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

A federal judge deemed actions by the state Department of Financial Services over risk adjustment payments as constitutional, and dismissed a lawsuit from UnitedHealthCare against the state agency.

U.S. District Judge John Koeltl of the Southern District of New York granted a motion to dismiss DFS, which was defending its method of distributing risk adjustment payments alongside a federal program.

DFS was sued by UnitedHealthCare of New York and Oxford Health Insurance in October for promulgating a regulation that allowed it to modify 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, or low-risk, enrollees to pay into a common fund. Money from that fund is then distributed to insurers who incur higher claim costs due to less healthy enrollees. The system is designed to ensure that insurers do not only seek out the healthiest, and therefore least expensive, enrollees.

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

The same year, DFS Superintendent Maria Vullo issued an emergency regulation that allowed her 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 regulation allowed Vullo to collect up to 30 percent of the funds received through FRAP and redistribute them to other insurers based on a methodology developed by DFS.

United and Oxford sued the state because they claimed DFS did not have the authority to take their FRAP funds and redistribute them. Their complaint alleges that the state’s regulation is pre-empted by the federal program and is an unconstitutional taking of their property.

Koeltl disagreed in his decision, saying the HHS rules allowed states to adjust the federal program if they need to and is therefore neither an overstep by DFS nor an unconstitutional taking.

“In sum, the fact that the agencies responsible for implementing the FRAP—HHS and CMS—have repeatedly stated that States may turn to their own authority to adjust for unintended consequences of the FRAP—and have acknowledged that there have been such unintended consequences—is strong evidence that the ACA does not preempt the 2017 [New York regulatory action],” Koeltl wrote.

The two claims were essentially rolled into one based on that argument, Koeltl said. Since the state has the authority to adjust the FRAP funds, according to him, it also has the authority to redistribute them as allowed under the regulation.

Vullo said in a statement that the decision affirms the agency’s authority to regulate insurers in New York.

“DFS is pleased that the federal court has recognized the Superintendent’s authority to promulgate New York’s health insurance risk adjustment regulation, and to enforce state law through regulation to protect New York’s markets and consumers,” Vullo said. “This decision correctly upholds New York’s regulatory insurance authority, and clearly affirms that New York’s continued enforcement of New York insurance law and regulation is not preempted by federal law.”

Steven Rosenbaum, a partner at Covington & Burling, represented United and Oxford in the matter. He declined to comment when reached by phone Monday. Jon-Michael Dougherty, an associate at Covington, was also on the case.