Centers for Medicare & Medicaid Services Department of Health and Human Services File code: CMS9975P Date:

August 17, 2011

Americans for Prosperity Comments Regarding: Patient Protection and Affordable Care Act; Standards Related to Reinsurance, Risk Corridors and Risk Adjustment
To Whom It May Concern: Americans for Prosperity (AFP) is a free market non-profit organization that is committed to educating and engaging grassroots citizen activists across the country to advocate for smaller government, lower taxes and free enterprise. We believe that the free market is and always has been the true path to prosperity. With the nation struggling to regain its economic footing following the recent recession, AFP believes reinvigorating the core American values of entrepreneurship, self-reliance and constitutionally-restrained government are central to the nations resurgence. AFP currently has more than 1.8 million members in all 50 states, including our 31 chapter and affiliate states. In 2010, the country witnessed one of the most aggressive legislative battles in a generation, with unified Democratic governance advancing a health care reform bill that divided the nation and jeopardized individuals control of their health care choices.1 AFP worked tirelessly in opposition to this legislation because we were concerned that it would create unnecessary centralization and government control of the health care market. One aspect of centralization that we feared was command-and-control regulation that puts bureaucrats between patients and doctors. While examining the Affordable Care Act (the Act), Philip Klein from The American Spectator found more than 700 instances in which the Secretary is instructed that she shall do something, and more than 200 cases in which she may take some form of regulatory action if she chooses. On 139 occasions, the law mentions decisions that the Secretary determines.2 AFP remains concerned about this broad delegation of rulemaking authority to the Department of Health and Human Services (the Agency) and the spate of regulations that is sure to result. It is in this context that AFP submits the following comments in regard to the Agencys proposed rule: Patient Protection and Affordable Care Act; Standards Related to Reinsurance, Risk Corridors and Risk Adjustment.3

The Patient Protection and Affordable Care Act of 2010, Pub. L. No. 111-148, 124 Stat. 119 (2010) as amended by the Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111152, 124. Stat. 1029 (2010). 2 Philip Klein, The Empress of ObamaCare, AM. SPECTATOR, June 2010, available at http://spectator.org/archives/2010/06/04/the-empress-of-obamacare. 3 76 Fed. Reg. 41930 (proposed July, 15, 2011) (to be codified at 45 C.F.R. pt. 153).

Section 153.340: Data Collection under Risk Adjustment One of the dangers of centralized control of the nations health care system is the aggregation of individuals private information. Thankfully, the Agency recognizes this problem in its proposed rule. However, in the proposed regulations for state standards related to the risk adjustment program, the Agency still aspires to assert control over a great deal of personal information.4 The proposed rule solicits comments on which of three models is the most preferable way to extract risk information from insurers so that the Agency can determine which insurers will be forced to subsidize their competitors as instructed by the Act.5 While AFP remains opposed to this type of intervention in the health care market and the distortions and disruptions these proposed regulations will create, we urge the Agency to adopt the third proposal for data collection: the distributed approach. As the Agency recognizes in multiple places throughout its proposed rule for risk adjustment, the aggregation of individuals personal health data carries inherent security and privacy risks.6 AFP urges the Agency to take all possible steps to keep this data as decentralized as possible. The Center for Democracy & Technology provides a persuasive justification for the decentralized approach: A decentralized model would leave enrollee health information with the current record holders namely the health plans rather than compile new copies of the health information into a one big system Decentralized models leverage existing systems, minimize data transfer and reduce the risk of a severe data breach. Moreover, leaving health claims information with the health plans is more in line with the publics expectations of privacy.7 The Agency also hints at another danger of massive data aggregation in its closing comments on the data collection proposal. The proposed rule states: We anticipate encounter and claims data collected for risk adjustment may be required to support other Exchange-related functions such as cost-sharing requirements and quality reporting.8 AFP is concerned that these other uses are only the tip of the iceberg when it comes to uses Agency bureaucrats will find for American citizens personal health care information. Hopefully, adoption of a decentralized model will minimize the mischief the Agency can cause with patients data. Section 153.610: Risk Adjustment Issuer Requirements In addition to the method of data collection, AFP has concerns about the type of data the Agency seeks to collect. Section 153.610 of the proposed rule instructs that insurers will be required to disclose their customers demographic data; encounter data for items and services provided in conjunction with a risk adjustment covered plan; and prescription drug utilization data.9 AFP believes that neither the Agency nor a risk adjustment entity or contractor should be in control of
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PROPOSED RULE, supra note 3, 153.340, at 41940 41. AFFORDABLE CARE ACT, supra note 1, at 1343. 6 PROPOSED RULE, supra note 3, at 41941. 7 Harley Geiger, Center for Democracy & Technology, OPM Revises Its Health Information Database, June 17, 2011, available at http://www.cdt.org/blogs/harley-geiger/opm-revises-its-health-information-database. 8 PROPOSED RULE, supra note 3, at 41941. 9 Id. at 41944.

this type of patient information. As stated above, we remain concerned that regardless of the security mechanisms put in place, the regular transferwhich the Agency proposes could be as often as every 30 days10of this type of information from patient to provider to insurer to risk adjustment entity to government violates Americans basic sensibilities about privacy in their health care choices, treatment and conditions. Takings Clause Concerns AFP also believes that the mandatory nature of this data collection may violate the Takings Clause of the U.S. Constitution. The Fifth Amendment instructs, nor shall private property be taken for public use, without just compensation.11 This clause has long been used to protect individuals from the government reappropriating their land without remuneration. However, the Supreme Court has ruled that the clause protects intellectual property and trade secrets as well.12 In a case involving Environmental Protection Agency regulations requiring a company to turn over data, the Court held that to the extent that [the company] has an interest in its data cognizable as a trade-secret property right that property right is protected by the Takings Clause of the Fifth Amendment.13 The Court supplied three factors to weigh when determining whether the action results in a regulatory taking: the character of the governmental action, its economic impact and its interference with reasonable investment-backed expectations.14 AFP believes that the Agencys proposal requiring insurers to turn over data for the purpose of a scheme to have one group of insurers subsidize another group could run afoul of this principle. Data that insurers collect from their customers for the purpose of actuarial risk model calculation constitutes a property right so long as the insurer treats the models as a trade secret, or the extent to which the owner of the secret protects his interest from disclosure to others.15 The Restatement defines a trade secret as any formula, pattern, device or compilation of information which is used in ones business, and which gives him an opportunity to obtain an advantage over competitors who do now know or use it.16 Risk modeling is the essential business function of any type of insurance company. Insurers proprietary models and customer data allow them to gain a competitive advantage, provide services to their customers and generate a profit for their shareholders. These actuarial models are essentially insurers core trade secret. The first factor of the Courts testcharacter of government actionis arguably met in this case because the data are being taken for the public purpose of facilitating a massive health care overhaul at the behest of Congress. However, the Agency proposes using these data to calculate relative risk standing in the health care market and then have low actuarial risk plans pay a fee that is then transferred to high actuarial risk plans.17 The harm of the taking flows to the insurer that is losing the trade secret and the benefit flows to the insurer with a less effective model. Thus, it can be argued that this taking is not for a public purpose at all but instead for the private
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PROPOSED RULE, supra note 3, at 41944. U.S. CONST. amend. V, Takings Clause. 12 Ruckelshaus v. Monsanto, 467 U.S. 986 (1984). 13 Id. at 1003-4. 14 Id. at 1005. 15 Id. at 1002. 16 RESTATEMENT (SECOND) OF TORTS 757 cmt. b (1979). 17 AFFORDABLE CARE ACT, supra note 1, at 1343(a).

enrichment and subsidization of the insurer with the less efficient risk model. If this is the case, the entire data mining scheme could be found unconstitutional. This economic cost-benefit transfer scheme leads directly to the second and third factors of the Supreme Courts analysis: economic impact and investment-backed expectation. While high risk plans will receive a subsidy, the low risk plans will be turning over their information in order for the government to calculate how effective the insurer has been in designing a trade-secret protected actuarial risk model. The more effective the trade secret, the higher the penalty the government will charge and transfer to insurers with less effective trade secrets. Once the insurers trade secret is disclosed it becomes an economic weapon to be used against him. Complete divestment is not required to trigger a regulatory taking; disclosure and lack of exclusive use of a trade secret is enough to constitute a taking. Even though the insurer will still be able to retain the data for its own use, the economic value of [the] property right lies in the competitive advantage over others that [the insurer] enjoys by virtue of its exclusive access to the data, and disclosure or use by others of the data would destroy that competitive edge.18 AFP believes that even if the data is not directly disclosed to an insurers competitor, the insurer has been denied the competitive advantage of its use when the model is wielded against the insurers economic advantage by virtue of the penalty envisioned in the Act and the proposed rules.19 The goal of this risk adjustment scheme is obviously to level the playing field between insurers who have taken on higher risk patients and those that have not. However, it hardly follows that the reduction from a position of dominance to one of parity does not count as a loss, simply because state action could have reduced that position to one of absolute inferiority.20 AFP finds this type of scheme offensive to the principles of innovation and entrepreneurship. It will also dangerously jeopardize the incentive for insurers to manage their risk. Before long, insurers will realize that effective risk management is actually costing them money and they will seek to drive their risk adjustment scores as close to the average as possible. This middling of the entire market will have both economic and health related consequences. On the economic side, it will unnecessarily damage the insurers business model, increase costs and hurt stock prices. On the health side, it will introduce perverse incentives that limit health insurance companies need to keep their customers healthy. Because making and keeping patients well will cause risk adjustment scores to deviate from the average, insurers may not have the same motivation for wellness. AFP can only conclude that this would run counter to the Acts and the Agencys desired outcome. We urge the Agency to abandon this course of action due its obvious detrimental effects on the health care insurance market. One possible argument against interpreting this proposed rule as a regulatory taking is that insurer participation is voluntary and thus the government has not forced insurers to reveal trade secrets. AFP believes this argument is misguided. Section 1343 of the Act envisions a scheme where all health plan[s] or health insurance issuer[s] [that] provide coverage in the individual or

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Monsanto, 467 U.S. at 1012. AFFORDABLE CARE ACT, supra note 1, at 1343(a) and PROPOSED RULE, supra note 3, at 41944. 20 Richard Epstein, The Constitutional Protection of Trade Secrets under the Takings Clause, 71 U. CHI. L. REV. 57, 62 (2004).

small group market within the State would be required to turn over their actuarial data.21 This proposed rule mirrors the Acts section by requiring participation in the risk adjustment program for all risk adjustment covered plans [because] any voluntary participation provisions would result in non-participation by the lowest actuarial risk plans.22 Additionally, in its proposed rule for exchanges the Agency outlines the requirements on [qualified health plan] issuers as a condition of participation in the Exchange [including] the risk adjustment participation requirements as described in this proposed rule.23 In other words, the Agency is proposing a Mortons fork dilemma where the government creates exchanges to govern and dominate the health care market; issues qualified plan rules to control who has access to the exchanges; and then requires insurers to turn over their data as the price of admission to the exchange.24 It is possible that the Agency will try to argue that data disclosure functions as part of the registration process for the exchanges. AFP believes that this too is misguided. The Supreme Court has given a special exemption from the Takings Clause for government registration actions. The Court wrote that as long as [the company] is aware of the conditions under which the data are submitted, and the conditions are rationally related to a legitimate Government interest, a voluntary submission of data by an applicant in exchange for the economic advantages of a registration can hardly be called a taking.25 AFP believes that the proposed risk adjustment rule does not qualify for the registration exemption because compliance in this case can hardly be considered voluntary. As we noted in the paragraph above, the Agency is seizing control of the entire marketplace and now making the insurers jump through hoops just to stay in business. Compliance with such overreach is coercive not voluntary. Additionally, AFP believes that the Courts rational basis test is incorrect and that strict scrutiny should be applied to regulatory takings cases.26 AFP is concerned that the proposed risk adjustment rule may be an unconstitutional regulatory taking and urges the Agency to allow insurers to retain their trade-secret protected data and risk models. We also urge the Agency to allow voluntary participation in the risk adjustment program. Insurer risk models deserve Takings Clause analysis because the insurers have invested time, effort and money into their development and have shielded the models from competitors. The Agencys scheme that would penalize insurers for their risk model innovation and require low risk plans to subsidize their competitors high risk plans should be abandoned.

AFFORDABLE CARE ACT, supra note 1, at 1343(c). PROPOSED RULE, supra note 3, at 41944. 23 Patient Protection and Affordable Care Act; Establishment of Exchanges and Qualified Health Plans, 76 Fed. Reg. 41866, 41896-97 (proposed July, 15, 2011) (to be codified at 45 C.F.R. pts. 155-56). 24 EPSTEIN, supra note 20, at 68 (discussing the vexing doctrine of unconstitutional conditions, which places limits on the ability of the government to require individuals to waive their constitutional rights, including those to property under the Takings Clause, in order to escape the burden of some regulatory exaction.). 25 Monsanto, 467 U.S. at 1007, see also Corn Products Refining Co. v. Eddy, 249 U.S. 427, 431-32 (1919). 26 EPSTEIN, supra note 20, at 72-3 (noting that it is not possible to draw any principled line between [physical and regulatory takings] that justifies the use of strict scrutiny in the former case and rational basis in the latter.).
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Conclusion Americans for Prosperity appreciates the opportunity to comment on the proposed rules governing risk adjustment. We have concerns about both the method and content of data transfers from the private to public sector. Health care information is among the most sensitive that individuals entrust to providers and insurers. That trust should not be violated by government stepping in and extracting that private information in order to meddle in the health care marketplace. AFP is likewise concerned about the possible Takings Clause implications surrounding the Agencys efforts to use one insurers proprietary risk model and data to benefit another insurer. This market interference could affect both the investment-backed expectations of the insurers and the innovation and risk management behavior of the entire marketplace. AFP urges the Agency to carefully consider the impacts of its rule on patients privacy and insurers property rights before the Agency issues a final rule.

Sincerely,

James Valvo Director of Government Affairs Americans for Prosperity

Americans for Prosperity (AFP) is a nationwide organization of citizen-leaders committed to advancing every individuals right to economic freedom and opportunity. AFP believes reducing the size and intrusiveness of government is the best way to promote individual productivity and prosperity for all Americans. AFP educates and engages citizens to support restraining state and federal government growth and returning government to its constitutional limits. AFP is more than 1.8 million activists strong, with activists in all 50 states. AFP has 31 state chapters and affiliates. More than 85,000 Americans in all 50 states have made a financial contribution to AFP or AFP Foundation. For more information, visit www.americansforprosperity.org Americans for Prosperity does not support or oppose candidates for public office. ###