017 and 2018 rules after agency issued new rules	NMHC: concessions and subsequent agency replacements mooted challenges to the old 2017/2018 rules	HHS: did not meaningfully contest mootness on appeal	Court held claims to original 2017/2018 rules are moot, remanded to district court to vacate judgment as to them and dismiss for lack of jurisdiction
Appellate jurisdiction despite district-court remand (administrative remand rule)	NMHC and HHS did not contest appealability; court must assess jurisdiction	HHS argued appealable; agency action was legislative and transfers already occurred	Court found the district order final and appealable: rules were quasi‑legislative and the remand did not present a typical nonfinal remand

Key Cases Cited

Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519 (2012) (describing ACA’s purpose and context)
Motor Vehicle Mfrs. Ass’n v. State Farm, 463 U.S. 29 (1983) (standards for arbitrary and capricious review)
Dep’t of Commerce v. New York, 139 S. Ct. 2551 (2019) (narrow review and deference to reasoned agency explanations)
Encino Motorcars, LLC v. Navarro, 136 S. Ct. 2117 (2016) (agency must give adequate reasons for rulemaking)
W. Watersheds Project v. Bureau of Land Mgmt., 721 F.3d 1264 (10th Cir. 2013) (deference to agency action under APA)
Olenhouse v. Commodity Credit Corp., 42 F.3d 1560 (10th Cir. 1994) (district court’s role in reviewing administrative records)
Already, LLC v. Nike, 568 U.S. 85 (2013) (mootness — live controversy requirement)
Brown v. Buhman, 822 F.3d 1151 (10th Cir. 2016) (mootness exceptions: capable of repetition and voluntary cessation)