By Jonathan Stempel

(Reuters) – A U.S. appeals court upheld the validity of a federal program governing the payment of billions of dollars to insurers under the Affordable Care Act, reversing a lower court ruling that had prompted the White House to temporarily suspend payments.

Tuesday’s 3-0 decision by the 10th U.S. Circuit Court of Appeals in Denver is a victory for insurers that feared the Feb. 2018 lower court ruling and payments suspension could drive up premium costs and cause market turmoil.

The appeals court said the Department of Health & Human Services did not act arbitrarily and capriciously in implementing its “risk adjustment” payments program.

That program is intended to create incentives for insurers to cover sicker patients, including those with pre-existing conditions, by paying them with money collected from insurers that enroll healthier patients.

Circuit Judge Scott Matheson said HHS acted reasonably in using a formula that relied on the “statewide average premium,” or average of applicable premiums that insureds pay health insurers in a state, to calculate collections from or payments to insurers.

He said HHS justified its approach over alternatives such as using the plans’ own premiums, which it feared could dissuade high-risk plans to lower prices, to make the program “budget-neutral,” where total charges would equal total payments.

“Courts cannot second guess an agency’s rulemaking decision when it provided reasons for its chosen course of action,” Matheson wrote.

Tuesday’s decision overturned a ruling by U.S. District Judge James Browning in Albuquerque, New Mexico that had set aside payment rules for 2014 through 2018.

The case had been brought by New Mexico Health Connections, which had said the rules were slanted to favor large insurers over “smaller competitors” such as itself.

Lawyers for the insurer did not immediately respond to requests for comment. HHS had no immediate comment.

The Trump administration announced the payments suspension on July 7, 2018, freezing $10.4 billion for the 2017 benefit year, saying Browning’s ruling made it necessary but that it was “disappointed” with the ruling.

While the administration has long criticized the Affordable Care Act, it ended the suspension 2-1/2 weeks later to “mitigate some of the uncertainty caused by the New Mexico litigation,” after insurers said the suspension could upset markets.

HHS later issued new risk adjustment rules for 2017 and 2018, with additional justifications that Matheson said mooted New Mexico Health Connections’ claims for those years.

The case is New Mexico Health Connections v U.S. Department of Health & Human Services et al, 10th U.S. Circuit Court of Appeals, No. 18-2186.

(Reporting by Jonathan Stempel in New York; Editing by David Gregorio)