[Federal Register Volume 77, Number 236 (Friday, December 7, 2012)]
[Proposed Rules]
[Pages 73118-73218]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-29184]



[[Page 73117]]

Vol. 77

Friday,

No. 236

December 7, 2012

Part II





Department of Health and Human Services





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45 CFR Part 153, 155, 156, et al.





Patient Protection and Affordable Care Act; HHS Notice of Benefit and 
Payment Parameters for 2014; Proposed Rule

Federal Register / Vol. 77 , No. 236 / Friday, December 7, 2012 / 
Proposed Rules

[[Page 73118]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

45 CFR Parts 153, 155, 156, 157 and 158

[CMS-9964-P]
RIN 0938-AR51


Patient Protection and Affordable Care Act; HHS Notice of Benefit 
and Payment Parameters for 2014

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Proposed rule.

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SUMMARY: This proposed rule provides further detail and parameters 
related to: the risk adjustment, reinsurance, and risk corridors 
programs; cost-sharing reductions; user fees for a Federally-
facilitated Exchange; advance payments of the premium tax credit; a 
Federally-facilitated Small Business Health Option Program; and the 
medical loss ratio program. The cost-sharing reductions and advanced 
payments of the premium tax credit, combined with new insurance market 
reforms, will significantly increase the number of individuals with 
health insurance coverage, particularly in the individual market. The 
premium stabilization programs--risk adjustment, reinsurance, and risk 
corridors--will protect against adverse selection in the newly enrolled 
population. These programs, in combination with the medical loss ratio 
program and market reforms extending guaranteed availability (also 
known as guaranteed issue) protections and prohibiting the use of 
factors such as health status, medical history, gender, and industry of 
employment to set premium rates, will help to ensure that every 
American has access to high-quality, affordable health insurance.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on December 31, 
2012.

ADDRESSES: In commenting, please refer to file code CMS-9964-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (please choose only one 
of the ways listed):
    1. Electronically. You may submit electronic comments on this 
regulation to http://www.regulations.gov. Follow the ``Submit a 
comment'' instructions.
    2. By regular mail. You may mail written comments to the following 
address ONLY:

Centers for Medicare & Medicaid Services, Department of Health and 
Human Services, Attention: CMS-9964-P, P.O. Box 8016, Baltimore, MD 
21244-8016.

    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments to 
the following address ONLY:

Centers for Medicare & Medicaid Services, Department of Health and 
Human Services, Attention: CMS-9964-P, Mail Stop C4-26-05, 7500 
Security Boulevard, Baltimore, MD 21244-1850.

    4. By hand or courier. Alternatively, you may deliver (by hand or 
courier) your written comments ONLY to the following addresses prior to 
the close of the comment period:
    a. For delivery in Washington, DC--

Centers for Medicare & Medicaid Services, Department of Health and 
Human Services, Room 445-G, Hubert H. Humphrey Building, 200 
Independence Avenue SW., Washington, DC 20201.

    (Because access to the interior of the Hubert H. Humphrey Building 
is not readily available to persons without Federal government 
identification, commenters are encouraged to leave their comments in 
the CMS drop slots located in the main lobby of the building. A stamp-
in clock is available for persons wishing to retain a proof of filing 
by stamping in and retaining an extra copy of the comments being 
filed.)
    b. For delivery in Baltimore, MD--

Centers for Medicare & Medicaid Services, Department of Health and 
Human Services, 7500 Security Boulevard, Baltimore, MD 21244-1850.

    If you intend to deliver your comments to the Baltimore address, 
call telephone number (410) 786-7195 in advance to schedule your 
arrival with one of our staff members.
    Comments erroneously mailed to the addresses indicated as 
appropriate for hand or courier delivery may be delayed and received 
after the comment period.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Sharon Arnold at (301) 492-4286, 
Laurie McWright at (301) 492-4311, or Jeff Wu at (301) 492-4305 for 
general information.
    Adrianne Glasgow at (410) 786-0686 for matters related to 
reinsurance.
    Michael Cohen at (301) 492-4277 for matters related to the 
methodology for determining the reinsurance contribution rate and 
payment parameters.
    Grace Arnold at (301) 492-4272 for matters related to risk 
adjustment, the HHS risk adjustment methodology, or the distributed 
data collection approach for the HHS-operated risk adjustment and 
reinsurance programs.
    Adam Shaw at (410) 786-1091 for matters related to risk corridors.
    Johanna Lauer at (301) 492-4397 for matters related to cost-sharing 
reductions, advance payments of the premium tax credits, or user fees.
    Rex Cowdry at (301) 492-4387 for matters related to the Small 
Business Health Options Program.
    Carol Jimenez at (301) 492-4457 for matters related to the medical 
loss ratio program.

SUPPLEMENTARY INFORMATION: 
    Inspection of Public Comments: All comments received before the 
close of the comment period are available for viewing by the public, 
including any personally identifiable or confidential business 
information that is included in a comment. We post all comments 
received before the close of the comment period on the following Web 
site as soon as possible after they have been received: http://www.regulations.gov. Follow the search instructions on that Web site to 
view public comments.
    Comments received timely will also be available for public 
inspection as they are received, generally beginning approximately 3 
weeks after publication of a document, at the headquarters of the 
Centers for Medicare & Medicaid Services, 7500 Security Boulevard, 
Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 
a.m. to 4 p.m. To schedule an appointment to view public comments, 
phone 1-800-743-3951.

Table of Contents

I. Executive Summary
II. Background
III. Provisions of the Proposed HHS Notice of Benefit and Payment 
Parameters for 2014
    A. Provisions for the State Notice of Benefit and Payment 
Parameters
    B. Provisions and Parameters for the Permanent Risk Adjustment 
Program
    1. Approval of State-Operated Risk Adjustment
    2. Risk Adjustment User Fees
    3. Overview of the Risk Adjustment Methodology HHS Would 
Implement When Operating Risk Adjustment on Behalf of a State
    4. State Alternate Methodology
    5. Risk Adjustment Data Validation
    C. Provisions and Parameters for the Transitional Reinsurance 
Program
    1. State Standards Related to the Reinsurance Program

[[Page 73119]]

    2. Contributing Entities and Excluded Entities
    3. National Contribution Rate
    4. Calculation and Collection of Reinsurance Contributions
    5. Eligibility for Reinsurance Payments Under Health Insurance 
Market Rules
    6. Reinsurance Payment Parameters
    7. Uniform Adjustment to Reinsurance Payments
    8. Supplemental State Reinsurance Parameters
    9. Allocation and Distribution of Reinsurance Contributions
    10. Data Collection Standards for Reinsurance Payments
    D. Provisions for the Temporary Risk Corridors Program
    1. Definitions
    2. Risk Corridors Establishment and Payment Methodology
    3. Risk Corridors Data Requirements
    4. Manner of Risk Corridor Data Collection
    E. Provisions for the Advance Payment of the Premium Tax Credit 
and Cost-Sharing Reduction Programs
    1. Exchange Responsibilities With Respect to Advance Payments of 
the Premium Tax Credit and Cost-Sharing Reductions
    2. Exchange Functions: Certification of Qualified Health Plans
    3. QHP Minimum Certification Standards Relating to Advance 
Payments of the Premium Tax Credit and Cost-Sharing Reductions
    4. Health Insurance Issuer Responsibilities With Respect to 
Advance Payments of the Premium Tax Credit and Cost-Sharing 
Reductions
    F. Provisions on User Fees for a Federally-Facilitated Exchange 
(FFE)
    G. Distributed Data Collection for the HHS-Operated Risk 
Adjustment and Reinsurance Programs
    1. Background
    2. Issuer Data Collection and Submission Requirements
    3. Risk Adjustment Data Requirements
    4. Reinsurance Data Requirements
    H. Small Business Health Options Program
    I. Medical Loss Ratio Requirements Under the Patient Protection 
and Affordable Care Act
    1. Treatment of Premium Stabilization Payments, and Timing of 
Annual MLR Reports and Distribution of Rebates
    2. Deduction of Community Benefit Expenditures
    3. Summary of Errors in the MLR Regulation
IV. Collection of Information Requirements
V. Response to Comments
VI. Regulatory Impact Analysis
    A. Statement of Need
    B. Overall Impact
    C. Impact Estimates of the Payment Notice Provisions
    D. Regulatory Flexibility Act
    E. Unfunded Mandates
    F. Federalism
    G. Congressional Review Act Regulations Text

Acronyms

Affordable Care Act The Affordable Care Act of 2010 (which is the 
collective term for the Patient Protection and Affordable Care Act 
(Pub. L. 111-148) and the Health Care and Education Reconciliation 
Act (Pub. L. 111-152))
APTC Advance payment of the premium tax credit
AV Actuarial Value
CFR Code of Federal Regulations
CHIP Children's Health Insurance Program
CMS Centers for Medicare & Medicaid Services
EHB Essential Health Benefits
ERISA Employee Retirement Income Security Act
ESI Employer sponsored insurance
FFE Federally-facilitated Exchange
FPL Federal Poverty Level
GAAP Generally accepted accounting principles
HCC Hierarchical condition category
HHS United States Department of Health and Human Services
HIPAA Health Insurance Portability and Accountability Act of 1996 
(Pub. L. 104-191)
IHS Indian Health Service
IRS Internal Revenue Service
MLR Medical Loss Ratio
NAIC National Association of Insurance Commissioners
OMB Office of Management and Budget
OPM United States Office of Personnel Management
PHS Act Public Health Service Act
PRA Paperwork Reduction Act of 1985
QHP Qualified Health Plan
SHOP Small Business Health Options Program
The Code Internal Revenue Code of 1986

I. Executive Summary

A. Purpose

    Beginning in 2014, individuals and small businesses will be able to 
purchase private health insurance through competitive marketplaces, 
called Affordable Insurance Exchanges, or ``Exchanges.'' Individuals 
who enroll in health plans through Exchanges may receive premium tax 
credits to make health insurance more affordable, and financial 
assistance to cover cost sharing for health care services. The premium 
tax credits, combined with the new insurance reforms, will 
significantly increase the number of individuals with health insurance 
coverage, particularly in the individual market. Premium stabilization 
programs--risk adjustment, reinsurance, and risk corridors--protect 
against adverse selection in the newly enrolled population. These 
programs, in combination with the medical loss ratio program and market 
reforms extending guaranteed availability (also known as guaranteed 
issue) protections, prohibiting the use of factors such as health 
status, medical history, gender, and industry of employment to set 
premium rates, will help to ensure that every American has access to 
high-quality, affordable health insurance.
    Premium stabilization programs: The Affordable Care Act establishes 
transitional reinsurance and temporary risk corridors programs, and a 
permanent risk adjustment program to provide payments to health 
insurance issuers that cover higher-risk populations and to more evenly 
spread the financial risk borne by issuers.
    The transitional reinsurance program and the temporary risk 
corridors program, which begin in 2014, are designed to provide issuers 
with greater payment stability as insurance market reforms are 
implemented. The reinsurance program will reduce the uncertainty of 
insurance risk in the individual market by partially offsetting risk of 
high-cost enrollees. The risk corridors program, which is a Federally 
administered program, will protect against uncertainty in rates for 
qualified health plans by limiting the extent of issuer losses and 
gains. On an ongoing basis, the risk adjustment program is intended to 
provide increased payments to health insurance issuers that attract 
higher-risk populations, such as those with chronic conditions, and 
reduce the incentives for issuers to avoid higher-risk enrollees. Under 
this program, funds are transferred from issuers with lower-risk 
enrollees to issuers with higher-risk enrollees.
    In the Premium Stabilization Rule (77 FR 17220), we laid out a 
regulatory framework for these three programs. In that rule, we stated 
that the specific payment parameters for those programs would be 
published in this proposed rule. In this proposed rule, we expand upon 
these standards, and propose payment parameters for these programs.
    Advanced payments of the premium tax credit and cost-sharing 
reductions: This proposed rule proposes standards for advanced payments 
of the premium tax credit and for cost-sharing reductions. These 
programs assist low- and moderate-income Americans in affording health 
insurance on an Exchange. Section 1401 of the Affordable Care Act 
amended the Internal Revenue Code (26 U.S.C.) to add section 36B, 
allowing an advance, refundable premium tax credit to help individuals 
and families afford health insurance coverage. Section 36B of the Code 
was subsequently amended by the Medicare and Medicaid Extenders Act of 
2010 (Pub. L. 111-309) (124 Stat. 3285 (2010)); the Comprehensive 1099 
Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act 
of 2011 (Pub. L. 112-9) (125 Stat. 36 (2011)); and the Department of 
Defense and Full-Year Continuing Appropriations Act, 2011 (Pub. L. 112-
10) (125 Stat. 38 (2011)). The section

[[Page 73120]]

36B credit is designed to make a qualified health plan affordable by 
reducing a taxpayer's out-of-pocket premium cost.
    Under section 1411 of the Affordable Care Act, an Exchange makes an 
advance determination of tax credit eligibility for individuals 
enrolling in coverage through the Exchange and seeking financial 
assistance. Using information available at the time of enrollment, the 
Exchange determines: (1) whether the individual meets the income and 
other requirements for advance payments, and (2) the amount of the 
advance payments. Advance payments are made monthly under section 1412 
of the Affordable Care Act to the issuer of the qualified health plan 
(QHP) in which the individual enrolls.
    Section 1402 of the Affordable Care Act provides for the reduction 
of cost sharing for certain individuals enrolled in QHPs offered 
through the Exchanges and section 1412 of the Affordable Care Act 
provides for the advance payment of these reductions to issuers. This 
assistance will help low- and moderate-income qualified individuals and 
families afford the out-of-pocket spending associated with health care 
services provided through QHP coverage. The law directs issuers to 
reduce cost sharing for essential health benefits for individuals with 
household incomes between 100 and 400 percent of the Federal Poverty 
Level (FPL) who are enrolled in a silver level QHP through an 
individual market Exchange and are eligible for advance payment of 
premium tax credits. The statute also directs issuers to eliminate cost 
sharing for Indians (as defined in section 4(d) of the Indian Self-
Determination and Education Assistance Act) with a household income at 
or below 300 percent of the FPL who are enrolled in a QHP of any 
``metal'' level (that is, bronze, silver, gold, or platinum) through 
the individual market in the Exchange, and prohibits issuers of QHPs 
from requiring cost sharing for Indians, regardless of household 
income, for items or services furnished directly by the Indian Health 
Service, an Indian Tribe, a Tribal Organization, or an Urban Indian 
Organization, or through referral under contracted health services.
    HHS published a bulletin \1\ outlining an intended regulatory 
approach to calculations of actuarial value and implementation of cost-
sharing reductions on February 24, 2012 (the ``AV/CSR Bulletin''). 
Specifically, HHS outlined an intended regulatory approach for the 
calculation of AV, de minimis variation standards, silver plan 
variations for individuals eligible for cost-sharing reductions, and 
advance payments of cost-sharing reductions to issuers, among other 
topics. In the Exchange Establishment Rule, we established eligibility 
standards for these cost-sharing reductions. In this proposed rule, we 
establish standards governing the administration of cost-sharing 
reductions and provide specific payment parameters for the program.
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    \1\ Available at: http://cciio.cms.gov/resources/files/Files2/02242012/Av-csr-bulletin.pdf.
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    Federally-facilitated Exchange user fees: Section 1311(d)(5)(A) of 
the Affordable Care Act contemplates an Exchange charging assessments 
or user fees to participating issuers to generate funding to support 
its operations. As the operator of a Federally-facilitated Exchange, 
HHS has the authority, under this section of the statute, to collect 
and spend such user fees. In addition, 31 U.S.C. 9701 provides for an 
agency to establish a charge for a service provided by the agency. 
Office of Management and Budget Circular A-25 Revised (``Circular A-
25R'') establishes Federal policy regarding user fees and specifies 
that a user charge will be assessed against each identifiable recipient 
for special benefits derived from Federal activities beyond those 
received by the general public. In this proposed rule, we establish a 
user fee for issuers participating in a Federally-facilitated Exchange.
    Small Business Health Options Program: Section 1311(b)(1)(B) of the 
Affordable Care Act directs each State that chooses to operate an 
Exchange to establish a Small Business Health Options Program (SHOP) 
that provides health insurance options for small businesses. The 
Exchange Establishment Rule sets forth standards for the administration 
of SHOP Exchanges. In this proposed rule, we clarify and expand upon 
the standards established in that final rule.
    Medical loss ratio program: Public Health Service (PHS) Act section 
2718 generally requires health insurance issuers to submit an annual 
MLR report to HHS and provide rebates to consumers if they do not 
achieve specified MLRs. On December 1, 2010, we published an interim 
final rule, entitled ``Health Insurance Issuers Implementing Medical 
Loss Ratio (MLR) Requirements under the Patient Protection and 
Affordable Care Act,'' (75 FR 74864) that established standards for the 
MLR program. Since then, we have made several revisions and technical 
corrections to those rules. We propose in this proposed rule to amend 
the regulations to specify how issuers are to account for payments or 
receipts for risk adjustment, reinsurance, and risk corridors, and to 
change the timing of the annual MLR report and distribution of rebates 
required of issuers to allow for accounting of the premium 
stabilization programs. This proposed rule also proposes to amend the 
regulations to revise the treatment of community benefit expenditures 
in the MLR calculation for issuers exempt from Federal income tax.

B. Summary of the Major Provisions

    This proposed rule fills in the framework established by the 
Premium Stabilization Rule by proposing provisions and parameters for 
the three premium stabilization programs--the permanent risk adjustment 
program, the transitional reinsurance program, and the temporary risk 
corridors program. It also proposes key provisions governing advance 
payments of the premium tax credit, cost-sharing reductions, and user 
fees for Federally-facilitated Exchanges. Finally, it proposes a number 
of amendments relating to the SHOP and the medical loss ratio program.
    Risk Adjustment: The goal of the Affordable Care Act risk 
adjustment program is to mitigate the impacts of possible adverse 
selection and stabilize the premiums in the individual and small group 
markets as and after insurance market reforms are implemented. In this 
proposed rule, we propose a number of standards and parameters for 
implementing the risk adjustment program, including:
     Provisions governing a State operating a risk adjustment 
program;
     The risk adjustment methodology HHS will use when 
operating risk adjustment on behalf of a State, including the risk 
adjustment model, the payments and charges methodology, and the data 
collection approach; and
     An outline of the data validation process we propose to 
use when operating risk adjustment on behalf of a State.
    Reinsurance: The Affordable Care Act directs that a transitional 
reinsurance program be established in each State to help stabilize 
premiums for coverage in the individual market from 2014 through 2016. 
In this proposed rule, we propose a number of standards and parameters 
for implementing the reinsurance program, including:
     Provisions excluding certain types of health coverage from 
reinsurance contributions;
     The national per capita contribution rate to be paid by 
health insurance issuers and self-insured group health plans along with 
the methodology to be used for calculating the contributions

[[Page 73121]]

due from a health insurance issuer or self-insured group health plan;
     Provisions establishing eligibility for reinsurance 
payments;
     The national reinsurance payment parameters and the 
approach we propose to use to calculate and administer the reinsurance 
program; and
     The distributed data collection approach we propose to use 
to implement the reinsurance program.
    Risk Corridors: The temporary risk corridors program permits the 
Federal government and QHPs to share in profits or losses resulting 
from inaccurate rate setting from 2014 to 2016. In this proposed rule, 
we propose to permit a QHP to include profits and taxes within its risk 
corridors calculations. We also propose an annual schedule for the 
program and standards for data submissions.
    Advance Payments of the Premium Tax Credit: Sections 1401 and 1411 
of the Affordable Care Act provide for advance payments of the premium 
tax credit for low- and moderate-income enrollees in QHPs on Exchanges. 
In this proposed rule, we propose a number of standards governing the 
administration of this program, including:
     Provisions governing the reduction of premiums by the 
amount of any advance payments of the premium tax credit; and
     Provisions governing the allocation of premiums to 
essential health benefits.
    Cost-Sharing Reductions: Sections 1402 and 1412 of the Affordable 
Care Act provide for reductions in cost sharing on essential health 
benefits for low- and moderate-income enrollees in qualified silver 
level health plans in individual market Exchanges. It also provides for 
reductions in cost sharing for Indians enrolled in QHPs at any metal 
level. In this proposed rule, we propose a number of standards 
governing the cost-sharing reduction program, including:
     Provisions governing the design of variations of QHPs with 
cost-sharing structures for enrollees of various income levels and for 
Indians;
     The maximum out-of-pocket limits applicable to the various 
plan variations;
     Provisions governing the assignment and reassignment of 
enrollees to plan variations;
     Provisions governing issuer submissions of estimates of 
cost-sharing reductions, which are paid in advance to issuers by the 
Federal government; and
     Provisions governing reconciliation of these advance 
estimates against actual cost-sharing reductions provided.
    User Fees: This proposed rule proposes a per billable member user 
fee applicable to issuers participating in a Federally-facilitated 
Exchange. This proposed rule also outlines HHS's approach to 
calculating the fee.
    SHOP: Beginning in 2014, SHOP Exchanges will allow small employers 
to offer employees a variety of QHPs. In this proposed rule, we propose 
several standards and processes for implementing SHOP Exchanges, 
including:
     Standards governing the definitions and counting methods 
used to determine whether an employer is a small or large employer;
     A safe harbor method of employer contribution in a 
Federally-facilitated SHOP (FF-SHOP);
     The default minimum participation rate;
     QHP standards linking Exchange and FF-SHOP participation 
and ensuring broker commissions in FF-SHOP that are the same as those 
in the outside market; and
     Allowing Exchanges and SHOPs to selectively list only 
brokers registered with the Exchange or SHOP (and adopting that policy 
for FFEs and FF-SHOPs).
    MLR: The MLR program requires issuers to rebate a portion of 
premiums if their MLRs fall short of the applicable MLR standard for 
the reporting year. MLR is calculated as a ratio of claims plus quality 
improvement activities to premium revenue, with adjustments for taxes, 
regulatory fees, and the premium stabilization programs. In this 
proposed rule, we propose a number of standards governing the MLR 
program, including:
     Provisions accounting for risk adjustment, reinsurance, 
and risk corridors in the MLR calculation;
     A revised timeline for MLR reporting and rebates; and
     Provisions modifying the treatment of community benefit 
expenditures.

C. Costs and Benefits

    The provisions of this proposed rule, combined with other 
provisions in the Affordable Care Act, will improve the individual 
insurance market by making insurance more affordable and accessible to 
millions of Americans who currently do not have affordable options 
available to them. The shortcomings of the individual market today have 
been widely documented.\2\
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    \2\ Michelle M. Doty et al., Failure to Protect: Why the 
Individual Insurance Market Is Not a Viable Option for Most U.S. 
Families: Findings from the Commonwealth Fund Biennial Health 
Insurance Survey, 2007, The Commonwealth Fund, July 2009; Sara R. 
Collins, Invited Testimony: Premium Tax Credits Under The Affordable 
Care Act: How They Will Help Millions Of Uninsured And Underinsured 
Americans Gain Affordable, Comprehensive Health Insurance, The 
Commonwealth Fund, October 27, 2011.
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    These limitations of the individual market are made evident by how 
few people actually purchase coverage in the individual market. In 
2011, approximately 48.6 million people were uninsured in the United 
States,\3\ while only around 10.8 million were enrolled in the 
individual market.\4\ The relatively small fraction of the target 
market that actually purchases coverage in the individual market in 
part reflects people's resources, how expensive the product is relative 
to its value, and how difficult it is for many people to access 
coverage.
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    \3\ Source: U.S. Census Bureau, Current Population Survey, 2012 
Annual Social and Economic Supplement, Table HI01. Health Insurance 
Coverage Status and Type of Coverage by Selected Characteristics: 
2011.
    \4\ Source: CMS analysis of June 2012 Medical Loss Ratio Annual 
Reporting data for 2011 MLR reporting year, available at http://cciio.cms.gov/resources/data/mlr.html.
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    The provisions of this proposed rule, combined with other 
provisions in the Affordable Care Act, will improve the functioning of 
both the individual and the small group markets while stabilizing 
premiums. The transitional reinsurance program will serve to stabilize 
premiums in the individual market. Reinsurance will attenuate 
individual market rate increases that might otherwise occur because of 
the immediate enrollment of higher risk individuals, potentially 
including those currently in State high-risk pools. In 2014, it is 
anticipated that reinsurance payments will result in premium decreases 
in the individual market of between 10 and 15 percent relative to 
expected premiums without reinsurance.
    The risk corridors program will protect QHP issuers in the 
individual and small group market against inaccurate rate setting and 
will permit issuers to lower rates by not adding a risk premium to 
account for perceived uncertainties in the 2014 through 2016 markets.
    The risk adjustment program protects against adverse selection by 
allowing issuers to set premiums according to the average actuarial 
risk in the individual and small group market without respect to the 
type of risk selection the issuer would otherwise expect to experience 
with a specific product offering in the market. This should lower the 
risk premium issuers would otherwise price into premiums in the 
expectation of enrolling individuals with unknown health status. In 
addition, it mitigates the incentive for health plans to avoid

[[Page 73122]]

unhealthy members. The risk adjustment program also serves to level the 
playing field inside and outside of the Exchange, as payments and 
charges are applied to all non-grandfathered individual and small group 
plans.
    Provisions addressing the advance payments of the premium tax 
credit and cost-sharing reductions will help provide for premium tax 
credits and the reduction or elimination of cost sharing for certain 
individuals enrolled in QHPs offered through the Exchanges. This 
assistance will help many low-and moderate-income individuals and 
families obtain health insurance. For many people, cost sharing is a 
barrier to obtaining needed health care.\5\ The availability of premium 
tax credits through Exchanges starting in 2014 will result in lower net 
premium rates for many people currently purchasing coverage in the 
individual market, and will encourage younger and healthier enrollees 
to enter the market, improving the risk pool and leading to reductions 
in premium rates for current policyholders.\6\
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    \5\ Brook, Robert H., John E. Ware, William H. Rogers, Emmett B. 
Keeler, Allyson Ross Davies, Cathy D. Sherbourne, George A. 
Goldberg, Kathleen N. Lohr, Patricia Camp and Joseph P. Newhouse. 
The Effect of Coinsurance on the Health of Adults: Results from the 
RAND Health Insurance Experiment. Santa Monica, CA: RAND 
Corporation, 1984. Available at: http://www.rand.org/pubs/reports/R3055.
    \6\ Congressional Budget Office, Letter to Honorable Evan Bayh, 
providing an Analysis of Health Insurance Premiums Under the Patient 
Protection and Affordable Care Act, November 30, 2009; Sara R. 
Collins, Invited Testimony: Premium Tax Credits Under The Affordable 
Care Act: How They Will Help Millions Of Uninsured And Underinsured 
Americans Gain Affordable, Comprehensive Health Insurance, The 
Commonwealth Fund, October 27, 2011; Fredric Blavin et al., The 
Coverage and Cost Effects of Implementation of the Affordable Care 
Act in New York State, Urban Institute, March 2012.
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    The provisions addressing SHOP Exchanges will reduce the burden and 
costs of enrolling employees in small group plans, and give small 
businesses many of the cost advantages and choices that large 
businesses already have. Additionally, SHOP Exchanges will allow for 
employers to preserve control over health plan choices while saving 
employers money by spreading insurers' administrative costs across more 
employers.
    The provisions addressing the MLR program will result in a more 
accurate calculation of MLR and rebate amounts, since it will reflect 
issuers' claims-related expenditures, after adjusting for the premium 
stabilization programs.
    We solicit comments on additional strategies consistent with the 
Affordable Care Act that HHS or States might deploy to help make rates 
affordable in the current market and encourage timely enrollment in 
coverage in 2014. Ensuring that premiums are affordable is a priority 
for HHS as well as States, consumers, and insurers, so we welcome 
suggestions for the proposed rule on ways to achieve this goal while 
implementing these essential consumer protections.
    Issuers may incur some one-time fixed costs to comply with the 
provisions of the final rule, including administrative and hardware 
costs. However, issuer revenues and expenditures are also expected to 
increase substantially as a result of the expected increase in the 
number of people purchasing individual market coverage. That enrollment 
is projected to exceed current enrollment by 50 percent.\7\ We are 
soliciting comments on the nature and magnitude of these costs and 
benefits to issuers, and the potential effect of the provisions of this 
rule on premium rates and financial performance.
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    \7\ Congressional Budget Office, http://www.cbo.gov/sites/default/files/cbofiles/attachments/03-13-Coverage%20Estimates.pdf 
(Table 3).
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    In addition, States may incur administrative and operating costs if 
they choose to establish their own programs. We are also requesting 
information on such costs. In accordance with Executive Orders 12866 
and 13563, we believe that the benefits of this regulatory action would 
justify the costs.

II. Background

    Starting in 2014, individuals and small businesses will be able to 
purchase private health insurance through State-based competitive 
marketplaces called Affordable Insurance Exchanges (Exchanges). The 
Department of Health and Human Services (HHS), the Department of Labor, 
and the Department of the Treasury are working in close coordination to 
release guidance related to Exchanges in several phases. The Patient 
Protection and Affordable Care Act (Pub. L. 111-148) was enacted on 
March 23, 2010. The Health Care and Education Reconciliation Act (Pub. 
L. 111-152) was enacted on March 30, 2010. We refer to the two statutes 
collectively as the Affordable Care Act in this proposed rule.

A. Premium Stabilization

    A proposed regulation was published in the Federal Register on July 
15, 2011 (76 FR 41930) to implement health insurance premium 
stabilization policies in the Affordable Care Act. A final rule 
implementing the health insurance premium stabilization programs (that 
is, risk adjustment, reinsurance, and risk corridors) (Premium 
Stabilization Rule) (77 FR 17220) was published in the Federal Register 
on March 23, 2012. We published a white paper on risk adjustment 
concepts on September 12, 2011 (Risk Adjustment White Paper). We 
published a bulletin on May 1, 2012, outlining our intended approach to 
implementing risk adjustment when we are operating risk adjustment on 
behalf of a State (Risk Adjustment Bulletin). On May 7-8, 2012, we 
hosted a public meeting in which we discussed that approach (Risk 
Adjustment Spring Meeting).
    We published a bulletin on May 31, 2012, outlining our intended 
approach to making reinsurance payments to issuers when we are 
operating the reinsurance program on behalf of a State (Reinsurance 
Bulletin). The Department solicited comment on proposed operations for 
both reinsurance and risk adjustment when we are operating the program 
on behalf of a State.

B. Cost-Sharing Reductions

    We published a bulletin outlining an intended regulatory approach 
to calculating actuarial value and implementing cost-sharing reductions 
on February 24, 2012 (AV/CSR Bulletin). In that bulletin, we outlined 
an intended regulatory approach for the design of plan variations for 
individuals eligible for cost-sharing reductions, and advance payments 
and reimbursement of cost-sharing reductions to issuers, among other 
topics. We reviewed and considered comments to the AV/CSR Bulletin in 
developing section III.E. of this proposed rule.

C. Advance Payments of the Premium Tax Credit

    A proposed regulation relating to the health insurance premium tax 
credit was published by the Department of the Treasury in the Federal 
Register on August 17, 2011 (76 FR 50931). A final rule relating to the 
health insurance premium tax credit was published by the Department of 
the Treasury in the Federal Register on May 23, 2012 (26 CFR parts 1 
and 602).

D. Exchanges

    A Request for Comment relating to Exchanges was published in the 
Federal Register on August 3, 2010 (75 FR 45584). An Initial Guidance 
to States on Exchanges was issued on November 18, 2010. A proposed 
regulation was published in the Federal Register on July 15, 2011 (76 
FR 41866) to implement components of the

[[Page 73123]]

Exchange. A proposed regulation regarding Exchange functions in the 
individual market, eligibility determinations, and Exchange standards 
for employers was published in the Federal Register on August 17, 2011 
(76 FR 51202). A final rule implementing components of the Exchanges 
and setting forth standards for eligibility for Exchanges (Exchange 
Establishment Rule) was published in the Federal Register on March 27, 
2012 (77 FR 18310).

E. Market Reform Rules

    A notice of proposed rulemaking relating to market reforms and 
effective rate review was published in the Federal Register on November 
26, 2012 (77 FR 70584) (proposed Market Reform Rule).

F. Essential Health Benefits and Actuarial Value

    A notice of proposed rulemaking relating to essential health 
benefits and actuarial value was published in the Federal Register on 
November 26, 2012 (77 FR 70644) (proposed EHB/AV Rule).

G. Medical Loss Ratio

    HHS published a request for comment on PHS Act section 2718 in the 
Federal Register on April 14, 2010 (75 FR 19297), and published an 
interim final rule with 60 day comment period relating to the medical 
loss ratio (MLR) program on December 1, 2010 (75 FR 74864). A final 
rule with 30 day comment period (MLR Final Rule) was published in the 
Federal Register on December 7, 2011 (76 FR 76574).

H. Tribal Consultations

    This proposed rule may be of interest to, and affect, American 
Indians/Alaska Natives. Therefore, we plan to consult with Tribes 
during the comment period and prior to publishing a final rule.

III. Provisions of the Proposed HHS Notice of Benefit and Payment 
Parameters for 2014

A. Provisions for the State Notice of Benefit and Payment Parameters

    In Sec.  153.100(c), we established a deadline of March 1 of the 
calendar year prior to the applicable benefit year for States to 
publish a State notice of benefit and payment parameters if the State 
wishes to modify the parameters for the reinsurance program or the risk 
adjustment methodology set forth in the applicable HHS notice of 
benefit and payment parameters. We recognize that, for this initial 
benefit year (that is, for benefit year 2014), it may be difficult for 
States to publish such a notice by the required deadline. We therefore 
propose to modify Sec.  153.100(c) to require that, for benefit year 
2014 only, a State must publish a State notice by March 1, 2013, or by 
the 30th day following publication of the final HHS notice of benefit 
and payment parameters, whichever is later. If a State that chooses to 
operate reinsurance or risk adjustment does not publish the State 
notice within that timeframe, the State would: (1) Adhere to the data 
requirements for health insurance issuers to receive reinsurance 
payments that are specified in the annual HHS notice of benefit and 
payment parameters for the applicable benefit year; (2) forgo the 
collection of additional reinsurance contributions under Sec.  
153.220(d) and the use of additional funds for reinsurance payments 
under Sec.  153.220(d)(3); (3) forgo the use of more than one 
applicable reinsurance entity; and (4) adhere to the risk adjustment 
methodology and data validation standards published in the annual HHS 
notice of benefit and payment parameters.

B. Provisions and Parameters for the Permanent Risk Adjustment Program

    The risk adjustment program is a permanent program created by the 
Affordable Care Act that transfers funds from lower risk, non-
grandfathered plans to higher risk, non-grandfathered plans in the 
individual and small group markets, inside and outside the Exchanges. 
In subparts D and G of the Premium Stabilization Rule, we established 
standards for the administration of the risk adjustment program. A 
State approved or conditionally approved by the Secretary to operate an 
Exchange may establish a risk adjustment program, or have HHS do so on 
its behalf.
    In the Premium Stabilization Rule, we established that a risk 
adjustment program is operated using a risk adjustment methodology. 
States operating their own risk adjustment program may use a risk 
adjustment methodology developed by HHS, or may elect to submit an 
alternate methodology to HHS for approval. In the Premium Stabilization 
Rule, we also laid out standards for States and issuers with respect to 
the collection and validation of risk adjustment data.
    In section III.B.1. of this proposed rule, we propose standards for 
HHS approval of a State-operated risk adjustment program (regardless of 
whether a State elects to use the HHS-developed methodology or an 
alternate, Federally certified risk adjustment methodology). This 
approval process would be distinct from the approval process for State-
based Exchanges. In section III.B.2. of this proposed rule, we propose 
a fee to support HHS operation of the risk adjustment program. This fee 
is a per-capita fee applied to issuers of risk adjustment covered plans 
in States where HHS is operating the risk adjustment program.
    In section III.B.3. of this proposed rule, we describe the 
methodology that HHS would use when operating a risk adjustment program 
on behalf of a State. This methodology would be used to assign a plan 
average risk score based upon the relative average risk of a plan's 
enrollees, and to apply a payment transfer formula to determine risk 
adjustment payments and charges. We also describe the HHS-operated data 
collection approach, and the schedule for operating the HHS-operated 
risk adjustment program. States operating a risk adjustment program can 
use this methodology, or submit an alternate methodology, as described 
in section III.B.4. of this proposed rule.
    Finally, in section III.B.5. of this proposed rule, we describe the 
data validation process we propose to use when operating a risk 
adjustment program on behalf of a State. We propose that issuers 
contract with independent auditors to conduct an initial validation 
audit of risk adjustment data, and that we conduct a second validation 
audit of a sample of risk adjustment data validated in the initial 
validation audit to verify the findings of the initial validation 
audit. We propose that this process be implemented over time, such that 
payment adjustments based on data validation findings would not be made 
in the initial years. We also describe a proposed framework for appeals 
of data validation findings.
1. Approval of State-Operated Risk Adjustment
a. Risk Adjustment Approval Process
    In the Premium Stabilization Rule, we laid out minimum standards 
for States that choose to operate risk adjustment. In Sec.  153.310(a), 
we specified that a State that elects to operate an Exchange is 
eligible to establish a risk adjustment program. In Sec.  153.310(a)(2) 
and (a)(3), we specified that HHS would carry out risk adjustment 
functions on behalf of the State if the State was not eligible to 
operate risk adjustment, or if the State deferred operation of risk 
adjustment to HHS. Under our authority in section 1321(a) of the 
Affordable Care Act on standards for operation of risk adjustment 
programs and section 1343(b) of the Affordable Care act on criteria and 
methods to be used in carrying out risk adjustment activities,

[[Page 73124]]

we now propose to add Sec.  153.310(a)(4) such that, beginning in 2015, 
HHS would carry out the risk adjustment functions on behalf of a State 
if the State is not approved by HHS (that is, does not meet the 
standards proposed in Sec.  153.310(c)) to operate a risk adjustment 
program prior to State publication of its notice of benefit and payment 
parameters. We believe an approval process for State-operated risk 
adjustment programs will promote confidence in these programs so that 
they can effectively protect against the effects of adverse selection.
    We propose that a new paragraph (c), entitled ``State 
responsibilities for risk adjustment,'' set forth a State's 
responsibilities with regard to risk adjustment program operations. 
With this change, we also propose to redesignate paragraphs (c) and (d) 
to paragraphs (e) and (f) of Sec.  153.310. We note that the State must 
ensure that the entity it selects to operate risk adjustment complies 
with the standards established in Sec.  153.310(b).
    In paragraph Sec.  153.310(c)(1), we propose that if a State is 
operating a risk adjustment program for a benefit year, the State 
administer the program through an entity that meets certain standards. 
These standards would ensure the entity has the capacity to operate the 
risk adjustment program throughout the benefit year, and is able to 
administer the risk adjustment methodology. We will work with States to 
ensure that entities are ready to operate a risk adjustment program by 
the beginning of the applicable benefit year.
    As proposed in Sec.  153.310(c)(1)(i), the entity must be 
operationally ready to administer the applicable Federally certified 
risk adjustment methodology and process the resulting payments and 
charges. We believe that it is important for a State to demonstrate 
that its risk adjustment entity has the capacity to implement the 
applicable Federally certified risk adjustment methodology so that 
issuers may have confidence in the program, and so that the program can 
effectively mitigate the effects of potential adverse selection. To 
meet this standard, a State would demonstrate that the risk adjustment 
entity: (1) Has systems in place to implement the data collection 
approach, to calculate individual risk scores, and calculate issuers' 
payments and charges in accordance with the applicable Federally 
certified risk adjustment methodology; and (2) has tested, or has plans 
to test, the functionality of the system that would be used for risk 
adjustment operations prior to the start of the applicable benefit 
year. States would also demonstrate that the entity has legal authority 
to carry out risk adjustment program operations, and has the resources 
to administer the applicable risk adjustment methodology in its 
entirety, including the ability to make risk adjustment payments and 
collect risk adjustment charges.
    We propose in paragraph Sec.  153.310(c)(1)(ii) that the entity 
have relevant experience to operate a risk adjustment program. To meet 
this standard, a State would demonstrate that the entity has on staff, 
or has contracted with, individuals or firms with experience relevant 
to the implementation of a risk adjustment methodology. This standard 
is intended to ensure that the entity has the resources and staffing 
necessary to successfully operate the risk adjustment program.
    We propose in paragraph Sec.  153.310(c)(2) that a State seeking to 
operate its own risk adjustment program ensure that the risk adjustment 
entity complies with all applicable provisions of subpart D of 45 CFR 
part 153 in the administration of the applicable Federally certified 
risk adjustment methodology. In particular, the State would ensure that 
the entity complies with the privacy and security standards set forth 
in Sec.  153.340.
    We propose in Sec.  153.310(c)(3) that the State conduct oversight 
and monitoring of risk adjustment activities in order for HHS to 
approve the State's risk adjustment program. Because the integrity of 
the risk adjustment program has important implications for issuers and 
enrollees, we propose to consider the State's plan to monitor the 
conduct of the entity. HHS would examine the State's requirements for 
data integrity and the maintenance of records, and the State's 
standards for issuers' use of risk adjustment payments. We will provide 
more detail about oversight in future rulemaking.
    Finally, we propose in Sec.  153.310(d) that a State submit to HHS 
information that establishes that it and its risk adjustment entity 
meet the criteria set forth in Sec.  153.310(c). Under the proposed 
Sec.  153.310(a)(4), HHS would operate risk adjustment in the State, 
under the HHS-developed methodology, if the State does not receive 
approval prior to the March deadline for publication of the State 
notice of benefit and payment parameters. Thus, if a State wishes to 
operate risk adjustment for benefit year 2015, it would have to be 
approved prior to publication of the State notice of benefit and 
payment parameters for benefit year 2015 (publication of which must 
occur by March 1, 2014). We will issue future guidance on application 
dates, procedures, and standards.
    We welcome comments on these proposed provisions.
b. Risk Adjustment Approval Process for Benefit Year 2014
    For benefit year 2014, we recognize there are unique timing issues 
for approving a State-operated risk adjustment program. States would 
not know whether they are eligible to operate a risk adjustment program 
until they are approved or conditionally approved to operate an 
Exchange for the 2014 benefit year. In addition, the set of Federally 
certified risk adjustment methodologies and the State-operated risk 
adjustment program approval process will not be finalized until the 
final Payment Notice is effective.
    Given these timing constraints, we are proposing a transitional 
policy for benefit year 2014. We would not require that a State-
operated risk adjustment program receive approval for benefit year 
2014. Instead, we propose a transitional process shortly after the 
provisions of Sec.  153.310(a)(4), (c), and (d) become effective. We 
are requesting that States planning to operate risk adjustment in 
benefit year 2014 consult with HHS to determine the capacity of the 
State to operate risk adjustment. In these consultations, HHS would ask 
States to identify the entity they select to operate risk adjustment, 
and to describe its plans for risk adjustment operations in the State. 
This consultative process would apply for benefit year 2014; however, 
we intend that States obtain formal approval under the proposed process 
for benefit year 2015 and subsequent years.
    For benefit year 2015 and subsequent benefit years, the proposed 
approval process would continue to involve ongoing consultations with 
States and their selected risk adjustment entities. In the course of 
these consultations, we would provide States and proposed entities with 
our ongoing views on whether they are adequately demonstrating the 
capacity of the entity to operate all risk adjustment functions. If the 
State does not produce the requested evidence or make the requested 
changes in the specified timeframe, HHS may determine that the relevant 
criteria were not met, and may decline to approve that State's risk 
adjustment program. We welcome comments on this proposal.
2. Risk Adjustment User Fees
    If a State is not approved to operate or chooses to forgo operating 
its own risk adjustment program, HHS would operate risk adjustment on 
the State's

[[Page 73125]]

behalf. We intend to collect a user fee to support the administration 
of HHS-operated risk adjustment. This fee would apply to issuers of 
risk adjustment covered plans in States in which HHS is operating the 
risk adjustment program.
    Circular No. A-25R establishes Federal policy regarding user fees, 
and specifies that a user charge will be assessed against each 
identifiable recipient for special benefits derived from Federal 
activities beyond those received by the general public. The risk 
adjustment program will provide special benefits as defined in section 
6(a)(1)(b) of Circular No. A-25R to an issuer of a risk adjustment 
covered plan because it will mitigate the financial instability 
associated with risk selection as other market reforms go into effect. 
The risk adjustment program will also contribute to consumer confidence 
in the insurance industry by helping to stabilize premiums across the 
individual and small group health insurance markets.
    We propose to determine HHS' total costs for administering risk 
adjustment programs on behalf of States by examining HHS's contract 
costs of operating the risk adjustment program. These contracts cover 
development of the model and methodology, collections, payments, 
account management, data collection, program integrity and audit 
functions, operational and fraud analytics, stakeholder training, and 
operational support. We do not propose to set the user fee to cover 
Federal personnel.
    We would set the user fee rate as a national per capita rate, which 
would spread the cost of the program across issuers of risk adjustment 
covered plans based on enrollment. We would divide HHS's projected 
total costs for administering the risk adjustment programs on behalf of 
States by the expected number of enrollees in risk adjustment covered 
plans in HHS-operated risk adjustment programs.
    An issuer of a risk adjustment covered plan in a State where HHS is 
operating risk adjustment would pay a risk adjustment user fee equal to 
the product of its annual enrollment in the risk adjustment covered 
plan multiplied by the annual per capita risk adjustment user fee rate 
specified in the annual notice of benefit and payment parameters for 
the applicable benefit year. We would calculate the total user fee that 
would be charged to each issuer based on the issuer's monthly 
enrollment, as provided to HHS using the data collection approach for 
the risk adjustment program. This approach would ensure that user fees 
are appropriately tied to enrollment and spread across issuers. We 
expect that the use of existing data collection and submission methods 
would minimize burden on issuers, while promoting accuracy.
    We anticipate that the total cost for HHS to operate the risk 
adjustment program on behalf of States for 2014 would be less than $20 
million, and that the per capita risk adjustment user fee would be no 
more than $1.00 per enrollee per year.
    HHS would collect risk adjustment user fees from issuers of risk 
adjustment covered plans in June of the year after the applicable 
benefit year to align with payments and charges processing, to provide 
issuers the time to fully comply with the data collection and 
submission standards, and to permit HHS to perform the user fee 
calculations based on actual monthly enrollment counts from the benefit 
year.
    We seek comment on this proposed assessment of user fees to support 
HHS-operated risk adjustment programs.
3. Overview of the risk adjustment methodology HHS would implement when 
operating risk adjustment on behalf of a State
    The goal of the risk adjustment program is to stabilize the 
premiums in the individual and small group markets as and after 
insurance market reforms are implemented. The risk adjustment 
methodology proposed here, which HHS would use when operating risk 
adjustment on behalf of a State, is based on the premise that premiums 
should reflect the differences in plan benefits and plan efficiency, 
not the health status of the enrolled population.
    Under Sec.  153.20, a risk adjustment methodology is made up of 
five elements:
     The risk adjustment model uses an individual's recorded 
diagnoses, demographic characteristics, and other variables to 
determine a risk score, which is a relative measure of how costly that 
individual is anticipated to be.
     The calculation of plan average actuarial risk and the 
calculation of payments and charges average all individual risk scores 
in a risk adjustment covered plan, make certain adjustments, and 
calculate the funds transferred between plans. In this proposed rule, 
these two elements of the methodology are presented together as the 
payment transfer formula.
     The data collection approach describes HHS' approach to 
obtaining data, using the distributed model described in section III.G. 
of this proposed rule that is required for the risk adjustment model 
and the payment transfer formula.
     The schedule for the risk adjustment program describes the 
timeframe for risk adjustment operations.
    States approved to operate risk adjustment may utilize this risk 
adjustment methodology, or they may submit an alternate methodology as 
described in section III.B.4. of this proposed rule.
    The risk adjustment methodology addresses three considerations: (1) 
The newly insured population; (2) plan metal levels and permissible 
rating variation; and (3) the need for inter-plan transfers that net to 
zero. Risk adjustment payments or charges would be calculated from the 
payment transfer formula described in section III.B.3.c. of this 
proposed rule. The key feature of the HHS risk adjustment methodology 
is that the risk score alone does not determine whether a plan is 
assessed charges or receives payments. Transfers depend not only on a 
plan's average risk score, but also on its plan-specific cost factors 
relative to the average of these factors within a risk pool within a 
State.
    As discussed in greater detail below, the risk adjustment 
methodology developed by HHS:
     Is developed on commercial claims data for a population 
similar to the expected population to be risk adjusted;
     Uses the hierarchical condition categories (``HCC'') 
grouping logic used in the Medicare population, with HCCs refined and 
selected to reflect the expected risk adjustment population;
     Calculates risk scores with a concurrent model (current 
year diagnoses predict current year costs);
     Establishes 15 risk adjustment models, one for each 
combination of metal level (platinum, gold, silver, bronze, 
catastrophic) and age group (adults, children, infants);
     Results in ``balanced'' payment transfers within a risk 
pool within a market within a State;
     Adjusts payment transfers for plan metal level, geographic 
rating area, induced demand, and age rating, so that transfers reflect 
health risk and not other cost differences; and
     Transfers funds between plans within a market within a 
State.
a. Risk Adjustment Applied to Plans in the Individual and Small Group 
Markets
    Section 1343(c) of the Affordable Care Act stipulates that risk 
adjustment is to apply to non-grandfathered health insurance coverage 
offered in the individual and small group markets. We previously 
defined a ``risk adjustment covered plan'' in Sec.  153.20 as health

[[Page 73126]]

insurance coverage offered in the individual or small group markets, 
excluding plans offering excepted benefits and certain other plans, 
including ``any other plan determined not to be a risk adjustment 
covered plan in the annual HHS notice of benefit and payment 
parameters.'' We propose to amend this definition by replacing ``and 
any plan determined not to be a risk adjustment covered plan in the 
annual HHS notice of benefit and payment parameters'' with ``and any 
plan determined not to be a risk adjustment covered plan in the 
applicable Federally certified risk adjustment methodology.'' We note 
that, under this revised definition, we would describe any plans not 
determined to be risk adjustment covered plans under the HHS risk 
adjustment methodology in the annual notice of benefit and payment 
parameters, which is subject to notice and comment.
    We describe below our proposed treatment of certain types of plans 
(specifically, plans not subject to market reforms, student health 
plans, and catastrophic plans), and our proposed approach to risk 
pooling for risk adjustment purposes when a State merges markets for 
the purposes of the single risk pool provision described in section 
1312(c) of the Affordable Care Act. States may propose different 
approaches to these plans and to risk pooling in State alternate 
methodologies, subject to the requirements established at Sec.  
153.330(b) in this proposed rule.
    Plans not subject to market reforms: Certain types of plans 
offering non-grandfathered health insurance coverage in the individual 
and small group markets would not be subject to the insurance market 
reforms proposed in the Market Reform Rule and the EHB/AV proposed 
rule. In addition, plans providing benefits through policies that begin 
in 2013, with renewal dates in 2014, would not be subject to these 
requirements until renewal in 2014. The law specifies that the risk 
adjustment program is to assess charges on non-grandfathered health 
insurance coverage in the individual and small group markets with less 
than average actuarial risk and to make payments to non-grandfathered 
health insurance coverage in these markets with higher than average 
actuarial risk. We interpret actuarial risk to mean predictable risk 
that the issuer has not been able to compensate for through exclusion 
or pricing. In the current market, plans are generally not subject to 
the insurance market reforms that begin in 2014 described at Sec.  
147.102 (fair health insurance premiums), Sec.  147.104 (guaranteed 
availability of coverage, subject to the student health insurance 
provisions at Sec.  147.145), Sec.  147.106 (guaranteed renewability of 
coverage, subject to the student health insurance provisions at Sec.  
147.145), Sec.  156.80 (single risk pool), and Subpart B 156 (essential 
health benefits package), and so are generally able to minimize 
actuarial risk by excluding certain conditions (for example, maternity 
coverage for women of child-bearing age), denying coverage to those 
with certain high-risk conditions, and by pricing individual premiums 
to cover the costs of providing coverage to an individual with those 
conditions.
    We propose to use the authority in section 1343(b) of the 
Affordable Care Act to ``establish criteria and methods to be used in 
carrying out * * * risk adjustment activities'' to treat plans not 
subject to insurance market reforms at Sec.  147.102 (fair health 
insurance premiums), Sec.  147.104 (guaranteed availability of 
coverage, subject to the student health insurance provisions at Sec.  
147.145), Sec.  147.106 (guaranteed renewability of coverage, subject 
to the student health insurance provisions at Sec.  147.145), Sec.  
156.80 (single risk pool), and Subpart B 156 (essential health benefits 
package), as follows. Because we believe that plans not subject to 
these market reform rules are able to effectively minimize actuarial 
risk, we believe these plans would have uniform and virtually zero 
actuarial risk. We therefore propose to treat these plans separately, 
such that these plans would not be subject to risk adjustment charges 
and would not receive risk adjustment payments. Also, these plans would 
not be subject to the issuer requirements described in subparts G and H 
of part 153. We note that plans issued in 2013 and subject to these 
requirements upon renewal would become subject to risk adjustment upon 
renewal, and would comply with the requirements established in subparts 
G and H of part 153 at that time.
    Student health plans: Only individuals attending a particular 
college or university are eligible to enroll in a student health plan 
(as described in Sec.  147.145) offered by that college or university. 
We believe that student health plans, because of their unique 
characteristics, will have relatively uniform actuarial risk. We 
therefore propose to use the authority in section 1343(b) of the 
Affordable Care Act to ``establish criteria and methods to be used in 
carrying out * * * risk adjustment activities'' to treat these plans as 
a separate group that would not be subject to risk adjustment charges 
and would not receive risk adjustment payments. Therefore, these plans 
would not be subject to the issuer requirements described in subparts G 
and H of part 153.
    Catastrophic plans: Unlike metal level coverage, only individuals 
age 30 and under, or individuals for whom insurance is deemed to be 
unaffordable as specified in section 1302(e) of the Affordable Care 
Act, are eligible to enroll in catastrophic plans. Because of the 
unique characteristics of this population, we propose to use our 
authority to establish ``criteria and methods'' to risk adjust 
catastrophic plans in a separate risk pool from the general (metal 
level) risk pool. Catastrophic plans with less than average actuarial 
risk compared with other catastrophic plans would be assessed charges, 
while catastrophic plans with higher than average actuarial risk 
compared with other catastrophic plans would receive payments. The 
specific mechanisms for assessing risk, and calculating payments and 
charges, are described below. We are not, however, proposing to exempt 
these plans from the requirements in subparts G and H of part 153.
    Merger of markets: Section 1312(c) of the Affordable Care Act 
directs issuers to use a single risk pool for a market--the individual 
or small group market--when developing rates and premiums. Section 
1312(c)(3) gives States the option to merge the individual and small 
group market into a single risk pool. To align risk pools for the risk 
adjustment program and rate development, we would merge markets when 
operating risk adjustment on behalf of a State if the State elects to 
do the same for single risk pool purposes. In such a case, rather than 
transferring funds between individual market plans only and between 
small group market plans only, we would transfer funds between all 
individual and small group market plans, considered as one market. When 
the individual and small group markets are merged, the State average 
premium, described in section III.B.3.c. below, would be the average 
premium of all applicable individual and small group market plans in 
the applicable risk pool, and normalization described in section 
III.B.3.c. below would occur across all plans in the applicable risk 
pool in the individual and small group market.
    Risk adjustment in State of licensure: Risk adjustment is a State-
based program in which funds are transferred within a State within a 
market, as described above. In general, a risk adjustment methodology 
will be linked to the rate and benefit requirements applicable under 
State and Federal law

[[Page 73127]]

in a particular State. Such requirements may differ from State to 
State, and apply to policies filed and approved by the department of 
insurance in a State.\8\ However, a plan licensed in a State (and 
therefore subject to that State's rate and benefit requirements) may 
enroll individuals in multiple States. To help ensure that policies in 
the small group market are subject to risk adjustment programs linked 
to the State rate and benefit requirements applicable to that policy, 
we propose in Sec.  153.360 that a risk adjustment covered plan be 
subject to risk adjustment in the State in which the policy is filed 
and approved. We welcome comments on these proposals.
---------------------------------------------------------------------------

    \8\ State Jurisdictional and Extraterritorial Issues White 
Paper: States' Treatment of Regulatory Jurisdiction Over Single 
Employer Group Health Insurance (unpublished white paper--available 
from NAIC Research Library or in NAIC Proceedings I, 2009) NAIC,3/
17/09.
---------------------------------------------------------------------------

b. Overview of the HHS Risk Adjustment Model
    We developed the HHS risk adjustment model in consultation with 
States, providers, issuers, and consumers on methodological choices by 
soliciting comment on the choices in preamble to the proposed Premium 
Stabilization Rule and in the Risk Adjustment White Paper.\9\ We also 
engaged in discussions with these stakeholders at the Risk Adjustment 
Spring Meeting and in user group calls with States.
---------------------------------------------------------------------------

    \9\ http://cciio.cms.gov/resources/files/riskadjustment_whitepaper_web.pdf.
---------------------------------------------------------------------------

    Each HHS risk adjustment model predicts plan liability for an 
enrollee based on that person's age, sex, and diagnoses (risk factors), 
producing a risk score. We propose separate models for adults, 
children, and infants to account for cost differences in each of these 
age groups. The adult and child models are additive; that is, the 
relative costs assigned to an individual's age, sex, and diagnoses are 
added together to produce a risk score. Infant risk scores are 
determined by inclusion in one of 25 mutually exclusive groups based on 
the infant's maturity and the severity of its diagnoses. If applicable, 
the risk score is multiplied by a cost-sharing reduction adjustment.
    The enrollment-weighted average risk score of all enrollees in a 
particular risk adjustment covered plan within a geographic rating area 
are then input into the payment transfer formula, as described in 
section III.B.3.c. of this proposed rule, to determine an issuer's 
payment or charge for a particular plan.
    Each HHS risk adjustment model predicts individual-level risk 
scores, but is designed to predict average group costs to account for 
risk across plans.\10\ This method accords with the Actuarial Standard 
Board's Actuarial Standard of Practice for risk classification.\11\
---------------------------------------------------------------------------

    \10\ American Academy of Actuaries: Risk Assessment and Risk 
Adjustment, Issue Brief. May 2010.
    \11\ Actuarial Standard of Practice No. 12: Risk Classification 
(for All Practice Areas). Actuarial Standards Board, Doc. No. 101. 
December 2005.
---------------------------------------------------------------------------

(1) Data Used To Develop the HHS Risk Adjustment Model
    Each HHS risk adjustment model was calibrated using de-identified 
data from the Truven Health Analytics 2010 MarketScan[supreg] 
Commercial Claims and Encounters database (MarketScan) for individuals 
living in all States, aged 0-64, enrolled in commercial health 
insurance plans. The database contains enrollee-specific clinical 
utilization, expenditures, and enrollment across inpatient, outpatient, 
and prescription drug services from a selection of large employers and 
health plans. The database includes de-identified data from 
approximately 100 payers, and has more than 500 million claims from 
insured employees, their spouses, and dependents. Active employees, 
early retirees, individuals on COBRA continuation coverage, and their 
dependents are included in the database. The enrollment data files 
contain information for any person enrolled in one of the employer or 
individual health plans at any point during a year. Enrollees were 
classified as enrolled in fee-for-service (``FFS'') plans or encounter-
type plans, with most FFS plans being preferred provider organization 
(``PPO'') plans, and the majority of encounter-type plans being health 
maintenance organization (``HMO'') plans. An individual could have been 
enrolled for as few as one and as many as 365 days in a year, and could 
have been enrolled in one or more years. In operation, the same rules 
will be applied with respect to enrollment.
    Diagnoses for model calibration were extracted from facility and 
professional claims. Facility claims were extracted only from bill 
types that were hospital inpatient, hospital outpatient, rural health 
clinic, federally qualified health center, or community mental health 
center. For professional and outpatient facility claims, diagnoses were 
generally extracted from claims where the procedure (CPT code) 
indicated a face-to-face visit with a qualified clinician. Diagnoses 
from procedures that did not meet these criteria (for example, durable 
medical equipment, pathology/laboratory, and diagnostic radiology) were 
not included. The concurrent modeling sample (approximately 20 million 
individuals) was generated using the following criteria: (1) The 
enrollee had to be enrolled in a FFS plan; \12\ (2) the enrollee must 
not have incurred any claims paid on a capitated basis;\13\ and (3) the 
enrollee must have been enrolled in a plan with drug benefits and 
mental health and substance abuse coverage. The final database reflects 
our best approximation of the essential health benefits package under 
the Affordable Care Act, which also includes prescription drug and 
mental health and substance abuse coverage.
---------------------------------------------------------------------------

    \12\ We limited the modeling sample to enrollees in FFS plans 
because costs on non-FFS claims may not represent the full cost of 
care associated with a disease.
    \13\ In 2010 the MarketScan database, even FFS plan types can 
have carve-out services paid on a capitated basis, which are less 
reliable for predicted expenditure calculations.
---------------------------------------------------------------------------

    MarketScan expenditure data includes gross covered charges, which 
were defined as:

Gross covered charges = submitted charges-non-covered charges-pricing 
reductions

    Inpatient, outpatient, and prescription drug expenditures for each 
enrollee were calculated by summing gross covered charges in, 
respectively, the inpatient, outpatient, and prescription drug services 
files. Total expenditures were defined as the sum of inpatient, 
outpatient, and prescription drug expenditures. Plan liability 
expenditures for a given plan type (platinum, gold, silver, bronze, 
catastrophic) were defined by applying the applicable standardized 
benefit design, as discussed in section III.B.3.b.10., to total 
expenditures. To more accurately reflect expected expenditures for 
2014, the 2010 total expenditures were increased for projected cost 
growth.\14\ Average monthly expenditures were defined as the enrollee's 
expenditures for the enrollment period divided by the number of 
enrollment months. Annualized expenditures (total or plan liability) 
were defined as average monthly expenditures multiplied by 12. Data for 
each individual was weighted by months of enrollment divided by 12.
---------------------------------------------------------------------------

    \14\ We used the same projected cost growth as was used in the 
development of the AV calculator.
---------------------------------------------------------------------------

(2) Concurrent Model
    The HHS risk adjustment model is a concurrent model. A concurrent 
model takes diagnoses from a given period to predict cost in that same 
period. This is in contrast to a prospective model, which would use 
data from a prior period to predict costs in a future period. We are 
proposing to use a

[[Page 73128]]

concurrent model because 2013 diagnostic data will not be available for 
use in the model in 2014. In addition, we anticipate that enrollees may 
move between plans, or between programs. A concurrent model would be 
better able to handle changes in enrollment than a prospective model 
because individuals newly enrolling in health plans may not have prior 
data available that can be used in risk adjustment.
(3) Prescription Drugs
    At this time, we have elected not to include prescription drug use 
as a predictor in each HHS risk adjustment model. While use of 
particular prescription drugs may be useful for predicting 
expenditures, we believe that inclusion of prescription drug 
information could create adverse incentives to modify discretionary 
prescribing. We seek comments on possible approaches for future 
versions of the model to include prescription drug information while 
avoiding adverse incentives.
(4) Principles of Risk Adjustment and the Hierarchical Condition 
Category (HCC) Classification System
    A diagnostic classification system determines which diagnosis codes 
should be included, how the diagnosis codes should be grouped, and how 
the diagnostic groupings should interact for risk adjustment purposes. 
The ten principles that were used to develop the hierarchical condition 
category (HCC) classification system for the Medicare risk adjustment 
model guided the creation of the HHS risk adjustment model we propose 
to use when HHS operates risk adjustment on behalf of a State. Those 
principles are:
    Principle 1--Diagnostic categories should be clinically meaningful. 
Each diagnostic category is a set of International Classification of 
Diseases, Ninth Revision, Clinical Modification (``ICD-9-CM'') 
codes.\15\ These codes should all relate to a reasonably well-specified 
disease or medical condition that defines the category.
---------------------------------------------------------------------------

    \15\ Please note that in future years we will update the 
calibration of the HHS risk adjustment model to account for the 
transition from ICD-9-CM codes to ICD-10-CM codes.
---------------------------------------------------------------------------

    Principle 2--Diagnostic categories should predict medical 
(including drug) expenditures. Diagnoses in the same HCC should be 
reasonably homogeneous with respect to their effect on both current 
(this year's) costs (concurrent risk adjustment) or future (next 
year's) costs (prospective risk adjustment).
    Principle 3--Diagnostic categories that will affect payments should 
have adequate sample sizes to permit accurate and stable estimates of 
expenditures. Diagnostic categories used in establishing payments 
should have adequate sample sizes in available data sets.
    Principle 4--In creating an individual's clinical profile, 
hierarchies should be used to characterize the person's illness level 
within each disease process, while the effects of unrelated disease 
processes accumulate. Related conditions should be treated 
hierarchically, with more severe manifestations of a condition 
dominating (and zeroing out the effect of) less serious ones.
    Principle 5--The diagnostic classification should encourage 
specific coding. Vague diagnostic codes should be grouped with less 
severe and lower-paying diagnostic categories to provide incentives for 
more specific diagnostic coding.
    Principle 6--The diagnostic classification should not reward coding 
proliferation. The classification should not measure greater disease 
burden simply because more ICD-9-CM codes are present.
    Principle 7--Providers should not be penalized for recording 
additional diagnoses (monotonicity). This principle has two 
consequences for modeling: (1) no HCC should carry a negative payment 
weight; and (2) a condition that is higher-ranked in a disease 
hierarchy (causing lower-rank diagnoses to be ignored) should have at 
least as large a payment weight as lower-ranked conditions in the same 
hierarchy. (There may be exceptions, as when a coded condition 
represents a radical change of treatment of a disease process.)
    Principle 8--The classification system should be internally 
consistent (transitive). If diagnostic category A is higher-ranked than 
category B in a disease hierarchy, and category B is higher-ranked than 
category C, then category A should be higher-ranked than category C. 
Transitivity improves the internal consistency of the classification 
system and ensures that the assignment of diagnostic categories is 
independent of the order in which hierarchical exclusion rules are 
applied.
    Principle 9--The diagnostic classification should assign all ICD-9-
CM codes (exhaustive classification). Because each diagnostic code 
potentially contains relevant clinical information, the classification 
should categorize all ICD-9-CM codes.
    Principle 10--Discretionary diagnostic categories should be 
excluded from payment models. Diagnoses that are particularly subject 
to intentional or unintentional discretionary coding variation or 
inappropriate coding by health plans/providers, or that are not 
clinically or empirically credible as cost predictors, should not 
increase cost predictions. Excluding these diagnoses reduces the 
sensitivity of the model to coding variation, coding proliferation, 
gaming, and upcoding.
(5) CMS HCC Diagnostic Classification System
    The HCCs in the Medicare risk adjustment model are referred to as 
CMS HCCs. The HCCs in the HHS risk adjustment model are referred to as 
HHS HCCs. The CMS HCC diagnostic classification provides the diagnostic 
framework for the classification and selection of HCCs for the HHS risk 
adjustment model. The CMS HCC risk adjustment model uses patient 
diagnoses and demographic information to prospectively predict medical 
spending for beneficiaries in Medicare Part C managed care plans. The 
CMS HCC classification system was reviewed and adapted to account for 
the different population to create the HHS HCC classification.
    The CMS HCC diagnostic classification system begins by classifying 
over 14,000 ICD-9-CM diagnosis codes into diagnostic groups, or DXGs. 
Each ICD-9-CM code maps to exactly one DXG, which represents a well-
specified medical condition or set of conditions. DXGs are further 
aggregated into Condition Categories, or CCs. CCs describe a broader 
set of similar diseases. Although they are not as homogeneous as DXGs, 
diseases within a CC are related clinically and with respect to cost. 
Hierarchies are imposed among related CCs, so that a person is coded 
for only the most severe manifestation among related diseases.
    After imposing hierarchies, CCs become Hierarchical Condition 
Categories, or HCCs. Although HCCs reflect hierarchies among related 
disease categories, for unrelated diseases, HCCs accumulate. For 
example, a female with rheumatoid arthritis and breast cancer has (at 
least) two separate HCCs coded, and her predicted cost would reflect 
increments for both conditions. The model's structure thus provides, 
and predicts from, a detailed comprehensive clinical profile for each 
individual.
    Three major characteristics of the CMS HCC classification system 
required modification for use with the HHS risk adjustment model: (1) 
Population; (2) type of spending; and (3) prediction year. The CMS HCCs 
were developed using data from the aged and/or disabled Medicare 
population. Although every ICD-9-CM diagnosis code is

[[Page 73129]]

mapped and categorized into a diagnostic grouping, for some conditions 
(such as pregnancy) the sample size in the Medicare population is quite 
low. With larger sample sizes in the commercial population, HCCs were 
re-examined for infant, child, and adult subpopulations. Additionally, 
the CMS HCCs are configured to predict medical spending, while HHS HCCs 
predict both medical and drug spending. Finally, the CMS HCC 
classification is primarily designed for use with a prospective risk 
adjustment model, using base year diagnoses and demographic information 
to predict the next year's spending. Each HHS risk adjustment model is 
concurrent, using current year diagnoses and demographics to predict 
the current year's spending. Medical conditions may predict current 
year costs that differ from future costs; HCC and DXG groupings should 
reflect those differences.
    As such, HCCs and DXGs may not be the same between the Medicare and 
HHS risk adjustment models. For example, the newborn hierarchy was 
reconfigured in the HHS risk adjustment model to include new HCCs and 
DXGs to account for major cost differences in the youngest premature 
newborns and in neonatal disorders. Adjustments such as these resulted 
in 264 classification HCCs in the HHS risk adjustment model.
    In designing the diagnostic classification for the HHS risk 
adjustment model, principles 7 (monotonicity), 8 (transitivity), and 9 
(exhaustive classification) were prioritized. For example, if the 
expenditure weights for the models did not originally satisfy 
monotonicity, constraints were imposed to create models that did. 
However, tradeoffs were often required among other principles. For 
example, clinical meaningfulness is often best served by creating a 
very large number of detailed clinical groupings. However, a large 
number of groupings may not allow for adequate sample sizes for each 
category.
(6) Principles for HCC Selection
    We selected 127 of the full classification of 264 HHS HCCs for 
inclusion in the HHS risk adjustment model. In determining which HCCs 
to include in the HHS risk adjustment model, HCCs that were more 
appropriate for a concurrent model or for the expected risk adjustment 
population (for example, low birth weight babies were included in the 
HHS risk adjustment model). We considered the basic criteria below to 
determine which HCCs should be included in the HHS risk adjustment 
model:
     Whether the HCC represents clinically significant medical 
conditions with significant costs for the target population;
     Whether there will be a sufficient sample size to ensure 
stable results for the HCC;
     Whether excluding the HCC would exclude (or limit the 
impact of) diagnoses particularly subject to discretionary coding;
     Whether the HCC identifies chronic or systematic 
conditions that represent insurance risk selection or risk 
segmentation, rather than random acute events;
     Do not represent poor quality of care; and
     Whether the HCC is applicable to the model age group.
    Consistent with the risk adjustment principles described 
previously, each HHS risk adjustment model excludes HHS HCCs containing 
diagnoses that are vague or nonspecific (for example, symptoms), 
discretionary in medical treatment or coding (for example, 
osteoarthritis), or not medically significant (for example, muscle 
strain). Each HHS risk adjustment model also excludes HHS HCCs that do 
not add to costs.
(7) Grouping of HCCs
    To balance the competing goals of improving predictive power and 
limiting coding variability to create a relatively simple risk 
adjustment model, a number of HHS HCCs were grouped into sets 
equivalent to a single HCC. HHS HCCs were grouped (1) To reduce model 
complexity; (2) to avoid including HHS HCCs with small sample size; (3) 
to limit upcoding by severity within an HCC hierarchy; and (4) to 
reduce additivity within disease groups (but not across disease groups) 
to decrease the sensitivity of the model to coding proliferation. After 
grouping, the number of HHS HCCs included in the proposed HHS risk 
adjustment model was effectively reduced from 127 to 100.\16\
---------------------------------------------------------------------------

    \16\ In addition, we imposed several additional constraints -HCC 
coefficient values were made equal if a lower-ranked HCC in a 
disease hierarchy had a higher coefficient than a higher-ranked HCC; 
the 10 principles of risk adjustment models described in section 
III.B.3.b.4. were generally followed.
---------------------------------------------------------------------------

(8) Demographics
    In addition to the HHS HCCs included in the HHS risk adjustment 
model, enrollee risk scores are calculated from demographic factors. 
There are 18 age/sex categories for adults, and 8 age/sex categories 
for children. As described below, age/sex categories for infants are 
not used. Adults are defined as ages 21+, children are ages 2-20, and 
infants are ages 0-1. The age categories for adult male and female are 
ages 21-24, 25-29, 30-34, 35-39, 40-44, 45-49, 50-54, 55-59, and 60+. 
The age categories for children male and female are ages 2-4, 5-9, 10-
14, and 15-20. This is consistent with the CMS HCC model, which also 
uses five year increments for age groups. In operation, age will be 
defined as age as of the enrollee's last day of enrollment in risk 
adjustment covered plans within an issuer in the applicable benefit 
year. For individuals who do not have any of the HHS HCCs included in 
the proposed HHS risk adjustment model, predicted expenditures are 
based solely on their demographic risk factors. In the calibration data 
set, 19 percent of adults, nine percent of children, and 45 percent of 
infants have HCCs included in the risk adjustment models.
(9) Separate Adult, Child and Infant Models
    Due to the inherent clinical and cost differences in the adult (age 
21+), child (age 2-20), and infant (age 0-1) populations, HHS developed 
separate risk adjustment models for each age group. The models for 
adults and children generally have similar specifications, including 
demographic age/sex categories and HHS HCCs, but differ slightly due to 
clinical and cost differences. However, infants have certain costs 
related to hospitalization at birth and can have severe and expensive 
conditions that do not apply to adults or children, while having 
relatively low frequencies for most HHS HCCs included in the model 
compared to adults and children. Therefore, HHS proposes to use a 
separate infant model.
    The infant model utilizes a mutually exclusive groups approach in 
which infants are assigned a maturity category (by gestation and birth 
weight) and a severity category. There are 5 maturity categories: 
Extremely Immature; Immature; Premature/Multiples; Term; and Age 1. For 
the maturity category, age 0 infants would be assigned to one of the 
first four categories and age 1 infants would be assigned to the Age 1 
category. There are 5 severity categories based on the clinical 
severity and associated costs of the non-maturity HCCs: Severity Level 
1 (Lowest Severity) to Severity Level 5 (Highest Severity). All infants 
(age 0 or 1) are assigned to a severity category based on the highest 
severity of their non-maturity HCCs. The 5 maturity categories and 5 
severity categories would be used to create 25 mutually-exclusive 
interaction terms to which

[[Page 73130]]

each infant is assigned. An infant who has HCCs in more than one 
severity category would be assigned to the highest of those severity 
categories. An infant who has no HCCs or only a newborn maturity HCC 
would be assigned to Severity Level 1 (Lowest). Finally, evidence 
suggests that male infants have higher costs than female infants due to 
increased morbidity and neonatal mortality.\17\ To account for these 
differences by sex, there are 2 male-age indicator variables: Age 0 
Male and Age 1 Male. The male-age variable would be added to the 
interaction term to which the infant is assigned.
---------------------------------------------------------------------------

    \17\ Mathews, T.J., M.S. & Marian F. MacDormon, Ph.D., Division 
of Vital Statistics. Infant Mortality Statistics From the 2007 
Period Linked Birth/Infant Death Data Set. National Vital Statistic 
Reports. Vol. 59. No. 6. (June 29, 2011). Available at: www.cdc.gov/nchs/data/nvsr/nvsr59/nvsr59_06.pdf.
---------------------------------------------------------------------------

    We understand that there may be cases in which there is no separate 
infant birth claim from which to gather diagnoses. For example, at an 
operational level mother and infant claims may be bundled such that 
infant diagnoses appear on the mother's record. Where newborn diagnoses 
appear on the mother's claims, HHS is exploring the feasibility of 
associating those codes with the appropriate infant. This assumes that 
the mother and infant enrollment records exist and can be matched, 
which may also pose operational problems in some cases. Alternatively, 
we are considering requiring issuers to provide separate mother and 
infant claims when they have received a combined claim. We seek comment 
on the operational feasibility of both of these approaches.
    Tables 5 and 6 contain descriptions of how the severity and 
maturity are defined.
(10) Selection of Plan Liability Model
    We propose separate risk adjustment models for each metal level 
because plans at different metal levels would have different liability 
for enrollees with the same expenditure patterns.
    We considered using a total expenditure approach to estimating the 
HHS risk adjustment model. A total expenditure risk adjustment model 
would use the demographic age/sex categories, HHS HCCs included in the 
model, and any other independent variables to predict all of the costs 
associated with an enrollee, whether those costs are incurred by the 
enrollee or the issuer. In a total expenditure model, two individuals 
of the same age with the same set of HCCs would have the same risk 
score regardless of the metal level plan type in which the individuals 
were enrolled. However, we do not believe that this approach would 
accurately capture plan liability levels due to the non-linear nature 
of liability for plans at different metal levels. In particular, 
deductibles are anticipated to be highest in bronze plans and lowest in 
platinum plans. Plan liabilities for plan types (platinum, gold, 
silver, bronze, and catastrophic) were defined by applying standardized 
benefit design parameters for each given metal level to total 
expenditures. We estimated average plan liability for each of the plan 
types, and created an adult, child, and infant model for each plan 
type.
(11) Disease Interactions
    We propose that the HHS risk adjustment models for adults include 
interaction factors. Including interactions improves model performance 
for low- and high-cost individuals and better reflects plan liability 
across metal levels.
    Disease interactions were created using the silver model by first 
creating a single severity illness indicator. We elected to use the 
silver model to create interaction terms because we expect enrollment 
to be highest in silver plans due to the availability of premium tax 
credits and cost-sharing reductions in those plans. The severity 
illness indicator variable was interacted with individual HCCs or HCC 
groups, and the predicted costs of the interaction variables were then 
grouped into three cost categories: low, medium and high. Interaction 
groups in the medium and high cost categories were included in the HHS 
risk adjustment model as shown at the bottom of Table 1 below. An 
individual is determined to have the severity indicator if they have 
one or more of the HCCs listed in Table 2.
    An individual with at least one of the HCCs that comprises the 
severity illness indicator variable and at least one of the HCCs 
interacted with the severity illness indicator variable would be 
assigned a single interaction factor. A hierarchy is imposed on these 
interaction groups such that an individual with a high cost interaction 
is excluded from having a medium cost interaction. The high or the 
medium interaction factor would be added to demographic and diagnosis 
factors of the individual.
(12) List of Factors To Be Employed in the Model
    The proposed HHS risk adjustment models predict annualized plan 
liability expenditures using age and sex categories and the HHS HCCs 
included in the HHS risk adjustment model. Dollar coefficients were 
estimated for these categories and HCCs using weighted least squares 
regression, where the weight was the fraction of the year enrolled.
    For each model, the factors were the statistical regression dollar 
values for each category or HCC in the model divided by a weighted 
average plan liability for the full modeling sample. The factors 
represent the predicted relative incremental expenditures for each 
category or HCC. For a given enrollee, the sums of the factors for the 
enrollee's category and HCCs are the total relative predicted 
expenditures for that enrollee. Table 1 contains factors for each adult 
model, including the interactions. Table 3 contains the factors for 
each child model. Table 5 contains the factors for each infant model.

                                  Table 1--Adult Risk Adjustment Model Factors
----------------------------------------------------------------------------------------------------------------
                   Factor                       Platinum       Gold        Silver       Bronze     Catastrophic
----------------------------------------------------------------------------------------------------------------
                                               Demographic Factors
----------------------------------------------------------------------------------------------------------------
Age 21-24, Male.............................        0.258        0.208        0.141        0.078           0.062
Age 25-29, Male.............................        0.278        0.223        0.150        0.081           0.064
Age 30-34, Male.............................        0.338        0.274        0.187        0.101           0.079
Age 35-39, Male.............................        0.413        0.339        0.240        0.140           0.113
Age 40-44, Male.............................        0.487        0.404        0.293        0.176           0.145
Age 45-49, Male.............................        0.581        0.487        0.365        0.231           0.195
Age 50-54, Male.............................        0.737        0.626        0.484        0.316           0.269
Age 55-59, Male.............................        0.863        0.736        0.580        0.393           0.339
Age 60-64, Male.............................        1.028        0.880        0.704        0.487           0.424

[[Page 73131]]

 
Age 21-24, Female...........................        0.433        0.350        0.221        0.101           0.072
Age 25-29, Female...........................        0.548        0.448        0.301        0.156           0.120
Age 30-34, Female...........................        0.656        0.546        0.396        0.243           0.203
Age 35-39, Female...........................        0.760        0.641        0.490        0.334           0.293
Age 40-44, Female...........................        0.839        0.713        0.554        0.384           0.338
Age 45-49, Female...........................        0.878        0.747        0.583        0.402           0.352
Age 50-54, Female...........................        1.013        0.869        0.695        0.486           0.427
Age 55-59, Female...........................        1.054        0.905        0.726        0.507           0.443
Age 60-64, Female...........................        1.156        0.990        0.798        0.559           0.489
----------------------------------------------------------------------------------------------------------------
                                                Diagnosis Factors
----------------------------------------------------------------------------------------------------------------
HIV/AIDS....................................        5.485        4.972        4.740        4.740           4.749
Septicemia, Sepsis, Systemic Inflammatory          13.696       13.506       13.429       13.503          13.529
 Response Syndrome/Shock....................
Central Nervous System Infections, Except           7.277        7.140        7.083        7.117           7.129
 Viral Meningitis...........................
Viral or Unspecified Meningitis.............        4.996        4.730        4.621        4.562           4.550
Opportunistic Infections....................        9.672        9.549        9.501        9.508           9.511
Metastatic Cancer...........................       25.175       24.627       24.376       24.491          24.526
Lung, Brain, and Other Severe Cancers,             11.791       11.377       11.191       11.224          11.235
 Including Pediatric Acute Lymphoid Leukemia
Non-Hodgkin`s Lymphomas and Other Cancers           6.432        6.150        6.018        5.983           5.970
 and Tumors.................................
Colorectal, Breast (Age < 50), Kidney, and          5.961        5.679        5.544        5.500           5.483
 Other Cancers..............................
Breast (Age 50+) and Prostate Cancer, Benign/       3.509        3.294        3.194        3.141           3.121
 Uncertain Brain Tumors, and Other Cancers
 and Tumors.................................
Thyroid Cancer, Melanoma, Neurofibromatosis,        1.727        1.559        1.466        1.353           1.315
 and Other Cancers and Tumors...............
Pancreas Transplant Status/Complications....        9.593        9.477        9.411        9.434           9.439
Diabetes with Acute Complications...........        1.331        1.199        1.120        1.000           0.957
Diabetes with Chronic Complications.........        1.331        1.199        1.120        1.000           0.957
Diabetes without Complication...............        1.331        1.199        1.120        1.000           0.957
Protein-Calorie Malnutrition................       14.790       14.790       14.786       14.862          14.883
Mucopoly-saccharidosis......................        2.335        2.198        2.130        2.071           2.052
Lipidoses and Glycogenosis..................        2.335        2.198        2.130        2.071           2.052
Amyloidosis, Porphyria, and Other Metabolic         2.335        2.198        2.130        2.071           2.052
 Disorders..................................
Adrenal, Pituitary, and Other Significant           2.335        2.198        2.130        2.071           2.052
 Endocrine Disorders........................
Liver Transplant Status/Complications.......       18.445       18.197       18.105       18.165          18.188
End-Stage Liver Disease.....................        6.412        6.102        5.974        6.001           6.012
Cirrhosis of Liver..........................        2.443        2.255        2.177        2.137           2.125
Chronic Hepatitis...........................        1.372        1.228        1.152        1.071           1.046
Acute Liver Failure/Disease, Including              4.824        4.634        4.548        4.547           4.550
 Neonatal Hepatitis.........................
Intestine Transplant Status/Complications...       77.945       78.110       78.175       78.189          78.195
Peritonitis/Gastrointestinal Perforation/          13.144       12.823       12.681       12.743          12.764
 Necrotizing Enterocolitis..................
Intestinal Obstruction......................        7.257        6.922        6.789        6.842           6.864
Chronic Pancreatitis........................        6.682        6.385        6.269        6.309           6.329
Acute Pancreatitis/Other Pancreatic                 3.614        3.380        3.281        3.245           3.234
 Disorders and Intestinal Malabsorption.....
Inflammatory Bowel Disease..................        2.894        2.640        2.517        2.398           2.355
Necrotizing Fasciitis.......................        7.878        7.622        7.508        7.545           7.559
Bone/Joint/Muscle Infections/Necrosis.......        7.878        7.622        7.508        7.545           7.559
Rheumatoid Arthritis and Specified                  3.414        3.135        3.009        2.987           2.982
 Autoimmune Disorders.......................
Systemic Lupus Erythematosus and Other              1.263        1.124        1.051        0.954           0.921
 Autoimmune Disorders.......................
Osteogenesis Imperfecta and Other                   3.524        3.300        3.184        3.126           3.107
 Osteodystrophies...........................
Congenital/Developmental Skeletal and               3.524        3.300        3.184        3.126           3.107
 Connective Tissue Disorders................
Cleft Lip/Cleft Palate......................        2.168        1.978        1.891        1.815           1.793
Hemophilia..................................       49.823       49.496       49.321       49.330          49.329
Myelodysplastic Syndromes and Myelofibrosis.       15.404       15.253       15.182       15.214          15.224
Aplastic Anemia.............................       15.404       15.253       15.182       15.214          15.224
Acquired Hemolytic Anemia, Including                7.405        7.198        7.099        7.090           7.089
 Hemolytic Disease of Newborn...............
Sickle Cell Anemia (Hb-SS)..................        7.405        7.198        7.099        7.090           7.089
Thalassemia Major...........................        7.405        7.198        7.099        7.090           7.089
Combined and Other Severe Immunodeficiencies        5.688        5.489        5.402        5.419           5.423
Disorders of the Immune Mechanism...........        5.688        5.489        5.402        5.419           5.423
Coagulation Defects and Other Specified             3.080        2.959        2.899        2.880           2.872
 Hematological Disorders....................
Drug Psychosis..............................        3.776        3.517        3.389        3.302           3.274
Drug Dependence.............................        3.776        3.517        3.389        3.302           3.274
Schizophrenia...............................        3.122        2.854        2.732        2.647           2.624
Major Depressive and Bipolar Disorders......        1.870        1.698        1.601        1.476           1.436
Reactive and Unspecified Psychosis,                 1.870        1.698        1.601        1.476           1.436
 Delusional Disorders.......................
Personality Disorders.......................        1.187        1.065        0.974        0.836           0.790

[[Page 73132]]

 
Anorexia/Bulimia Nervosa....................        3.010        2.829        2.732        2.657           2.631
Prader-Willi, Patau, Edwards, and Autosomal         5.387        5.219        5.141        5.101           5.091
 Deletion Syndromes.........................
Down Syndrome, Fragile X, Other Chromosomal         1.264        1.171        1.099        1.015           0.985
 Anomalies, and Congenital Malformation
 Syndromes..................................
Autistic Disorder...........................        1.187        1.065        0.974        0.836           0.790
Pervasive Developmental Disorders, Except           1.187        1.065        0.974        0.836           0.790
 Autistic Disorder..........................
Traumatic Complete Lesion Cervical Spinal          11.728       11.537       11.444       11.448          11.449
 Cord.......................................
Quadriplegia................................       11.728       11.537       11.444       11.448          11.449
Traumatic Complete Lesion Dorsal Spinal Cord       10.412       10.205       10.108       10.111          10.111
Paraplegia..................................       10.412       10.205       10.108       10.111          10.111
Spinal Cord Disorders/Injuries..............        6.213        5.969        5.861        5.843           5.836
Amyotrophic Lateral Sclerosis and Other             3.379        3.094        2.967        2.927           2.919
 Anterior Horn Cell Disease.................
Quadriplegic Cerebral Palsy.................        2.057        1.810        1.681        1.610           1.589
Cerebral Palsy, Except Quadriplegic.........        0.729        0.596        0.521        0.437           0.408
Spina Bifida and Other Brain/Spinal/Nervous         0.727        0.590        0.522        0.467           0.449
 System Congenital Anomalies................
Myasthenia Gravis/Myoneural Disorders and           5.174        4.999        4.921        4.900           4.891
 Guillain-Barre Syndrome/Inflammatory and
 Toxic Neuropathy...........................
Muscular Dystrophy..........................        2.118        1.928        1.848        1.771           1.745
Multiple Sclerosis..........................        7.441        6.971        6.764        6.830           6.850
Parkinson`s, Huntington`s, and                      2.118        1.928        1.848        1.771           1.745
 Spinocerebellar Disease, and Other
 Neurodegenerative Disorders................
Seizure Disorders and Convulsions...........        1.578        1.411        1.321        1.229           1.199
Hydrocephalus...............................        7.688        7.552        7.486        7.492           7.493
Non-Traumatic Coma, and Brain Compression/          9.265        9.102        9.022        9.026           9.025
 Anoxic Damage..............................
Respirator Dependence/Tracheostomy Status...       40.054       40.035       40.022       40.105          40.131
Respiratory Arrest..........................       12.913       12.707       12.612       12.699          12.728
Cardio-Respiratory Failure and Shock,              12.913       12.707       12.612       12.699          12.728
 Including Respiratory Distress Syndromes...
Heart Assistive Device/Artificial Heart.....       33.372       33.025       32.877       32.978          33.014
Heart Transplant............................       33.372       33.025       32.877       32.978          33.014
Congestive Heart Failure....................        3.790        3.648        3.587        3.591           3.594
Acute Myocardial Infarction.................       11.904       11.451       11.258       11.423          11.478
Unstable Angina and Other Acute Ischemic            6.369        6.001        5.861        5.912           5.935
 Heart Disease..............................
Heart Infection/Inflammation, Except                6.770        6.611        6.537        6.530           6.528
 Rheumatic..................................
Specified Heart Arrhythmias.................        3.363        3.193        3.112        3.063           3.046
Intracranial Hemorrhage.....................       10.420       10.062        9.907        9.943           9.959
Ischemic or Unspecified Stroke..............        4.548        4.304        4.215        4.242           4.256
Cerebral Aneurysm and Arteriovenous                 5.263        5.000        4.890        4.867           4.859
 Malformation...............................
Hemiplegia/Hemiparesis......................        5.979        5.846        5.794        5.858           5.881
Monoplegia, Other Paralytic Syndromes.......        4.176        4.024        3.959        3.938           3.931
Atherosclerosis of the Extremities with            11.941       11.801       11.745       11.844          11.876
 Ulceration or Gangrene.....................
Vascular Disease with Complications.........        8.228        7.996        7.896        7.922           7.932
Pulmonary Embolism and Deep Vein Thrombosis.        4.853        4.642        4.549        4.539           4.537
Lung Transplant Status/Complications........       31.457       31.161       31.030       31.131          31.161
Cystic Fibrosis.............................       10.510       10.142        9.957        9.960           9.962
Chronic Obstructive Pulmonary Disease,              1.098        0.978        0.904        0.810           0.780
 Including Bronchiectasis...................
Asthma......................................        1.098        0.978        0.904        0.810           0.780
Fibrosis of Lung and Other Lung Disorders...        2.799        2.657        2.596        2.565           2.556
Aspiration and Specified Bacterial                  9.052        8.934        8.883        8.913           8.924
 Pneumonias and Other Severe Lung Infections
Kidney Transplant Status....................       10.944       10.576       10.432       10.463          10.482
End Stage Renal Disease.....................       37.714       37.356       37.193       37.352          37.403
Chronic Kidney Disease, Stage 5.............        2.189        2.048        1.995        1.990           1.992
Chronic Kidney Disease, Severe (Stage 4)....        2.189        2.048        1.995        1.990           1.992
Ectopic and Molar Pregnancy, Except with            1.377        1.219        1.120        0.912           0.828
 Renal Failure, Shock, or Embolism..........
Miscarriage with Complications..............        1.377        1.219        1.120        0.912           0.828
Miscarriage with No or Minor Complications..        1.377        1.219        1.120        0.912           0.828
Completed Pregnancy With Major Complications        3.778        3.285        3.134        2.931           2.906
Completed Pregnancy With Complications......        3.778        3.285        3.134        2.931           2.906
Completed Pregnancy with No or Minor                3.778        3.285        3.134        2.931           2.906
 Complications..............................
Chronic Ulcer of Skin, Except Pressure......        2.515        2.371        2.313        2.304           2.304
Hip Fractures and Pathological Vertebral or         9.788        9.570        9.480        9.521           9.536
 Humerus Fractures..........................
Pathological Fractures, Except of Vertebrae,        1.927        1.805        1.735        1.648           1.620
 Hip, or Humerus............................
Stem Cell, Including Bone Marrow, Transplant       30.944       30.908       30.893       30.917          30.928
 Status/Complications.......................
Artificial Openings for Feeding or                 11.093       10.939       10.872       10.943          10.965
 Elimination................................
Amputation Status, Lower Limb/Amputation            7.277        7.087        7.009        7.056           7.073
 Complications..............................
----------------------------------------------------------------------------------------------------------------
                                               Interaction Factors
----------------------------------------------------------------------------------------------------------------
Severe illness x Opportunistic Infections...       12.094       12.327       12.427       12.527          12.555

[[Page 73133]]

 
Severe illness x Metastatic Cancer..........       12.094       12.327       12.427       12.527          12.555
Severe illness x Lung, Brain, and Other            12.094       12.327       12.427       12.527          12.555
 Severe Cancers, Including Pediatric Acute
 Lymphoid Leukemia..........................
Severe illness x Non-Hodgkin`s Lymphomas and       12.094       12.327       12.427       12.527          12.555
 Other Cancers and Tumors...................
Severe illness x Myasthenia Gravis/Myoneural       12.094       12.327       12.427       12.527          12.555
 Disorders and Guillain-Barre Syndrome/
 Inflammatory and Toxic Neuropathy..........
Severe illness x Heart Infection/                  12.094       12.327       12.427       12.527          12.555
 Inflammation, Except Rheumatic.............
Severe illness x Intracranial Hemorrhage....       12.094       12.327       12.427       12.527          12.555
Severe illness x HCC group G06 (HCC Group 6        12.094       12.327       12.427       12.527          12.555
 includes Myelodysplastic Syndromes and
 Myelofibrosis, and Aplastic Anemia)........
Severe illness x HCC group G08 (HCC Group 8        12.094       12.327       12.427       12.527          12.555
 includes Combined and Other Severe
 Immunodeficiencies, and Disorders of the
 Immune Mechanism)..........................
Severe illness x End-Stage Liver Disease....        2.498        2.648        2.714        2.813           2.841
Severe illness x Acute Liver Failure/               2.498        2.648        2.714        2.813           2.841
 Disease, Including Neonatal Hepatitis......
Severe illness x Atherosclerosis of the             2.498        2.648        2.714        2.813           2.841
 Extremities with Ulceration or Gangrene....
Severe illness x Vascular Disease with              2.498        2.648        2.714        2.813           2.841
 Complications..............................
Severe illness x Aspiration and Specified           2.498        2.648        2.714        2.813           2.841
 Bacterial Pneumonias and Other Severe Lung
 Infections.................................
Severe illness x Artificial Openings for            2.498        2.648        2.714        2.813           2.841
 Feeding or Elimination.....................
Severe illness x HCC group G03 (HCC Group 3         2.498        2.648        2.714        2.813           2.841
 includes Necrotizing Fasciitis and Bone/
 Joint/Muscle Infections/Necrosis)..........
----------------------------------------------------------------------------------------------------------------


      Table 2--HHS HCCs in the Severity Illness Indicator Variable
------------------------------------------------------------------------
                               Description
-------------------------------------------------------------------------
Septicemia, Sepsis, Systemic Inflammatory Response Syndrome/Shock.
Peritonitis/Gastrointestinal Perforation/Necrotizing Enter colitis.
Seizure Disorders and Convulsions.
Non-Traumatic Coma, Brain Compression/Anoxic Damage.
Respirator Dependence/Tracheostomy Status.
Respiratory Arrest.
Cardio-Respiratory Failure and Shock, Including Respiratory Distress
 Syndromes.
Pulmonary Embolism and Deep Vein Thrombosis.
------------------------------------------------------------------------


                                  Table 3--Child Risk Adjustment Model Factors
----------------------------------------------------------------------------------------------------------------
                   Factor                       Platinum       Gold        Silver       Bronze     Catastrophic
----------------------------------------------------------------------------------------------------------------
                                               Demographic Factors
----------------------------------------------------------------------------------------------------------------
Age 2-4, Male...............................        0.283        0.209        0.106        0.019           0.000
Age 5-9, Male...............................        0.196        0.140        0.064        0.005           0.000
Age 10-14, Male.............................        0.246        0.189        0.110        0.047           0.033
Age 15-20, Male.............................        0.336        0.273        0.191        0.114           0.095
Age 2-4, Female.............................        0.233        0.165        0.071        0.019           0.000
Age 5-9, Female.............................        0.165        0.113        0.048        0.005           0.000
Age 10-14, Female...........................        0.223        0.168        0.095        0.042           0.031
Age 15-20, Female...........................        0.379        0.304        0.198        0.101           0.077
----------------------------------------------------------------------------------------------------------------
                                                Diagnosis Factors
----------------------------------------------------------------------------------------------------------------
HIV/AIDS....................................        2.956        2.613        2.421        2.228           2.166
Septicemia, Sepsis, Systemic Inflammatory          17.309       17.142       17.061       17.081          17.088
 Response Syndrome/Shock....................
Central Nervous System Infections, Except          12.636       12.409       12.296       12.313          12.319
 Viral Meningitis...........................
Viral or Unspecified Meningitis.............        3.202        3.004        2.896        2.750           2.702
Opportunistic Infections....................       20.358       20.262       20.222       20.201          20.189
Metastatic Cancer...........................       34.791       34.477       34.307       34.306          34.300
Lung, Brain, and Other Severe Cancers,             11.939       11.618       11.436       11.358          11.334
 Including Pediatric Acute Lymphoid Leukemia
Non-Hodgkin's Lymphomas and Other Cancers           9.354        9.071        8.908        8.806           8.774
 and Tumors.................................
Colorectal, Breast (Age <50), Kidney, and           3.689        3.480        3.337        3.188           3.143
 Other Cancers..............................
Benign/Uncertain Brain Tumors, and Other            3.308        3.084        2.954        2.814           2.769
 Cancers and Tumors \18\....................

[[Page 73134]]

 
Thyroid Cancer, Melanoma, Neurofibromatosis,        1.530        1.368        1.254        1.114           1.066
 and Other Cancers and Tumors...............
Pancreas Transplant Status/Complications....       18.933       18.476       18.264       18.279          18.289
Diabetes with Acute Complications...........        2.629        2.354        2.198        1.904           1.799
Diabetes with Chronic Complications.........        2.629        2.354        2.198        1.904           1.799
Diabetes without Complication...............        2.629        2.354        2.198        1.904           1.799
Protein-Calorie Malnutrition................       13.930       13.794       13.726       13.751          13.759
Mucopolysaccharidosis.......................        6.177        5.867        5.696        5.642           5.625
Lipidoses and Glycogenosis..................        6.177        5.867        5.696        5.642           5.625
Congenital Metabolic Disorders, Not                 6.177        5.867        5.696        5.642           5.625
 Elsewhere Classified.......................
Amyloidosis, Porphyria, and Other Metabolic         6.177        5.867        5.696        5.642           5.625
 Disorders..................................
Adrenal, Pituitary, and Other Significant           6.177        5.867        5.696        5.642           5.625
 Endocrine Disorders........................
Liver Transplant Status/Complications.......       18.322       18.048       17.922       17.898          17.888
End-Stage Liver Disease.....................       12.960       12.754       12.650       12.622          12.614
Cirrhosis of Liver..........................        1.177        1.027        0.920        0.871           0.833
Chronic Hepatitis...........................        1.177        1.027        0.920        0.807           0.775
Acute Liver Failure/Disease, Including              6.255        6.092        6.003        5.972           5.966
 Neonatal Hepatitis.........................
Intestine Transplant Status/Complications...      106.169      106.704      106.991      107.180         107.222
Peritonitis/Gastrointestinal Perforation/          16.784       16.360       16.156       16.171          16.179
 Necrotizing Enterocolitis..................
Intestinal Obstruction......................        5.715        5.451        5.307        5.210           5.178
Chronic Pancreatitis........................       16.692       16.315       16.148       16.163          16.166
Acute Pancreatitis/Other Pancreatic                 3.843        3.685        3.584        3.471           3.434
 Disorders and Intestinal Malabsorption.....
Inflammatory Bowel Disease..................        5.049        4.673        4.471        4.320           4.271
Necrotizing Fasciitis.......................        5.829        5.551        5.398        5.318           5.292
Bone/Joint/Muscle Infections/Necrosis.......        5.829        5.551        5.398        5.318           5.292
Rheumatoid Arthritis and Specified                  2.689        2.473        2.327        2.171           2.122
 Autoimmune Disorders.......................
Systemic Lupus Erythematosus and Other              1.397        1.249        1.139        0.996           0.951
 Autoimmune Disorders.......................
Osteogenesis Imperfecta and Other                   1.536        1.410        1.311        1.211           1.183
 Osteodystrophies...........................
Congenital/Developmental Skeletal and               1.536        1.410        1.311        1.211           1.183
 Connective Tissue Disorders................
Cleft Lip/Cleft Palate......................        1.785        1.573        1.441        1.281           1.228
Hemophilia..................................       46.388       45.839       45.551       45.541          45.535
Myelodysplastic Syndromes and Myelofibrosis.       29.387       29.168       29.063       29.075          29.078
Aplastic Anemia.............................       29.387       29.168       29.063       29.075          29.078
Acquired Hemolytic Anemia, Including                7.791        7.476        7.308        7.229           7.203
 Hemolytic Disease of Newborn...............
Sickle Cell Anemia (Hb-SS)..................        7.791        7.476        7.308        7.229           7.203
Thalassemia Major...........................        7.791        7.476        7.308        7.229           7.203
Combined and Other Severe Immunodeficiencies        5.690        5.455        5.339        5.270           5.247
Disorders of the Immune Mechanism...........        5.690        5.455        5.339        5.270           5.247
Coagulation Defects and Other Specified             4.909        4.754        4.650        4.543           4.511
 Hematological Disorders....................
Drug Psychosis..............................        4.067        3.816        3.693        3.596           3.566
Drug Dependence.............................        4.067        3.816        3.693        3.596           3.566
Schizophrenia...............................        5.536        5.127        4.916        4.775           4.730
Major Depressive and Bipolar Disorders......        1.779        1.591        1.453        1.252           1.188
Reactive and Unspecified Psychosis,                 1.779        1.591        1.453        1.252           1.188
 Delusional Disorders.......................
Personality Disorders.......................        0.935        0.832        0.723        0.511           0.441
Anorexia/Bulimia Nervosa....................        2.565        2.372        2.252        2.146           2.111
Prader-Willi, Patau, Edwards, and Autosomal         3.606        3.347        3.239        3.201           3.189
 Deletion Syndromes.........................
Down Syndrome, Fragile X, Other Chromosomal         2.403        2.203        2.093        1.982           1.943
 Anomalies, and Congenital Malformation
 Syndromes..................................
Autistic Disorder...........................        1.673        1.500        1.372        1.177           1.112
Pervasive Developmental Disorders, Except           0.963        0.850        0.723        0.511           0.441
 Autistic Disorder..........................
Traumatic Complete Lesion Cervical Spinal          18.394       18.224       18.156       18.210          18.228
 Cord.......................................
Quadriplegia................................       18.394       18.224       18.156       18.210          18.228
Traumatic Complete Lesion Dorsal Spinal Cord       18.394       18.224       18.156       18.210          18.228
Paraplegia..................................       18.394       18.224       18.156       18.210          18.228
Spinal Cord Disorders/Injuries..............        4.668        4.416        4.287        4.181           4.150
Amyotrophic Lateral Sclerosis and Other            14.484       14.155       13.995       13.958          13.954
 Anterior Horn Cell Disease.................
Quadriplegic Cerebral Palsy.................        5.717        5.367        5.223        5.251           5.262
Cerebral Palsy, Except Quadriplegic.........        1.899        1.672        1.557        1.447           1.412
Spina Bifida and Other Brain/Spinal/Nervous         0.943        0.785        0.686        0.592           0.562
 System Congenital Anomalies................
Myasthenia Gravis/Myoneural Disorders and           5.301        5.071        4.950        4.861           4.832
 Guillain-Barre Syndrome/Inflammatory and
 Toxic Neuropathy...........................
Muscular Dystrophy..........................        3.122        2.915        2.800        2.698           2.669
Multiple Sclerosis..........................        5.370        4.996        4.806        4.769           4.752
Parkinson's, Huntington's, and                      3.122        2.915        2.800        2.698           2.669
 Spinocerebellar Disease, and Other
 Neurodegenerative Disorders................
Seizure Disorders and Convulsions...........        2.188        2.012        1.882        1.702           1.644
Hydrocephalus...............................        6.791        6.630        6.550        6.521           6.513

[[Page 73135]]

 
Non-Traumatic Coma, and Brain Compression/          9.073        8.882        8.788        8.753           8.735
 Anoxic Damage..............................
Respirator Dependence/Tracheostomy Status...       34.717       34.532       34.471       34.623          34.668
Respiratory Arrest..........................       14.998       14.772       14.669       14.691          14.696
Cardio-Respiratory Failure and Shock,              14.998       14.772       14.669       14.691          14.696
 Including Respiratory Distress Syndromes...
Heart Assistive Device/Artificial Heart.....       25.734       25.262       25.057       25.189          25.225
Heart Transplant............................       25.734       25.262       25.057       25.189          25.225
Congestive Heart Failure....................        6.292        6.159        6.073        6.013           5.992
Acute Myocardial Infarction.................        4.568        4.453        4.410        4.433           4.448
Unstable Angina and Other Acute Ischemic            4.568        4.453        4.410        4.433           4.448
 Heart Disease..............................
Heart Infection/Inflammation, Except               12.842       12.655       12.573       12.590          12.597
 Rheumatic..................................
Hypoplastic Left Heart Syndrome and Other           7.019        6.823        6.668        6.528           6.480
 Severe Congenital Heart Disorders..........
Major Congenital Heart/Circulatory Disorders        2.257        2.143        2.018        1.870           1.828
Atrial and Ventricular Septal Defects,              1.411        1.319        1.206        1.078           1.047
 Patent Ductus Arteriosus, and Other
 Congenital Heart/Circulatory Disorders.....
Specified Heart Arrhythmias.................        4.483        4.276        4.141        4.052           4.026
Intracranial Hemorrhage.....................       21.057       20.757       20.616       20.617          20.618
Ischemic or Unspecified Stroke..............        8.498        8.373        8.324        8.360           8.363
Cerebral Aneurysm and Arteriovenous                 4.704        4.464        4.344        4.280           4.250
 Malformation...............................
Hemiplegia/Hemiparesis......................        5.561        5.404        5.334        5.315           5.310
Monoplegia, Other Paralytic Syndromes.......        5.561        5.404        5.334        5.315           5.310
Atherosclerosis of the Extremities with            10.174        9.937        9.799        9.688           9.641
 Ulceration or Gangrene.....................
Vascular Disease with Complications.........       11.571       11.355       11.257       11.260          11.272
Pulmonary Embolism and Deep Vein Thrombosis.       13.894       13.661       13.557       13.591          13.604
Lung Transplant Status/Complications........      100.413      100.393      100.412      100.660         100.749
Cystic Fibrosis.............................       13.530       13.006       12.743       12.739          12.742
Chronic Obstructive Pulmonary Disease,              0.521        0.458        0.354        0.215           0.175
 Including Bronchiectasis...................
Asthma......................................        0.521        0.458        0.354        0.215           0.175
Fibrosis of Lung and Other Lung Disorders...        5.812        5.657        5.555        5.472           5.450
Aspiration and Specified Bacterial                 10.730       10.615       10.549       10.566          10.571
 Pneumonias and Other Severe Lung Infections
Kidney Transplant Status....................       18.933       18.476       18.264       18.279          18.289
End Stage Renal Disease.....................       43.158       42.816       42.659       42.775          42.808
Chronic Kidney Disease, Stage 5.............       11.754       11.581       11.472       11.374          11.340
Chronic Kidney Disease, Severe (Stage 4)....       11.754       11.581       11.472       11.374          11.340
Ectopic and Molar Pregnancy, Except with            1.191        1.042        0.917        0.674           0.590
 Renal Failure, Shock, or Embolism..........
Miscarriage with Complications..............        1.191        1.042        0.917        0.674           0.590
Miscarriage with No or Minor Complications..        1.191        1.042        0.917        0.674           0.590
Completed Pregnancy With Major Complications        3.419        2.956        2.778        2.498           2.437
Completed Pregnancy With Complications......        3.419        2.956        2.778        2.498           2.437
Completed Pregnancy with No or Minor                3.419        2.956        2.778        2.498           2.437
 Complications..............................
Chronic Ulcer of Skin, Except Pressure......        1.570        1.479        1.394        1.314           1.289
Hip Fractures and Pathological Vertebral or         7.389        7.174        7.022        6.882           6.842
 Humerus Fractures..........................
Pathological Fractures, Except of Vertebrae,        2.353        2.244        2.128        1.965           1.912
 Hip, or Humerus............................
Stem Cell, Including Bone Marrow, Transplant       30.558       30.485       30.466       30.522          30.538
 Status/Complications.......................
Artificial Openings for Feeding or                 14.410       14.247       14.197       14.340          14.383
 Elimination................................
Amputation Status, Lower Limb/Amputation           10.174        9.937        9.799        9.688           9.641
 Complications..............................
----------------------------------------------------------------------------------------------------------------

     
---------------------------------------------------------------------------

    \18\ This HCC also includes Breast (Age 50+) and Prostate 
Cancer.

                                 Table 4--Infant Risk Adjustment Models Factors
----------------------------------------------------------------------------------------------------------------
                    Group                       Platinum       Gold        Silver       Bronze     Catastrophic
----------------------------------------------------------------------------------------------------------------
Extremely Immature x Severity Level 5             393.816      392.281      391.387      391.399         391.407
 (Highest)..................................
Extremely Immature x Severity Level 4.......      225.037      223.380      222.424      222.371         222.365
Extremely Immature x Severity Level 3.......       60.363       59.232       58.532       58.247          58.181
Extremely Immature x Severity Level 2.......       60.363       59.232       58.532       58.247          58.181
Extremely Immature x Severity Level 1              60.363       59.232       58.532       58.247          58.181
 (Lowest)...................................
Immature x Severity Level 5 (Highest).......      207.274      205.589      204.615      204.629         204.644
Immature x Severity Level 4.................       89.694       88.105       87.188       87.169          87.178
Immature x Severity Level 3.................       45.715       44.305       43.503       43.394          43.379
Immature x Severity Level 2.................       33.585       32.247       31.449       31.221          31.163
Immature x Severity Level 1 (Lowest)........       33.585       32.247       31.449       31.221          31.163
Premature/Multiples x Severity Level 5            173.696      172.095      171.169      171.111         171.108
 (Highest)..................................

[[Page 73136]]

 
Premature/Multiples x Severity Level 4......       34.417       32.981       32.155       31.960          31.925
Premature/Multiples x Severity Level 3......       18.502       17.382       16.694       16.311          16.200
Premature/Multiples x Severity Level 2......        9.362        8.533        7.967        7.411           7.241
Premature/Multiples x Severity Level 1              6.763        6.144        5.599        4.961           4.771
 (Lowest)...................................
Term x Severity Level 5 (Highest)...........      132.588      131.294      130.511      130.346         130.292
Term x Severity Level 4.....................       20.283       19.222       18.560       18.082          17.951
Term x Severity Level 3.....................        6.915        6.286        5.765        5.092           4.866
Term x Severity Level 2.....................        3.825        3.393        2.925        2.189           1.951
Term x Severity Level 1 (Lowest)............        1.661        1.449        0.998        0.339           0.188
Age1 x Severity Level 5 (Highest)...........       62.385       61.657       61.217       61.130          61.108
Age1 x Severity Level 4.....................       10.855       10.334        9.988        9.747           9.686
Age1 x Severity Level 3.....................        3.633        3.299        3.007        2.692           2.608
Age1 x Severity Level 2.....................        2.177        1.930        1.665        1.320           1.223
Age1 x Severity Level 1 (Lowest)............        0.631        0.531        0.333        0.171           0.137
Age 0 Male..................................        0.629        0.587        0.574        0.533           0.504
Age 1 Male..................................        0.117        0.102        0.094        0.065           0.054
----------------------------------------------------------------------------------------------------------------


                                             Table 5--HHS HCCS Included in Infant Model Maturity Categories
--------------------------------------------------------------------------------------------------------------------------------------------------------
             Maturity category                                                             HCC/Description
--------------------------------------------------------------------------------------------------------------------------------------------------------
Extremely Immature........................  Extremely Immature Newborns, Birthweight < 500 Grams.
Extremely Immature........................  Extremely Immature Newborns, Including Birthweight 500-749 Grams.
Extremely Immature........................  Extremely Immature Newborns, Including Birthweight 750-999 Grams.
Immature..................................  Premature Newborns, Including Birthweight 1000-1499 Grams.
Immature..................................  Premature Newborns, Including Birthweight 1500-1999 Grams.
Premature/Multiples.......................  Premature Newborns, Including Birthweight 2000-2499 Grams.
Premature/Multiples.......................  Other Premature, Low Birthweight, Malnourished, or Multiple Birth Newborns.
Term......................................  Term or Post-Term Singleton Newborn, Normal or High Birthweight.
Age 1.....................................  All age 1 infants.
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                             Table 6--HHS HCCS Included in Infant Model Severity Categories
--------------------------------------------------------------------------------------------------------------------------------------------------------
         Severity category                                                                   HCC
--------------------------------------------------------------------------------------------------------------------------------------------------------
Severity Level 5 (Highest).........  Metastatic Cancer.
Severity Level 5...................  Pancreas Transplant Status/Complications.
Severity Level 5...................  Liver Transplant Status/Complications.
Severity Level 5...................  End-Stage Liver Disease.
Severity Level 5...................  Intestine Transplant Status/Complications.
Severity Level 5...................  Peritonitis/Gastrointestinal Perforation/Necrotizing Enterocolitis.
Severity Level 5...................  Respirator Dependence/Tracheostomy Status.
Severity Level 5...................  Heart Assistive Device/Artificial Heart.
Severity Level 5...................  Heart Transplant.
Severity Level 5...................  Congestive Heart Failure.
Severity Level 5...................  Hypoplastic Left Heart Syndrome and Other Severe Congenital Heart Disorders.
Severity Level 5...................  Lung Transplant Status/Complications.
Severity Level 5...................  Kidney Transplant Status.
Severity Level 5...................  End Stage Renal Disease.
Severity Level 5...................  Stem Cell, Including Bone Marrow, Transplant Status/Complications.
Severity Level 4...................  Septicemia, Sepsis, Systemic Inflammatory Response Syndrome/Shock.
Severity Level 4...................  Lung, Brain, and Other Severe Cancers, Including Pediatric Acute Lymphoid Leukemia.
Severity Level 4...................  Mucopolysaccharidosis.
Severity Level 4...................  Major Congenital Anomalies of Diaphragm, Abdominal Wall, and Esophagus, Age < 2.
Severity Level 4...................  Myelodysplastic Syndromes and Myelofibrosis.
Severity Level 4...................  Aplastic Anemia.
Severity Level 4...................  Combined and Other Severe Immunodeficiencies.
Severity Level 4...................  Traumatic Complete Lesion Cervical Spinal Cord.
Severity Level 4...................  Quadriplegia.
Severity Level 4...................  Amyotrophic Lateral Sclerosis and Other Anterior Horn Cell Disease.
Severity Level 4...................  Quadriplegic Cerebral Palsy.
Severity Level 4...................  Myasthenia Gravis/Myoneural Disorders and Guillain-Barre Syndrome/Inflammatory and Toxic Neuropathy.
Severity Level 4...................  Non-Traumatic Coma, Brain Compression/Anoxic Damage.
Severity Level 4...................  Respiratory Arrest.
Severity Level 4...................  Cardio-Respiratory Failure and Shock, Including Respiratory Distress Syndromes.
Severity Level 4...................  Acute Myocardial Infarction.
Severity Level 4...................  Heart Infection/Inflammation, Except Rheumatic.
Severity Level 4...................  Major Congenital Heart/Circulatory Disorders.
Severity Level 4...................  Intracranial Hemorrhage.

[[Page 73137]]

 
Severity Level 4...................  Ischemic or Unspecified Stroke.
Severity Level 4...................  Vascular Disease with Complications.
Severity Level 4...................  Pulmonary Embolism and Deep Vein Thrombosis.
Severity Level 4...................  Aspiration and Specified Bacterial Pneumonias and Other Severe Lung Infections.
Severity Level 4...................  Chronic Kidney Disease, Stage 5.
Severity Level 4...................  Hip Fractures and Pathological Vertebral or Humerus Fractures.
Severity Level 4...................  Artificial Openings for Feeding or Elimination.
Severity Level 3...................  HIV/AIDS.
Severity Level 3...................  Central Nervous System Infections, Except Viral Meningitis.
Severity Level 3...................  Opportunistic Infections.
Severity Level 3...................  Non-Hodgkin`s Lymphomas and Other Cancers and Tumors.
Severity Level 3...................  Colorectal, Breast (Age < 50), Kidney and Other Cancers.
Severity Level 3...................  Benign/Uncertain Brain Tumors, and Other Cancers and Tumors.\19\
Severity Level 3...................  Lipidoses and Glycogenosis.
Severity Level 3...................  Adrenal, Pituitary, and Other Significant Endocrine Disorders.
Severity Level 3...................  Acute Liver Failure/Disease, Including Neonatal Hepatitis.
Severity Level 3...................  Intestinal Obstruction.
Severity Level 3...................  Necrotizing Fasciitis.
Severity Level 3...................  Bone/Joint/Muscle Infections/Necrosis.
Severity Level 3...................  Osteogenesis Imperfecta and Other Osteodystrophies.
Severity Level 3...................  Cleft Lip/Cleft Palate.
Severity Level 3...................  Hemophilia.
Severity Level 3...................  Disorders of the Immune Mechanism.
Severity Level 3...................  Coagulation Defects and Other Specified Hematological Disorders.
Severity Level 3...................  Prader-Willi, Patau, Edwards, and Autosomal Deletion Syndromes.
Severity Level 3...................  Traumatic Complete Lesion Dorsal Spinal Cord.
Severity Level 3...................  Paraplegia.
Severity Level 3...................  Spinal Cord Disorders/Injuries.
Severity Level 3...................  Cerebral Palsy, Except Quadriplegic.
Severity Level 3...................  Muscular Dystrophy.
Severity Level 3...................  Parkinson's, Huntington's, and Spinocerebellar Disease, and Other Neurodegenerative Disorders.
Severity Level 3...................  Hydrocephalus.
Severity Level 3...................  Unstable Angina and Other Acute Ischemic Heart Disease.
Severity Level 3...................  Atrial and Ventricular Septal Defects, Patent Ductus Arteriosus, and Other Congenital Heart/Circulatory Disorders.
Severity Level 3...................  Specified Heart Arrhythmias.
Severity Level 3...................  Cerebral Aneurysm and Arteriovenous Malformation.
Severity Level 3...................  Hemiplegia/Hemiparesis.
Severity Level 3...................  Cystic Fibrosis.
Severity Level 3...................  Fibrosis of Lung and Other Lung Disorders.
Severity Level 3...................  Pathological Fractures, Except of Vertebrae, Hip, or Humerus.
Severity Level 2...................  Viral or Unspecified Meningitis.
Severity Level 2...................  Thyroid, Melanoma, Neurofibromatosis, and Other Cancers and Tumors.
Severity Level 2...................  Diabetes with Acute Complications.
Severity Level 2...................  Diabetes with Chronic Complications.
Severity Level 2...................  Diabetes without Complication.
Severity Level 2...................  Protein-Calorie Malnutrition.
Severity Level 2...................  Congenital Metabolic Disorders, Not Elsewhere Classified.
Severity Level 2...................  Amyloidosis, Porphyria, and Other Metabolic Disorders.
Severity Level 2...................  Cirrhosis of Liver.
Severity Level 2...................  Chronic Pancreatitis.
Severity Level 2...................  Inflammatory Bowel Disease.
Severity Level 2...................  Rheumatoid Arthritis and Specified Autoimmune Disorders.
Severity Level 2...................  Systemic Lupus Erythematosus and Other Autoimmune Disorders.
Severity Level 2...................  Congenital/Developmental Skeletal and Connective Tissue Disorders.
Severity Level 2...................  Acquired Hemolytic Anemia, Including Hemolytic Disease of Newborn.
Severity Level 2...................  Sickle Cell Anemia (Hb-SS).
Severity Level 2...................  Drug Psychosis.
Severity Level 2...................  Drug Dependence.
Severity Level 2...................  Down Syndrome, Fragile X, Other Chromosomal Anomalies, and Congenital Malformation Syndromes.
Severity Level 2...................  Spina Bifida and Other Brain/Spinal/Nervous System Congenital Anomalies.
Severity Level 2...................  Seizure Disorders and Convulsions.
Severity Level 2...................  Monoplegia, Other Paralytic Syndromes.
Severity Level 2...................  Atherosclerosis of the Extremities with Ulceration or Gangrene.
Severity Level 2...................  Chronic Obstructive Pulmonary Disease, Including Bronchiectasis.
Severity Level 2...................  Chronic Ulcer of Skin, Except Pressure.
Severity Level 1 (Lowest)..........  Chronic Hepatitis.
Severity Level 1...................  Acute Pancreatitis/Other Pancreatic Disorders and Intestinal Malabsorption.
Severity Level 1...................  Thalassemia Major.
Severity Level 1...................  Autistic Disorder.

[[Page 73138]]

 
Severity Level 1...................  Pervasive Developmental Disorders, Except Autistic Disorder.
Severity Level 1...................  Multiple Sclerosis.
Severity Level 1...................  Asthma.
Severity Level 1...................  Chronic Kidney Disease, Severe (Stage 4).
Severity Level 1...................  Amputation Status, Lower Limb/Amputation Complications.
Severity Level 1...................  No Severity HCCs.
--------------------------------------------------------------------------------------------------------------------------------------------------------

(13) Adjustments to Model Discussed in the Risk Adjustment White Paper
---------------------------------------------------------------------------

    \19\ This HCC also includes Breast (Age 50+) and Prostate 
Cancer.
---------------------------------------------------------------------------

    We discussed the possibility of including adjustments to the HHS 
risk adjustment model to account for cost-sharing reductions and 
reinsurance payments in the Risk Adjustment White Paper, and sought 
comment. We propose to include an adjustment for the receipt of cost-
sharing reductions in the model, but not to adjust for receipt of 
reinsurance payments in the model.
(i) Cost-sharing Reductions Adjustments
    We propose an adjustment to the HHS risk adjustment models for 
individuals who receive cost-sharing reductions. The Affordable Care 
Act establishes cost-sharing reductions for enrollees in individual 
market plans in Exchanges based on their income and/or Indian status. 
Individuals who qualify for cost-sharing reductions may utilize health 
care services at a higher rate than would be the case in the absence of 
cost-sharing reductions. This higher utilization (to the extent not 
covered by required cost sharing by the enrollees or cost-sharing 
reductions reimbursed by the Federal government) would neither be paid 
by cost sharing reductions nor built into premiums. This adjustment to 
the HHS risk adjustment models would be based on the adjustment for 
induced demand for advanced payment of cost-sharing reductions 
described in section III.E. of this proposed rule. The proposed 
adjustment factors are set forth in Table 7. These adjustments would be 
multiplicative, and applied after demographic, diagnosis, and 
interaction factors are summed.
    We plan to evaluate this adjustment in the future, once data from 
the first few years of risk adjustment are available. We seek comment 
on this approach.

               Table 7--Cost-Sharing Reduction Adjustment
------------------------------------------------------------------------
                                                               Induced
        Household income                   Plan AV           utilization
                                                               factor
------------------------------------------------------------------------
                        Non-Indian CSR Recipients
------------------------------------------------------------------------
100-150% of FPL.................  Plan Variation 94%......          1.12
150-200% of FPL.................  Plan Variation 87%......          1.12
200-250% of FPL.................  Plan Variation 73%......          1.00
>250% of FPL....................  Standard Plan 70%.......          1.00
------------------------------------------------------------------------
                          Indian CSR Recipients
------------------------------------------------------------------------
<300% of FPL....................  Platinum (90%)..........          1.15
<300% of FPL....................  Gold (80%)..............          1.12
<300% of FPL....................  Silver (70%)............          1.07
<300% of FPL....................  Bronze (60%)............          1.00
>300% of FPL....................  ........................          1.00
------------------------------------------------------------------------

(ii) Reinsurance Adjustments
    Section 1341 of the Affordable Care Act establishes a three-year 
transitional reinsurance program in the individual market, raising the 
question of whether to account for these reinsurance payments when 
developing the HHS risk adjustment models. Some reinsurance payments 
would be made for low-risk individuals with unexpected high-cost 
expenditures (for example, due to an accident) that may not be 
accounted for in the risk adjustment models. However, plans that 
receive risk adjustment payments for their higher-than-average risk 
enrollees may also be eligible to receive reinsurance payments for the 
same high-risk enrollees. Adjusting for reinsurance payments in the HHS 
risk adjustment model would address the concerns that reinsurance and 
risk adjustment could compensate twice for the same high-risk 
individuals.
    Despite this potential, we propose not to adjust for reinsurance in 
the HHS risk adjustment model for a number for reasons. First, removing 
reinsurance payments from risk adjustment would reduce protections for 
issuers of reinsurance-eligible plans that enroll high-cost 
individuals. Second, it would be difficult to determine what portion of 
reinsurance payments were made for conditions included in each HHS risk 
adjustment model, and the appropriate model adjustment for these 
payments. Finally, because the size of the reinsurance pool declines 
over its three-year duration, the methodology to account for 
reinsurance payments would need to be modified each year for the HHS 
risk adjustment model.
(14) Model Performance Statistics
    To evaluate model performance, we examined their R-squared and 
predictive ratios. The R-squared statistic, which calculates the 
percentage of individual variation

[[Page 73139]]

explained by a model, measures the predictive accuracy of the model 
overall. The predictive ratios measure the predictive accuracy of a 
model for different validation groups or subpopulations. The predictive 
ratio for each of the HHS risk adjustment models is the ratio of the 
weighted mean predicted plan liability for the model sample population 
to the weighted mean actual plan liability for the model sample 
population. The predictive ratio represents how well the model does on 
average at predicting plan liability for that subpopulation. A 
subpopulation that is predicted perfectly would have a predictive ratio 
of 1.0. For each of the HHS risk adjustment models, the R-squared 
statistic and the predictive ratio are in the range of published 
estimates for concurrent risk adjustment models.\20\ The R-squared 
statistic for each model is shown in Table 8.
---------------------------------------------------------------------------

    \20\ Winkleman, Ross and Syed Mehmud. ``A Comparative Analysis 
of Claims-Based Tools for Health Risk Assessment.'' Society of 
Actuaries. April 2007.
---------------------------------------------------------------------------

    We welcome comment on these proposed risk adjustment models.

       Table 8--R-Squared Statistic for HHS Risk Adjustment Models
------------------------------------------------------------------------
                                                              R-squared
                   Risk adjustment model                      statistic
------------------------------------------------------------------------
Platinum Adult.............................................        0.360
Platinum Child.............................................        0.307
Platinum Infant............................................        0.292
Gold Adult.................................................        0.355
Gold Child.................................................        0.302
Gold Infant................................................        0.289
Silver Adult...............................................        0.352
Silver Child...............................................        0.299
Silver Infant..............................................        0.288
Bronze Adult...............................................        0.351
Bronze Child...............................................        0.296
Bronze Infant..............................................        0.289
Catastrophic Adult.........................................        0.350
Catastrophic Child.........................................        0.295
Catastrophic Infant........................................        0.289
------------------------------------------------------------------------

c. Overview of the Payment Transfer Formula
    Plan average risk scores are calculated as the member month-
weighted average of individual enrollee risk scores, as shown in 
section III.B.3.b. of this proposed rule. We defined the calculation of 
plan average actuarial risk and the calculation of payments and charges 
in the Premium Stabilization Rule. Here, we combine these concepts into 
a risk adjustment payment transfer formula. In this section, we refer 
to payments and charges generically as transfers. Under Sec.  
153.310(e), as proposed to renumbered, HHS would invoice issuers of 
risk adjustment covered plans for transfers by June 30 of the year 
following the applicable benefit year.
    We propose to calculate risk adjustment transfers after the close 
of the applicable benefit year, following the completion of issuer risk 
adjustment data reporting. As discussed in detail below, the payment 
transfer formula includes a set of cost adjustment terms that require 
transfers to be calculated at the geographic rating area level for each 
plan (thus, HHS would calculate two separate transfer amounts for a 
plan that operates in two rating areas). Payment transfer amounts would 
be aggregated at the issuer level (that is, at the level of the entity 
licensed by the State) such that each issuer would receive an invoice 
and a report detailing the basis for the net payment that would be made 
or the charge that would be owed. The invoice would also include plan-
level risk adjustment information that may be used in the issuer's risk 
corridors calculations.
    The proposed payment transfer formula is designed to provide a per 
member per month (PMPM) transfer amount. The PMPM transfer amount 
derived from the payment transfer formula would be multiplied by each 
plan's total member months for the benefit year to determine the total 
payment due or charge owed by the issuer for that plan in a rating 
area.
(1) Rationales for a Transfer Methodology Based on State Average 
Premiums
    Risk adjustment transfers are intended to reduce the impact of risk 
selection on premiums while preserving premium differences related to 
other cost factors, such as the actuarial value, local patterns of 
utilization and care delivery, local differences in the cost of doing 
business, and, within limits established by the Affordable Care Act, 
the age of the enrollee. Risk adjustment payments would be fully funded 
by the charges that are collected from plans with lower risk enrollees 
(that is, transfers within a State would net to zero).
    In the Risk Adjustment White Paper, we presented several approaches 
for calculating risk adjustment transfers using the State average 
premium and plans' own premiums. The approaches that used plans' own 
premiums resulted in unbalanced payment transfers, requiring a 
balancing adjustment to yield transfers that net to zero. These 
examples also demonstrated that the balancing adjustments could 
introduce differences in premiums across plans that were not consistent 
with features of the plan (for example, AV or differences in costs and 
utilization patterns across rating areas). A balancing adjustment would 
likely vary from year to year, and could add uncertainty to the rate 
development process (that is, plan actuaries would need to factor the 
uncertainty of the balancing adjustment into their transfer estimates).
    Therefore, we propose a payment transfer formula that is based on 
the State average premium for the applicable market, as described in 
section III.B.3.a. of this proposed rule. The State average premium 
provides a straightforward and predictable benchmark for estimating 
transfers. As shown in the examples in the Risk Adjustment White Paper, 
transfers net to zero when the State average premium is used as the 
basis for calculating transfers.
    Plan premiums differ from the State average premium due to a 
variety of factors, such as differences in cost-sharing structure or 
regional differences in utilization and unit costs. The proposed 
payment transfer formula applies a set of cost factor adjustments to 
the State average premium so that it will better reflect plan 
liability. These adjustments to the State average premium result in 
transfers that compensate plans for liability differences associated 
with risk selection, while preserving premium differences related to 
the other cost factors described above.
(2) Conceptual Overview of the Payment Transfer Formula
    In this section, we provide a broad overview of the payment 
transfer formula that we propose to use when operating risk adjustment 
on behalf of a State. We discuss at a conceptual level our proposal to 
use the State average premium as the basis of the formula and the 
components of the formula.
(i) Calculating Transfers Using the State Average Premium
    The payment transfer formula proposed for 2014 is based on the 
difference between two plan premium estimates: (1) A premium based on 
plan-specific risk selection; and (2) a premium without risk selection. 
Transfers are intended to bridge the gap between these two premium 
estimates:

[[Page 73140]]

[GRAPHIC] [TIFF OMITTED] TP07DE12.000

    Conceptually, the goal of payment transfers is to provide plans 
with payments to help cover their actual risk exposure beyond the 
premiums the plans would charge reflecting allowable rating and their 
applicable cost factors. In other words, payments would help cover 
excess actuarial risk due to risk selection.
    Both of these premium estimates would be based on the State average 
premium. The State average premium is the average premium requirement 
for providing insurance to the applicable market population. The 
proposed payment transfer formula develops plan premium estimates by 
adjusting the State average premium to account for plan-specific 
characteristics such as benefit differences. This approach also assumes 
that all plans have premiums that can be decomposed into the State 
average premium and a set of adjustment factors, and that all plans 
would have the same premium if the adjustment factors were held 
constant across plans. Finally, the derivation of the payment transfers 
also assumes that plans ``price to cost,'' that is, that competition 
among plans for enrollees drives plans' premiums to their premium 
requirements. Therefore, we may consider ``premiums'' to be ``costs'' 
or ``premium requirements.'' The payment transfer formula includes the 
following premium adjustment terms:
     Plan average risk score: multiplying the plan average risk 
score by the State average premium shows how a plan's premium would 
differ from the State average premium based on the risk selection 
experienced by the plan.
     Actuarial value: a particular plan's premium may differ 
from the State average premium based on the plan's cost sharing 
structure, or actuarial value. An AV adjustment is applied to the State 
average premium to account for relative differences between a plan's AV 
and the market average AV.
     Permissible rating variation: plan rates may differ based 
on allowable age rating factors. The rating adjustment accounts for the 
impact of allowable rating factors on the premium that would be 
realized by the plan.
     Geographic cost differences: differences in unit costs and 
utilization may lead to differences in the average premium between 
intra-State rating areas, holding other cost factors (for example, 
benefit design) constant. The geographic cost adjustment accounts for 
cost differences across rating areas.
     Induced demand: enrollee spending patterns may vary based 
on the generosity of cost-sharing. The induced demand adjustment 
accounts for greater utilization of health care services induced by 
lower enrollee cost sharing in higher metal level plans.
    The State average premium is multiplied by these factors to develop 
the plan premium estimates used in the payment transfer formula. The 
factors are relative measures that compare how plans differ from the 
market average with respect to the cost factors (that is to say, the 
product of the adjustments is normalized to the market average product 
of the cost factors).
    In the absence of these adjustments, transfers would reflect 
liability differences attributed to cost factors other than risk 
selection. For example, in the absence of the AV adjustment, a low AV 
plan with lower-risk enrollees would be overcharged because the State 
average premium would not be scaled down to reflect the fact that the 
plan's AV is lower than the average AV of plans operating in the market 
in the State.
    The figure below shows how the State average premium, the plan 
average risk score, and other plan-specific cost factors are used to 
develop the two plan premium estimates that are used to calculate 
payment transfers:
[GRAPHIC] [TIFF OMITTED] TP07DE12.001

(ii) Estimating the Plan Premium With Risk Selection
    The first premium term in the proposed payment transfer formula, 
the plan premium estimate reflecting risk selection, is calculated as 
the product of the State average premium and the normalized product of 
the plan average risk score, the plan geographic cost factor, and the 
plan induced demand factor.
    The formula below shows how the plan premium estimate reflecting 
risk selection would be calculated:
[GRAPHIC] [TIFF OMITTED] TP07DE12.002

Where,

Ps = State average premium,
PLRSi = plan i's plan liability risk score,
IDFi = plan i`s induced demand factor,
GCFi = plan i's geographic cost factor,
si = plan i's share of State enrollment;

and the denominator is summed across all plans in the risk pool in 
the market in the State.

    The key factor in the premium reflecting risk selection is the plan 
average risk score, which would be calculated from the HHS risk 
adjustment models. The plan average risk score is a relative measure of 
plan liability based on the health status of a plan's enrollees. The 
State average premium is multiplied by the plan average risk score to 
estimate plan liability based on the risk selection present in its 
enrollee population. However, because the HHS risk adjustment models do 
not account for plan liability differences attributable to induced 
demand or geographic cost differences, those cost factors must be 
included in the estimate of the premium with risk selection.
    The denominator of the adjustment term normalizes the product of 
the plan cost factors to the State average product of the cost factors. 
The normalized product of the plan cost factors provides an estimate of 
how a plan's liability differs from the market average due to 
underlying differences in its cost factors, including risk selection, 
induced demand and geographic cost differences.

[[Page 73141]]

    The premium reflecting risk selection does not include an AV 
adjustment because the risk score reflects the plan's AV. Additionally, 
the premium estimate reflecting risk selection does not include the 
allowable rating factor adjustment. Thus, the difference between the 
premium estimates (that is, the premium with and the premium without 
risk selection) provides an estimate of plan liability attributed to 
risk selection that is not compensated for through allowable premium 
rating--our measure of actuarial risk.
(iii) Estimating the Plan Premium Without Risk Selection
    The second premium term in the proposed payment transfer formula, 
the plan premium estimate not reflecting risk selection, would be 
calculated as the product of the State average premium and the 
normalized product of the plan AV, plan allowable rating factor, the 
induced demand factor, and a geographic cost factor. The formula below 
shows how this term would be calculated:
[GRAPHIC] [TIFF OMITTED] TP07DE12.003

Where,

Ps = State average premium,
AVi = plan i's metal level AV,
ARFi = allowable rating factor
IDFi = plan i's induced demand factor,
GCFi = plan i's geographic cost factor,
si = plan i's share of State enrollment;

and the denominator is summed across all plans in the risk pool in 
the market in the State.

    The normalized adjustment terms would account for how a plan's AV, 
allowed rating variation, induced demand, and geographic cost factors 
jointly vary from the State average product of these terms. The 
normalized product of the adjustment terms would be multiplied by the 
State average premium to estimate the extent to which the plan's 
premium requirement would differ from the premium requirement for the 
State average plan due to cost factors unrelated to risk selection.
(iv) Risk Adjustment Payment Transfer Formula
    Transfers would be calculated as the difference between the plan 
premium estimate reflecting risk selection and the plan premium 
estimate not reflecting risk selection--the two premium estimates 
described above. Therefore, the proposed 2014 HHS risk adjustment 
payment transfer formula is:
[GRAPHIC] [TIFF OMITTED] TP07DE12.004

Where,

Ps = State average premium,
PLRSi = plan i's plan liability risk score,
AVi = plan i's metal level AV,
ARFi = allowable rating factor
IDFi = plan i's allowable rating factor,
GCFi = plan i's geographic cost factor,
si = plan i's share of State enrollment;

and the denominator is summed across all plans in the risk pool in 
the market in the State.

    The difference between the two premium estimates in the payment 
transfer formula would determine whether a plan would pay a risk 
transfer charge or receive a risk transfer payment. Note that the value 
of the plan average risk score by itself does not determine whether a 
plan would be assessed a charge or receive a payment--even if the risk 
score is greater than 1.0, it is possible that the plan would be 
assessed a charge if the premium compensation that the plan may receive 
through its rating practices (as measured through the allowable rating 
factor) exceeds the plan's predicted liability associated with risk 
selection.
    Plans with higher AV would, other things being equal, also have 
higher risk scores. This is due to the fact that the metal level-
specific risk adjustment models that are used to predict plan liability 
assume different cost sharing and levels of plan liability. Thus, the 
risk score for two identical sets of enrollees would differ depending 
on the metal level model used. Thus, a bronze plan with an average risk 
score of 1.1 would likely have more adverse selection than a gold plan 
with an average risk score of 1.1 (because the bronze plan risk 
adjustment model assumes a lower level of plan liability than the gold 
plan model).
    Risk adjustment transfers are calculated at the risk pool level. 
Each State will have a risk pool for all of its metal-level plans. 
Catastrophic plans will be treated as a separate risk pool for purposes 
of risk adjustment. Individual and small group market plans will either 
be pooled together or treated as separate risk pools, as described in 
section III.B.3.a. of this proposed rule.
(v) Normalization and Budget Neutral Transfers
    As discussed above, each of the two premium terms in the payment 
transfer formula would be divided by its average. This means that each 
``normalized'' term would average to 1.0. Thus, the average of the 
difference between these terms would be zero. This is the fundamental 
property of the payment transfer formula that ensures that transfers 
across a risk pool would net to zero.
    Note that the individual factors in the proposed payment transfer 
formula do not need to independently average to 1.0. For example, the 
average risk score for a State may not equal 1.0 due to the underlying 
differences in the health status of the State's population and the 
national sample used to calibrate the model. It is not necessary to 
separately renormalize plan average risk scores to the State average 
risk score because the payment transfer formula normalizes the product 
of the risk score, the induced demand factor and the geographic cost 
factor. The individual scales for PLRS, IDF, GCF, and ARF are not 
specified because the payment transfer formula applies to the plan-
specific value relative to the State average.
(vi) Calculation of Transfer Formula Inputs
    In this section, we describe each component of the proposed payment 
transfer formula, and explain how it is computed and how it affects 
transfers.
(A) Plan Average Risk Score
    The plan average risk score represents the plan's overall risk 
exposure. The proposed plan average risk score calculation includes an 
adjustment to account for the family rating rules proposed in the 
Market Reform Rule, which caps the number of children that can count 
toward the build-up of family rates at three. If risk scores were 
calculated as the member month-weighted average of all enrollee risk 
scores, plan average risk scores would tend to misrepresent the risk 
issuers take on for family policies that include children that do not 
count toward family rates. In general, children tend to have lower risk 
scores than adults, and without an adjustment the average risk score 
for family policies including more than three children would tend to be 
lower than the average risk score of

[[Page 73142]]

family policies with three or fewer children, despite the fact that 
family policies with more than three children face more uncompensated 
risk.
    The formula below shows the proposed plan average risk score 
calculation including the risk of all members on the policy, including 
those children not included in the premium.
[GRAPHIC] [TIFF OMITTED] TP07DE12.005

Where,

PLRSi is plan i's average plan liability risk score, the subscript e 
denotes each enrollee within the plan,
PLRSe is each enrollee's individual plan liability risk score,
Me is the number of months during the risk adjustment period the 
enrollee e is enrolled in the plan, and
    Mb is the number of months during the risk adjust period the 
billable member b is enrolled in the plan (billable members exclude 
children who do not count towards family rates).

    The proposed payment transfer formula uses the plan average risk 
score to calculate transfers. The plan average risk scores would be 
calculated using the applicable risk adjustment model described in 
section III.B.3.b. of this proposed rule. The plan liability models 
would produce risk scores that reflect the health status of the plan's 
enrollees and the AV of the plan. The AV adjustment in the proposed 
payment transfer formula would help ensure that transfers do not 
compensate plans for differences in AV (for which the plans may charge 
an appropriate premium).
(B) Billable Members
    With the exception of the plan average risk score calculation 
discussed above, all of the other calculations used in the proposed 
payment transfer formula are based on billable members (that is, 
children who do not count toward family policy premiums are excluded). 
Member months, the State average premium, the allowable rating factor, 
and the geographic cost factor are all calculated based on billable 
members.
(C) State Average Premium
    As noted above, we propose to use the State average premium as the 
basis of calculating payment transfers. The average premium calculation 
would be based on the total premiums assessed to enrollees, including 
the portion of premiums that are attributable to administrative costs. 
The State average premium would be calculated as the enrollment-
weighted mean of all plan average premiums of risk adjustment covered 
plans in the applicable risk pool in the applicable market in the 
State. The State average premium calculation is based on billable 
member months and excludes member months for children that do not count 
toward family policy rates. Plan average premiums would be calculated 
from the actual premiums charged to their enrollees, weighted by the 
number of months enrolled.
    The proposed equations for these average premiums are:
    [GRAPHIC] [TIFF OMITTED] TP07DE12.006
    
    The first equation calculates the State average premium 
Ps as the average of individual plan averages, Pi 
weighted by each plan's share of statewide enrollment in the risk pool 
in the market, Sis (based on billable member months). The second 
equation shows how the plan averages are calculated. This is the 
weighted mean over all subscribers s of subscriber premiums 
Ps, with Ms representing the number of billable 
member months of enrollment under the policy of each subscriber s.
(D) Actuarial Value
    The proposed AV adjustment in the payment transfer formula would 
account for relative differences in plan liability due to differences 
in actuarial value. The AV adjustment helps to achieve the goal of 
compensating plans for risk selection while allowing other determinants 
of premiums--including the generosity of plan benefits--to be reflected 
in premiums. If the payment transfer formula were to ignore actuarial 
value, it would effectively force low-AV plans to subsidize high-AV 
plans. This is because the State average premium is calculated from all 
plans at all metal levels in the risk pool in the market. As a result, 
in the absence of an actuarial value adjustment, a bronze plan with a 
low risk score would see its transfer charge increased based on a State 
average premium that includes plans with more generous benefits.
    The AV adjustment would be based on the metal level actuarial value 
associated with each plan type (for example, all bronze health plans 
would be assigned an AV factor of .6 in the proposed payment transfer 
formula). Using the metal level actuarial value as the basis for this 
adjustment provides a simple and straightforward approach for 
estimating the impact of benefit design on plan liability. The standard 
metal level actuarial values approximate plan liability for the 
standard population (that is, plan liability in the absence of risk 
selection). Additionally, the adjustment should not be based on a 
plan's actuarial value, including the de minimis range as computed by 
the AV calculator. The cost sharing assumptions in the HHS risk 
adjustment models correspond to the standard metal level actuarial 
values (for example, 0.6 a bronze plan), so the actuarial value 
adjustment in the payment transfer formula must also correspond to the 
standard metal level actuarial values.
    Table 9 shows the AV adjustment that would be used for each 
category of metal level plans.

  Table 9--Actuarial Value Adjustment Used for Each Metal Level in the
                        Payment Transfer Formula
------------------------------------------------------------------------
                                                                  AV
                        Metal level                           adjustment
------------------------------------------------------------------------
Catastrophic...............................................         0.57
Bronze.....................................................         0.60
Silver.....................................................         0.70
Gold.......................................................         0.80
Platinum...................................................         0.90
------------------------------------------------------------------------

(E) Allowable Rating Variation
    PHS Act section 2701, as added by the Affordable Care Act, 
establishes standards for plan premium rating. Rates can vary based on 
three enrollee characteristics--age, family size, and tobacco use--and 
geographic area within each State. Furthermore, the law limits the 
amount by which premiums may vary by age; the most expensive age 
group's rating cannot be more than three times as high as the lowest 
(for adults age 21 or above), and rating based on tobacco use cannot 
exceed a 50 percent increment. Plans cannot base premiums on enrollee 
health status. In the proposed Market Reform Rule, we have issued 
proposed standards related to the rating rules under the Affordable 
Care Act. The proposed payment transfer formula discussed above assumes 
the rating standards of the proposed Market Reform Rule. The final 
payment transfer formula may require updating in the final Payment 
Notice to reflect any changes to the rating standards in the final 
Market Reform Rule.
    The proposed Allowable Rating Factor (ARF) adjustment in the 
payment transfer formula would account only for age rating. Tobacco 
use, wellness discounts, and family rating

[[Page 73143]]

requirements would not be included in the payment transfer formula for 
the reasons specified below. Geographic cost variation is treated as a 
separate adjustment in the payment transfer formula.
    Age rating is permitted within limits to enable plans to be 
partially compensated for risk based on enrollee age. Under the 
proposed Market Reform Rule, each State would have a standard age curve 
that all issuers would be required to use. The 3:1 age rating 
restriction applies to the adults aged 21 and older. Age bands for 
individuals under 21 would not be subject to the 3:1 restriction, but 
their corresponding rating factors would still be specified in the 
standard age curves. Each plan's allowable rating factor would be 
calculated as the enrollment-weighted average of the age factor, based 
on the applicable standard age curve, across all of a plan's enrollees. 
In operation, for the age rating factor included in the payment 
transfer formula, age would be calculated as the enrollee's age at the 
time of enrollment, as outlined in the proposed Market Reform Rule.
    Under the proposed Market Reform Rule, premiums for families with 
three or fewer children would be calculated as the sum of individual 
rates for each individual within the family. These individual rates 
would be based on each person's age, tobacco use, and geographic rating 
area. For families with more than three children, the family premium 
would be built up from the individual premiums of the parents plus the 
three oldest children. Additional children would not be reflected in 
the family premium. The proposed payment transfer formula does not 
include an explicit adjustment related to the family rating 
requirements, as rate setting would not include a family rating factor.
    Tobacco rating and wellness discounts are also not included in the 
proposed allowable rating factor adjustment. These rating factors are 
discretionary. HHS proposes not to include adjustments for these rating 
factors in the payment transfer formula to maintain issuer flexibility 
with respect to tobacco and wellness discount rating that is allowed by 
the Affordable Care Act.
    Table 10 shows a simplified example of how the ARF values would be 
calculated for three plans.

                              Table 10--Example Allowable Rating Factor Calculation
----------------------------------------------------------------------------------------------------------------
                                                  State age-
                    Age band                        rating       Plan A       Plan B       Plan C       State
                                                    curve
----------------------------------------------------------------------------------------------------------------
                                                 ...........    Enrollment percentages (Share of member-months)
                                                             ---------------------------------------------------
21.............................................        1.000       33.30%       40.00%       10.00%       31.70%
----------------------------------------------------------------------------------------------------------------
(Age bands from 22-39 omitted)
----------------------------------------------------------------------------------------------------------------
40.............................................        1.278       33.30%       40.00%       20.00%       33.30%
----------------------------------------------------------------------------------------------------------------
(Age bands from 41-63 omitted)
----------------------------------------------------------------------------------------------------------------
64 and older...................................        3.000       33.30%       20.00%       70.00%       35.00%
Total member-months............................  ...........      300,000      200,000      100,000      600,000
ARF............................................  ...........        1.758        1.511        2.456        1.793
----------------------------------------------------------------------------------------------------------------

    In Table 10, three plans constitute the entire risk pool in the 
market in the State. In practice, each State age rating curve would 
have 44 adult bands: One for each year from 21 to 63, plus a 64-and-
older band. In this example, we simplify by considering only three 
bands: 21, 40, and 64 and older. The second column shows the relative 
premiums for each age band; note that these values conform to the 3:1 
rating restriction.
    Three plans are presented in the next three columns, followed by 
statewide totals. We assume Plan A's enrollment of 300,000 member-
months is equally distributed among the three age bands. Enrollment in 
Plan B is weighted toward younger ages, while Plan C captures a 
disproportionately older population. Statewide, these enrollments add 
up to a 31.7 percent share in the age 21 band, 33.3 percent in 40 and 
older age band, and 35.0 percent in 64 and older age band.
    Plan-specific ARF values are calculated similarly. For example, 
Plan C's ARF is the sum of three products: 1.000*0.10 + 1.278*0.20 + 
3.000*0.70 = 2.456. This value indicates that within the 3:1 rating 
restriction, Plan C would be expected to collect premiums that are 
higher than the State average due to Plan C's enrollments skewing 
older. Plan A's enrollees are slightly younger than the State average, 
which is also reflected in its 1.758 ARF, and Plan B's enrollment is 
younger than Plan A.
(F) Induced Demand
    Induced demand reflects differences in enrollee spending patterns 
attributable to differences in the generosity of plan benefits (as 
opposed to risk selection). Induced demand is a function of plan 
benefit design. We believe risk adjustment should not compensate a plan 
for differences in plan liability that are not attributed to the 
underlying health and demographic characteristics of the plan's 
enrollees. In the absence of an induced demand adjustment, relative 
differences in induced demand may not be reflected in a plan's post-
transfer premiums. In other words, plans with relatively high AV and 
induced demand could receive larger transfers, allowing them to reduce 
the premium impact of induced demand. For example, a plan that 
experiences 10 percent higher utilization due to induced demand would 
have a post-transfer premium that is less than 10 percent above an 
otherwise identical plan without induced demand.
    The expenditure data underlying the AV calculator includes an 
induced demand factor for each metal level. We propose to use the same 
induced demand factors in the payment transfer formula, shown in Table 
11.

  Table 11--Induced Demand Adjustment Used for Each Metal Level in the
                        Payment Transfer Formula
------------------------------------------------------------------------
                                                              Induced
                       Metal level                            demand
                                                            adjustment
------------------------------------------------------------------------
Catastrophic............................................            1.00

[[Page 73144]]

 
Bronze..................................................            1.00
Silver..................................................            1.03
Gold....................................................            1.08
Platinum................................................            1.15
------------------------------------------------------------------------

(G) Geographic Area Cost Variation
    The proposed geographic cost factor (GCF) would be an adjustment in 
the payment transfer formula because there are some plan costs--such as 
input prices or utilization rates--that vary geographically and are 
likely to affect plan premiums. By including the adjustment, these 
costs would be reflected in premiums, rather than being offset by 
transfers.
    Excluding this adjustment would cause transfers to subsidize high-
risk plans in high-cost areas at the expense of low-risk plans in low-
cost areas. In a low-cost area, for example, a plan with lower-than-
average risk enrollees would face a charge scaled to State average 
costs, which would be larger than would be appropriate in an area where 
costs are low. At the same time, the payment received by higher-than-
average risk plans would be larger than necessary to compensate for the 
plan's excess risk. This would disadvantage low-risk plans relative to 
high-risk plans in the low-cost area. The opposite would be true in 
high-cost areas.
    GCFs would be calculated for each rating area. These factors would 
be calculated based on the observed average silver plan premiums in a 
geographic area relative to the Statewide average silver plan premium. 
Using only silver plans as the basis of the adjustment would help 
control for differences in premiums across rating areas due to 
differential enrollment patterns in the available plan types. 
Additionally, the silver plan premiums used to calculate the adjustment 
must be standardized for age to isolate geographic cost differences in 
premiums.
    Calculation of the GCF would involve three steps. First, the 
average premium would be computed for each silver plan in each rating 
area (using the same formula that is used to compute plan premiums in 
the State average premium calculation discussed above). The calculation 
would be:
[GRAPHIC] [TIFF OMITTED] TP07DE12.007

    The second step would be to generate a set of plan average premiums 
that standardizes the premiums for age rating. Plan premiums are 
standardized for age by dividing the average plan premium by the plan 
rating factor, the enrollment-weighted rating factor applied to all 
billable members (discussed above). This formula would be:
[GRAPHIC] [TIFF OMITTED] TP07DE12.008

    The third and final step would compute a GCF for each area and 
assign it to all plans in that area. This would be accomplished with 
the following calculation:
[GRAPHIC] [TIFF OMITTED] TP07DE12.009


[[Page 73145]]


    This equation divides the enrollment-weighted average of 
standardized silver-level plan premiums in a geographic area by the 
average of those premiums Statewide. The numerator's summation is over 
all silver-level plans within plan i's geographic area,
[GRAPHIC] [TIFF OMITTED] TP07DE12.010

    Using these formulas, the enrollment-weighted statewide average of 
plan GCF values would equal 1.0, so deviations from 1.0 can be 
interpreted as the percentage by which any geographic area's costs 
deviate from the State average. In other words, a GCF equal to 1.15 
indicates that the plan operates in a geographic area where costs are, 
on average, 15 percent higher than the Statewide average.
(H) Calculation of the Plan Transfer Payments
    The PMPM transfer payment calculated from the proposed payment 
transfer formula would be multiplied by the total number of plan member 
months for billable members to calculate the total plan level payment. 
As discussed above, transfers would be calculated at the plan level 
within rating areas (that is, a plan operating in two rating areas 
would be treated as two separate plans for the purposes of calculating 
transfers).
    We welcome comment on this proposed payment transfer formula.
d. Overview of the Data Collection Approach
    In Sec.  153.20, we propose a technical correction to the 
definition of risk adjustment data collection approach. We propose to 
delete ``and audited'' so that the definition of risk adjustment data 
collection approach means ``the specific procedures by which risk 
adjustment data is to be stored, collected, accessed, transmitted, 
validated and the applicable timeframes, data formats, and privacy and 
security standards.'' This technical correction clarifies that auditing 
of risk adjustment data is not part of the risk adjustment data 
collection approach. Risk adjustment data should be audited during the 
data validation process, which is not a part of the risk adjustment 
methodology or data collection approach.
    We also propose to modify Sec.  153.340(b)(3) by adding the 
additional restriction that ``Use and disclosure of personally 
identifiable information is limited to those purposes for which the 
personally identifiable information was collected (including for 
purposes of data validation).'' This addition will further ensure the 
privacy and security of potentially sensitive data by limiting the use 
or disclosure of any personally identifiable information collected as a 
part of this program.
    The data collection approach HHS proposes to use when operating 
risk adjustment on behalf of the State is described in the applicable 
sections of section III.G. of this proposed rule and in the new 
proposed Sec.  153.700 through Sec.  153.730.
    We welcome comment on this proposed data collection approach.
e. Schedule for Risk Adjustment
    Under Sec.  153.610(a), issuers of risk adjustment covered plans 
will provide HHS with risk adjustment data in the form and manner 
specified by HHS. Under the HHS-operated risk adjustment program, 
issuers will not send, but must make available to HHS, anonymized 
claims and enrollment data, as specified in section III.G. of this 
proposed rule, for benefit year 2014 beginning January 1, 2014. 
Enrollee risk scores will be calculated based on enrollee enrollment 
periods and claims dates of service that occur between January 1, 2014 
and December 31, 2014. Enrollee risk scores for subsequent benefit 
years will be calculated based on claims and enrollment periods for 
that same benefit year.
    As set forth in the proposed Sec.  153.730, claims to be used in 
the risk score calculation must be made available to HHS by April 30 of 
the year following the benefit year. We believe this date provides for 
ample claims runout to ensure that diagnoses for the benefit year are 
captured, while providing HHS sufficient time to run enrollee risk 
score, plan average risk, and payments and charges calculations and 
meet the June 30 deadline described at the redesignated Sec.  
153.310(e).
    We welcome comment on this proposed schedule for risk adjustment.
4. State Alternate Methodology
a. Technical Correction
    The Premium Stabilization Rule established standards for States 
that establish their own risk adjustment programs. Under the proposed 
revision to Sec.  153.310, a State may establish a risk adjustment 
program if it elects to operate an Exchange and is approved to operate 
risk adjustment in the State. If a State does not meet the requirements 
to operate risk adjustment, HHS will carry out all functions of risk 
adjustment on behalf of the State. In Sec.  153.320(a), we established 
that Federally certified methodologies must be used in the operation of 
the risk adjustment program, and defined the process by which a 
methodology may become Federally certified. In this proposed rule, we 
modify Sec.  153.320(a)(1) and (a)(2) to clarify that these 
methodologies must be published in ``the applicable annual'' notice of 
benefit and payment parameters as opposed to ``an annual'' HHS notice 
of benefit and payment parameters. This proposed change makes clear 
that methodologies must be certified for use each year.
b. State Alternate Risk Adjustment Methodology Evaluation Criteria
    The Premium Stabilization Rule specified the information that a 
State will need to provide to support its request for HHS to certify an 
alternate risk adjustment methodology. In Sec.  153.330(a), we 
specified the elements required to be included with the request to HHS 
for certification of an alternate risk adjustment methodology. Section 
153.330(a)(1)(i) states that a request for certification for an 
alternate methodology must include the elements specified in Sec.  
153.320(b), which includes a complete description of: (1) The risk 
adjustment model; (2) the calculation of plan average actuarial risk; 
(3) the calculation of payments and charges; (4) the risk adjustment 
data collection approach; and (5) the schedule for the risk adjustment 
program. Section 153.330(a)(1)(ii) states that the alternate 
methodology request must also include the calibration methodology and 
frequency of calibration, and Sec.  153.330(a)(1)(iii) provides that 
the request must include statistical performance metrics specified by 
HHS. Section 153.330(a)(2) requires

[[Page 73146]]

that the request also include certain descriptive and explanatory 
information relating to the alternate methodology.
    Under our existing regulations, States wishing to submit an 
alternate risk adjustment methodology should do so by submitting the 
information described in this proposed rule to HHS at 
[email protected]. As described in preamble to the 
Premium Stabilization Rule, at the Risk Adjustment Spring Meeting, and 
in technical assistance calls with States, requests for State alternate 
methodologies will be accepted up to 30 days after publication of this 
proposed rule. We will review a State's request for certification of 
its alternate methodology only if it has submitted an Exchange 
Blueprint application and has indicated on that application its intent 
to operate a risk adjustment program in the State (or, in later years, 
if it is operating or has been approved to operate an Exchange). We 
expect to work with States as they develop their alternate 
methodologies.
    We noted in the Premium Stabilization Rule that we would provide 
greater detail about the process for receiving Federal certification of 
alternate risk adjustment methodologies in this proposed rule. We 
propose the following evaluation criteria to certify alternate risk 
adjustment methodologies. We propose to redesignate paragraph (b) of 
Sec.  153.330 to paragraph (c), and are proposing a new paragraph (b) 
that sets forth the evaluation criteria for alternate risk adjustment 
methodologies. In the new Sec.  153.330(b)(1), we propose to consider 
whether the alternate risk adjustment methodology meets criteria that 
correspond to the elements of the alternate methodology request 
described in paragraph Sec.  153.330(a)(1) and (2). Specifically, we 
will be evaluating the extent to which an alternate risk adjustment 
methodology:
    (i) Explains the variation in health care costs of a given 
population;
    (ii) Links risk factors to daily clinical practices and is 
clinically meaningful to providers;
    (iii) Encourages favorable behavior among providers and health 
plans and discourages unfavorable behavior;
    (iv) Uses data that is complete, high in quality, and available in 
a timely fashion;
    (v) Is easy for stakeholders to understand and implement;
    (vi) Provides stable risk scores over time and across plans; and
    (vii) Minimizes administrative costs.
    For example, to determine the extent that an alternate methodology 
explains the variation in health care costs of a given populations, we 
would consider whether the risk adjustment model was calibrated from 
data reflecting the applicable market benefits, was calibrated on a 
sample that is reasonably representative of the anticipated risk 
adjustment population, and was calibrated using a sufficient sample to 
ensure stable weights across time and plans. In addition, in evaluating 
this criterion, we would consider whether the methodology has suitably 
categorized the types of plans subject or not subject to risk 
adjustment, given the overall approach taken by the methodology and the 
goal of the program to account for plan average actuarial risk. States 
must provide a rationale for the methodology's approach to the plans 
subject to risk adjustment. Under this proposed criteria, we would also 
evaluate the State's method for calculating payments and charges, as 
described in section III.B.4.c., below.
    We also note that we would consider whether the alternate 
methodology discriminates against vulnerable populations or creates 
inappropriate incentives. Alternate methodologies must not discriminate 
against individuals because of age, disability, or expected length of 
life, and should take into account the health care needs of diverse 
segments of the risk adjustment population, including women, children, 
persons with disabilities, and other vulnerable groups.
    In the proposed Sec.  153.330(b)(2), we would consider whether the 
alternate methodology complies with the requirements of subpart D, 
especially Sec.  153.310(e) (as proposed to be renumbered) and Sec.  
153.340. Section 153.310(e) requires alternate methodologies to have a 
schedule that provides annual notification to issuers of risk 
adjustment covered plans of payments and charges by June 30 of the year 
following the benefit year. Section 153.340(b)(1) sets forth a number 
of minimum requirements for data collection under risk adjustment, 
including standards relating to data privacy and security. While the 
Federal approach will not directly collect data from insurers, but 
instead will use a distributed approach that will not include 
personally identifiable information, the Premium Stabilization Rule 
gave States the flexibility to design their own data collection 
approach, provided privacy and security standards are met. The privacy 
and security of enrollees' data is of paramount importance to HHS, and 
the data collection approach in an alternate methodology must protect 
personally identifiable information, if any, that is stored, 
transmitted, or analyzed, to be certified. The application for 
certification of the alternate methodology should identify which data 
elements contain personally identifiable information, and should 
specify how the State would meet these data and privacy security 
requirements.
    In Sec.  153.330(b)(3), we propose to consider whether the 
alternate risk adjustment methodology accounts for payment transfers 
across metal levels. We believe that sharing risk across metal levels 
is a critical part of a risk adjustment methodology as new market 
reforms are implemented because of the need to mitigate adverse 
selection across metal levels, as well as within metal levels. The 
proposed HHS risk adjustment methodology transfers funds between plans 
across metal levels, and under this proposal, State alternate 
methodologies must do so as well.
    For reasons described previously, under the proposed HHS risk 
adjustment methodology, we propose to apply risk adjustment to 
catastrophic plans in their own risk pool--that is, we would transfer 
funds between catastrophic plans, but not between catastrophic plans 
and metal level plans. For a number of plans, such as student health 
plans and plans not subject to the market reform rules, we have 
proposed not to transfer payments under the HHS risk adjustment 
methodology. However, as discussed above, we believe that States should 
have the flexibility to submit a methodology that transfers funds 
between these types of plans (either in their own risk pool or with the 
other metal levels).
    In Sec.  153.330(b)(4), we propose to consider whether the elements 
of the alternate methodology align with each other. For example, the 
data collected through the data collection approach should align with 
the data required by the risk adjustment model to calculate individual 
risk scores.
    Alternate methodologies submitted by States that are approved as 
Federally certified risk adjustment methodologies for 2014 will be 
published in the final 2014 HHS notice of benefit and payment 
parameters. We envision working closely with States during the 
development of their alternate methodologies to ensure that they meet 
the criteria described above. We expect to have a number of meetings 
with any State proposing an alternate methodology during the 
certification process. During these meetings, we intend to provide 
input to States on whether their proposed alternate methodologies meet 
the given criteria. States will then have the opportunity to modify 
their alternate methodologies and request further review. We are

[[Page 73147]]

committed to working with States in a collaborative fashion on these 
matters.
c. Payment and Charges
    In the preamble to the Premium Stabilization Rule, we noted that we 
plan to establish a national method for calculation of payments and 
charges. The goal of the proposed payment transfer formula is to reduce 
the impact of risk selection on premiums while ensuring that payments 
and charges net to zero. A national method for the calculation of 
payments and charges would ensure a degree of consistency in the risk 
adjustment program from State to State, while allowing States to vary 
other elements of the program. However, we recognize that a uniform 
national method could limit States' flexibility in developing their 
alternate risk adjustment methodologies.
    The proposed payment transfer formula (regardless of whether for a 
plan liability or total expenditure approach, as described in section 
III.B.3.10. utilizes the plan average risk score and the State average 
premium. The proposed HHS payment transfer formula is based on a plan 
liability model. States can adapt this formula to a total expenditure 
model by replacing the plan liability risk score in the formula with 
the total expenditure risk score of a plan, and multiplying the total 
expenditure risk score by an adjustment for AV. We propose to provide 
States the flexibility to select the adjustments used for the 
calculation of payments and charges in their alternate methodologies. 
The proposed HHS payment transfer formula will make adjustments for AV, 
age rating factor, geographic cost differences, and induced demand. 
States have the option of including or excluding any of these 
adjustments. States may also include other adjustments in the 
calculation of payments and charges under their alternate 
methodologies. Adjustments can be added to or removed from the basic 
payment transfer formula as long as these factors are normalized, so 
that transfers net to zero. We will work with States on a one-on-one 
basis in developing their payment transfer formulae for their alternate 
methodologies.
    States may construct particular adjustment factors in different 
ways. For example, HHS would determine an adjustment for geographic 
cost differences by comparing the area premium to the State average 
premium. A State may elect to develop a different factor to adjust for 
geographic cost differences. As described above, we ask States to 
provide the adjustments, the associated factors or curves, and the 
rationale for the adjustments they plan to use for their alternate 
methodologies as part of their response to the criterion proposed in 
Sec.  153.330(b)(1). We believe this approach ensures a degree of 
consistency while allowing States flexibility for calculating payments 
and charges.
5. Risk Adjustment Data Validation
    In Sec.  153.350, we specified standards applicable to States, or 
HHS on behalf of States, in validating risk adjustment data. 
Specifically, we required States operating risk adjustment programs and 
HHS to establish a process to appeal findings from data validation and 
allow the State, or HHS on behalf of the State, to adjust risk 
adjustment payments and charges based on data validation findings. The 
credibility of risk adjustment data, which results from a reliable data 
validation process, is important to establishing issuer confidence in 
the risk adjustment program. Moreover, as error rates derived from the 
results of data validation may be used to make adjustments to the plan 
average actuarial risk calculated for a risk adjustment covered plan, 
the data validation process will ensure that such transfers accurately 
reflect each plan's average enrollee risk. In this proposed rule, we 
build upon guidance released in the Risk Adjustment Bulletin and in 
discussions held with stakeholders at the Risk Adjustment Spring 
Meeting to define data validation standards applicable to issuers of 
risk adjustment covered plans when HHS operates risk adjustment on 
behalf of a State.
    We propose that, beginning in 2014, HHS conduct a six-stage data 
validation program when operating risk adjustment on behalf of a State: 
(1) Sample selection; (2) initial validation audit; (3) second 
validation audit; (4) error estimation; (5) appeals; and (6) payment 
adjustments. We discuss these concepts in greater detail below. We note 
States are not required to adopt this HHS data validation methodology.
a. Data Validation Standards When HHS Operates Risk Adjustment
    We propose to add a new subsection, Sec.  153.630, which sets forth 
risk adjustment data validation standards applicable to all issuers of 
risk adjustment covered plans when HHS is operating risk adjustment. In 
Sec.  153.630(a), we propose a general standard that issuers of risk 
adjustment covered plans have an initial and second validation audit of 
risk adjustment data. These are the second and third stages of the six-
stage data validation program described below.
b. Data Validation Process When HHS Operates Risk Adjustment
(1) Sample Selection
    Under the Premium Stabilization Rule, HHS will validate a 
statistically valid sample from each issuer that submits data for risk 
adjustment every year. As described above, sample selection is the 
first stage of HHS' six-stage risk adjustment data validation process. 
HHS would select the sample for each issuer of a risk adjustment 
covered plan in accordance with standards discussed in this section. 
HHS would ensure that the data validation process reviews an adequate 
sample size of enrollees such that the estimated payment errors will be 
statistically sound and so that enrollee-level risk score distributions 
reflect enrollee characteristics for each issuer. The sample would 
cover applicable subpopulations for each issuer. For example, enrollees 
with and without risk adjustment diagnoses would be included in the 
sample. In determining the appropriate sample size for data validation, 
we recognize the need to strike a balance between ensuring statistical 
soundness of the sample and minimizing the operational burden on 
issuers, providers, and HHS.
    We expect that each issuer's initial validation audit sample within 
a State will consist of approximately 300 enrollees, with up to two-
thirds of the sample consisting of enrollees with HCCs.
    Note that any assumptions used by HHS that underlie the sample size 
determinations in the initial years of the program may be updated as we 
gain experience performing data validation for risk adjustment. 
Additionally, we will continue to evaluate population distributions to 
determine the sample subpopulations. We seek comment on this approach 
to sample selection, particularly on use of existing data validation 
program results that could be used to derive comparable estimates under 
this program.
(2) Initial Validation Audit
    Once the audit samples are selected by HHS, issuers would conduct 
independent audits of the risk adjustment data for their initial 
validation audit sample enrollees, as set forth in Sec.  153.630(b). In 
Sec.  153.630(b)(1), we propose that issuers of risk adjustment covered 
plans engage one or more auditors to conduct these independent initial 
validation audits. We propose in Sec.  153.630(b)(2) through (4) that 
issuers ensure that initial validation auditors are reasonably capable 
of performing the audit, that the

[[Page 73148]]

audit is completed, that the auditor is free from conflicts of 
interest, and that the auditor submits information regarding the 
initial validation audit to HHS in the manner and timeframe specified 
by HHS. These proposed requirements would ensure that the initial 
validation audit is conducted according to minimum audit standards, and 
that issuers or auditors transmit necessary information to HHS for use 
in the second validation audit.
    For the enrollees included in the HHS-specified audit sample, 
issuers of risk adjustment covered plans would provide enrollment and 
medical record documentation to the initial validation auditor to 
validate the demographic and health status data of each enrollee, as 
described above.\21\ We anticipate that issuers would have considerable 
autonomy in selecting their initial validation auditors. However, 
initial validation auditors must conduct data validation audits in 
accordance with audit standards established by HHS. We have identified 
three methods for establishing these standards:
---------------------------------------------------------------------------

    \21\ We note that issuers will need to link information on the 
dedicated distributed data environments with the information 
specified this proposed rule for data validation purposes.
---------------------------------------------------------------------------

     HHS or an HHS-designated entity could prospectively 
certify auditors for these audits;
     HHS could develop standards that issuers and initial 
validation auditors would follow, without any requirement of prior HHS 
certification or approval of auditors; or
     HHS could issue non-binding, ``best practice'' guidelines 
for issuers and auditors.
    We request comment on these approaches and on any standards or best 
practices that should be applicable. Upon conclusion of the initial 
validation audit process, issuers of risk adjustment covered plans 
would be required to submit audit findings to HHS in accordance with 
the standards established by HHS.
(3) Second Validation Audit
    We propose to retain an independent second validation auditor to 
verify the accuracy of the findings of the initial validation audit. We 
would select a sub-sample of initial validation audit sample enrollees 
for review by the second validation auditor. We would provide 
additional information pertaining to its approach for selecting the 
second validation audit sub-sample in future guidance. The second 
validation auditor would only review enrollee information that was or 
was to be originally presented during the initial validation audit.
    In Sec.  153.630(c), we establish standards for issuers of risk 
adjustment covered plans related to HHS' second validation audit of 
risk adjustment data. These requirements establish minimum standards 
for issuer compliance with the second validation audit. We propose that 
an issuer of a risk adjustment covered plan comply with, and ensure the 
initial validation auditor complies with, HHS and the second validation 
auditor in connection with the second validation audit. Specifically, 
issuers would submit (or ensure their initial validation auditor 
submits) data validation information, as specified by HHS, from their 
initial validation audit for each enrollee included in the second 
validation audit sub-sample. Issuers would also transmit all 
information to HHS or its second validation auditor in an electronic 
format to be determined by HHS. The second validation auditor would 
inform the issuers of error findings based on their review of enrollees 
in the second validation audit subsample.
(4) Error Estimation
    We would estimate risk score error rates based on the findings from 
the data validation process. Risk adjustment errors may include any 
findings that result in a change to the demographic or health status 
components of an enrollee's risk score. This may include errors due to 
incorrect diagnosis coding, invalid documentation, missing or 
insufficient medical record documentation, or incorrect determination 
of enrollee demographic information. We are considering estimating 
changes in plan average actuarial risk for the issuer error rates 
calculated from data validation activities, with a suitable confidence 
interval. We plan to conduct analyses to determine the most effective 
methodology for adjusting plan risk scores for calculating risk 
adjustment payment transfers.
    Upon completion of the second validation audit and error estimation 
stages of HHS's data validation process, we would provide each issuer 
with enrollee-level audit results and error estimates at the issuer 
level, based on the methodology described above.
    We are requesting comments on the described error estimation 
concepts.
c. Appeals
    In accordance with Sec.  153.350(d), we provide an administrative 
process to appeal findings with respect to data validation. We propose 
in Sec.  153.630(d) that issuers may appeal the findings of a second 
validation audit or the application of a risk score error rate to its 
risk adjustment payments and charge. We anticipate that appeals would 
be limited to instances in which the audit was not conducted in 
accordance with second validation audit standards established by HHS. 
We will provide further detail on this process in future guidance or 
regulation, as appropriate.
d. Payment Adjustments
    In accordance with 153.350(b), HHS may adjust charges and payments 
to a risk adjustment covered plan based on the recalculation of plan 
average actuarial risk following the data validation process. We 
anticipate that HHS would use a prospective approach when making such 
payment adjustments. We believe a prospective approach is appropriate 
because we anticipate issuers' error estimates to be relatively stable 
from year to year. Further, we believe it is necessary to use a 
prospective approach to allow issuers and HHS sufficient time to 
complete the validation and appeals processes. Transfers for a given 
benefit year would likely be invoiced before the data validation 
process for that benefit year is completed. The prospective approach 
would ensure that issuers would not be subject to a second transfer for 
the benefit year. We would use an issuer's data validation error 
estimates from the prior year to adjust the issuer's average risk score 
in the current year for transfers. We request comments on this 
approach.
    As described previously, because the risk adjustment program 
transfers funds between issuers in a zero sum manner, trust in the 
system is important for the success of the program. We have proposed 
the data validation process described here to ensure that issuers 
comply with risk adjustment standards and to promote confidence in the 
risk adjustment program. As such, we propose in paragraph Sec.  
153.630(e) that HHS may adjust payments and charges for issuers that do 
not comply with the initial or second validation audit standards set 
forth in Sec.  153.630(b) and (c). We seek comment on the types of 
adjustments that may be assessed on issuers that do not comply with 
parameters set forth in this proposed rule.
e. Proposed HHS-Operated Data Validation Process for Benefit Years 2014 
and 2015
    We propose that issuers of risk adjustment covered plans adhere to 
the data validation process outlined above beginning with data for the 
2014 benefit year. However, we recognize the complexity of the risk 
adjustment

[[Page 73149]]

program and the data validation process, and the uncertainty in the 
market that will exist in 2014. In particular, we are concerned that 
adjusting payments and charges without first gathering information on 
the prevalence of error could lead to a costly and potentially 
ineffective audit program. Therefore, we are proposing that issuers 
conduct an initial validation audit and that we conduct a second 
validation audit for benefit year 2014 and 2015, but that we would not 
adjust payments and charges based on validation findings during these 
first two years of the program (that is, we would not adjust payments 
and charges based on validation results on data from the 2014 and 2015 
benefit years). However, we would conduct all aspects of the data 
validation program other than adjusting payments and charges (though we 
would make adjustments under the proposed Sec.  153.630(e)) during the 
first two years of the program, including requiring the initial 
validation and second validation audits, and calculating error rates 
for each issuer. We believe that the data validation conducted during 
the first two years of the program will serve an important educational 
purpose for issuers and providers. Although we are proposing not to 
adjust payments and charges as a correction based on error estimates 
discovered, we note that other remedies, such as prosecution under the 
False Claims Act, may be applicable to issuers not in compliance with 
the risk adjustment program requirements. We have tried to balance the 
need to provide assurance to issuers that all risk adjustment data is 
adequate and that calculations are appropriate with the desire to limit 
burden and uncertainty in the initial years of program operation.
    This approach was taken with the Medicare Part C risk adjustment 
program--the data validation audit process was observed for several 
years before payment adjustments were made. We plan to work with 
issuers during the first two years of the data validation program, and 
will seek additional input on how to improve the process. We are 
requesting comments on this approach, particularly with respect to 
improvements to the data validation process generally, whether there 
are alternatives to forgoing changes to payments and charges that we 
should adopt, and what methods we should adopt to ensure data integrity 
in the first two years of the program.
    As part of our effort to refine the data validation program during 
the first two years, we are considering publishing a report on the 
error rates discovered during these first two years, and propose to use 
these results to inform our audit program. For this report, we may 
conduct special studies of the second validation audits aimed at 
comparing the error rate results of the initial validation auditors and 
second validation audits. For example, the second validation audits may 
be used to assess the extent to which auditor error contributed to the 
initial validation audit risk score error rate findings, and to 
determine whether discrepancies between the results of the two audits 
may result in adjustments to the estimated error rates calculated for 
the initial validation audit process.
    The second validation audits could also be used to assess the 
accuracy of the initial audit error rates at either the auditor or 
issuer level. Conducting the second validation audits at the auditor 
level in future years would allow us to examine the accuracy of the 
initial validation audit without having to draw large initial 
validation audit record samples from each issuer that participates in 
risk adjustment. We anticipate that a small number of audit firms will 
perform the majority of initial audits. We seek comment on the 
approaches outlined here, as well as additional approaches to data 
validation for risk adjustment.
f. Data Security and Transmission
    In Sec.  153.630(f), we establish data security and transmission 
requirements for issuers related to the HHS data validation process. 
These requirements establish the manner in which issuers and auditors 
must transmit audit information, and ensure that any enrollee 
information that is transmitted is protected. In Sec.  153.630(f)(1), 
we propose that issuers submit any risk adjustment data and source 
documentation specified by HHS for the initial and second validation 
audits to HHS in the manner and timeframe established by HHS. We 
propose in Sec.  153.630(f)(2) that, in connection with the initial 
validation audit, the second validation audit, and any appeals, an 
issuer must ensure that it and its initial validation auditor complies 
with the security standards described at Sec.  164.308, Sec.  164.310, 
and Sec.  164.312.

C. Provisions and Parameters for the Transitional Reinsurance Program

    The Affordable Care Act directs that a transitional reinsurance 
program be established in each State to help stabilize premiums for 
coverage in the individual market from 2014 through 2016. The 
reinsurance program is designed to alleviate the need to build into 
premiums the risk of enrolling individuals with significant unmet 
medical needs. By stabilizing premiums in the individual market 
equitably throughout the United States, the reinsurance program is 
intended to help millions of Americans purchase affordable health 
insurance, reduce unreimbursed usage of hospital and other medical 
facilities by the uninsured, and thereby lower medical expenses and 
premiums for all people with private health insurance.
    We aim to administer the reinsurance program to provide reinsurance 
payments in an efficient, fair, and accurate manner, where they are 
needed most, to effectively stabilize premiums nationally. In addition, 
we intend to implement the reinsurance program in a manner that 
minimizes the administrative burden of collecting contributions and 
making reinsurance payments. For example, HHS intends to collect 
contributions from health insurance issuers and self-insured group 
health plans \22\ in all States, including States that elect to operate 
their reinsurance programs. This would allow for a centralized and 
streamlined process for the collection of contributions, and would 
avoid inefficiencies related to using different processes in different 
States. This would also eliminate the need for States to send to HHS 
the contributions collected for the U.S. Treasury. Federal collections 
will also leverage economies of scale, reducing the overall 
administrative costs of the reinsurance program.
---------------------------------------------------------------------------

    \22\ As discussed in more detail below, Section 1341 of the 
Affordable Care Act provides that health insurance issuers and 
``third party administrators on behalf of group health plans'' must 
make contributions to an applicable reinsurance entity. Although 
self-insured group health plans are ultimately liable for 
reinsurance contributions, a third-party administrator or 
administrative-services-only contractor may be utilized for transfer 
of the reinsurance contributions. For consistency, throughout this 
proposed rule, we will refer to these contributing entities as self-
insured group health plans.
---------------------------------------------------------------------------

    We also intend to simplify collections by using a national per 
capita uniform contribution rate. Collection based on a per capita rate 
is simpler and easier to implement than other methods. In addition, in 
the HHS-operated reinsurance program, we propose to calculate 
reinsurance payments using the same distributed approach for data 
collection that we propose for operating risk adjustment on behalf of 
States.\23\ This will permit issuers to receive reinsurance payments 
using the same systems established for the risk adjustment program, 
resulting in less administrative burden and lower costs,

[[Page 73150]]

while maintaining the security of identifiable health information.
---------------------------------------------------------------------------

    \23\ See our discussion of this distributed approach in section 
III.G. of this proposed rule.
---------------------------------------------------------------------------

    In this proposed rule, we propose modifications and refinements to 
the reinsurance program standards for States and issuers. These 
modifications further reduce the administrative burden of collecting 
contributions and making reinsurance payments, and will more 
effectively stabilize premiums in the individual markets in all States 
across the country. In particular, we propose uniform reinsurance 
payment parameters to be used across all States. These payment 
parameters would be used to calculate reinsurance payments in all 
States, regardless of whether the State or HHS on behalf of the State 
operates the reinsurance program. We also propose that HHS will collect 
contributions from health insurance issuers and self-insured group 
health plans in all States, including States that elect to operate 
their own reinsurance programs. In addition, we propose a national, 
uniform calendar under which reinsurance contributions will be 
collected from all contributing entities, and reinsurance payments will 
be disbursed to issuers of non-grandfathered individual market plans. 
Furthermore, we propose to distribute reinsurance payments based on the 
need for reinsurance payments in each State. Because reinsurance 
contributions and reinsurance needs will vary significantly between 
States, we believe a policy of disbursing reinsurance payments solely 
in a State in which the contributions are collected would not meet the 
States' individual reinsurance needs, would not fulfill HHS's 
obligation to provide equitable allocation of these funds under section 
1341(b)(2)(B) of the Affordable Care Act as well as would disbursing 
reinsurance payments in the manner proposed in this proposed rule.
    We note that these proposals reflect changes from policies set 
forth in the Premium Stabilization Rule. The principal proposed changes 
from the policies in the Premium Stabilization Rule include:
     Uniform reinsurance payment parameters to be used by all 
States;
     A uniform reinsurance contribution collection and payment 
calendar;
     A one-time annual reinsurance contribution collection, 
instead of quarterly collections in a benefit year;
     Collection of reinsurance contributions by HHS under the 
national contribution rate from both health insurance issuers and self-
insured group health plans;
     A limitation on States' ability to change reinsurance 
payment parameters from those that HHS establishes in the annual HHS 
notice of benefit and payment parameters--a State may only propose 
supplemental reinsurance payment parameters if the State elects to 
collect additional funds for reinsurance payments or use additional 
State funds for reinsurance payments; and
     A limitation on States that seek additional reinsurance 
funds for administrative expenses, such that the State must have its 
applicable reinsurance entity collect those additional funds.
    These modifications are proposed in addition to other regulatory 
changes outlined below to ensure effective administration of the 
transitional reinsurance program.
1. State Standards Related to the Reinsurance Program
a. State Notice of Benefit and Payment Parameters
    HHS intends to establish a reinsurance contribution and payment 
process and reinsurance payment parameters that will be applicable in 
all States, and proposes to amend the requirements set forth in the 
Premium Stabilization Rule accordingly. First, instead of allowing a 
State establishing its own reinsurance program to modify, via a State 
notice of benefit and payment parameters, the data collection frequency 
for issuers to receive reinsurance payments from those specified in 
this proposed rule, we propose that all States be required to use the 
annual payment schedule set forth in this proposed rule. As such, we 
propose to amend Sec.  153.100(a)(1) to remove the reference to State 
modification of data collection frequency. Under this proposal, the 
frequency with which data must be submitted for reinsurance payments 
would follow a national schedule. Under Sec.  153.100(a)(1), HHS would 
continue to allow a State establishing a reinsurance program to modify 
the data requirements for health insurance issuers to receive 
reinsurance payments, provided that the State publishes a State notice 
of benefit and payment parameters and specifies these modifications in 
that notice.
    We propose to also amend Sec.  153.100 by deleting subparagraph 
(a)(5), and to add Sec.  153.232 to direct a State that elects to 
collect additional reinsurance contributions for purposes of making 
additional reinsurance payments or to use additional funds for 
reinsurance payments under Sec.  153.220(d) to publish supplemental 
State reinsurance payment parameters in its State notice of benefit and 
payment parameters under proposed Sec.  153.100(a)(2).
    The Premium Stabilization Rule stated that a State establishing a 
reinsurance program may either directly collect additional reinsurance 
contributions for administrative expenses and reinsurance payments when 
a State elects to collect from health insurance issuers, or may elect 
to have HHS collect contributions from health insurance issuers for 
administrative expenses. However, we now propose to change this policy 
such that a State operating its own reinsurance program will no longer 
be permitted to have HHS collect additional funds for administrative 
expenses. To create the most effective reinsurance program, we are 
proposing to collect reinsurance contributions on behalf of all States 
from both health insurance issuers and self-insured group health plans 
in the aggregate, and we propose to disburse reinsurance payments based 
on a State's need for reinsurance payments, not based on where the 
contributions were collected. As a result, HHS will no longer be able 
to attribute additional funds for administrative expenses back to a 
State. We propose to amend Sec.  153.100(a)(3) to clarify that these 
additional contributions may only be collected by a State operating its 
own reinsurance program in that State.
    We also propose to delete Sec.  153.110(d)(5) and Sec.  
153.210(a)(2)(iii), because we propose to disburse reinsurance 
contributions in proportion to the need for reinsurance payments. Thus, 
a State's allocation of reinsurance contributions among applicable 
reinsurance entities is no longer necessary. Accordingly, we also 
propose to delete Sec.  153.110(d)(2), which requires that a State 
notice include an estimate of the number of enrollees in fully insured 
plans with the boundaries of each reinsurance entity.
    We further propose that HHS collect all contributions under a 
national contribution rate from all health insurance issuers in all 
States. We therefore propose to delete all requirements regarding the 
State collection of reinsurance contributions from health insurance 
issuers under the national contribution rate, including Sec.  
153.100(a)(2) and Sec.  153.110(b), removing the requirement that a 
State publish a State notice of benefit and payment parameters to 
announce its intention to collect reinsurance contributions from health 
insurance issuers. We also propose to delete Sec.  153.110(d)(4) which 
requires States to publish in their State notices an estimate of the 
reinsurance contributions that will be collected by each applicable 
reinsurance entity.

[[Page 73151]]

b. Reporting to HHS
    We propose to amend Sec.  153.210 by adding paragraph (e), which 
directs a State that establishes a reinsurance program to provide 
information regarding all requests for reinsurance payments received 
from all reinsurance-eligible plans for each quarter during the benefit 
year. We propose to use this information to monitor requests for 
reinsurance payments and reinsurance contribution amounts throughout 
the benefit year, to ensure equitable reinsurance payments in all 
States.
    To provide issuers in the individual market with information to 
assist in developing rates in subsequent benefit years, we propose in 
Sec.  153.240(b)(2) that a State, or HHS on behalf of the State, 
provide issuers of reinsurance-eligible plans with quarterly estimates 
of the expected requests for reinsurance payments for the reinsurance-
eligible plan under both the national payment parameters and any State 
supplemental payments parameters set forth under Sec.  153.232, as 
determined by HHS or the State's reinsurance entity, as applicable. 
These quarterly estimates would provide issuers with the timely 
information that is needed to support the calculation of expected 
claims assumptions that are key to rate development and ultimately, 
premium stabilization. We expect that an issuer of a reinsurance-
eligible plan will use this information to estimate total reinsurance 
payments to be received for future benefit years, and will use its best 
estimates of future payments to reduce premiums. It is our expectation 
that reinsurance payments will be used in the rate setting process to 
reduce premiums, fulfilling the goals of the reinsurance program.
    The national reinsurance payment parameters are calculated to 
expend all reinsurance contributions collected under the national 
contribution rate. Similarly, the additional funds collected by the 
State for reinsurance payments or additional State funds are to be 
reasonably calculated, under proposed Sec.  153.232(a)(2), to cover all 
additional reinsurance payments projected to be made under the State 
supplemental payment parameters. Because the national payment 
parameters and State supplemental payment parameters apply to two 
separate funds, we believe that it is important for a State to 
distinguish between reinsurance payments made under the two different 
sets of parameters so that reinsurance-eligible plans can understand 
how each reinsurance program will likely affect claims costs. HHS 
intends to collaborate with issuers and States to develop these early 
notifications. We therefore propose in Sec.  153.240(b) that each 
State, or HHS on behalf of the State, ensure that each applicable 
reinsurance entity provides to issuers the expected requests for 
reinsurance payments made under Sec.  153.410 and Sec.  152.232 for all 
reinsurance-eligible plans in the State within 60 days of the end of 
each quarter, with a final report for a benefit year sent to issuers no 
later than June 30 of the year following the applicable benefit year.
    For efficient administration of the reinsurance program, HHS must 
ensure that reinsurance contributions are appropriately spent on 
reinsurance payments. To this end, we intend to obtain reports 
regarding reinsurance payments and administrative expenses from States 
that establish a reinsurance program. We intend to provide details of 
these reports in future regulation and guidance, along with similar 
standards for Exchanges, the risk adjustment program, and other 
Affordable Care Act programs.
c. Additional State Collections
    Under the current Sec.  153.220(g) of the Premium Stabilization 
Rule (which we now propose to redesignate as paragraph (d)), a State 
operating its own reinsurance program may elect to collect more than 
the amounts based on the national contribution rate set forth in the 
annual HHS notice of benefit and payment parameters for administrative 
expenses of the applicable reinsurance entity or additional reinsurance 
payments. Under Sec.  153.220(h)(1) of the Premium Stabilization Rule 
(now proposed to be designated as Sec.  153.220(d)(2)), a State must 
notify HHS within 30 days after publication of the draft annual HHS 
notice of benefit and payment parameters for the applicable benefit 
year of the additional contribution rate that it elects to collect.
    We note that although the proposed Sec.  153.220(d) specifies that 
a State may elect to collect additional reinsurance contributions for 
administrative expenses or reinsurance payments, nothing in section 
1341 of the Affordable Care Act or this proposed rule gives a State the 
authority to collect from self-insured group health plans covered by 
ERISA, and that Federal law generally preempts State law that relates 
to an ERISA-covered plan.
d. State Collections
    We propose that HHS collect reinsurance contributions from all 
contributing entities regardless of whether a State elects to operate 
the reinsurance program or have HHS operate the reinsurance program on 
its behalf. As reinsurance payments will be calculated based on 
aggregate contributions collected and total requests for reinsurance 
payments nationally, we believe that a centralized collection process 
for all contributing entities will facilitate the allocation and 
disbursement of funds. This will also streamline the contribution 
submissions process for health insurance issuers who operate in 
multiple States.
    We propose to amend Sec.  153.220(a) to set forth that if a State 
establishes a reinsurance program, HHS will collect all reinsurance 
contributions from all contributing entities for that State under the 
national contribution rate. We, therefore, propose to delete Sec.  
153.220(a)(2), as we are no longer requiring a State to ensure that the 
applicable reinsurance entity accepts contributions for reinsurance 
contribution enrollees who reside in that State with respect to health 
insurance issuers from HHS. In accordance with the proposed change 
regarding State collections, we also propose to delete Sec.  153.220(b) 
of the Premium Stabilization Rule, which directs a State operating its 
own reinsurance program to notify HHS of its intention to collect from 
its health insurance issuers for the 2014 benefit year by December 1, 
2012. If finalized as proposed, we would consider any notification a 
State made to HHS pursuant to Sec.  153.220(b) of the Premium 
Stabilization Rule prior to the finalization of this proposed rule to 
be withdrawn. We propose to delete Sec.  153.220(f) of the Premium 
Stabilization Rule which includes requirements on the State collection 
of reinsurance contributions from health insurance issuers.
    Section 153.220(e) of the Premium Stabilization Rule requires that 
reinsurance contributions are allocated as required in the annual HHS 
notice of benefit and payment parameters for the applicable benefit 
year such that contributions allocated for reinsurance payments within 
the State are only used for reinsurance payments, and contributions 
allocated for payments to the U.S. Treasury are paid in the timeframe 
and manner established by HHS. We also propose that any additional 
contributions collected under Sec.  153.220(d)(1)(ii) and allocated for 
reinsurance payments under the State supplemental reinsurance payment 
parameters must be used to make reinsurance payments. We also propose 
under Sec.  153.220(d)(3) that States may use additional funds, which 
were not collected as additional reinsurance contributions, to make 
reinsurance payments under the State supplemental

[[Page 73152]]

reinsurance payment parameters. This would allow States to use other 
revenue sources, including funds collected for State high-risk pools as 
discussed below, for supplemental reinsurance payments, as determined 
by a State. This proposal ensures that additional State collections for 
reinsurance payments and other State funds, as applicable, may be used 
to reduce premiums.
e. High-Risk Pools
    We are not proposing further requirements for State high-risk pools 
beyond those currently provided at Sec.  153.250. As stated in that 
section, a State must eliminate or modify its high-risk pool to the 
extent necessary to carry out the transitional reinsurance program. 
However, any changes made to a State high-risk pool must comply with 
the terms and conditions of Grants to States for Operation of Qualified 
High-Risk Pools (CFDA 93.780), as applicable. Under Sec.  
153.400(a)(2)(iii), State high-risk pools are excluded from making 
reinsurance contributions and cannot receive reinsurance payments. 
Because State high-risk pools and the transitional reinsurance program 
both target high-cost enrollees, high-risk pools can operate in 
parallel with the reinsurance program, serving a distinct subset of the 
target population. States have the flexibility to decide whether to 
maintain, phase out, or eliminate their high-risk pools.
    The Affordable Care Act permits a State to coordinate its high-risk 
pool with the reinsurance program ``to the extent not inconsistent'' 
\24\ with the statute. Thus, a State may coordinate the entry of the 
State's high-risk pool enrollees into the Exchange. HHS is examining 
ways in which a State could continue its program to complement Exchange 
coverage. We clarify that nothing in the Premium Stabilization Rule 
prevents a State that establishes its own reinsurance program from 
using State money designated for its own high-risk pool towards the 
reinsurance program. However, a State may not use funds collected for 
the reinsurance program for its high-risk pool. As indicated in the 
Premium Stabilization Rule, funds collected for the transitional 
reinsurance program can only be used for the purpose of making payments 
under the reinsurance program or for administering that program. 
Finally, a State could designate its high-risk pool as its applicable 
reinsurance entity, provided that the high-risk pool meets all 
applicable criteria for being an applicable reinsurance entity.
---------------------------------------------------------------------------

    \24\ See section 1341(d) of the Affordable Care Act.
---------------------------------------------------------------------------

2. Contributing Entities and Excluded Entities
    Section 1341 of the Affordable Care Act provides that health 
insurance issuers and third party administrators on behalf of group 
health plans must make payments to an applicable reinsurance entity. 
Thus, with respect to insured coverage, issuers are liable for making 
reinsurance contributions. With respect to self-insured group health 
plans, the plan is liable, although a third-party administrator or 
administrative-services-only contractor may be utilized to transfer 
reinsurance contributions on behalf of a self-insured group health 
plan, at that plan's discretion. A self-insured, self-administered 
group health plan without a third-party administrator or 
administrative-services-only contractor would make its reinsurance 
contributions directly.\25\
---------------------------------------------------------------------------

    \25\ In the Certain Preventive Services under the Affordable 
Care Act Advanced Notice of Proposed Rulemaking (77 FR 16501) 
published March 21, 2012, potential changes to the reinsurance 
contributions were contemplated with regard to a potential religious 
accommodation for contraception coverage for certain self-funded 
plans. If the rules regarding the religious accommodation include 
changes to the reinsurance contribution, this policy may be changed 
accordingly.
---------------------------------------------------------------------------

    Under section 1341(b)(3)(B)(i) of the Affordable Care Act, 
contribution amounts for reinsurance are to reflect, in part, an 
issuer's ``fully insured commercial book of business for all major 
medical products.'' We interpret this statutory language to mean that 
an issuer will not be required to make reinsurance contributions for 
coverage that is non-commercial, or that is not ``major medical 
coverage.'' \26\ We believe it is implicit in the statute that 
contributions are not required for health insurance coverage that is 
not regulated by a State department of insurance and written on a 
policy form filed with and approved by a State department of insurance 
(but contributions are generally required for self-insured plans even 
though they are not regulated by a State department of insurance). We 
discuss below our intent to exclude certain types of plans.
---------------------------------------------------------------------------

    \26\ We note that under the definition of reinsurance-eligible 
plan in Sec.  153.20, if a plan is excluded from making reinsurance 
contributions, the plan is excluded from the reinsurance program 
altogether, (that is, a plan excluded from making reinsurance 
contributions cannot receive reinsurance payments).
---------------------------------------------------------------------------

    Major medical coverage: Section 1341(b)(3)(B)(i) of the Affordable 
Care Act refers to ``major medical products,'' but does not define the 
term. For the purpose of the reinsurance program, our view is that 
coverage provided under a major medical product (which we refer to in 
Part 153 as ``major medical coverage'') is health coverage, which may 
be subject to reasonable enrollee cost sharing, for a broad range of 
services and treatments including diagnostic and preventive services, 
as well as medical and surgical conditions provided in various 
settings, including inpatient, outpatient, and emergency room 
settings.\27\ Thus, for purposes of the reinsurance program, we believe 
that coverage that is limited in scope (for example, dread disease 
coverage, hospital indemnity coverage, stand-alone vision coverage, or 
stand-alone dental coverage) or extent (for example, coverage that is 
not subject to the Public Health Service Act section 2711 and its 
implementing regulations) would not be major medical coverage.
---------------------------------------------------------------------------

    \27\ See Section 7F of the National Association of Insurance 
Commissioners (NAIC) Model Regulation to Implement the Accident and 
Sickness Insurance Minimum Standards Model Act, (MDL-171) for a 
definition of major medical expense coverage. Available at: http://naic.org/committees_index_model_description_a_c.htm#accident_health.
---------------------------------------------------------------------------

    In this proposed rule, we also propose to clarify that when an 
individual has both Medicare coverage and employer-provided group 
health coverage, Medicare Secondary Payer (MSP) rules under section 
1862(b) of the Social Security Act would be applicable, and the group 
health coverage would be considered major medical coverage only if the 
group health coverage is the primary payer of medical expenses (and 
Medicare is the individual's secondary payer) under the MSP rules. For 
example, a working 68-year-old employee enrolled in a group health plan 
who, under the MSP rules, is a beneficiary for whom Medicare is the 
secondary payer would be counted for purposes of reinsurance 
contributions. However, a 68-year-old retiree enrolled in a group 
health plan who, under the MSP rules, is a beneficiary for whom 
Medicare is the primary payer would not be counted for purposes of 
reinsurance contributions. Similarly, an individual covered under a 
group health plan with only Medicare Part A (hospitalization) benefits 
(where Medicare is the primary payer), would not be counted for 
purposes of reinsurance contributions because the group health coverage 
would not be considered major medical coverage. We also intend that 
individuals entitled to Medicare because of disability or end-stage 
renal disease that have other primary coverage under the MSP rules be 
treated consistently with the working

[[Page 73153]]

aged, as outlined above. We seek comment on this proposal.
    Commercial book of business: Section 1341(b)(3)(B)(i) of the 
Affordable Care Act refers to a ``commercial book of business,'' which 
we interpret to refer to large and small employer group policies and 
individual market policies. For example, products offered by an issuer 
under Medicare Part C or D would be part of a ``governmental'' book of 
business, not a commercial book of business. Similarly, a plan or 
coverage offered by a Tribe to Tribal members and their spouses and 
dependents, and other persons of Indian descent closely affiliated with 
the Tribe in the capacity of the Tribal members as Tribal members (and 
not in their capacity as current or former employees of the Tribe or 
their dependents) would not be part of a commercial book of business, 
but a plan or coverage offered by the Federal government, a State 
government or a Tribe to employees (or retirees or dependents) because 
of a current or former employment relationship would be part of a 
commercial book of business. We seek comment on this interpretation.
    Policy filed and approved in a State. We propose that a group or 
individual policy for health insurance coverage not filed and approved 
in a State be excluded from reinsurance contributions. To illustrate, 
if group coverage for employees substantially all of whom work outside 
the United States--``expatriate coverage''--is not written on a form 
filed with and approved by a State department of insurance, we propose 
to exclude it from reinsurance contributions because that coverage is 
not within the jurisdiction of a State department of insurance and the 
Affordable Care Act generally does not apply. On the other hand, 
insured group ``expatriate'' coverage written on a form filed with and 
approved by a State department of insurance would be subject to the 
Affordable Care Act and required to make reinsurance contributions. 
Individual coverage for overseas travel would be similarly treated.
    Therefore, we propose to amend Sec.  153.400(a)(1) to state that a 
contributing entity must make reinsurance contributions on behalf of 
its self-insured group health plans and health insurance coverage 
except to the extent that:
    (1) The plan or coverage is not major medical coverage;
    (2) In the case of health insurance coverage, the coverage is not 
considered to be part of an issuer's commercial book of business; or
    (3) In the case of health insurance coverage, the coverage is not 
issued on a form filed and approved by a State insurance 
department.\28\ We seek comment on this proposal.
---------------------------------------------------------------------------

    \28\ We note that contributions are generally required for self-
insured plans even if not regulated by a State department of 
insurance because self-insured plans are not typically regulated by 
these entities.
---------------------------------------------------------------------------

    Under the requirements proposed in Sec.  153.400(a)(1), and for 
clarity, we propose in Sec.  153.400(a)(2) to explicitly exclude the 
following types of plans and coverage from reinsurance contributions.
    (a) Excepted benefits: We are not proposing a change in policy with 
respect to plans or health insurance coverage that consist solely of 
excepted benefits as defined by section 2791(c) of the PHS Act, as 
currently described in Sec.  153.400(a)(2) of the Premium Stabilization 
Rule.
    (b) Private Medicare, Medicaid, CHIP, State high-risk pools, and 
basic health plans: Both Medicare and Medicaid have fee-for-service or 
traditional components, as well as managed care components, in which 
private health insurance issuers, under contract with HHS, deliver the 
requisite benefits. As discussed in the preamble to the Premium 
Stabilization Rule, these private Medicare or Medicaid plans are 
excluded from reinsurance contributions because they are not part of a 
commercial book of business. We also clarify that for purposes of 
reinsurance contributions, programs under the CHIP, Federal and State 
high-risk pools (including the Pre-Existing Condition Insurance Plan 
Program under section 1101 of the Affordable Care Act), and basic 
health plans described in section 1331 of the Affordable Care Act are 
similarly excluded from reinsurance contributions because they are not 
part of a commercial book of business.
    (c) Health Reimbursement Arrangements (HRAs) integrated with a 
group health plan: HRAs are group health plans that are governed by IRS 
Notice 2002-45 (2002-2 CB 93) and subsequent guidance. An employer 
credits an amount to each eligible employee's HRA which the employees 
may use for allowable medical expenses. An HRA that is integrated with 
a group health plan is excluded from reinsurance contributions because 
it is integrated with major medical coverage.\29\ We note that 
reinsurance contributions generally would be required for that group 
health plan.
---------------------------------------------------------------------------

    \29\ The preamble to interim final regulations under section 
2711 of the PHS Act provides that an HRA satisfies the prohibition 
on annual and lifetime limits in section 2711 when it is integrated 
as part of a group health plan with other coverage that satisfies 
section 2711. See 75 FR 37190-37191.
---------------------------------------------------------------------------

    (d) Health saving accounts (HSAs): Eligible individuals covered by 
a high deductible health plan may have the option of contributing to an 
HSA. An HSA is an individual arrangement governed by section 223(d) of 
the Code and subsequent guidance that consists of a tax-favored account 
held in trust to accumulate funds that can be used to pay qualified 
medical expenses of the beneficiary. An HSA is offered along with a 
high deductible health plan. For purposes of reinsurance contributions, 
we believe that an HSA is not major medical coverage because it 
consists of a fixed amount of funds that are available for both medical 
and non-medical purposes, and would be excluded from reinsurance 
contributions. We note that reinsurance contributions generally would 
be required for the high deductible health plan because we believe that 
it would constitute major medical coverage.
    (e) Health flexible spending arrangements (FSAs): Health FSAs are 
usually funded by an employee's voluntary salary reduction 
contributions under section 125 of the Code. Because section 9005 of 
the Affordable Care Act limits the annual amount that may be 
contributed by an employee to a health FSA to $2,500, we believe that a 
health FSA is not major medical coverage under this rule, and therefore 
would be excluded from reinsurance contributions.
    (f) Employee assistance plans, disease management programs, and 
wellness programs: Employee assistance plans, disease management 
programs, and wellness programs typically provide ancillary benefits to 
employees that in many cases do not constitute major medical coverage. 
Employers, plan sponsors, and health insurance issuers have flexibility 
in designing these programs to provide services to provide additional 
benefits to employees, participants, and beneficiaries. If the program 
(whether self-insured or insured) does not provide major medical 
coverage, we propose to exclude it from reinsurance contributions. We 
also note that employers that provide one or more of these ancillary 
benefits often sponsor major medical plans, which will be subject to 
reinsurance contributions, absent other excluding circumstances.
    (g) Stop-loss and indemnity reinsurance policies: For the purpose 
of reinsurance, we propose to exclude stop-loss insurance and indemnity 
reinsurance because they do not constitute major medical coverage for 
the applicable covered lives. Generally, a stop-loss policy is an 
insurance policy

[[Page 73154]]

that protects against health insurance claims that are catastrophic or 
unpredictable in nature and provides coverage to self-insured group 
health plans once a certain level of risk has been absorbed by the 
plan. Stop-loss insurance allows an employer to self-insure for a set 
amount of claims costs, with the stop-loss insurance covering most or 
all of the remainder of the claims costs that exceed the set amount. An 
indemnity reinsurance policy is an agreement between two or more 
insurance companies under which the reinsuring company agrees to accept 
and to indemnify the issuing company for all or part of the risk of 
loss under policies specified in the agreement and the issuing company 
retains its liability to, and its contractual relationship with, the 
applicable lives covered. We believe these types of policies were not 
intended to be subject to the reinsurance program. No inference is 
intended as to whether stop-loss or reinsurance policies constitute 
health insurance policies for purposes other than reinsurance 
contributions.
    (h) Military Health Benefits: TRICARE is the component of the 
Military Health System that furnishes health care insurance to active 
duty and retired personnel of the uniformed services (and covered 
dependents) through private issuers under contract. Although TRICARE 
coverage is provided by private issuers, it is not part of a commercial 
book of business because the relationship between the uniformed 
services and service members differs from the traditional employer-
employee relationship in certain important respects. For example, 
service members may not resign from duty during a period of obligated 
service, may not form unions, and may be subject to discipline for 
unexcused absences from duty. Consequently, our view is that such 
military health insurance is excluded from reinsurance contributions.
    In addition to TRICARE, the Military Health System also includes 
health care services that doctors, dentists, and nurses provide to 
uniformed services members on military bases and ships. The Veterans 
Health Administration within the U.S. Department of Veterans Affairs 
provides health care to qualifying veterans of the uniformed services 
at its outpatient clinics, hospitals, medical centers, and nursing 
homes. Similarly, because we do not consider these programs to be part 
of a commercial book of business, our view is that such military health 
programs are excluded from reinsurance contributions.
    (i) Tribal coverage: As discussed above, we propose to exclude 
plans or coverage (whether fully insured or self-insured) offered by a 
Tribe to Tribal members and their spouses and dependents (and other 
persons of Indian descent closely affiliated with the Tribe) in the 
capacity of the Tribal members as Tribal members (and not in their 
capacity as current or former employees of the Tribe or their 
dependents) as this would not be part of a commercial book of business. 
However, a plan or coverage offered by the Federal government, a State 
government or a Tribe to employees (or retirees or dependents) because 
of a current or former employment relationship would be part of a 
commercial book of business. Similarly, coverage provided to Indians 
through programs operated under the authority of the Indian Health 
Service (IHS), Tribes or Tribal organizations, or Urban Indian 
organizations, as defined in section 4 of the Indian Health Care 
Improvement Act would be excluded from reinsurance contributions 
because it is not part of a commercial book of business. We note, 
however, that a plan or coverage offered by a Tribe to its employees 
(or retirees or dependents) on account of a current or former 
employment relationship would not be excluded.
3. National Contribution Rate
a. 2014 Rate
    As described in Sec.  153.220(c) (previously designated as Sec.  
153.220(e)), we intend to publish in the annual HHS notice of benefit 
and payment parameters the national per capita reinsurance contribution 
rate for the upcoming benefit year. We read section 1341 of the 
Affordable Care Act to specify the total contribution amounts to be 
collected from contributing entities (reinsurance pool) as $10 billion 
in 2014, $6 billion in 2015, and $4 billion in 2016. Additionally, we 
read sections 1341(b)(3)(B)(iv) and 1341(b)(4) of the Affordable Care 
Act to direct the collection of funds for contribution to the U.S. 
Treasury each year as $2 billion in 2014, $2 billion in 2015, and $1 
billion in 2016. These amounts, payable to the U.S. Treasury, total $5 
billion, which we note is the same amount as that appropriated for the 
Early Retiree Reinsurance Program under section 1102 of the Affordable 
Care Act. It has been suggested that the collection of the $2 billion 
in funds payable to the U.S. Treasury for 2014 should be deferred until 
2016, thereby lowering the contribution rate in 2014, while ensuring 
that the total amount specified by law is returned to the U.S. Treasury 
by the end of this temporary program. We seek comment on whether such a 
delayed collection would be consistent with the statutory requirements 
described above and whether there are other steps that could be taken 
to reduce the burden of these collections on contributing entities. 
Finally, section 1341(b)(3)(B)(ii) of the Affordable Care Act allows 
for the collection of additional amounts for administrative expenses. 
Taken together, these three components make up the total dollar amount 
to be collected from contributing entities for each of the three years 
of the reinsurance program under the national per capita contribution 
rate.
    Each year, the national per capita contribution rate will be 
calculated by dividing the sum of the three amounts (the national 
reinsurance pool, the U.S. Treasury contribution, and administrative 
costs) by the estimated number of enrollees in plans that must make 
reinsurance contributions:
[GRAPHIC] [TIFF OMITTED] TP07DE12.011

    As an illustration, under the Affordable Care Act, the 2014 
national reinsurance pool is $10 billion, and the contribution to the 
U.S. Treasury is $2 billion. The amount to be collected for 
administrative expenses for benefit year 2014 would be $20.3 million 
(or 0.2 percent of the $10 billion dispersed), discussed in greater 
detail below. The HHS estimate of the number of enrollees in plans that 
must make reinsurance contributions that total the $12.02 billion 
described above yields a per capita contribution rate of $5.25 per

[[Page 73155]]

month in benefit year 2014. We seek comment on this calculation.
    Section 153.220(c) (previously designated as Sec.  153.220(e)) 
provides that HHS will set in the annual HHS notice of benefit and 
payment parameters for the applicable benefit year the national 
contribution rate and the proportion of contributions collected under 
the national contribution rate to be allocated to reinsurance payments, 
payments to the U.S. Treasury, and administrative expenses. In Table 12 
below, we specify these proportions (or amounts, as applicable):

 Table 12--Proportion of Contributions Collected Under the National Contribution Rate for Reinsurance Payments,
                              Payments to U.S. Treasury and Administrative Expenses
----------------------------------------------------------------------------------------------------------------
                                        If total contribution
                                        collections under the      If total contribution collections under the
      Proportion or amount for:         national  contribution   national contribution rate are more than $12.02
                                        rate are less than or                        billion
                                       equal to $12.02 billion
----------------------------------------------------------------------------------------------------------------
Reinsurance payments.................  83.2 percent ($10        The difference between total national
                                        billion/$12.02           collections and those contributions allocated
                                        billion).                to the U.S. Treasury and administrative
                                                                 expenses.
Payments to the U.S. Treasury........  16.6 percent ($2         $2 billion.
                                        billion/$12.02
                                        billion).
Administrative expenses..............  0.2 percent ($20.3       $20.3 million.
                                        million/$12.02
                                        billion).
----------------------------------------------------------------------------------------------------------------

    As shown in Table 12, if the total amount of contributions 
collected is less than equal to $12.02 billion, we propose to allocate 
approximately 83.2 percent of the reinsurance contributions collected 
to reinsurance payments, 16.6 percent of the reinsurance contributions 
collected to the U.S. Treasury and 0.2 percent of the reinsurance 
contributions collected to administrative expenses.
    Section III.C.6. of this proposed rule provides details on the 
methodology we used to develop enrollment estimates for the national 
per capita contribution rate.
b. Federal Administrative Fees
    As described in the Premium Stabilization Rule, HHS would collect 
reinsurance contributions from self-insured group health plans, even if 
a State is operating its own reinsurance program. As noted above, we 
propose that HHS also collect reinsurance contributions from health 
insurance issuers, even if a State is operating its own reinsurance 
program. In this proposed rule, we estimate the Federal administrative 
expenses of operating the reinsurance program in 2014 to be 
approximately $20.3 million, or approximately 0.2 percent of the $10 
billion in reinsurance funds to be distributed in 2014. We believe this 
figure reflects the Federal government's significant economies of scale 
in operating the program, and estimate a national per capita 
contribution rate of $0.11 annually for HHS administrative expenses.
    As shown in Table 13, we expect to apportion the annual per capita 
amount of $0.11 of administrative expenses as follows: $0.055 of the 
total amount collected per capita for administrative fees for the 
collection of contributions from health insurance issuers and self-
insured group health plans; and $0.055 of the total amount collected 
per capita for administrative fees for reinsurance payment activities, 
supporting the administration of payments to issuers of reinsurance-
eligible plans.

             Table 13--Breakdown of Administrative Expenses
                          [Annual, per capita]
------------------------------------------------------------------------
                        Item                           Estimated cost
-----------------------------------------------------------------------
Collecting contributions from health insurance                  $0.055
 issuers and self-insured group health plans........
Payment activities..................................             0.055
Total annual per capita fee for HHS to perform all                0.11
 reinsurance functions..............................
------------------------------------------------------------------------

    If HHS operates the reinsurance program on behalf of a State, HHS 
would retain the annual per capita fee for HHS to perform all 
reinsurance functions, which would be $0.11. If a State operates its 
own reinsurance program, HHS would transfer $0.055 of the per capita 
administrative fee to the State for purposes of administrative expenses 
incurred in making reinsurance payments, and retain the remaining 
$0.055 to offset the costs of contribution collection. We note that the 
administrative expenses for reinsurance payments will be distributed in 
proportion to the State-by-State total requests for reinsurance 
payments made under the national payment parameters. We seek comment on 
this approach, and other reasonable, administratively simple approaches 
that may be used to calculate administrative costs.
4. Calculation and Collection of Reinsurance Contributions
a. Calculation of Reinsurance Contribution Amount and Timeframe for 
Collections
    We intend to administer the reinsurance program in a manner that 
minimizes the administrative burden on health insurance issuers and 
self-insured group health plans, while ensuring that contributions are 
calculated accurately. Thus, we propose in Sec.  153.400(a) and Sec.  
153.240(b)(1), respectively, to collect and pay out reinsurance funds 
annually to minimize the costs of administering the program and the 
burden on contributing entities. If we were to collect and make 
reinsurance payments throughout the benefit year, we would likely be 
required to hold the disbursement of a large portion of the reinsurance 
payments until the end of the benefit year to ensure an equitable 
allocation of payments. This would deprive contributing entities of the 
use of those funds during the benefit year, and we believe that the 
proposed Sec.  153.400(a)

[[Page 73156]]

and Sec.  153.240(b)(1) would address this issue. However, we note that 
this approach would delay the receipt of some reinsurance payments for 
individual market issuers, and solicit comment on the benefits and 
burdens for issuers, States, and other stakeholders of a more frequent 
collections and payment cycle.
    Under the Premium Stabilization Rule, HHS would collect reinsurance 
contributions through a per capita assessment on contributing entities. 
To clarify how this assessment is made, we propose to add Sec.  
153.405, which provides that the reinsurance contribution of a 
contributing entity be calculated by multiplying the average number of 
covered lives of reinsurance contribution enrollees during the benefit 
year for all of the contributing entity's plans and coverage that must 
pay reinsurance contributions, by the national contribution rate for 
the applicable benefit year.
[GRAPHIC] [TIFF OMITTED] TP07DE12.012

    We also propose to amend Sec.  153.405(b) to require that, no later 
than November 15 of benefit year 2014, 2015, and 2016, as applicable, a 
contributing entity must submit to HHS an annual enrollment count of 
the average number of covered lives of reinsurance contribution 
enrollees for each benefit year. The count must be determined as 
specified in proposed Sec.  153.405(d), (e), (f), or (g) as applicable. 
We propose to amend Sec.  153.400(a) so that each contributing entity 
makes reinsurance contributions at the national contribution rate 
annually and in a manner specified by HHS. We also propose to amend 
Sec.  153.400(a) so that each contributing entity makes reinsurance 
contributions under any additional applicable State supplemental 
contribution rate, if a State elects to collect additional 
contributions for administrative expenses or reinsurance payments under 
Sec.  153.220(d), annually and in a manner specified by the State. We 
believe this annual collection schedule will ensure a more accurate 
count of a contributing entity's average covered lives, and would avoid 
the need for any initial estimates and subsequent reconciliation to 
account for fluctuations in enrollment during the course of the benefit 
year.
    Under Sec.  153.405(c)(1), within 15 days of submission of the 
annual enrollment count or by December 15, whichever is later, HHS will 
notify each contributing entity of the reinsurance contribution amounts 
to be paid based on that annual enrollment count. We specify in Sec.  
153.405(c)(2) that a contributing entity remit contributions to HHS 
within 30 days after the date of the notification of contributions due 
for the applicable benefit year. The amount to be paid by the 
contributing entity must be based upon the notification received under 
Sec.  153.405(c)(1).
    Counting Methods for Health Insurance Issuers: In Sec.  153.405(d), 
we propose a number of methods that a health insurance issuer may use 
to determine the average number of covered lives of reinsurance 
contribution enrollees under a health insurance plan for a benefit year 
for purposes of the annual enrollment count. These methods promote 
administrative efficiencies by building on the methods permitted for 
purposes of the fee to fund the Patient-Centered Outcomes Research 
Trust Fund (the PCORTF Rule), modified so that a health insurance 
issuer may determine an annual enrollment count during the fourth 
quarter of the benefit year.\30\ Thus, under each of these methods, the 
number of covered lives will be determined based on the first nine 
months of the benefit year.
---------------------------------------------------------------------------

    \30\ See the proposed rule published on April 17, 2012 (77 FR 
22691). Once the PCORTF Rule is finalized, we may modify the methods 
of reporting contained in this rulemaking.
---------------------------------------------------------------------------

    (1) Actual Count Method: Under the PCORTF Rule, an issuer may use 
the ``actual count method'' to determine the number of lives covered 
under the plan for the plan year by calculating the sum of the lives 
covered for each day of the plan year and dividing that sum by the 
number of days in the plan year. We propose that, for reinsurance 
contributions purposes, a health insurance issuer would add the total 
number of lives covered for each day of the first nine months of the 
benefit year and divide that total by the number of days in those nine 
months.
    (2) Snapshot Count Method: Under the PCORTF Rule, a health 
insurance issuer may use the ``snapshot count method'' generally by 
adding the total number of lives covered on a certain date during the 
same corresponding month in each quarter, or an equal number of dates 
for each quarter, and dividing the total by the number of dates on 
which a count was made. For reinsurance contributions purposes, an 
issuer would add the totals of lives covered on a date (or more dates 
if an equal number of dates are used for each quarter) during the same 
corresponding month in each of the first three quarters of the benefit 
year, (provided that the dates used for the second and third quarters 
must be within the same week of the quarter as the date used for the 
first quarter), and divide that total by the number of dates on which a 
count was made. For this purpose, the same months must be used for each 
quarter (for example, January, April and July).
    (3) Member Months Method or State Form Method: Under the PCORTF 
Rule, a health insurance issuer may use the ``Member Months Method'' or 
``State Form Method'' by using data from the NAIC Supplemental Health 
Exhibit or similar data from other State forms. However, data from 
these forms may be out of date at the time of the annual enrollment 
count submission, and we believe that it is important that health 
insurance issuers achieve an accurate count of covered lives, 
particularly for individual market plans. We expect that the individual 
market would be subject to large increases in enrollment between 2014 
and 2016. Therefore, we propose a modified counting method based upon 
the ratio of covered lives per policy in the NAIC or State form. 
Specifically, we propose that health insurance issuers using this 
method multiply the average number of policies for the first nine 
months of the applicable benefit year by the ratio of covered lives per 
policy calculated from the NAIC Supplemental Health Care Exhibit (or 
from a form filed with the issuer's State of domicile for the most 
recent time period). Issuers would count the number of policies in the 
first nine months of the applicable benefit year by adding the total 
number of policies on one date in each quarter, or an equal number of 
dates for each

[[Page 73157]]

quarter (or all dates for each quarter), and dividing the total by the 
number of dates on which a count was made.
    For example, if a health insurance issuer indicated on the NAIC 
form for the most recent time period that it had 2,000 policies 
covering 4,500 covered lives, it would apply the ratio of 4,500 divided 
by 2,000, equaling 2.25 to the number of policies it had over the first 
three quarters of the applicable benefit year. If the issuer had an 
average of 2,300 policies in the three quarters of the applicable 
benefit year, it would report 2.25 multiplied by 2,300 as the number of 
covered lives for the purposes of reinsurance contributions.
    Counting Methods for Self-Insured Group Health Plans: In Sec.  
153.405(e), we propose a number of methods that a self-insured group 
health plan may use to determine the average number of covered lives 
for purposes of the annual enrollment count. These methods mirror the 
methods permitted to sponsors of self-insured group health plans under 
the PCORTF Rule, modified slightly for timing, so that enrollment 
counts may be obtained on a more current basis.
    (1) Actual Count Method or Snapshot Count Method: We propose that 
self-insured plans, like health insurance issuers, may use the actual 
count method or snapshot count method as described above.
    (2) Snapshot Factor Method: Under the PCORTF Rule, a plan sponsor 
generally may use the ``snapshot factor method'' by adding the totals 
of lives covered on any date (or more dates if an equal number of dates 
are used for each quarter) during the same corresponding month in each 
quarter, and dividing that total by the number of dates on which a 
count was made, except that the number of lives covered on a date is 
calculated by adding the number of participants with self-only coverage 
on the date to the product of the number of participants with coverage 
other than self-only coverage on the date and a factor of 2.35.\31\ For 
this purpose, the same months must be used for each quarter (for 
example, January, April, July, and October). For reinsurance 
contributions purposes, a self-insured group health plan would use this 
PCORTF counting method over the first three quarters of the benefit 
year, provided that for this purpose, the corresponding dates for the 
second and third quarters of the benefits year must be within the same 
week of the quarter as the date selected for the first quarter.
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    \31\ The preamble to the proposed PCORTF Rule explains that 
``the 2.35 dependency factor reflects that all participants with 
coverage other than self-only have coverage for themselves and some 
number of dependents. The Treasury Department and the IRS developed 
the factor, and other similar factors used in the regulations, in 
consultation with Treasury Department economists and in consultation 
with plan sponsors regarding the procedures they currently use for 
estimating the number of covered individuals.''
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    (3) Form 5500 Method: Under the PCORTF Rule, a plan sponsor may use 
the ``Annual Return/Report of Employee Benefit Plan'' filed with the 
Department of Labor (Form 5500) by using data from the Form 5500 for 
the last applicable plan year. We propose that, for purposes of 
reinsurance contributions, a self-insured group health plan may also 
rely upon such data, even though the data may reflect enrollment in a 
previous benefit year. Our modeling of the 2014 health insurance 
marketplace, discussed in section III.C.6. of this proposed rule, 
suggests that enrollment in self-insured group health plans is less 
likely to fluctuate than enrollment in the individual market. Thus, we 
propose that a self-insured group plan may calculate the number of 
lives covered for a plan that offers only self-only coverage by adding 
the total participants covered at the beginning and end of the benefit 
year, as reported on the Form 5500, and dividing by two. Additionally, 
a self-insured group plan that offers self-only coverage and coverage 
other than self-only coverage may calculate the number of lives covered 
by adding the total participants covered at the beginning and the end 
of the benefit year, as reported on the Form 5500.
    Counting Methods for Plans With Self-insured and Insured Options: 
An employer may sponsor a group health plan that offers one or more 
coverage options that are self-insured and one or more other coverage 
options that are insured. In Sec.  153.405(f), we propose that to 
determine the number of covered lives of reinsurance contribution 
enrollees under a group health plan with both self-insured and insured 
options for a benefit year must use one of the methods specified in 
either Sec.  153.405(d)(1) or Sec.  153.405(d)(2)--the ``actual count'' 
method or ``snapshot count'' for health insurance issuers.
    Aggregation of self-insured group health plans and health insurance 
plans: We propose in Sec.  153.405(g)(1) that if a plan sponsor 
maintains two or more group health plans or health insurance plans (or 
a group health plan with both insured and self-insured components) that 
collectively provide major medical coverage for the same covered lives, 
which we refer to as ``multiple plans'' for the purpose of the 
reinsurance program, then these multiple plans must be treated as a 
single self-insured group health plan for purposes of calculating any 
reinsurance contribution amount due under paragraph (c) of this 
section. This approach would prevent the double counting of a covered 
life for major medical coverage offered across multiple plans, and 
prohibit plan sponsors that provide such major medical coverage from 
splitting the coverage into separate arrangements to avoid reinsurance 
contributions on the grounds that it does not offer major medical 
coverage.
    For purposes of Sec.  153.405(g)(1), the plan sponsor is 
responsible for paying the applicable fee. We propose to define ``plan 
sponsor'' in proposed Sec.  153.405(g)(2) based on the definition of 
the term in the PCORTF Rule.\32\ We propose to define ``plan sponsor'' 
as:
---------------------------------------------------------------------------

    \32\ If the definition of ``plan sponsor'' is revised in the 
final PCORTF Rule, we intend to revise the definition proposed 
herein to maintain consistency.
---------------------------------------------------------------------------

    (A) The employer, in the case of a plan established or maintained 
by a single employer;
    (B) The employee organization, in the case of a plan established or 
maintained by an employee organization;
    (C) The joint board of trustees, in the case of a multi-employer 
plan (as defined in section 414(f) of the Code);
    (D) The committee, in the case of a multiple employer welfare 
arrangement;
    (E) The cooperative or association that establishes or maintains a 
plan established or maintained by a rural electric cooperative or rural 
cooperative association (as such terms are defined in section 3(40)(B) 
of ERISA);
    (F) The trustee, in the case of a plan established or maintained by 
a voluntary employees' beneficiary association (meaning that the 
association is not merely serving as a funding vehicle for a plan that 
is established or maintained by an employer or other person);
    (G) In the case of a plan, the plan sponsor of which is not 
described in (A) through (F) above, the person identified or designated 
by the terms of the document under which the plan is operated as the 
plan sponsor, provided that designation is made and consented to, by no 
later than the date by which the count of covered lives for that 
benefit year is required to be provided. After that date, the 
designation for that benefit year may not be changed or revoked, and a 
person may be designated as the plan sponsor only if the person is one 
of the persons maintaining the plan (for example, one of the employers 
that is maintaining the plan with one or more other employers); or
    (H) In the case of a plan the sponsor of which is not described in 
(A) through

[[Page 73158]]

(F) above, and for which no identification or designation of a plan 
sponsor has been made pursuant (G), each employer or employee 
organization that maintains the plan (with respect to employees of that 
employer or employee organization), and each board of trustees, 
cooperative or association that maintains the plan.
    Exceptions: We propose two exceptions to this aggregation rule, in 
Sec.  153.405(g)(3). First, if the benefits provided by any health 
insurance or self-insured group health plans are limited to excepted 
benefits within the meaning of section 2791(c) of the PHS Act (such as 
stand-alone dental or vision benefits), the excepted benefits coverage 
need not be aggregated with other plans for purposes of this section. 
Second, if benefits provided by any health insurance or self-insured 
group health plan are limited to prescription drug coverage, that 
prescription drug coverage need not be aggregated so as to reduce the 
burden on sponsors who have chosen to structure their coverage in that 
manner. As discussed in section III.C.2. of this proposed rule, 
coverage that consists solely of prescription drug or excepted benefits 
is not major medical coverage. If enrollees have major medical coverage 
and separate coverage consisting of prescription drug or excepted 
benefits, reinsurance contributions only would be required with respect 
to the major medical coverage. Reinsurance contributions would not be 
required with respect to the same enrollees' prescription drug or 
excepted benefits coverage, and consequently, double counting of 
covered lives will not occur.
    Multiple Plans: In Sec.  153.405(g)(4), we propose counting 
requirements for multiple plans in which at least one of the plans is 
an insured plan (covered in Sec.  153.405(g)(4)(i)), and multiple self-
insured group health plans not including an insured plan (covered in 
Sec.  153.405(g)(4)(ii)). First, we anticipate that a plan sponsor will 
generate or obtain a list of the participants in each plan and then 
analyze the lists to identify those participants that have major 
medical coverage across all the plans collectively. To calculate the 
average number of covered lives of reinsurance contribution enrollees 
across multiple plans, we propose that a plan sponsor must use one of 
the methods applicable to health insurance plans or self-insured group 
health plans under Sec.  153.405(d) and Sec.  153.405(e), respectively, 
applied across the multiple plans as a whole. We also propose to 
require reporting to HHS or the applicable reinsurance entity 
concerning multiple plans, as discussed in Sec.  153.405(g)(4). 
Additionally, it is important to note that the reinsurance program 
operates on a benefit year basis as discussed in section III.C.5. of 
this proposed rule, which is defined at Sec.  153.20 of this part (by 
reference to Sec.  155.20) as the calendar year, and the applicable 
counting methods all apply on that basis, no matter the plan year 
applicable to particular plans.
    Multiple Group Health Plans Including an Insured Plan: When one or 
more of the multiple group health plans is an insured plan, we propose 
that the actual count method for health insurance issuers in Sec.  
153.405(d)(1) or the snapshot count method for health insurance issuers 
in Sec.  153.405(d)(2) must be used. We propose to prohibit the use of 
the ``Member Months Method'' or ``State Form Method'' to count covered 
lives across multiple insured plans because those methods would not 
easily permit aggregate counting, since the identities of the covered 
lives are not available on the applicable forms. We propose that the 
plan sponsor must determine and report, in a timeframe and manner 
established by HHS, to HHS (or, the applicable reinsurance entity if 
the multiple plans all consist solely of health insurance plans and the 
applicable reinsurance entity of a State is collecting contributions 
from health insurance issuers in such State): (1) The average number of 
covered lives calculated; (2) the counting method used; and (3) the 
names of the multiple plans being treated as a single group health plan 
as determined by the plan sponsor and reported to HHS.
    Multiple Self-Insured Group Health Plans Not Including an Insured 
Plan: We describe the counting provisions applicable to multiple self-
insured group health plans (that is, when none of the plans is an 
insured plan) in proposed paragraph (g)(4)(ii) of this section. There 
are four counting methods available for self-insured plans which are 
set forth in proposed Sec.  153.405(e)(1) through Sec.  153.405(e)(4) 
of this section. Proposed Sec.  153.405(e)(1) permits a plan sponsor to 
use the actual count method under Sec.  153.405(d)(1) or the snapshot 
count method under Sec.  153.405(d)(2) that are also available for 
insured plans. Proposed paragraph (e)(2) permits an additional method 
(the snapshot factor method) for self-insured plans. We propose not to 
permit a plan sponsor to use the fourth method, the ``Form 5500 
Method'' as described in proposed Sec.  153.405(e)(3) to count covered 
lives across multiple self-insured plans because that method would not 
easily permit aggregate counting, since the identities of the covered 
lives are not available on that form. Thus, we propose three possible 
methods for multiple self-insured plans under paragraph (g)(4)(ii). We 
further propose that the plan sponsor must report, in a timeframe and 
manner established by HHS, to HHS: (1) The average number of covered 
lives calculated; (2) the counting method used; and (3) the names of 
the multiple plans being treated as a single group health plan as 
determined by the plan sponsor.
    Consistency with PCORTF Rule Not Required: We intend to allow a 
contributing entity to use a different counting method for the annual 
enrollment count of covered lives for purposes of reinsurance 
contributions from that used for purposes of the return required in 
connection with the PCORTF Rule. Because time periods and counting 
methods may differ, we would not require that a contributing entity 
submit consistent estimates of its covered lives in the return required 
in connection with the PCORTF Rule and the annual enrollment count 
required for reinsurance contributions (although these counts should be 
performed in accordance with the rules of the counting method chosen). 
However, when calculating the average number of covered lives across 
two or more plans under proposed paragraph (g), the same counting 
method must be used across all of the multiple plans, because they 
would be treated as a single plan for counting purposes.
    We welcome comments on this approach to counting covered lives for 
reinsurance contributions.
b. State Use of Contributions Attributed to Administrative Expenses
    To achieve the purposes of the reinsurance program, reinsurance 
contributions collected must be appropriately spent on reinsurance 
payments, payments to the U.S. Treasury, and on reasonable expenses to 
administer the reinsurance program. Therefore, we provide guidance on 
three restrictions that we intend to propose on the use of reinsurance 
contributions for administrative expenses, to permit States that 
participate in the reinsurance program to accurately estimate the cost 
of administrative expenses. While we will provide details of those 
standards in future regulation and guidance, along with similar 
standards for Exchanges, the risk adjustment program, and other 
Affordable Care Act programs, we provide below an overview of our 
intentions.
    First, we intend to apply the prohibition described in section 
1311(d)(5)(B) of the Affordable Care Act

[[Page 73159]]

to the reinsurance program so that reinsurance funds intended for 
administrative expenses cannot be used for staff retreats, promotional 
giveaways, excessive executive compensation, or promotion of Federal or 
State legislative or regulatory modifications. Second, we intend to 
propose that reinsurance funds intended for administrative expenses may 
not be used for any expense not necessary to the operation and 
administration of the reinsurance program. Third, we intend to propose 
that an applicable reinsurance entity must allocate any shared, 
indirect, or overhead costs between reinsurance-related and other State 
expenses based on generally accepted accounting principles, 
consistently applied. An applicable reinsurance entity would be 
required to provide HHS, in a timeframe and manner specified by HHS, a 
report setting forth and justifying its allocation of administrative 
costs. We welcome comments on these intended proposals.
5. Eligibility for Reinsurance Payments Under Health Insurance Market 
Rules
    We are proposing to add Sec.  153.234 to clarify that, under either 
the reinsurance national payment parameters or the State supplemental 
reinsurance payment parameters, if applicable, a reinsurance-eligible 
plan's covered claims costs for an enrollee incurred prior to the 
application of 2014 market reform rules--Sec.  147.102 (fair health 
insurance premiums), Sec.  147.104 (guaranteed availability of 
coverage, subject to the student health insurance provisions at Sec.  
147.145), Sec.  147.106 (guaranteed renewability of coverage, subject 
to the student health insurance provisions at Sec.  147.145), Sec.  
156.80 (single risk pool), and Subpart B 156 (essential health benefits 
package)--do not count toward either the national or State supplemental 
attachment points, reinsurance caps, or coinsurance rates. Unlike plans 
subject to the market reform rules under the Affordable Care Act, plans 
not subject to these 2014 market reforms rules may use several 
mechanisms to avoid claims costs for newly insured, high-cost 
individuals by excluding certain conditions (for example, maternity 
coverage for women of child-bearing age), by denying coverage to those 
with certain high-risk conditions, and by pricing individual premiums 
to cover the costs of providing coverage to such individuals. (We note 
that student health plan eligibility would be subject to the modified 
guaranteed availability and guaranteed issue requirements only, to the 
extent that they apply, as set forth in Sec.  147.145, and we would 
require that the student health plans only meet those modified 
requirements to be eligible for reinsurance payments.) The market 
reform rules will be effective for the individual market for policy 
years \33\ beginning on or after January 1, 2014, and as a result, 
policies that are issued in 2013 will be subject to these rules at the 
time of renewal in 2014, and therefore, become eligible for reinsurance 
payments at the time of renewal in 2014.
---------------------------------------------------------------------------

    \33\ As defined at 45 CFR 144.103, ``policy year means in the 
individual health insurance market the 12-month period that is 
designated as the policy year in the policy documents of the 
individual health insurance coverage. If there is no designation of 
a policy year in the policy document (or no such policy document is 
available), then the policy year is the deductible or limit year 
used under the coverage. If deductibles or other limits are not 
imposed on a yearly basis, the policy year is the calendar year.''
---------------------------------------------------------------------------

    We believe that providing reinsurance payments only to those 
reinsurance-eligible plans that are subject to the 2014 market reform 
rules better reflects the reinsurance program's purpose of mitigating 
premium adjustments to account for risk from newly insured, high-cost 
individuals. We also propose that State-operated reinsurance programs 
similarly limit eligibility for reinsurance payments. We recognize that 
this policy contrasts with the approach proposed for State-operated 
risk adjustment programs, under which HHS is proposing to permit States 
to choose to risk adjust plans not subject to the 2014 market reform 
rules. Because some States may have enacted State-specific rating and 
market reforms that they believe would justify the inclusion of these 
plans in risk adjustment before these plans' renewal dates, permitting 
State flexibility on the applicability of risk adjustment to plans not 
subject to the 2014 market reform rules furthers the goals of the risk 
adjustment program. However, we believe that State flexibility for 
eligibility for reinsurance payments does not further the goal of the 
reinsurance program.
    Also, we intend to operate the reinsurance program on a calendar 
year basis, which we believe makes the most sense from policy and 
administrative perspectives. First, we believe that there is ambiguity 
in section 1341 of the Affordable Care Act as to whether the 
reinsurance program is to be administered on a plan year or calendar 
year basis. Some provisions of section 1341 concerning contributions 
from and payments to issuers use the term ``plan year.'' However, other 
provisions of section 1341--notably sections 1341(b)(4), 
1341(b)(3)(B)(iv) and 1341(c)(1)(A)--contemplate that the transitional 
reinsurance program would run with the calendar year. Second, a 
calendar year based program would ensure adequate collections in the 
early part of the program and to preserve fairness in making 
reinsurance payments. Third, implementing the reinsurance program on a 
calendar year basis permits the reinsurance program schedule to 
coincide with the MLR and the temporary risk corridors program 
schedules, both of which operate on a calendar year basis. Finally, we 
believe that the purpose of the reinsurance program is to stabilize 
premiums beginning in 2014, when the Exchanges begin to operate. We 
believe that the statute reflects this intent in section 1341(c)(1)(A) 
of the Affordable Care Act, which states that the purpose of an 
applicable reinsurance entity is ``to help stabilize premiums for 
coverage in the individual market in a State during the first three 
years of operation of an Exchange for such markets within the State 
when the risk of adverse selection related to new rating rules and 
market changes is greatest.''
    We welcome comments on this proposal.
6. Reinsurance Payment Parameters
    As described in the Premium Stabilization Rule, reinsurance 
payments to eligible issuers will be made for a portion of an 
enrollee's claims costs paid by the issuer that exceeds an attachment 
point, subject to a reinsurance cap. The coinsurance rate, attachment 
point, and reinsurance cap are the reinsurance ``payment parameters.'' 
Section 1341(b)(2)(B) of the Affordable Care Act directs the Secretary, 
in establishing standards for the transitional reinsurance program to 
include a formula for determining the amount of reinsurance payments to 
be made to issuers for high-risk individuals that provides for the 
equitable allocation funds. Using the Secretary's authority under this 
provision, we propose to amend the policy described in the Premium 
Stabilization Rule by establishing uniform, ``national'' reinsurance 
payment parameters that will be applicable to the reinsurance program 
for each State, whether or not operated by a State. We believe that 
using uniform, national payment parameters would result in equitable 
access to the reinsurance funds across States, while furthering the 
goal of premium stabilization across all States by disbursing 
reinsurance contributions where they are most needed.
    The primary purpose of the transitional reinsurance program is to 
stabilize premiums by setting the reinsurance payment parameters to 
achieve the greatest impact on rate

[[Page 73160]]

setting, and therefore, premiums, through reductions in plan risk, 
while complementing the current commercial reinsurance market. In 
contrast to commercial reinsurance, which is used to protect against 
risk, the primary purpose of the reinsurance program is to stabilize 
premiums in the individual market from 2014 through 2016. The 
reinsurance program is designed to protect against issuers' potential 
perceived need to raise premiums due to the implementation of the 2014 
market reform rules, specifically guaranteed availability. Even though 
HHS expects that any potential new high-cost claims from newly insured 
individuals would be balanced out by low-cost claims from many newly 
insured individuals who enter the individual market as a result of the 
availability of premium tax credits, more affordable coverage, the 
minimum coverage provision, and greater transparency and competition in 
the market, the reinsurance program is designed to alleviate the 
concern of new high-cost claims from newly insured individuals.
    Therefore, we propose that the 2014 national payment parameters be 
established at an attachment point of $60,000, when reinsurance 
payments would begin, a national reinsurance cap of $250,000, when the 
reinsurance program stops paying claims for a high-cost individual, and 
a uniform coinsurance rate of 80 percent, meant to reimburse a 
proportion of claims between the attachment point and reinsurance cap 
while giving issuers an incentive to contain costs. These three 
proposed payment parameters would help offset high-cost enrollees, 
without interfering with traditional commercial reinsurance, which 
typically has attachment points in the $250,000 range. We estimate that 
these national payment parameters will result in total requests for 
reinsurance payments of approximately $10 billion. With the coinsurance 
rate, reinsurance cap, and attachment point fixed uniformly across all 
States, we believe that the reinsurance program would have the greatest 
equitable impact on premiums across all States. We believe that these 
proposed national payment parameters best address the reinsurance 
program's goals to promote national premium stabilization and market 
stability while providing plans incentives to continue effective 
management of enrollee costs. We intend to continue to monitor 
individual market enrollment and claims patterns to appropriately 
disburse reinsurance payments throughout each of the benefit years.
    To assist with the development of the payment parameters, HHS 
developed a model that estimates market enrollment incorporating the 
effects of State and Federal policy choices and accounting for the 
behavior of individuals and employers, the Affordable Care Act Health 
Insurance Model (ACAHIM). The outputs of the ACAHIM, especially the 
estimated enrollment and expenditure distributions, were used to 
analyze a number of policy choices relating to benefit and payment 
parameters, including the national reinsurance contribution rate and 
national reinsurance payment parameters.
    The ACAHIM generates a range of national and State-level outputs 
for 2014, including the level and composition of enrollment across 
markets given the eligible population in a State. The ACAHIM is 
described below in two sections: (1) The approach for estimating 2014 
enrollment and (2) the approach for estimating 2014 expenditures. 
Because enrollment projections are key to estimating the reinsurance 
payment parameters for the reinsurance program, HHS paid much attention 
to the underlying data sources and assumptions for the ACAHIM. The 
ACAHIM uses recent Current Population Survey (CPS) data adjusted for 
small populations at the State level, exclusion of undocumented 
immigrants, and population growth to 2014, to assign individuals to the 
various coverage markets.
    More specifically, the ACAHIM assigns each individual to a single 
health insurance market as their baseline (pre-Affordable Care Act) 
insurance status. In addition to assuming that individuals currently in 
Medicare, TRICARE, or Medicaid will remain in such coverage, the ACAHIM 
takes into account the probability that a firm will offer employment-
based coverage based on the CPS distribution of coverage offers for 
firms of a similar size and industry. Generally, to determine the 
predicted insurance enrollment status for an individual or family (the 
``health insurance unit'' or ``HIU'') in 2014, the ACAHIM calculates 
the probability that the firm will offer insurance, then models 
Medicaid eligibility, and finally models eligibility for advance 
payments of the premium tax credit and cost-sharing reductions under 
the Exchange. Whenever a transition to another coverage market is 
possible, the ACAHIM takes into account the costs and benefits of the 
decision for the HIU and assigns a higher probability of transition to 
those with the greatest benefit. The ACAHIM also assumes that uninsured 
individuals will take up individual market coverage as informed by 
current take-up rates of insurance across States, varying by 
demographics and incomes and adjusting for post Affordable Care Act 
provisions, such as advance payments of the premium tax credit and 
cost-sharing reductions.
    Estimated expenditure distributions from the ACAHIM are used to set 
the uniform, national reinsurance payment parameters so that estimated 
contributions align with estimated payments for eligible enrollees. The 
ACAHIM uses the Health Intelligence Company, LLC (HIC) database from 
calendar year 2010, with the claims data trended to 2014 to estimate 
total medical expenditures per enrollee by age, gender, and area of 
residence. The expenditure distributions are further adjusted to take 
into account plan benefit design, or, ``metal'' level (that is, ``level 
of coverage,'' as defined in 156.20) of individual insurance coverage 
in an Exchange. To describe a State's coverage market, the ACAHIM 
computes the pattern of enrollment using the model's predicted number 
and composition of participants in a coverage market. These estimated 
expenditure distributions were the basis for the national reinsurance 
payment parameters.
7. Uniform Adjustment to Reinsurance Payments
    We propose to amend Sec.  153.230 by specifying in subparagraph (d) 
that HHS will adjust reinsurance payments by a uniform, pro rata 
adjustment rate in the event that HHS determines that the amount of 
total requests for reinsurance payments under the national reinsurance 
payment parameters will exceed the amount of reinsurance contributions 
collected under the national contribution rate during a given benefit 
year. The total amount of contributions considered for this purpose 
would include any contributions collected but unused under the national 
contribution rate during any previous benefit year.
    For example, in 2014, if total requests for reinsurance payments 
under the national reinsurance payment parameters are $10.1 billion and 
only $10 billion is collected for reinsurance payments under the 
national contribution rate, then all requests for reinsurance payments 
would be reduced by approximately 1 percent. However, if HHS determines 
that the total reinsurance contributions collected under the national 
contribution rate for the applicable benefit year are equal to or more 
than the total requests for reinsurance payments calculated using the 
national reinsurance payment

[[Page 73161]]

parameters, then no such adjustment will be applied, and all requests 
for reinsurance payments will be paid in full under the national 
payment parameters. Any unused reinsurance funds would be used for the 
next benefit year's reinsurance payments. This uniform pro rata 
adjustment would ensure that claims are paid at the same rate out of 
the national reinsurance fund, and promote equitable access to the 
national reinsurance fund across all States while furthering the goal 
of premium stabilization under the Affordable Care Act. We invite 
comment on this policy.
8. Supplemental State Reinsurance Parameters
    While we propose uniform, national payment parameters applicable to 
all States as discussed above, we are also proposing to add Sec.  
153.232(a), which specifies the manner in which States may modify the 
national reinsurance payment parameters established in the HHS notice 
of benefit and payment parameters. Specifically, we propose that a 
State that establishes its own reinsurance program may only modify the 
national reinsurance payment parameters by establishing State 
supplemental payment parameters that cover an issuer's claims costs 
beyond the national reinsurance payments parameters. Furthermore, 
reinsurance payments under these State supplemental payments parameters 
may only be made with additional funds the State collects for 
reinsurance payments under Sec.  153.220(d)(1)(ii) or State funds 
applied to the reinsurance program under Sec.  153.220(d)(3). We 
believe that this approach would not prohibit States from collecting 
additional amounts for reinsurance payments, as provided for under 
section 1341(b)(3)(B) of the Affordable Care Act, while allowing 
nationwide access to the reinsurance payments from the contributions 
collected under the national reinsurance contribution rate.
    We propose in Sec.  153.232(a) that a State may set State 
supplemental reinsurance payments parameters by adjusting the national 
reinsurance payment parameters in one or more of the following ways: 
(1) Decreasing the national attachment point; (2) increasing the 
national reinsurance cap; or (3) increasing the national coinsurance 
rate. In other words, a State may not alter the national reinsurance 
payment parameters in a manner that could result in reduced reinsurance 
payments. We seek comment on this approach, including whether there 
should be any limitations as to how a State may supplement the national 
reinsurance payment parameters.
    To provide issuers with greater certainty for premium rate setting 
purposes, we propose that a State ensure that any additional funds for 
reinsurance payments it collects under Sec.  153.220(d)(1)(ii) or State 
funds under Sec.  153.220(d)(3) as applicable are reasonably calculated 
to cover additional reinsurance payments that are projected to be made 
under the State's supplemental reinsurance payment parameters for a 
given benefit year. We believe that the State must also ensure that 
such parameters are applied to all reinsurance-eligible plans in that 
State in the same manner. We further propose in Sec.  153.232(b) that 
contributions collected under Sec.  153.220(d)(1)(ii) or additional 
funds collected under Sec.  153.220(d)(3), as applicable, must be 
applied toward requests for reinsurance payments made under the State 
supplemental reinsurance payments parameters for each benefit year 
commencing in 2014 and ending in 2016.
    We also propose in Sec.  153.232(c) that, as applicable, a health 
insurance issuer of a non-grandfathered individual market plan becomes 
eligible for reinsurance payments under a State's supplemental 
reinsurance parameters, if its incurred claims costs for an individual 
enrollee's covered benefits during a benefit year: (1) Exceed the 
supplemental State attachment point; (2) exceed the national 
reinsurance cap; or (3) exceed the national attachment point, if the 
State has established a State supplemental coinsurance rate. This would 
allow reinsurance payments made under the State supplemental payment 
parameters to ``wrap around'' the national reinsurance payment 
parameters so that the State could apply any additional contributions 
it collects under proposed Sec.  153.220(d) towards reinsurance 
payments beyond the national reinsurance payment parameters. In this 
way, HHS can distribute funds under the national payments formula to 
where they are needed most, while allowing States that elect to run 
their own program the flexibility to supplement nationally calculated 
reinsurance payments. As mentioned previously, States would be required 
to separate in its reporting to issuers the reinsurance payments paid 
under the national reinsurance payment parameters and State 
supplemental reinsurance payment parameters.
    To ensure that reinsurance payments under State supplemental 
payment parameters do not overlap with the national reinsurance payment 
parameters, we propose the method for calculating State supplemental 
reinsurance payments. Specifically, we propose in Sec.  153.232(d) that 
supplemental reinsurance payments with respect to a health insurance 
issuer's claims costs for an individual enrollee's covered benefits 
must be calculated by taking the sum of: (1) The product of such claims 
costs between the supplemental State attachment point and the national 
attachment point multiplied by the national coinsurance rate (or 
applicable State supplemental coinsurance rate); (2) the product of 
such claims costs between the national reinsurance cap and the 
supplemental State reinsurance cap multiplied by the national 
coinsurance rate (or applicable State supplemental coinsurance rate); 
and (3) the product of such claims costs between the national 
attachment point and the national reinsurance cap multiplied by the 
difference between the State supplemental coinsurance rate and the 
national coinsurance rate.
    For example, in 2014 a State may elect to establish supplemental 
State reinsurance payment parameters that modify all three national 
reinsurance payment parameters, by establishing a State supplemental 
attachment point of $50,000, a State supplemental coinsurance rate of 
100 percent, and a State supplemental reinsurance cap of $300,000. 
Under these supplemental State reinsurance payment parameters, the 
State must use its additional contributions to pay up to $98,000 of the 
issuer costs under $300,000 or the sum of: $10,000 (100 percent of an 
issuer's costs between the State's 2014 supplemental attachment point 
of $50,000 and the 2014 national attachment point $60,000); and $50,000 
(100 percent of an issuer's costs between the 2014 national reinsurance 
cap of $250,000 and the 2014 State supplemental reinsurance cap 
$300,000); and $38,000 (the product of an issuer's costs between 
$60,000 and $250,000 multiplied by the difference between the State's 
supplemental coinsurance rate (100 percent) and the national 
coinsurance rate (80 percent). Contributions collected under the 
national contribution rate would be applied to an issuer's claims costs 
above the 2014 national attachment point, subject to the national 
coinsurance rate and national reinsurance cap.
    Alternatively, a second State may elect to establish a State 
supplemental attachment point of $40,000 in 2014, but elect not to 
establish a supplemental State coinsurance rate or reinsurance cap. 
That State would then use any additional contributions it collects to 
cover up to $16,000 or 80 percent (the 2014 national coinsurance rate) 
of an

[[Page 73162]]

issuer's claims costs between $40,000 (the 2014 supplemental State 
attachment point) and $60,000 (the 2014 national attachment point). As 
in the first example, contributions collected under the national 
contribution rate would be applied to an issuer's claims costs above 
the 2014 national attachment point, subject to the national coinsurance 
rate and national reinsurance cap.
    Similar to payment calculations under the national reinsurance 
payments parameters, we propose in Sec.  153.232(e) that if all 
requested reinsurance payments under the State supplemental reinsurance 
parameters calculated in a State for a benefit year will exceed all the 
additional funds a State collects for reinsurance payments under Sec.  
153.220(d)(1)(ii) or State funds under Sec.  153.220(d)(3) as 
applicable, the State must determine a uniform pro rata adjustment to 
be applied to all such requests for reinsurance payments in the State. 
Each applicable reinsurance entity in the State must reduce all such 
requests for reinsurance payments under the State supplemental 
reinsurance payment parameters for the applicable benefit year by that 
adjustment.
    Finally, in Sec.  153.232(f), we propose that a State must ensure 
that reinsurance payments made to issuers under the State supplemental 
reinsurance payment parameters do not exceed the issuer's total paid 
amount for the reinsurance-eligible claim(s) and any remaining 
additional funds collected under Sec.  153.220(d)(1)(ii) must be used 
for reinsurance payments under the State supplemental parameters in 
subsequent benefit years. We seek comment on this proposal, including 
other areas of flexibility that could be provided to State-operated 
reinsurance programs.
9. Allocation and Distribution of Reinsurance Contributions
    Section 153.220(d) of the Premium Stabilization Rule currently 
provides that HHS would distribute reinsurance contributions collected 
for reinsurance payments from a State to the applicable reinsurance 
entity for that State. We propose to replace this section with proposed 
Sec.  153.235(a), which provides that HHS will allocate and distribute 
the reinsurance contributions collected under the national contribution 
rate based on the need for reinsurance payments, regardless of where 
the contribution was collected. As previously stated in this proposed 
rule, HHS will disburse all contributions collected under the national 
contribution rate from all States for the applicable benefit year, 
based on all available contributions and the aggregate requests for 
reinsurance payments, net of the pro rata adjustment, if any. We 
believe that this method of disbursing reinsurance contributions will 
allow the transitional reinsurance program to equitably stabilize 
premiums across the nation, and permit HHS to direct reinsurance funds 
based on the need for reinsurance payments. Consistent with this 
proposal, we propose to amend Sec.  153.220(a) to clarify that even if 
a State establishes a reinsurance program, HHS would directly collect 
from health insurance issuers, as well as self-insured group health 
plans, the reinsurance contributions for enrollees who reside in that 
State.
10. Reinsurance Data Collection Standards
a. Data Collection Standards for Reinsurance Payments
    Section 153.240(a) directs a State's applicable reinsurance entity 
to collect data needed to determine reinsurance payments as described 
in Sec.  153.230. We propose to amend Sec.  153.240(a) by adding 
subparagraph (1) to direct a State to ensure that its applicable 
reinsurance entity either collect or be provided access to the data 
necessary to determine reinsurance payments from an issuer of a 
reinsurance-eligible plan. We note that this data would include data 
related to cost-sharing reductions because reinsurance payments are not 
based on a plan's paid claims amounts that are reimbursed by cost-
sharing reduction amounts. The applicable reinsurance entity, 
therefore, must reduce a plan's paid claims amount considered for 
reinsurance payments attributable to cost-sharing reductions. When HHS 
operates a reinsurance program on behalf of a State, HHS would utilize 
the same distributed data collection approach that we propose to use 
for risk adjustment, as described in section III.G. of this proposed 
rule. This proposed amendment would clarify that an applicable 
reinsurance entity may either use a distributed data collection 
approach for its reinsurance program or directly collect privacy-
protected data from issuers to determine an issuer's reinsurance 
payments. The distributed data collection approach would not involve 
the direct collection of data; instead, HHS or the State would access 
data on plans' secure servers.
    We also propose to amend Sec.  153.240(a) by adding subparagraph 
(3), directing States to provide a process through which an issuer of a 
reinsurance-eligible plan that does not generate individual enrollee 
claims in the normal course of business (such as a capitated plan) may 
request reinsurance payments (or submit data to be considered for 
reinsurance payments) based on estimated costs of encounters for the 
plan in accordance with the requirements of Sec.  153.410. We propose 
to direct States to ensure that such requests (or a subset of such 
requests) are subject to (to the extent required by the State) a data 
validation program. A State would have the flexibility to design a data 
validation program that meets its adopted methodology and State-
specific circumstances. This proposed amendment would enable certain 
reinsurance-eligible plans, such as staff-model health maintenance 
organizations, that do not generate claims with associated costs in the 
normal course of business to provide data to request and receive 
reinsurance payments.
    When HHS operates a reinsurance program on behalf of a State, 
issuers of capitated plans would generate claims for encounters, and 
derive costs for those claims when submitting requests for reinsurance 
payments (or submitting data to be considered for reinsurance 
payments). It is our understanding that many capitated plans currently 
use some form of encounter data pricing methodology to derive claims, 
often by imputing an amount based upon the Medicare fee-for-service 
equivalent price or the usual, customary, and reasonable equivalent 
that would have been paid for the service in the applicable market. A 
capitated plan should use its principal internal methodology for 
pricing encounters, such as the methodology in use for other State or 
Federal programs (for example, a methodology used for the Medicare 
Advantage market). If a plan has no such methodology, or has an 
incomplete methodology, it would be permitted to implement a 
methodology or supplement the methodology in a manner that yields 
derived claims that are reasonable in light of the specific market that 
the plan is serving. Capitated plans, like all plans that submit 
reinsurance payment requests (or data to be considered for reinsurance 
payments) in the HHS-operated program, will be subject to validation 
and audit. Because capitated plans already use pricing methodologies, 
we believe this proposed policy would permit capitated plans to 
participate in the reinsurance program with a minimal increase in 
administrative burden. We welcome comments on this approach.

[[Page 73163]]

b. Notification of Reinsurance Payments
    We propose to add Sec.  153.240(b)(1) which directs a State, or HHS 
on behalf of the State, to notify issuers of the total amount of 
reinsurance payments that will be made no later than June 30 of the 
year following the benefit year. This corresponds with the date on 
which a State or HHS must notify issuers of risk adjustment payments 
and charges. As such, by June 30 of the year following the applicable 
benefit year, issuers will be notified of reinsurance payments and risk 
adjustment payments and charges, allowing issuers to account for their 
total reinsurance payments and risk adjustment payments and charges 
when submitting data for the risk corridors and MLR programs. To 
provide issuers in the individual market with information to assist in 
development of premiums and rates in subsequent benefit years, we also 
propose in new Sec.  153.240(b)(2) that a State provide quarterly 
notifications of estimates to each reinsurance-eligible plan of the 
expected requests for reinsurance payments for each quarter. HHS 
intends to collaborate with issuers and States to develop these early 
notifications. We welcome comments on this proposal.
c. Privacy and Security Standards
    We propose to amend Sec.  153.240 by adding paragraph (d)(1), to 
require a State operating its own reinsurance program to ensure that 
the applicable reinsurance entity's collection of personally 
identifiable information is limited to information reasonably necessary 
for use in the calculation of reinsurance payments and that use and 
disclosure of personally identifiable information is limited to those 
purposes for which the personally identifiable information was 
collected (including for purposes of data validation). This proposal 
aligns with corresponding language for the risk adjustment program. The 
term ``personally identifiable information'' is a broadly used term 
across Federal agencies, and has been defined in the Office of 
Management and Budget Memorandum M-07-16 (May 22, 2007).\34\ To reduce 
duplicative guidance or potentially conflicting regulatory language, we 
are not defining personally identifiable information in this proposed 
rule, and incorporate the aforementioned definition in to this proposed 
rule.
---------------------------------------------------------------------------

    \34\ Available at: http://www.whitehouse.gov/sites/default/files/omb/memoranda/fy2007/m07-16.pdf.
---------------------------------------------------------------------------

    We also propose to amend Sec.  153.240 by adding paragraph (d)(2) 
to require that an applicable reinsurance entity implement specific 
privacy and security standards to ensure enrollee privacy, and to 
protect sensitive information. Specifically, this provision would 
require an applicable reinsurance entity to provide administrative, 
physical, and technical safeguards for personally identifiable 
information that may be used to request reinsurance payments. This 
provision is meant to ensure that an applicable reinsurance entity 
complies with the same privacy and security standards that apply to 
issuers and providers, specifically the security standards described at 
Sec.  164.308, Sec.  164.310, and Sec.  164.312.
d. Data Collection
    We propose to add new Sec.  153.420(a) to address data collection 
issues, including the distributed data collection approach that HHS 
intends to use when operating the reinsurance program on behalf of a 
State. We propose that issuers of plans eligible for and seeking 
reinsurance payments submit or make accessible data (including data on 
cost-sharing reductions to permit the calculation of enrollees' claims 
costs incurred by the issuer), in accordance with the reinsurance data 
collection approach established by the State, or HHS on behalf of the 
State.
    In Sec.  153.420(b), we propose that an issuer of a reinsurance-
eligible plan submit data to be considered for reinsurance payments for 
the applicable benefit year by April 30 of the year following the end 
of the applicable benefit year. The April 30 deadline would apply to 
all issuers of reinsurance-eligible plans, regardless of whether HHS or 
the State is operating reinsurance. We welcome comments on this 
proposal.

D. Provisions for the Temporary Risk Corridors Program

1. Definitions
    In the Premium Stabilization Rule, we stated in response to 
comments that we intended to propose that taxes and profits be 
accounted for in the risk corridors calculation, in a manner consistent 
with the MLR program. We, therefore, propose the following amendments 
and additions to the definitions in this section.
    We propose to amend Sec.  153.500 by defining ``taxes'' with 
respect to a QHP as Federal and State licensing and regulatory fees 
paid with respect to the QHP as described in Sec.  158.161(a), and 
Federal and State taxes and assessments paid for the QHP as described 
in Sec.  158.162(a)(1) and Sec.  158.162(b)(1). This definition aligns 
with the fees and taxes deductible from premiums in the MLR 
calculation. We use this definition to define ``after tax premiums 
earned'' which we propose to mean, with respect to a QHP, premiums 
earned minus taxes.
    We propose to revise the definition of ``administrative costs'' in 
Sec.  153.500 to mean, with respect to a QHP, the total non-claims 
costs incurred by the QHP issuer for the QHP, including taxes. We note 
that under this broader definition, administrative costs may also 
include fees and assessments other than ``taxes,'' as defined above.
    Using the definitions above, we propose to amend Sec.  153.500 by 
defining ``profits'' with respect to a QHP to mean the greater of: (1) 
3 percent of after-tax premiums earned; and (2) premiums earned by the 
QHP minus the sum of allowable costs and administrative costs of the 
QHP. Thus, we propose to define profits for a QHP through the use of 
the risk corridors equation; however, we provide for a minimum 3 
percent profit margin so that the risk corridors program will protect a 
reasonable profit margin (subject to the 20 percent cap on allowable 
administrative costs as described below). We believe that permitting 
issuers of QHPs to retain a reasonable profit margin will afford them 
greater assurance of achieving reasonable financial results given the 
expected changes in the market in 2014 through 2016, and will encourage 
the issuers to reduce the risk premium built into their rates. Long-
term industry trends suggest an average industry underwriting margin of 
approximately 2 percent.\35\ However, our understanding is that the 2 
percent margin includes many plans with significant, unexpected 
underwriting losses, and includes lines of business that typically have 
lower underwriting margins than those customarily earned in the 
individual and small group markets. MLR data from 2011 on 30 large 
issuers suggest an average underwriting margin of approximately 3 
percent, once individual issuer negative results are removed. We 
believe that a calculation with significant negative margins removed 
better reflects reasonable issuer projections of underwriting profit. 
We welcome comments on the estimates, data sources, and appropriate 
profit margin to use in the risk corridor calculation.
---------------------------------------------------------------------------

    \35\ Borsch, Matthew, CFA, and Wass, Sam, Equity Research 
Report, Americas: Managed Care, Decline in Blue Cross Margins Shows 
the Industry-Wide Downturn, Goldman Sachs Group, Inc. (August 28, 
2012).
---------------------------------------------------------------------------

    Finally, using the definition of profits discussed above, we 
propose to revise the definition of ``allowable administrative costs'' 
in Sec.  153.500 so that it means, with respect to a QHP, the sum of 
administrative costs, other than

[[Page 73164]]

taxes, and profits earned, which sum is limited to 20 percent of after-
tax premiums earned (including any premium tax credit under any 
governmental program), plus taxes. This definition reflects the 
inclusion of profits and taxes discussed above, and clarifies that the 
20 percent cap on allowable administrative costs applies to taxes, 
other than taxes deductible from premium revenue under the MLR rules, a 
result that is consistent with the way these taxes are accounted for by 
the MLR rules.
    The following example illustrates the operation of the risk 
corridors calculation as proposed in this proposed rule:
     Premiums earned: Assume a QHP with premiums earned of 
$200.
     Allowable costs: Assume allowable costs of $140, including 
expenses for health care quality and health information technology, and 
other applicable adjustments. Risk adjustment and reinsurance payments 
are after-the-fact adjustments to allowable costs for purposes of 
determining risk corridors amounts, and allowable costs must be reduced 
by the amount of any cost-sharing reductions received from HHS.
     Non-Claims Costs: Assume that the QHP has non-claims costs 
of $50, of which $15 are properly allocable to licensing and regulatory 
fees and taxes and assessments described in Sec.  158.161(a), Sec.  
158.162(a)(1), and Sec.  158.162(b)(1) (that is, ``taxes'').
    The following calculations result:
     Taxes: Under the proposed definition of taxes, the QHP's 
taxes will be $15.
     Administrative costs are proposed to be defined as non-
claims costs. In this case, those costs would be $50. Administrative 
costs other than taxes would be $35.
     After-tax premiums earned are proposed to be defined as 
premiums earned minus taxes, or in this case $200 - $15 = $185.
     Profits are proposed to be defined as the greater of: 3 
percent of premiums earned, or 3 percent * $200 = $6; and premiums 
earned by the QHP minus the sum of allowable costs and administrative 
costs, or $200--($140 + $50) = $200 - $190 = $10. Therefore, profits 
for the QHP would be $10, which is greater than $6.
     Allowable administrative costs are proposed to be defined 
as the sum of administrative costs, other than taxes, plus profits 
earned by the QHP, which sum is limited to 20 percent of after-tax 
premiums earned by the QHP (including any premium tax credit under any 
governmental program), plus taxes.

    = ($35 + $10), limited to 20 percent of $185, plus $15
    = $45, limited to $37, plus $15
    = $37, plus $15
    = $52.

     The target amount is defined as premiums earned reduced by 
allowable administrative costs, or $200 - $52 = $148.
     The risk corridors ratio is the ratio of allowable costs 
to target amount, or the ratio of $140 to $148, or approximately 94.6 
percent (rounded to the nearest one-tenth of one percent), meaning that 
the QHP issuer would be required to remit to HHS 50 percent of 
approximately (97 percent - 94.6 percent) = 50 percent of 2.4 percent, 
or approximately 1.2 percent of the target amount, or approximately 
0.012 * $148, or approximately $1.78.
    We propose these amendments to account for taxes and profits in a 
manner broadly consistent with the MLR calculation. As described in the 
Premium Stabilization Rule, we seek alignment between the MLR and risk 
corridors program when practicable so that similar concepts in the two 
programs are handled in a similar manner, and similar policy goals are 
reflected. Otherwise, there would be the potential for the Federal 
government to subsidize MLR rebate payments, or for an issuer to make 
risk corridors payments even though no MLR rebates would have been 
required.
    We welcome comments on these proposals.
2. Risk Corridors Establishment and Payment Methodology
    We propose to add paragraph (d) to Sec.  153.510, which would 
specify the due date for QHP issuers to remit risk corridors charges to 
HHS. Under this provision, an issuer would be required to remit charges 
within 30 days after notification of the charges.
    We propose a schedule for the risk corridors program, as follows. 
By June 30 of the year following an applicable benefit year, under the 
redesignated Sec.  153.310(e), issuers of QHPs will have been notified 
of risk adjustment payments and charges for the applicable benefit 
year. By that same date, under proposed Sec.  153.240(b)(1), QHP 
issuers also would have been notified of all reinsurance payments to be 
made for the applicable benefit year. As such, we propose in Sec.  
153.530(d) that the due date for QHP issuers to submit all information 
required under Sec.  153.530 of the Premium Stabilization Rule is July 
31 of the year following the applicable benefit year. We note that in 
section III.I. of this proposed rule, we are proposing that the MLR 
reporting deadline be revised to align with this schedule.
    We welcome comments on these proposals.
3. Risk Corridors Data Requirements
    In Sec.  153.530 of the Premium Stabilization Rule, we stated that 
to support the risk corridors program calculations, a QHP must submit 
data related to actual premium amounts collected, including premium 
amounts paid by parties other than the enrollee in a QHP, specifically 
advance premium tax credits. We further specified that risk adjustment 
and reinsurance payments be regarded as after-the-fact adjustments to 
allowable costs for purposes of determining risk corridors amounts, and 
allowable costs be reduced by the amount of any cost-sharing reductions 
received from HHS. For example, if a QHP incurred $200 in allowable 
costs for a benefit year, but received a risk adjustment payment of 
$25, made reinsurance contributions of $10, received reinsurance 
payments of $35, and received cost-sharing reduction payments of $15, 
its allowable costs would be $135 ($200 allowable costs - $25 risk 
adjustment payments received + $10 reinsurance contributions made - $35 
reinsurance payments received - $15 cost-sharing reduction payments).
    As noted in section III.E. of this proposed rule, we are proposing 
an approach to reimbursement of cost-sharing reductions that would add 
an additional reimbursement requirement for cost-sharing reductions by 
providers with whom the issuer has a fee-for-service compensation 
arrangement. As described in section III.E., we propose that issuers be 
reimbursed for, in the case of a benefit for which the issuer 
compensates the provider in whole or in part on a fee-for-service 
basis, the actual amount of cost-sharing reductions provided to the 
enrollee for the benefit and reimbursed to the provider by the issuer. 
However, cost-sharing reductions on benefits rendered by providers for 
which the issuer provides compensation other than on a fee-for-service 
arrangement (such as a capitated system) would not be held to this 
standard.
    It is our understanding that, in most fee-for-service arrangements, 
cost-sharing reductions will be passed through to the fee-for-service 
provider, and as such a QHP's allowable costs should not include either 
enrollee cost sharing or cost-sharing reductions reimbursed by HHS. 
However, in contrast in capitated arrangements, cost-sharing reduction 
payments should be accounted for as a deduction from

[[Page 73165]]

allowable costs because we assume in a competitive market that 
capitation payments (which are reflected directly in an issuer's 
allowable costs) will be raised to account for the reductions in 
providers' cost-sharing income, and that the issuer will retain the 
cost-sharing reduction payments.
    Therefore, we are proposing to amend Sec.  153.530(b)(2)(iii) so 
that allowable costs are reduced by any cost-sharing reduction payments 
received by the issuer for the QHP to the extent not reimbursed to the 
provider furnishing the item or service.
4. Manner of Risk Corridor Data Collection
    We also propose to amend Sec.  153.530(a), (b), and (c) to specify 
that we will address the manner of submitting required risk corridors 
data in future guidance rather than in this HHS notice of benefit and 
payment parameters.

E. Provisions for the Advance Payments of the Premium Tax Credit and 
Cost-Sharing Reduction Programs

1. Exchange Responsibilities With Respect to Advance Payments of the 
Premium Tax Credit and Cost-Sharing Reductions
a. Special Rule for Family Policies
    We propose to amend Sec.  155.305(g)(3), currently entitled 
``special rule for multiple tax households.'' Currently, this provision 
sets forth a rule for determining the cost-sharing reductions 
applicable to individuals who are, or who are expected to be, in 
different tax households but who enroll in the same QHP policy. This 
provision includes a hierarchy of cost-sharing eligibility categories. 
Our proposed amendment would rename this paragraph ``special rule for 
family policies,'' add a category for qualified individuals who are not 
eligible for any cost-sharing reductions, and add text to explicitly 
address situations in which Indians (as defined in Sec.  155.300(a)) 
and non-Indians enroll in a family policy. The proposed amendment would 
extend the current policy with respect to tax households such that 
individuals on a family policy would be eligible to be assigned to the 
most generous plan variation for which all members of the family are 
eligible. We note that nothing in this provision precludes qualified 
individuals with different levels of eligibility for cost-sharing 
reductions from purchasing separate policies to secure the highest 
cost-sharing reductions for which they are respectively eligible. We 
expect that Exchanges will assist consumers in understanding the 
relative costs and benefits of enrolling in a family policy versus 
several individual policies.
    The following example demonstrates the applicability of this 
provision:
     Example: A and B are parent and child who live together, 
but are each in separate tax households. A and B purchase a silver 
level QHP family policy in the individual market on an Exchange. A has 
a household income of 245 percent of the FPL, while B has a household 
income of 180 percent of the FPL. Individually, A would be eligible for 
enrollment in the 73 percent AV silver plan variation (that is, with 
higher cost-sharing requirements), and B in the 87 percent AV silver 
plan variation (that is, with lower cost-sharing requirements). Under 
the proposed provision, A and B would collectively qualify for the 73 
percent AV silver plan variation, but not the 87 percent AV silver plan 
variation.
    HHS recognizes that this policy may limit the cost-sharing 
reductions that members of a family could receive if the family chooses 
to enroll in a family policy; however, section 1402 of the Affordable 
Care Act does not permit an individual to receive benefits under the 
Federal cost-sharing reductions program for which the individual is 
ineligible. In addition, because deductibles and out-of-pocket limits 
are calculated at the policy level, as opposed to the individual level, 
it would be operationally difficult to establish separate cost-sharing 
requirements for different enrollees within the same policy. We discuss 
this policy further with regard to Indians in section III.E.4.i. of 
this proposed rule. We welcome comments on this proposal and its effect 
on families.
b. Recalculation of Advance Payments of the Premium Tax Credit and 
Cost-Sharing Reductions
    We propose to add paragraph (g) to Sec.  155.330, related to 
eligibility redeterminations during a benefit year, to clarify how 
changes during a benefit year in a tax filer's situation that are 
reported or identified in accordance with Sec.  155.330 affect 
eligibility for advance payments of the premium tax credit and cost-
sharing reductions. As discussed in the Exchange Establishment Rule, an 
Exchange must redetermine a tax filer's eligibility for advance 
payments of the premium tax credit and cost-sharing reductions either 
as a result of a self-reported change by an individual under Sec.  
155.330(b) or as a result of periodic data matching as described in 
Sec.  155.330(d).
    As described in 26 CFR 1.36B-4(a)(1), a tax filer whose premium tax 
credit for the taxable year exceeds the tax filer's advance payments 
may receive the excess as an income tax refund, and a tax filer whose 
advance payments for the taxable year exceed the tax filer's premium 
tax credit would owe the excess as additional income tax liability, 
subject to the limits specified in 26 CFR 1.36B-4(a)(3). Consequently, 
it is important when calculating advance payments that the Exchange act 
to minimize any projected discrepancies between the advance payments 
and the final premium tax credit amount, which would be determined by 
the IRS after the close of the tax year. Thus, we propose in Sec.  
155.330(g)(1)(i) that when an Exchange is recalculating the amounts of 
advance payments of the premium tax credit available due to an 
eligibility redetermination made during the benefit year, an Exchange 
must account for any advance payments already made on behalf of the tax 
filer in the benefit year for which information is available to the 
Exchange, such that the recalculated advance payment amount is 
projected to result in total advance payments for the benefit year that 
correspond to the tax filer's projected premium tax credit for the 
benefit year, calculated in accordance with 26 CFR 1.36B-3. We propose 
in Sec.  155.330(g)(1)(ii) to specify that the advance payment provided 
on the tax filer's behalf must be greater than or equal to zero, and 
must comply with 26 CFR 1.36B-3(d), which limits advance payments to 
the total premiums for the QHPs (and stand-alone dental plans, if 
applicable) selected.
    The following example demonstrates the applicability of this 
provision:
     Tax filer A is determined eligible for enrollment in a QHP 
through the Exchange and for advance payments of the premium tax credit 
during open enrollment prior to 2014 based on an expected household 
income for the year 2014 of $33,510 (300 percent of the FPL). Tax filer 
A seeks to purchase coverage in a rating area where the premium for the 
second lowest cost silver plan is $300 per month. As such, the maximum 
amount of advance payments of the premium tax credit per month would be 
calculated as follows: 300 - ((1/12)*(9.5%*33,510)) = $35. During the 
month of June, the tax filer reports an expected decrease in annual 
household income such that tax filer A's projected household income for 
the year 2014 will now be $27,925 (250 percent of the FPL). Thus, the 
maximum amount of advance payments of the premium tax credit per month 
would be calculated as follows: 300 - ((1/12)*(8.05%*27,925)) = $113. 
However, the Exchange's recalculation of advance payments of the 
premium tax credit

[[Page 73166]]

must take into account the advance payments already made on behalf of 
tax filer A. The Exchange must first multiply $113 by 12 months to 
calculate the expected tax credit for the entire year ($1,356), 
subtract the amount already paid for the first six months ($210), and 
then divide the difference by the number of months remaining in the 
year (six), which results in a recalculated maximum advance payment for 
the remaining months of $191. In this example, we assume that the 
taxpayer has elected to have the maximum advance payment for which he 
or she is eligible to be paid to his or her selected QHP issuer.
    If a tax filer is determined eligible for advance payments of the 
premium tax credit during the benefit year but did not previously 
receive advance payments of the premium tax credit, the Exchange would 
calculate the advance payments in accordance with the process described 
above, without subtracting any previous payments. We reiterate that the 
provision of all advance payments of the premium tax credit must be 
consistent with section 36B of the Code and its implementing 
regulations, including the requirement that premium tax credits (and 
advance payments) are available only for ``coverage months'' during 
which the individual is eligible and enrolled in a QHP through the 
Exchange. We also considered taking a different approach if an 
eligibility redetermination during the benefit year results in an 
increase in advance payments of the premium tax credit--we considered 
proposing that in such a situation, HHS would make retroactive payments 
to the QHP issuer for all prior months of the benefit year to reflect 
the increased advance payment amount, not to exceed the total premium 
for each month. This approach would permit us to pay out more of the 
full premium tax credit amount prior to the close of the tax year. 
Without retroactive payments, in the case of a redetermination late in 
the year, we would have a limited ability to pay out an increase 
because of the limitation that the premium tax credit--and thus the 
advance payments of the premium tax credit not exceed the total premium 
for the month. Following this alternative approach in the case of 
increases in advance payments of the premium tax credit during the 
benefit year could also help address any outstanding premium amounts 
owed by an enrollee to a QHP issuer. We solicit comments regarding 
whether we should adopt this approach, and how QHP issuers should be 
required to provide the retroactive payments to enrollees.
    In Sec.  155.330(g)(2), we propose that, when redetermining 
eligibility for cost-sharing reductions during the benefit year, an 
Exchange must determine an individual to be eligible for the category 
of cost-sharing reductions that corresponds to the individual's 
expected annual household income for the benefit year, as determined at 
redetermination. Section 1402(f)(3) of the Affordable Care Act provides 
that eligibility determinations for cost-sharing reductions are made on 
the basis of the expected annual household income for the same taxable 
year for which the advance payment determination is made under section 
1412(b) of the Affordable Care Act. Therefore, if a mid-year change in 
income triggers use of a new annual household income figure for 
purposes of determining eligibility for advance payments of the premium 
tax credit, eligibility for cost-sharing reductions must also be 
redetermined using the new figure. However, unlike the premium tax 
credit, cost-sharing reductions are not reconciled at the end of the 
year by tax filers. As such, redeterminations of eligibility for cost-
sharing reductions should not take into account the amount of cost-
sharing reductions already provided on an individual's behalf.
    The following example demonstrates the applicability of this 
provision:
     Tax filer B is determined eligible for enrollment in a QHP 
through the Exchange and for cost-sharing reductions during open 
enrollment prior to 2014 and enrolls in a silver plan QHP. Tax filer B 
is assigned to a plan variation in January 2014 based on an expected 
annual household income of 150 percent of the FPL. During the month of 
June, the tax filer self-reports an increase in expected household 
income such that tax filer B's expected annual household income will 
now be at 200 percent of the FPL. The Exchange must redetermine the tax 
filer's eligibility for cost-sharing reductions for the remainder of 
the benefit year following the effective date of redetermination at 200 
percent of the FPL, which is the tax filer's expected annual household 
income, and the tax filer should then be assigned to the plan variation 
designed to provide cost-sharing reductions for individuals with that 
expected annual household income.
c. Administration of Advance Payments of the Premium Tax Credit and 
Cost-Sharing Reductions
    We propose to add two paragraphs to Sec.  155.340. First, we 
propose to add paragraph (e) to Sec.  155.340, which would provide that 
if one or more individuals in a tax household who are eligible for 
advance payments of the premium tax credit(s) collectively enroll in 
more than one policy through the Exchange (whether by enrolling in more 
than one policy under a QHP, enrolling in more than one QHP, or 
enrolling in one or more QHPs and one or more stand-alone dental plans) 
for any month in a benefit year, the Exchange must allocate the advance 
payment of the premium tax credit(s) in accordance with the methodology 
proposed in Sec.  155.340(e)(1) and (2). We note that an Exchange, 
under Sec.  155.340(a), must submit to HHS the dollar amount of the 
advance payment that will be made to each QHP on behalf of the 
enrollee.
    We propose the following allocation methodology: as described in 
Sec.  155.340(e)(1), the Exchange must first allocate the portion of 
the advance payment of the premium tax credit(s) that is less than or 
equal to the aggregate adjusted monthly premiums for the QHP policies, 
as defined under 26 CFR 1.36B-3(e), properly allocated to EHB, among 
the QHP policies in proportion to the respective portions of the 
premiums for the policies properly allocated to EHB. As described in 
proposed Sec.  155.340(e)(2), any remaining advance payment of the 
premium tax credit(s) must be allocated among the stand-alone dental 
policies in proportion to the respective portions of the adjusted 
monthly premiums for the stand-alone dental policies properly allocated 
to the pediatric dental EHB. The portion of the adjusted monthly 
premium for a QHP policy or a stand-alone dental policy that is 
allocated to EHB would be determined based on the information that the 
QHP issuer submits, under the proposed Sec.  156.470, and described in 
section III.E.2. of this proposed rule. For example, if a family 
collectively eligible for advance payments of the premium tax credit 
purchases two QHPs and a stand-alone dental plan, with a $500 adjusted 
monthly premium allocated to EHB, a $400 adjusted monthly premium 
allocated to EHB, and a $100 adjusted monthly premium allocated to the 
pediatric dental essential health benefit, respectively, the Exchange 
must allocate five-ninths of the advance payment of the premium tax 
credit (up to $500) to the first QHP, and four-ninths (up to $400) to 
the second QHP. If there is any remaining advance payment of the 
premium tax credit, this will be allocated to the stand-alone dental 
plan. This rule ensures a pro rata allocation (by premium) of the 
advance payment of the premium tax credit to the QHPs, while ensuring 
that the advance

[[Page 73167]]

payment of premium tax credits are only for (and based on) the portion 
of premiums for EHB. We welcome comments on this proposal.
    Second, we propose to add paragraph (f) to Sec.  155.340, which 
sets forth standards for an Exchange when it is facilitating the 
collection and payment of premiums to QHP issuers and stand-alone 
dental plans on behalf of enrollees, as permitted under Sec.  
155.240(c). Consistent with our proposed provision in Sec.  156.460(a), 
Sec.  155.340(f)(1) would direct the Exchange to reduce the portion of 
the premium for the policy collected from the enrollee by the amount of 
the advance payment of the premium tax credit for the applicable 
month(s) when the Exchange elects to collect premiums on behalf of 
QHPs. Because the Exchange is responsible for premium collections in 
these circumstances, the Exchange must also take responsibility for 
lowering the premium costs charged to enrollees by the amount of the 
credit. Proposed Sec.  155.340(f)(2) would direct Exchanges to display 
the amount of the advance payment of the premium tax credit for the 
applicable month(s) on an enrollee's billing statement. This is the 
Exchange equivalent of the requirement for QHP issuers proposed in 
Sec.  156.460(b). Both rules are drafted for the same purpose: To 
ensure that an enrollee is aware of the total cost of the premium so 
that he or she may verify that the correct advance payment of the 
premium tax credit has been applied. We welcome comments on this 
proposal.
2. Exchange Functions: Certification of Qualified Health Plans
    We propose to add Sec.  155.1030. This section would set forth 
standards for Exchanges to ensure that QHPs in the individual market on 
the Exchange meet the requirements related to advance payments of the 
premium tax credit and cost-sharing reductions, as proposed in Sec.  
156.215 and described below. We propose these standards under section 
1311(c) of the Affordable Care Act, which provides for the Secretary to 
establish criteria for the certification of health plans as QHPs, as 
well as section 1321(a)(1), which provides general rulemaking authority 
for title I of the Affordable Care, including the establishment of 
programs for the provision of advance payments of the premium tax 
credit and cost-sharing reductions. We believe that it is appropriate 
to incorporate these standards into the QHP certification criteria 
because Exchanges are the primary entities that interact with and 
oversee QHPs.
    In Sec.  155.1030(a)(1), we propose that the Exchange ensure that 
each issuer that offers or seeks to offer a QHP in the individual 
market on the Exchange submit the required plan variations, as proposed 
in Sec.  156.420, for each of its health plans proposed to be offered 
in the individual market on the Exchange. Further we propose that the 
Exchange must certify that the plan variations meet the requirements 
detailed in Sec.  156.420. We expect that an Exchange would collect 
prior to each benefit year the information necessary to validate that 
the issuer meets the requirements for silver plan variations, as 
detailed in Sec.  156.420(a), and collect for certification the 
information necessary to validate that the issuer meets the 
requirements for zero and limited cost sharing plan variations, as 
detailed in Sec.  156.420(b) . We expect that this data collection 
would include the cost-sharing requirements for the plan variations, 
such as the annual limitation on cost sharing, and any reductions in 
deductibles, copayments or coinsurance. In addition, the Exchange would 
collect or calculate the actuarial values of each QHP and silver plan 
variation, calculated under Sec.  156.135 of the proposed EHB/AV Rule. 
We propose in Sec.  155.1030(a)(2) that the Exchange provide the 
actuarial values of the QHPs and silver plan variations to HHS. As 
described in Sec.  156.430, HHS would use this information to determine 
the payments to QHP issuers for the value of the cost-sharing 
reductions.
    In Sec.  155.1030(b)(1), we propose to require the Exchange to 
collect certain information that an issuer must submit under Sec.  
156.470 that would allow for the calculation of the advance payments of 
cost-sharing reductions and the premium tax credit. Specifically, in 
Sec.  156.470(a), we propose that an issuer provide to the Exchange 
annually for approval, for each metal level health plan (that is, a 
health plan at any of the four levels of coverage, as defined in Sec.  
156.20) offered, or proposed to be offered, in the individual market on 
the Exchange, an allocation of the rate and the expected allowed claims 
costs for the plan, in each case, to: (1) EHB, other than services 
described in Sec.  156.280(d)(1),\36\ and (2) any other services or 
benefits offered by the health plan not described in clause (1). We 
propose this annual submission of the rate allocation information, 
under section 36B(b)(3)(D) of the Code, as added by section 1401 of the 
Affordable Care Act, to allow for the removal of the cost of 
``additional benefits'' from the advance payments of the premium tax 
credit. The rate allocation information would allow the Exchange to 
calculate the percentage of the rate attributable to EHB; this 
percentage could then be multiplied by the adjusted monthly premium, as 
defined by 26 CFR 1.36B-3(e), and the monthly premium of the QHP in 
which the taxpayer enrolls, to calculate the premium assistance amount. 
The allocation of the expected allowed claims costs would be used to 
validate the rate allocation, and to calculate the advance payments for 
cost-sharing reductions as described in proposed Sec.  156.430 of this 
proposed rule.
---------------------------------------------------------------------------

    \36\ 45 CFR 156.280(e)(1)(i) provides that if a QHP provides 
coverage of services described in paragraph (d)(1) of that section, 
the QHP issuer must not use Federal funds, including advance 
payments of the premium tax credit or cost-sharing reductions, to 
pay for the services.
---------------------------------------------------------------------------

    In Sec.  156.470(e), we further propose that an issuer of a metal 
level health plan offered, or proposed to be offered, in the individual 
market on the Exchange also submit to the Exchange annually for 
approval, an actuarial memorandum with a detailed description of the 
methods and specific bases used to perform the allocations. The 
Exchange and HHS would use this memorandum to verify that the 
allocations meet the standard, proposed in Sec.  156.470(c). First, the 
issuer must ensure that the allocation is performed by a member of the 
American Academy of Actuaries in accordance with generally accepted 
actuarial principles and methodologies. Second, the rate allocation 
should reasonably reflect the allocation of the expected allowed claims 
costs attributable to EHB (excluding those services described in Sec.  
156.280(d)(1)). Third, the allocation should be consistent with the 
allocation of State-required benefits to be submitted by the issuer as 
proposed in Sec.  155.170(c) of the proposed EHB/AV Rule, and the 
allocation requirements described in Sec.  156.280(e)(4) for certain 
services. Fourth, the issuer should calculate the allocation as if it 
was a premium under the fair health insurance premium standards 
described at Sec.  147.102, the single risk pool standards described at 
Sec.  156.80, and the same premium rate standards described at Sec.  
156.255. We propose this requirement because we believe the allocation 
of rates should be performed consistent with the standards applicable 
to the setting of rates. Thus, for example, an issuer should calculate 
the allocation of premiums using costs for essential health benefits 
across all enrollees in all plans in the relevant risk pool, under 
Sec.  156.80, and not across a standardized population or a plan-
specific population. Although the last

[[Page 73168]]

approach might yield a more accurate allocation, it would increase the 
analytical burden on issuers, and it would not align with other 
reporting requirements, such as for the Effective Rate Review program 
(established under section 2794 of the PHS Act), which requires 
projections based on the single risk pool standards. We welcome comment 
on this proposed standard and alternative approaches.
    In Sec.  156.470(b), we propose somewhat similar standards for the 
allocation of premiums for stand-alone dental plans. Specifically, we 
propose that an issuer provide to the Exchange annually for approval, 
for each stand-alone dental plan offered, or proposed to be offered, in 
the individual market on the Exchange, a dollar allocation of the 
expected premium for the plan, to: (1) the pediatric dental essential 
health benefit, and (2) any benefits offered by the stand-alone dental 
plan that are not the pediatric essential health benefit. As described 
in 26 CFR 1.36B-3(k), this allocation will be used to determine premium 
tax credit, and thus the advance payment of the premium tax credit, 
available if an individual enrolls in both a QHP and a stand-alone 
dental plan. We note that unlike issuers of metal level health plans 
offered or proposed to be offered as QHPs, issuers of stand-alone 
dental plans would be required to submit a dollar allocation of the 
expected premium for the plan (rather than a percentage of the rate, 
which would be multiplied by the premium to determine the allocation of 
the premium).
    We propose this approach because issuers of stand-alone dental 
plans are exempt from certain standards in the proposed Market Reform 
Rule, including Sec.  147.102 and 156.80 (related to fair health 
insurance premiums and the single risk pool), and as a result, are not 
required to develop rates under the same limitations that apply to 
issuers of QHPs in the individual and small group markets. Implicit in 
the allocation methodology required for issuers of QHPs proposed in 
Sec.  156.470(a) is a requirement that the premium rating methodology 
be set prior to the allocation. We anticipate that issuers of stand-
alone dental plans may take into account additional rating factors, up 
to and including medical underwriting, which would make the completion 
and submission of final premium rating methodologies to the Exchange 
problematic. Our proposal at Sec.  156.470(b) does not require issuers 
of stand-alone dental plans to finalize the total premium prior to the 
benefit year, but does require issuers to finalize the dollar amount of 
the premium allocable to the pediatric dental essential health benefit 
to allow for the calculation of advance payments of the premium tax 
credit. This approach will ensure that Exchanges have sufficient 
information to calculate advance payments of the premium tax credit at 
the time an applicant selects coverage.
    In proposed Sec.  156.470(e), we also propose that issuers of 
stand-alone dental plans submit to the Exchange annually for approval 
an actuarial memorandum with a detailed description of the methods and 
specific bases used to perform the allocations, demonstrating that the 
allocations meet the standards proposed in Sec.  156.470(d). These 
standards are similar to those proposed for issuers of metal level 
health plans offered or proposed to be offered as QHPs, with some 
adaptations specific to stand-alone dental plans. In Sec.  
156.470(d)(1) and (2) we propose that the allocation be performed by a 
member of the American Academy of Actuaries in accordance with 
generally accepted actuarial principles and methodologies, and be 
consistent with the allocation applicable to State-required benefits to 
be submitted by the issuer under Sec.  155.170(c). In addition, in 
Sec.  156.470(d)(3), we propose that the allocation be calculated under 
the fair health insurance premium standards described at 45 CFR 
147.102, except for the provision related to age set forth at Sec.  
147.102(a)(1)(ii); the single risk pool standards described at 45 CFR 
156.80; and the same premium rate standards described at 45 CFR 156.255 
(in each case subject to the standard proposed in subparagraph (4) 
described below). We propose these standards because we believe that 
Congress intended that premium tax credits be available based on the 
market reforms embodied in the Affordable Care Act. However, in the 
place of the fair health insurance premium standards related to age, we 
propose in subparagraph (4) that the allocation be calculated so that 
the amount of the premium allocated to the pediatric dental essential 
health benefit for an individual under the age of 19 years does not 
vary, and the amount of the premium allocated to the pediatric dental 
essential health benefit for an individual aged 19 years or more is 
equal to zero. Thus, for example, an issuer of a stand-alone dental 
plan should calculate the dollar allocation for individuals under 19 
years of age across all such enrollees in all plans in the relevant 
risk pool, under Sec.  156.80. This will ensure that advance payments 
of the premium tax credit are applied to policies that include 
individuals who may benefit from the pediatric dental essential health 
benefit as interpreted in the proposed EHB/AV Rule. We seek comment on 
this approach and the proposed allocation standards. We also note that 
issuers of stand-alone dental plans are not required to submit an 
allocation of their expected allowed claims costs because these plans 
are not eligible for cost-sharing reductions, as described in Sec.  
156.440(b).
    In Sec.  155.1030(b)(1), we propose that the Exchange collect and 
review annually the rate or premium allocation, the expected allowed 
claims cost allocation, and the actuarial memorandum that an issuer 
submits; and ensure that such allocations meet the standards set forth 
in Sec.  156.470(c). To ensure that the allocations are completed 
appropriately, we expect that the Exchange will review the allocation 
information in conjunction with the rate and benefit information that 
the issuer submits under Sec.  156.210. To facilitate this review, we 
proposed revisions to the reporting requirements for the Effective Rate 
Review program in the proposed Market Reform rule to include the rate 
allocation and expected allowed claims cost allocation information that 
issuers of metal level health plans would submit. Therefore, an 
Exchange that coordinates its review of QHP rates and benefits with the 
State's Effective Rate Review program would be able to also coordinate 
the allocation review, avoiding duplication. This approach should 
streamline the submission process for issuers. We note, however, that 
it is ultimately the responsibility of the Exchange to ensure that the 
issuer performs the allocations appropriately for each health plan or 
stand-alone dental plan that the issuer offers, or seeks to offer, on 
the individual market in the Exchange, including those that are not 
reported as part of the Effective Rate Review program. Therefore, we 
expect that Exchanges will collect the allocation information through 
the Effective Rate Review program or the QHP certification and annual 
submission process, as appropriate.
    As discussed above, the rate and premium allocation information 
would then be used by the Exchange to calculate the dollar amounts of 
the advance payments of the premium tax credit, and the expected 
allowed claims cost allocation would be used by HHS to calculate the 
advance payments of the cost-sharing reductions, as described in Sec.  
156.430. To allow for these calculations, and to ensure that Federal 
funds are spent appropriately, we propose under Sec.  155.1030(b)(2) 
that the Exchange be required to submit to HHS the approved 
allocation(s) and actuarial memorandum for each QHP and stand-

[[Page 73169]]

alone dental plan. We propose to provide further detail on the manner 
and timeframe of this submission to HHS in the future; however, we 
expect that the Exchange would be required to submit the information 
prior to the start of the benefit year. In paragraph (b)(4), we propose 
authority for the use of this data by HHS for the approval of the 
estimates that issuers submit for advance payments of cost-sharing 
reductions described in Sec.  156.430, and for the oversight of the 
advance payments of cost-sharing reductions and premium tax credits 
programs.
    In Sec.  155.1030(b)(3), we propose that the Exchange collect 
annually any estimates and supporting documentation that a QHP issuer 
submits to receive advance payments for the value of the cost-sharing 
reductions under Sec.  156.430(a). The Exchange must then submit the 
estimates and supporting documentation to HHS for review and approval. 
This collection from issuers should occur as part of the initial QHP 
certification process and any annual submission process. We propose to 
provide further detail on the manner and timeframe of the submission to 
HHS in the future; however, we expect that the Exchange would be 
required to submit the information prior to the start of the benefit 
year.
3. QHP Minimum Certification Standards Relating to Advance Payments of 
the Premium Tax Credit and Cost-Sharing Reductions
    Under HHS rulemaking authority under sections 1311(c)(1), 
1321(a)(1), 1402 and 1412 of the Affordable Care Act, we propose to add 
Sec.  156.215. This section would amend the QHP minimum certification 
standards and specify that an issuer seeking to offer a health plan on 
the individual market in the Exchange meet the requirements described 
in subpart E of part 156 related to the administration of advance 
payments of the premium tax credit and cost-sharing reductions. We 
propose to add this section to clarify that compliance with part 156 
subpart E, including the standards and submission requirements proposed 
at Sec.  156.420 and Sec.  156.470, is a requirement of QHP 
certification, and therefore, is included in the standard described at 
Sec.  155.1000(b), under which an Exchange must offer only health plans 
that meet the minimum certification requirements. Under our proposal, 
continuing compliance with subpart E requirements by QHPs and QHP 
issuers is a condition of certification; failure to comply with the 
requirements could result in decertification of the QHP as well as 
other enforcement actions. This corresponds to the proposed addition of 
Sec.  155.1030, which sets forth the Exchange responsibilities on 
certification with respect to advance payments of the premium tax 
credit and cost-sharing reductions (described previously).
4. Health Insurance Issuer Responsibilities With Respect to Advance 
Payments of the Premium Tax Credit and Cost-Sharing Reductions
a. Definitions
    Under Sec.  156.400, we propose definitions for terms that are used 
throughout subpart E of part 156. These terms apply only to subpart E. 
Some of these definitions cross-reference definitions elsewhere in 
parts 155 or 156, including definitions proposed in the proposed EHB/AV 
Rule: the terms ``advance payments of the premium tax credit'' and 
``Affordable Care Act'' are defined by reference to Sec.  155.20, and 
the term ``maximum annual limitation on cost sharing'' is defined as 
the highest annual dollar amount that health plans (other than QHPs 
with cost-sharing reductions) may require in cost sharing for a 
particular year, as established for that year under Sec.  156.130 of 
the proposed EHB/AV Rule. The terms ``Federal poverty level or FPL'' 
and ``Indian'' are defined by reference to Sec.  155.300(a). The term 
``de minimis variation'' is defined as the allowable variation in the 
AV of a health plan that does not result in a material difference in 
the true dollar value of the health plan as established in Sec.  
156.140(c)(1) of the proposed EHB/AV Rule. We also propose to define 
``stand-alone dental plan'' as a plan offered through an Exchange under 
Sec.  155.1065. We seek comment on these definitions.
    We propose to rely on the definitions of ``cost sharing'' and 
``cost-sharing reductions'' from Sec.  156.20. We note that the 
definitions of cost sharing and cost-sharing reductions apply only with 
respect to EHB, though without regard to whether the EHB is provided 
inside or outside of a QHP's network. We propose to define ``annual 
limitation on cost sharing'' to mean the annual dollar limitation on 
cost sharing required to be paid by an enrollee that is established by 
a particular health plan. However, as proposed in Sec.  156.130(c) of 
the proposed EHB/AV Rule, we note again that the annual limitation on 
cost sharing would not include cost sharing for benefits provided 
outside of a QHP's network. If a State requires a QHP to cover benefits 
in addition to EHB, the provisions of this subpart E (except for Sec.  
156.420(c) and (d)) relating to cost-sharing reductions do not apply to 
those additional State-required benefits. For clarity, we note these 
provisions apply to State-required benefits included in EHB under Sec.  
156.110(f) of the proposed EHB/AV Rule. Finally, we note that cost-
sharing reductions are subject to Sec.  156.280(e)(1)(ii).
    Other definitions are proposed here to effectuate the regulations 
proposed in subpart E. This Payment Notice includes five related 
definitions: standard plan, silver plan variation, zero cost sharing 
plan variation, limited cost sharing plan variation, and plan 
variation, as follows:
     We propose to define ``standard plan'' as a QHP offered at 
one of the four levels of coverage, defined at Sec.  156.140, with an 
annual limitation on cost sharing that conforms to the requirements of 
Sec.  156.130(a). A standard plan at the bronze, silver, gold, or 
platinum level of coverage is referred to as a standard bronze plan, a 
standard silver plan, a standard gold plan, and a standard platinum 
plan, respectively.
     We propose to define ``silver plan variation'' as, with 
respect to a standard silver plan, any of the variations of that 
standard silver plan described in Sec.  156.420(a).
     We propose to define ``zero cost sharing variation'' as, 
with respect to a QHP at any level of coverage, the variation of such 
QHP described in Sec.  156.420(b)(1), which provides for the 
elimination of cost sharing for Indians based on household income 
level.
     We propose to define ``limited cost sharing variation'' 
as, with respect to a QHP at any level of coverage, the variation of 
such QHP described in Sec.  156.420(b)(2), which provides for the 
prohibition on cost sharing applicable to the receipt of benefits from 
IHS or certain other providers, irrespective of income level.
     We propose to define ``plan variation'' as a zero cost 
sharing plan variation, limited cost sharing plan variation, or silver 
plan variation. We emphasize that the plan variations of a QHP are not 
separate plans, but variations in how the cost sharing required under 
the QHP is to be shared between the enrollee(s) and the Federal 
government.
    We propose these definitions to administer and implement the cost-
sharing reductions established under section 1402 of the Affordable 
Care Act. As described in more detail below, although there will only 
be one actual QHP (for example, a standard silver plan) with one 
standard cost-sharing structure, we use the concept of plan variations 
to describe how certain eligible individuals will pay only a

[[Page 73170]]

portion of the total cost sharing required under that QHP, with the 
Federal government bearing the remaining cost-sharing obligations under 
section 1402 of the Affordable Care Act.
    To reflect how the Affordable Care Act creates different 
eligibility categories with different associated cost-sharing 
reductions, we propose that each plan variation will reflect the 
enrollee's portion of the cost sharing requirements for the QHP. We 
refer to ``assigning'' enrollees to the applicable plan variation to 
describe how the enrollee will receive the benefits described in 
section 1402 of the Affordable Care Act. We reiterate that these 
variations are not different QHPs and that a change in eligibility for 
cost-sharing reductions simply changes the enrollee's responsibility 
for part of the total cost sharing under the same QHP. We seek comment 
on these definitions.
    We propose to define ``de minimis variation for a silver plan 
variation'' as a single percentage point. That is, we propose that 1 
percentage point variation in the AV of a silver plan variation would 
not result in a material difference in the true dollar value of the 
silver plan variation. We note that this proposal differs from the 2 
percentage point de minimis variation standard for health plans, 
proposed in Sec.  156.140(c)(1) of the proposed EHB/AV Rule. We believe 
that because cost-sharing reductions are reimbursed by the Federal 
government, the degree of flexibility afforded to issuers of silver 
plan variations in the cost-sharing design should be somewhat less. 
With this standard we seek to balance the need to ensure that 
individuals receive the full value of the cost-sharing reductions for 
which they are eligible, and issuers' ability to set reasonable cost-
sharing requirements.
    We propose to define ``most generous'' or ``more generous'' as, 
between a QHP (including a standard silver plan) or plan variation and 
one or more other plan variations of the same QHP, the QHP or plan 
variation designed for the category of individuals last listed in Sec.  
155.305(g)(3). That list, as proposed to be amended under this rule, 
first lists the QHP with no cost-sharing reductions, followed by the 
limited cost sharing plan variation, the 73 percent, 87 percent, and 94 
percent silver plans, and finally, the zero cost sharing plan 
variation. We seek comment on this definition.
    We propose to define the ``annual limitation on cost sharing'' as 
the annual dollar limit on cost sharing required to be paid by an 
enrollee that is established by a particular QHP. We note that this 
definition refers to the plan-specific cost-sharing parameter, while 
the defined term ``maximum annual limitation on cost sharing'' refers 
to the uniform maximum that would apply to all QHPs (other than QHPs 
with cost-sharing reductions) for a particular year.
    Finally, we propose to define the ``reduced maximum annual 
limitation on cost sharing'' as the dollar value of the maximum annual 
limitation on cost sharing for a silver plan variation that remains 
after applying the reduction in the maximum annual limitation on cost 
sharing required by section 1402 of the Affordable Care Act, as 
announced in the annual HHS notice of benefit and payment parameters. 
The reduced maximum annual limitation on cost sharing for each silver 
plan variation for 2014 is proposed in the preamble for Sec.  156.420 
of this Payment Notice. The reduced maximum annual limitation applies, 
as does the maximum annual limitation, only with respect to cost 
sharing on EHB, and does not apply to cost sharing on services provided 
by out-of-network providers.
b. Cost-Sharing Reductions for Enrollees
    In Sec.  156.410(a), we propose that a QHP issuer must ensure that 
an individual eligible for cost-sharing reductions, as demonstrated by 
assignment to a particular plan variation, pay only the cost sharing 
required of an eligible individual for the applicable covered service 
under a plan variation. For example, if an individual is assigned to an 
87 percent AV silver plan variation, and the copayment for a hospital 
emergency room visit is reduced from $100 to $50 under that silver plan 
variation, the individual must be charged only the reduced copayment of 
$50. We also specify in this paragraph that the enrollee receive this 
reduction in cost sharing when the cost sharing is collected, which in 
this instance might occur when the enrollee visits the emergency room 
for care. This means that a QHP issuer may not create a system in which 
an eligible enrollee is required to pay the full cost sharing 
requirement and apply for a reimbursement or refund. This proposal 
applies to all forms of cost sharing, including copayments, 
coinsurance, and deductibles. Similarly, the QHP issuer must ensure 
that the enrollee is not charged any type of cost sharing after the 
applicable annual limitation on cost sharing has been met. We note, 
however, that an individual eligible for cost-sharing reductions would 
not be eligible for a reduced copayment or coinsurance rate until any 
applicable (potentially reduced) deductible has been paid. For example, 
assume that a QHP issuer requires a $750 deductible for individuals 
eligible for a 73 percent AV silver plan variation, with reduced cost 
sharing occurring after the deductible is met. Further assume that an 
individual eligible for cost-sharing reductions has not previously 
incurred cost sharing during the benefit year under the QHP and has a 
two day hospital stay that costs $500 per day. Under this plan 
variation, the individual must pay $500 for the first day and $250 for 
the second day to meet the plan's deductible requirements before 
receiving the reduced coinsurance or copayment under the 73 percent AV 
plan variation. We seek comment on these provisions.
    In Sec.  156.410(b), we propose that after a qualified individual 
makes a plan selection, a QHP issuer would assign the individual to the 
applicable plan variation under the eligibility determination sent to 
the QHP issuer by the Exchange. For example, an individual determined 
by the Exchange to be eligible for a 94 percent AV silver plan 
variation would be provided the option to enroll in any silver health 
plan with the appropriate cost-sharing reductions applied (the statute 
specifies that cost-sharing reductions are available to non-Indians 
only in silver health plans). We note that the QHP issuer is entitled 
to rely upon the eligibility determination sent to the QHP issuer by 
the Exchange.
    In Sec.  156.410(b)(1), we propose that a QHP issuer assign a 
qualified individual who chooses to enroll in a silver plan in the 
individual market in the Exchange to the silver plan variation for 
which the qualified individual is eligible. This proposal is consistent 
with section 1312(a)(1) of the Affordable Care Act, which permits the 
individual to enroll in the silver health plan. However, section 
1312(a)(1) does not address whether the individual could opt out of the 
most generous silver plan variation (that is, to refuse the most 
generous cost-sharing reductions for which the individual is eligible). 
We believe that allowing opting out of the most generous silver plan 
variation could cause significant consumer confusion, with no attendant 
policy benefit. Furthermore, we note that if a qualified individual 
does not want to take advantage of the cost-sharing reductions for 
which he or she is eligible, the individual may elect to decline to 
apply for cost-sharing reductions when seeking enrollment through the 
Exchange. In addition, we note that section 1402(a) states the 
requirement on QHP issuers to provide cost-sharing reductions to 
eligible individuals once the QHP issuer has

[[Page 73171]]

been notified of the individual's eligibility. We invite comment on 
this approach.
    Section Sec.  156.410(b)(2) and (3) are discussed below in the 
section of this proposed rule related to special cost-sharing reduction 
rules for Indians.
    In Sec.  156.410(b)(4), we propose that a QHP issuer must assign an 
individual determined ineligible by the Exchange for cost-sharing 
reductions to the selected QHP with no cost-sharing reductions.
c. Plan Variations
    In Sec.  156.420, we propose that issuers submit to the Exchange 
for certification and approval the variations of the health plans that 
they seek to offer, or continue to offer, in the individual market on 
the Exchange as QHPs that include required levels of cost-sharing 
reductions. We further clarify that under our proposal, multi-State 
plans, as defined in Sec.  155.1000(a), and CO-OP QHPs, as defined in 
Sec.  156.505, would be subject to the provisions of this subpart. OPM 
will certify the plan variations of the multi-State plans and determine 
the time and manner for submission.
    Sections 1402(a) through (c) of the Affordable Care Act direct 
issuers to reduce cost sharing for EHB for eligible insured enrolled in 
a silver health plan with household incomes between 100 and 400 percent 
of the FPL, such that the plan's share (before any reimbursement from 
HHS for cost-sharing reductions) of the total allowed costs of the 
benefits are a certain percentage (that is, the health plan meets a 
certain AV level). To achieve these AV levels, the law directs issuers 
to first reduce the maximum annual limitation on cost sharing. The 
amount of the reduction in the maximum annual limitation on cost 
sharing is specified in the statute; however, under section 
1402(c)(1)(B)(ii) of the Affordable Care Act, the Secretary may adjust 
the reduction to ensure that the resulting limits do not cause the AVs 
of the health plans to exceed the specified levels. After the issuer 
reduces the annual limitation on cost sharing to comply with the 
applicable reduced maximum annual limitation, section 1402(c)(2) of the 
Affordable Care Act directs the Secretary to establish procedures under 
which an issuer is to further reduce cost sharing if necessary to 
achieve the specified AV levels.
    Table 14 sets forth the reductions in the maximum annual limitation 
on cost sharing (subject to revision by the Secretary) and AV levels 
applicable to silver plans for these individuals, under section 1402(c) 
of the Affordable Care Act:

                   Table 14--Statutory Reductions in Maximum Annual Limitation on Cost Sharing
----------------------------------------------------------------------------------------------------------------
                                                                  Reduction in maximum
                                                                 annual  limitation on     AV level (calculated
                       Household  income                         cost sharing  (subject         before any
                                                                   to revision by the    reimbursement from HHS)
                                                                       Secretary)               (percent)
----------------------------------------------------------------------------------------------------------------
100-150% of FPL...............................................                    \2/3\                       94
150-200% of FPL...............................................                    \2/3\                       87
200-250% of FPL...............................................                    \1/2\                       73
250-300% of FPL...............................................                    \1/2\                       70
300-400% of FPL...............................................                    \1/3\                       70
----------------------------------------------------------------------------------------------------------------

    For individuals with household incomes of 250 to 400 percent of the 
FPL, we note that without any change in other forms of cost sharing, 
any reduction in the maximum annual limitation on cost sharing will 
cause an increase in AV. Therefore, a reduction in the maximum annual 
limitation on cost sharing for the standard silver plan could require 
corresponding increases in other forms of cost sharing to maintain the 
required 70 percent AV. For example, if a plan were directed to lower 
its annual limitation on cost sharing for individuals with household 
income between 250 and 400 percent of the FPL from $6,000 to $5,000, 
the issuer might be required to significantly increase plan 
deductibles, coinsurance, and co-payments to maintain the required 70 
percent AV. We anticipate that most individuals would not expect to 
reach the annual limitation on cost sharing, and therefore, would be 
required to pay more in up-front costs under such a cost-sharing 
structure. Given the effect of the reductions in the maximum annual 
limitation on cost sharing outlined above and the additional 
administrative burden required in designing and operating additional 
silver plan variations, we propose not to reduce the maximum annual 
limitation on cost sharing for individuals with household incomes 
between 250 and 400 percent of the FPL. We believe that this approach 
is within the Secretary's authority under section 1402(c)(1)(B)(ii) of 
the Affordable Care Act, and would benefit those individuals who do not 
expect to reach the annual limitation on cost sharing, who are likely 
to represent the majority of eligible individuals. The majority of 
those who commented on this approach in response to the AV/CSR Bulletin 
were supportive of this proposed implementation of section 1402(c)(1) 
of the Affordable Care Act.
    For individuals with a household income of 100 to 250 percent of 
the FPL, we propose, as outlined in the AV/CSR Bulletin, an annual 
three-step process for the design of cost-sharing structures in the 
silver plan variations, as follows:
    Step 1. In the first step, we would identify in the annual HHS 
notice of benefit and payment parameters the maximum annual limitation 
on cost sharing applicable to all plans that will offer the EHB 
package. This limit would be used to set the reduced maximum annual 
limitation on cost sharing applicable to silver plan variations.
    Section 156.130(a) of the proposed EHB/AV Rule relates to the 
maximum annual limitation on cost sharing for EHB packages. For benefit 
year 2014, cost sharing (except for cost sharing on services provided 
by out-of-network providers) under self-only coverage and non-self-only 
coverage may not exceed the annual dollar limit on cost sharing for 
high deductible health plans as described in sections 
223(c)(2)(A)(ii)(I) and 223(c)(2)(A)(ii)(II) of the Code, respectively. 
For a benefit year beginning after 2014, the maximum annual limitation 
on cost sharing will equal the dollar limit for 2014 benefit year 
adjusted by a premium adjustment percentage determined by HHS, under 
section 1302(c)(4) of the Affordable Care Act. We plan to propose the 
premium adjustment percentage applicable to the 2015 benefit year in 
the next HHS notice of benefit and payment parameters.
    Maximum Annual Limitation on Cost Sharing for Benefit Year 2014: As 
discussed above, the maximum annual limitation on cost sharing for 2014 
will be the dollar limit on cost sharing for

[[Page 73172]]

high deductible health plans set by the IRS for 2014. The IRS will 
publish this dollar limit in the spring of 2013. However, to allow time 
for HHS to analyze the impact of the reductions in the maximum annual 
limitation on cost sharing on health plan AV levels, and to allow 
issuers adequate time to develop the cost-sharing structures of their 
silver plan variations for submission during the QHP certification 
process, we propose to estimate the dollar limit for 2014, using the 
methodology detailed in sections 223(c)(2)(A)(ii) and 223(g) of the 
Code. This methodology calls for a base dollar limit to be updated 
annually by a cost-of-living adjustment, which for 2014 is based on the 
average Consumer Price Index for all urban consumers, published by the 
Department of Labor, for a 12-month period ending March 31, 2013. 
Because that the Consumer Price Index for March 2013 is not yet 
available, we propose to use a projection of this number developed by 
the Office of Management Budget for the President's Budget for Fiscal 
Year 2013. Using this projection, and the methodology described in the 
Code, we estimate that the maximum annual limitation on cost sharing 
for self-only coverage for 2014 will be approximately $6,400 (the 
maximum annual limitation on cost sharing for other than self-only 
coverage for 2014 would be twice that amount, or $12,800). This is 
slightly more than a 2 percent increase from the limit set by IRS for 
2013 ($6,250). We emphasize that this estimate was developed only for 
purposes of setting the reduced maximum annual limitation on cost 
sharing for silver plan variations. Under section 1302(c)(1)(A) of the 
Affordable Care Act, cost sharing incurred under plans offering EHB 
packages in 2014 cannot exceed the limit set by IRS under section 
223(c)(2)(A)(ii)(I) and (II) of the Code for 2014 plan years. We 
welcome comment on this approach.
    Step 2. In the second step under our proposal, we would analyze the 
effect on AV of the reductions in the maximum annual limitation on cost 
sharing described in section 1402(c)(1)(A) of the Affordable Care Act. 
Under section 1402(c)(1)(B)(ii), we would adjust the reduction in the 
maximum annual limitation on cost sharing, if necessary, to ensure that 
the actuarial value of the applicable silver plan variations would not 
exceed the actuarial value specified in section 1402(c)(1)(B)(i). A 
description of our analyses and the reduced annual limitations on cost 
sharing for the three income categories will be published in this 
annual HHS notice of benefit and payment parameters.
    Reduced Maximum Annual Limitation on Cost Sharing for Benefit Year 
2014. For the 2014 benefit year, we analyzed the impact on actuarial 
value of the reductions described in the Affordable Care Act to the 
estimated maximum annual limitation on cost sharing for self-only 
coverage for 2014 ($6,400). We began by developing three model silver 
level QHPs. These model plans were meant to represent the broad sets of 
plan designs that we expect issuers to offer at the silver level of 
coverage through an Exchange. To that end, the model plans include a 
PPO plan with a typical cost-sharing structure ($1,675 deductible and 
20 percent in-network coinsurance rate), a PPO plan with a lower 
deductible and above-average coinsurance ($575 deductible and 40 
percent in-network coinsurance rate), and an HMO-like plan ($2,100 
deductible, 20 percent coinsurance rate, and the following services 
with copays that are not subject to the deductible or coinsurance: $500 
inpatient stay, $350 emergency department visit, $25 primary care 
office visit, and $50 specialist office visit).\37\ All three model 
plans meet the actuarial value requirements for silver health plans, 
and start with an annual limitation on cost sharing equal to the 
estimated maximum annual limitation on cost sharing ($6,400). The plan 
design features of the model QHPs were entered into the AV calculator 
developed by HHS and proposed at Sec.  156.135(a) in the proposed EHB/
AV Rule, implementing section 1302(d) of the Affordable Care Act. We 
then observed how the reduction in the maximum annual limitation on 
cost sharing specified in the Affordable Care Act (that is, \2/3\ or 
\1/2\ of the annual limitation on cost sharing, as applicable) affected 
the AV of the plans.
---------------------------------------------------------------------------

    \37\ We note that these plan structures are broadly consistent 
with structures suggested by research from ``Small Group Health 
Insurance in 2010: A Comprehensive Survey of Premiums, Product 
Choices, and Benefits.'' America's Health Insurance Plans Center for 
Policy and Research. July 2011; ``Employer Health Benefits: 2011 
Summary of Findings.'' The Kaiser Family Foundation and Health 
Research & Educational Trust. Accessed on June 7, 2012 from http://ehbs.kff.org/pdf/8226.pdf; and ``What the Actuarial Values in the 
Affordable Care Act Mean.'' The Kaiser Family Foundation: Focus on 
Health Reform. April 2011. Accessed on June 7, 2012 from http://www.kff.org/healthreform/upload/8177.pdf.
---------------------------------------------------------------------------

    We found that the reduction in the maximum annual limitation on 
cost sharing specified in the Affordable Care Act for enrollees with a 
household income level between 100 and 150 percent of the FPL (\2/3\ 
reduction), and 150 and 200 percent of the FPL (\2/3\ reduction), did 
not cause the AV of any of the model QHPs to exceed the statutorily 
specified AV level (94 and 87, respectively). This suggests that it is 
unnecessary to adjust the reduction under section 1402(c)(1)(B)(ii) of 
the Affordable Care Act for benefit year 2014. In contrast, the 
reduction in the maximum annual limitation on cost sharing specified in 
the Affordable Care Act for enrollees with a household income level 
between 200 and 250 percent of FPL (\1/2\ reduction), did cause the AVs 
of the model QHPs to exceed the specified AV level of 73 percent. As a 
result, we propose that QHP issuers only be required to reduce their 
annual limitation on cost sharing for enrollees in the 2014 benefit 
year with a household income between 200 and 250 percent of FPL by 
approximately \1/5\, rather than \1/2\. We further propose to moderate 
the reductions in the maximum annual limitation on cost sharing for all 
three income categories, as shown in Table 15, to account for any 
potential inaccuracies in our estimate of the maximum annual limitation 
on cost sharing for 2014, and unique plan designs that may not be 
captured by our three model QHPs. We note that selecting a lesser 
reduction for the maximum annual limitation on cost sharing will not 
reduce the benefit afforded to enrollees in aggregate as QHP issuers 
are required to further reduce their limit on cost sharing, or reduce 
other types of cost sharing, if the required reduction does not cause 
the actuarial value of the QHP to meet the specified level, as detailed 
in step 3 of this proposal. Based on this analysis, in Table 15, we 
propose the following reduced maximum annual limitations on cost 
sharing for benefit year 2014:

[[Page 73173]]



                   Table 15--Reductions in Maximum Annual Limitation on Cost Sharing for 2014
----------------------------------------------------------------------------------------------------------------
                                                      Reduced maximum annual          Reduced maximum annual
                                                    limitation on cost sharing      limitation on cost sharing
              Eligibility category                  for self-only coverage for       for other than self-only
                                                               2014                      coverage for 2014
----------------------------------------------------------------------------------------------------------------
Individuals eligible for cost-sharing reductions                         $2,250                          $4,500
 under Sec.   155.305(g)(2)(i) (that is, 100-
 150% of FPL)...................................
Individuals eligible for cost-sharing reductions                         $2,250                          $4,500
 under Sec.   155.305(g)(2)(ii) (that is, 150-
 200% of FPL)...................................
Individuals eligible for cost-sharing reductions                         $5,200                         $10,400
 under Sec.   155.305(g)(2)(iii) (that is, 200-
 250% of FPL)...................................
----------------------------------------------------------------------------------------------------------------

    We do not believe there will be a need to revise our analyses once 
the IRS dollar limit for 2014 is published, and propose that QHP 
issuers may rely on the reduced maximum annual limitations on cost 
sharing published in the final HHS notice of benefit and payment 
parameters to develop their silver plan variations for the 2014 benefit 
year. We welcome comment on this approach.
    Step 3. In the third step under our proposal, a QHP issuer offering 
coverage in the individual market on the Exchange would develop three 
variations of its standard silver plan--one each for individuals with 
household incomes between 100 and 150 percent of the FPL, 150 and 200 
percent of the FPL, and 200 and 250 percent of the FPL--with each 
variation having an annual limitation on cost sharing that does not 
exceed the applicable reduced maximum annual limitation on cost sharing 
published in the annual HHS notice of benefit and payment parameters. 
If the application of the reduced annual limitation on cost sharing 
results in an AV for a particular silver plan variation that differs 
from the required 73, 87, or 94 percent AV level by more than the 
permitted amount (that is, the 1 percent de minimis amount for silver 
plan variations, subject to proposed Sec.  156.420(f), as described 
below), the QHP issuer would adjust the cost-sharing structure in that 
silver plan variation to achieve the applicable AV level.
    For example, we propose to set the reduced maximum annual 
limitation on cost sharing for self-only coverage for 2014 at $2,250 
for individuals with household incomes between 150 and 200 percent of 
the FPL. However, an issuer might find that even when the limitation on 
cost sharing for the proposed plan is reduced to $2,250, the actuarial 
value of the plan may only increase to 82 percent. The issuer would 
then amend its cost-sharing structure by decreasing copayments, 
deductibles or coinsurance (or further reducing the annual limitation 
on cost sharing) so that the silver plan variation achieves the 
required AV of 87 percent (plus or minus the de minimis variation for 
silver plan variations). The AV of the silver plan variation would be 
calculated using the AV calculator or other permitted methods, as 
described in Sec.  156.135 of the proposed EHB/AV Rule.
    We set forth in Sec.  156.420(a)(1) through (3) proposed 
specifications for the three silver plan variations, and propose that 
they may deviate from the required AV levels by the de minimis 
variation for silver plan variations, established as 1 percentage 
point. We further propose that issuers submit these silver plan 
variations annually to the Exchange for certification, prior to the 
benefit year. Silver plan variations must be approved annually even if 
the standard silver plan does not change, since the reduced maximum 
annual limitation on cost sharing may change annually due to the 
premium adjustment percentage. We welcome comment on this proposed 
provision.
    Sections 156.420(b) and (d) are discussed below in the section 
related to special cost-sharing reduction rules for Indians.
    In Sec.  156.420(c), we propose that silver plan variations cover 
the same benefits and include the same providers as the standard silver 
plan. We further propose that silver plan variations must require the 
same out-of-pocket spending for benefits other than EHB. Lastly, we 
propose that silver plan variations be subject to all requirements 
applicable to the standard silver plan (except for the requirement that 
the plan have an AV as set forth in Sec.  156.140(b)(2) of the proposed 
EHB/AV Rule). This means, for example, that silver plan variations must 
meet standards relating to marketing and benefit design of QHPs, 
network adequacy standards, and essential community providers. Although 
these requirements are implicit because a plan variation is not a 
separate plan, we seek to make these requirements explicit to ensure 
that QHP issuers develop appropriate plan variations.
    In Sec.  156.420(e), we propose a standard to govern the design of 
cost sharing structures for silver plan variations. Under this 
approach, the cost sharing for enrollees under any silver plan 
variation for an EHB from a provider may not exceed the corresponding 
cost sharing in the standard silver plan or any other silver plan 
variation of the standard silver plan with a lower AV. For example, if 
the co-payment on an emergency room visit at a particular university 
hospital is $30 in the silver plan variation with a 73 percent AV, the 
co-payment in the silver plan variation with an 87 percent AV for that 
issuer would be $30 or less. This proposed standard would apply to all 
types of cost-sharing reductions, including reductions to deductibles, 
coinsurance, and co-payments. An issuer would have the flexibility to 
vary cost sharing on particular benefits or providers so long as that 
cost sharing did not increase for a particular benefit or provider for 
higher AV silver plan variations. This standard, along with the 
proposed requirements in Sec.  156.420(c), would help ensure that 
silver plan variations with higher AVs would always provide the most 
cost savings to enrollees while providing the same benefits and 
provider network. Furthermore, consumers would be best served by 
enrolling in the highest AV variation of the standard silver plan 
selected for which they are eligible. We also believe that this 
proposed standard is appropriate as the plan variations are meant to be 
the same as the QHP, except as to the payer of the cost sharing and the 
reduction in out-of-pocket costs charged to the eligible individual.
    We provided an overview of this proposed approach in the AV/CSR 
Bulletin. One commenter expressed concern about the differential effect 
of deductibles on low-income populations, and suggested that we also 
set limits on deductibles in silver plan variations. A number of other 
commenters also urged HHS to adopt more restrictive

[[Page 73174]]

requirements on issuers' designs of cost-sharing structures in silver 
plan variations. One commenter urged HHS to systematically monitor a 
number of aspects of how QHP issuers implement cost-sharing reductions.
    We believe that, at this point, this proposal strikes the 
appropriate balance between protecting consumers and preserving QHP 
issuer flexibility. The standard in Sec.  156.420(e) that cost sharing 
for a silver plan variation not exceed the corresponding cost sharing 
for a standard silver plan or silver plan variation with a lower AV, 
along with non-discrimination standards described in Sec.  156.130(g) 
of the proposed EHB/AV Rule, protects low-income populations who are 
assigned to these QHP plan variations through the Exchange. We seek 
comment on this approach.
    In Sec.  156.420(f), we propose that, notwithstanding the permitted 
de minimis variation in AV for a health plan or the permitted de 
minimis variation for a silver plan variation, the AV of the standard 
silver plan (which must be 70 percent plus or minus 2 percentage 
points) and the AV of the silver plan variation applicable to 
individuals with household incomes between 200 and 250 percent of the 
FPL (which must be 73 percent plus or minus 1 percentage point) must 
differ by at least 2 percentage points. For example, under the de 
minimis standard proposed in Sec.  156.140(c)(1) of the proposed EHB/AV 
rule, an issuer would be permitted to offer a standard silver plan with 
an AV of 72 percent. Under the proposed rule in Sec.  156.420(f), that 
issuer would be permitted to offer a silver plan variation with an AV 
of 74 percent to individuals with household incomes between 200 and 250 
percent of the FPL, but not a silver plan variation with an AV of 73 
percent. This proposal helps ensure that eligible enrollees with 
household incomes between 200 and 250 percent of the FPL can purchase a 
plan with a cost-sharing structure that is more generous than that 
associated with the standard silver plan, consistent with Congressional 
intent for cost-sharing reductions under section 1402(c). We chose to 
propose a 2 percentage point differential to ensure that a difference 
in cost-sharing reductions provided to each income category is 
maintained, while still allowing issuers the flexibility to set the AV 
within the de minimis variation standards and to develop plan designs 
with easy-to-understand cost sharing arrangements. We welcome comments 
on this approach.
d. Changes in Eligibility for Cost-Sharing Reductions
    In Sec.  156.425(a), we propose that if the Exchange notifies a QHP 
issuer of a change in an enrollee's eligibility for cost-sharing 
reductions (including a change following which the enrollee will not be 
eligible for cost-sharing reductions), then the QHP issuer must change 
the individual's assignment so that the individual is assigned to the 
applicable standard plan or plan variation. We also propose that the 
QHP issuer effectuate the change in eligibility in accordance with the 
effective date of eligibility provided by the Exchange, as described in 
Sec.  155.330(f). We clarify that if an enrollee changes QHPs after the 
effective date of the eligibility change as the result of a special 
enrollment period, once the Exchange notifies the issuer of the new QHP 
of the enrollment, that QHP issuer must assign the enrollee to the 
applicable standard plan or plan variation of the QHP selected by the 
enrollee, consistent with the proposed Sec.  156.410(b).
    In paragraph (b) of Sec.  156.425, we propose that in the case of a 
change in assignment to a different plan variation (or standard plan 
without cost-sharing reductions) of the same QHP in the course of a 
benefit year (including in the case of a re-enrollment into the QHP 
following enrollment in a different plan), the QHP issuer must ensure 
that any cost sharing paid by the applicable individuals under the 
previous plan variations (or standard plan without cost-sharing 
reductions) is accounted for in the calculation of deductibles and 
annual limitations on cost sharing in the individual's new plan 
variation for the remainder of the benefit year. We note that a change 
from or to an individual or family policy of a QHP due to the addition 
or removal of family members does not constitute a change in plan for 
the family members who remain on the individual or family policy. 
Individuals would therefore not be penalized by changes in eligibility 
for cost-sharing reductions during the benefit year or the addition or 
removal of family members, although they would be ineligible for any 
refund on cost sharing to the extent the newly applicable deductible or 
annual limitation on cost sharing is exceeded by prior cost sharing. 
The QHP issuer would not be prohibited from or required to extend this 
policy to situations in which the individual changes QHPs, including by 
enrolling in a QHP at a different metal level, but would be permitted 
to so extend this policy, provided that this extension of the policy is 
applied across all enrollees in a uniform manner. We seek comment on 
this provision.
e. Payment for Cost-Sharing Reductions
    Section 1402(c)(3) of the Affordable Care Act directs a QHP issuer 
to notify the Secretary of HHS of cost-sharing reductions made under 
the statute for individuals with household incomes under 400 percent of 
the FPL, and directs the Secretary to make periodic and timely payments 
to the QHP issuer equal to the value of those reductions. Section 
1402(c)(3)(B) also permits the Secretary to establish a capitated 
payment system to carry out these payments. Further, section 1412(c)(3) 
of the Affordable Care Act permits advance payments of cost-sharing 
reduction amounts to QHP issuers based upon amounts specified by the 
Secretary. Under these authorities, we propose to implement a payment 
approach under which we would make monthly advance payments to issuers 
to cover projected cost-sharing reduction amounts, and then reconcile 
those advance payments at the end of the benefit year to the actual 
cost-sharing reduction amounts.\38\ This approach fulfills the 
Secretary's obligation to make ``periodic and timely payments equal to 
the value of the reductions'' under section 1402(c)(3) of the 
Affordable Care Act. This proposal would not require issuers to fund 
the value of any cost-sharing reductions prior to reimbursement (to the 
extent the issuers provide the required actuarial information), and 
ensures that payments are made only for actual cost-sharing reduction 
amounts realized by Exchange enrollees. This approach is similar to the 
one employed for the low-income subsidy under Medicare Part D. We 
welcome comments on this and alternative approaches, and whether this 
approach should change over time.
---------------------------------------------------------------------------

    \38\ We note that these payments (both advance and reconciled), 
and the estimated or actual cost-sharing reductions underlying them, 
are subject to 45 CFR 156.280(e)(1)(ii).
---------------------------------------------------------------------------

    To implement our proposed payment approach, in Sec.  
156.430(a)(1)(i) through (iv), we propose that for each health plan 
that an issuer offers, or intends to offer, in the individual market on 
the Exchange as a QHP, the issuer must provide to the Exchange annually 
prior to the benefit year, for approval by HHS, an estimate of the 
dollar value of the cost-sharing reductions to be provided over the 
benefit year. If the QHP is a silver health plan, the submission must 
identify separately the per member per month dollar value of the cost-
sharing reductions to be provided under each silver plan variation 
identified in

[[Page 73175]]

Sec.  156.420(a)(1), (2), and (3). And for each QHP, regardless of 
metal level, the submission must identify the per member per month 
dollar value of the cost-sharing reductions to be provided under the 
zero cost sharing plan variation. In addition, the estimate should be 
accompanied by supporting documentation validating the estimate. We 
expect that Exchanges will collect this information from issuers 
through the QHP certification process or an annual submission process, 
and then send the information to HHS for review and approval. Sections 
156.430(a)(1)(ii) and 156.430(a)(2) are further described in section 
III.E.4.i. of this proposed rule.
    We further propose that issuers develop the estimates using the 
methodology specified by HHS in the applicable annual HHS notice of 
benefit and payment parameters. In Sec.  156.430(a)(3), we propose that 
HHS will approve estimates that follow this methodology. For the 2014 
benefit year, we propose that issuers use a methodology that utilizes 
the data that issuers submit under Sec.  156.420 and Sec.  156.470. As 
a result, issuers would not be required to submit any additional data 
or supporting documentation to receive advance payments in benefit year 
2014 for the value of the cost-sharing reductions that would be 
provided under silver plan variations. Below, we describe in detail how 
the data that issuers will submit under Sec.  156.420 and Sec.  156.470 
will be used to develop the estimate of the value of the cost-sharing 
reductions for the 2014 benefit year.
    Methodology for Developing Estimate of Value of Cost-Sharing 
Reductions for Silver Plan Variations for 2014 Benefit Year. We propose 
that for the 2014 benefit year, issuers use a simplified methodology 
for estimating the value of the cost-sharing reductions under silver 
plan variations and calculating the advance payments. We believe that 
the lack of data regarding the costs that will be associated with the 
QHPs and their plan variations will make it difficult to accurately 
predict the value of the cost-sharing reductions, even if a complex 
methodology is used. We intend to review the methodology for estimating 
the advance payments in future years, once more data is available. We 
also note that the payment reconciliation process described Sec.  
156.430(c) through paragraph (e) would ensure that the QHP issuer is 
made whole for the value of any cost-sharing reductions provided during 
the year, which may not be equal to the value of the advance payments.
    For the 2014 benefit year, we propose that advance payments be 
estimated on a per enrollee per month basis using the following 
formula:
[GRAPHIC] [TIFF OMITTED] TP07DE12.013

    In this formula, the monthly expected allowed claims cost for a 
silver plan variation would equal one-twelfth of the expected allowed 
claims costs allocated to EHB, other than services described in Sec.  
156.280(d)(1),\39\ for the standard silver plan, multiplied by a factor 
to account for the increased utilization that may occur under the 
specific plan variation due to the reduced cost-sharing requirements. 
As described in Sec.  156.470, the QHP issuer will submit the expected 
allowed claims cost information to the Exchange annually. The Exchange 
will then review this estimate, and submit the approved information to 
HHS, as described in proposed Sec.  155.1030(b)(2) above, for use in 
the advance payment calculation. HHS will then multiply the monthly 
expected allowed claims cost by one of the following induced 
utilization factors, to arrive at the monthly expected allowed claims 
cost for the particular plan variation. We propose the following 
induced utilization factors based on our analysis of the expected 
difference in expenditures for enrollees in QHPs of different actuarial 
values. For this analysis, we used the Actuarial Value Calculator, 
developed by HHS using the Health Intelligence Company, LLC (HIC) 
database from calendar year 2010. This database includes detailed 
enrollment and claims information for individuals who are members of 
regional insurers and covers over 54 million individuals. The database 
includes current members of small group health plans, and a population 
relatively similar to the population of enrollees likely to participate 
in the health exchanges.\40\
---------------------------------------------------------------------------

    \39\ Under Sec.  156.20, cost-sharing reductions are only 
provided on EHB. In addition, Sec.  156.280(e)(1)(i) states that if 
a QHP provides coverage of services described in paragraph (d)(1) of 
that section, the QHP issuer must not use federal funds, including 
cost-sharing reductions, to pay for the service.
    \40\ We note that these induced utilization factors appear to be 
broadly consistent with results from the RAND Health Insurance 
Experiment, described in Robert H. Brook, John E. Ware, William H. 
Rogers, Emmett B. Keeler, Allyson Ross Davies, Cathy Donald 
Sherbourne, George A. Goldberg, Kathleen N. Lohr, Patti Camp, and 
Joseph P. Newhouse. The Effect of Coinsurance on the Health of 
Adults: Results from the RAND Health Insurance Experiment. Santa 
Monica, Calif.: RAND Corporation, R-3055-HHS, December 1984.

   Table 16--Induced Utilization Factors for Purposes of Cost-Sharing
                       Reduction Advance Payments
------------------------------------------------------------------------
                                                               Induced
         Household  income               Silver plan AV      utilization
                                                               factor
------------------------------------------------------------------------
100-150% of FPL....................  Plan Variation 94%...          1.12
150-200% of FPL....................  Plan Variation 87%...          1.12
200-250% of FPL....................  Plan Variation 73%...          1.00
------------------------------------------------------------------------

    In the second half of the formula, we propose the multiplication of 
the monthly expected allowed claims cost for the particular plan 
variation by the difference in AV between the standard silver plan and 
the plan variation. This will allow us to estimate the difference in 
cost sharing between the standard plan and the plan variation. We 
propose to use the actuarial values of the QHPs and silver plan 
variations that the Exchange will submit to HHS under Sec.  
155.1030(a)(2).
    This methodology should limit the burden of estimating cost-sharing 
reduction amounts on QHP issuers, and provide a standardized per 
enrollee per month estimate of the value of cost-sharing reductions. 
This estimate can then be multiplied by the number of enrollees 
assigned to a particular plan variation in a given month to arrive at 
the total advance payment that will be provided to the issuer for each 
plan variation of each QHP, for a given

[[Page 73176]]

month. We welcome comment on this methodology and the proposed induced 
utilization factors, as well as the value of increasing the complexity 
of the methodology versus the value of operational efficiency.
    In Sec.  156.430(b), we propose making periodic advance payments to 
issuers based on the approved advance estimates provided under Sec.  
156.430(a) and the confirmed enrollment information. We propose to use 
the methodology described above to determine the amount of these 
advance payments.
    In Sec.  156.430(c), we propose that a QHP issuer report to HHS the 
actual amount of cost-sharing reductions provided. In general, for a 
particular benefit provided by the QHP, this amount would equal the 
difference between the cost sharing required of an enrollee in the 
corresponding standard silver plan with no cost-sharing reductions and 
the cost sharing that was actually required of the enrollee under the 
plan variation at the point where the service was provided. For 
example, if an individual enrolled in a silver plan variation receives 
a benefit that would be subject to a $20 copayment under the standard 
silver plan but is subject to only a $5 copayment under the silver plan 
variation in which the individual is enrolled, the cost-sharing 
reduction amount would be $15. Additional specifications regarding 
submission of actual cost-sharing reduction amounts will be provided in 
future guidance; however, we expect that QHP issuers will submit the 
actual amount of cost-sharing reductions provided after the close of 
the benefit year.
    In Sec.  156.430(c)(1) and (c)(2), we propose specific standards 
for the reporting of cost-sharing reduction amounts. In Sec.  
156.430(c)(1), we propose that in the case of a benefit for which the 
QHP issuer compensates the applicable provider in whole or in part on a 
fee-for-service basis, the QHP issuer submit the total allowed costs 
for essential health benefits charged for an enrollees' policy for the 
benefit year, broken down by what the issuer paid, what the enrollee 
paid, and the amount reimbursed to the provider for the amount that the 
enrollee would have paid under the standard QHP without cost-sharing 
reductions. In Sec.  156.430(c)(2), we propose that in the case of a 
benefit for which the QHP issuer compensates the applicable provider in 
any other manner (such as on a capitated basis), the QHP issuer submit 
the total allowed costs for essential health benefits charged for an 
enrollees' policy for the benefit year, broken down by what the issuer 
paid, what the enrollee paid, and the amount that the enrollee would 
have paid under the standard QHP without cost-sharing reductions. When 
we refer to compensation made on a capitated basis in this context, we 
mean a compensation model under which issuers make payments to 
providers based on a contracted rate for each enrollee, commonly 
referred to as a ``per-member-per-month'' rate, regardless of the 
number or type of services provided. We note that a non-fee-for-service 
provider is not required to be reimbursed by the issuer. However, we 
expect that issuers and providers in non-fee-for-service arrangements 
will make available to providers compensation for cost-sharing 
reductions through their negotiated capitation payments. We seek 
comments on this assumption and other payment approaches for QHPs that 
use a capitated system to pay providers.
    In Sec.  156.430(d), we propose to periodically reconcile advance 
payments to issuers against the actual cost-sharing reduction amounts 
reported under Sec.  156.430(c). Thus, where a QHP issuer compensates a 
provider in whole or in part on a fee-for-service basis, we would 
reconcile the advance payments provided to the issuer against the 
actual amount of cost-sharing reductions reimbursed to providers and 
provided to enrollees. Where the QHP issuer compensates a provider 
under another arrangement, such as a capitated arrangement, we would 
reconcile the advance payments made to issuers against the actual cost-
sharing reduction amounts provided to enrollees. We propose this 
differentiated reimbursement approach because if issuers are paying 
providers on a basis other than a fee-for-service basis, the parties 
may not be exchanging data or making payments on a per-service basis. 
We do not wish to interfere with contractual payment arrangements 
between issuers and providers by imposing per-service accounting or 
payment streams if an issuer and provider have elected not to structure 
their relationship in that manner. However, in all cases we would 
condition reimbursement upon provision to the enrollee at the point-of-
service of the cost-sharing reduction under the applicable plan 
variation. We welcome comment on this proposal.
    We propose in Sec.  156.430(e) that if the actual amounts of cost-
sharing reductions exceed the advance payment amounts provided to the 
issuer (including if the QHP issuer elected not to submit an advance 
estimate of the cost-sharing reduction amounts provided under the 
limited cost sharing plan variation, and therefore received no advance 
payments), HHS would reimburse the issuer for the shortfall, assuming 
that the issuer has submitted its actual cost-sharing reduction amount 
report to HHS in a timely fashion. If the actual amounts of cost-
sharing reductions are less than the advance payment amounts provided 
to the issuer, we propose that the QHP issuer must repay the difference 
to HHS. Detailed procedural requirements and interpretive guidance on 
cost-sharing reduction reconciliation will be provided in the future.
    In Sec.  156.430(f), we propose rules on advance payment and 
reimbursement of cost-sharing reductions during special transitional 
periods of coverage where eligibility and enrollment are uncertain, 
including requirements relating to cost-sharing reductions provided 
during grace periods following non-payment of premium. Under Sec.  
156.270, a QHP issuer must establish a standard policy for termination 
of coverage for non-payment of premiums by enrollees. Under that 
policy, a three-month grace period applies if an enrollee receiving 
advance payments of the premium tax credit has previously paid at least 
one full month's premium during the benefit year. In the first month of 
the grace period, the QHP issuer must pay all appropriate claims for 
services rendered and HHS would reimburse the QHP issuer for cost-
sharing reductions for such claims (and the QHP issuer may retain any 
advance payments of cost-sharing reductions), but the issuer may pend 
claims for services rendered to the enrollee in the second and third 
months of the grace period. If an enrollee exhausts the grace period 
without making full payment of the premiums owed, the QHP issuer may 
terminate coverage and deny payment for the pending claims.
    In Sec.  156.430(f)(1), we propose standards related to the non-
payment of premiums and exhausted grace periods. We propose that a QHP 
issuer will be eligible for reimbursement of cost-sharing reductions 
provided prior to a termination of coverage effective date. 
Furthermore, any advance payments of cost-sharing reductions would be 
paid to a QHP issuer for coverage prior to a determination of 
termination, including during any grace period as described in Sec.  
155.430(b)(2)(ii)(A) and (B). The determination of termination occurs 
on the date that the Exchange sends termination information to the QHP 
issuer and HHS under Sec.  155.430(c)(2).
    The QHP issuer would be required to repay any advance payments of 
cost-sharing reductions made with respect to any month after any 
termination of

[[Page 73177]]

coverage effective date during a grace period. A QHP issuer generally 
would not be eligible for reimbursement of cost-sharing reductions 
provided after the termination of coverage effective date with respect 
to a grace period. For example, if an individual receiving advance 
payments of the premium tax credit is eligible for cost-sharing 
reductions, and stops paying his or her premium, HHS would continue to 
provide advance payments of the cost-sharing reductions during the 
grace period. HHS would reimburse the QHP issuer for any reduction in 
cost sharing provided during the first month of the three-month grace 
period, but not after the termination of coverage effective date (that 
is, there will be no reimbursement for cost-sharing reductions provided 
during the second and third month of the grace period if retroactive 
termination occurs). The issuer may pend claims and payments for cost-
sharing reductions for services rendered to the individual in the 
second and third month of the grace period, as described in Sec.  
156.270(d). The QHP issuer must return to HHS any advance payments of 
the cost-sharing reduction applicable to the second and third months. 
This proposed policy aligns with the approach for advance payments of 
the premium tax credit described in Sec.  156.270(e).
    We propose in Sec.  156.430(f)(2) and (3) that in the case of any 
other retroactive termination, if the termination (or late 
determination thereof) is the fault of the QHP issuer, as reasonably 
determined by the Exchange, the QHP issuer would not be eligible for 
advance payments and reimbursement for cost-sharing reductions provided 
during the period following the termination of coverage effective date 
and prior to the determination of the termination; and if the 
termination (or the late determination thereof) is not the fault of the 
QHP issuer, as reasonably determined by the Exchange, the QHP issuer 
would be eligible for advance payments and reimbursement for cost-
sharing reductions provided during such period. For example, if a QHP 
issuer fails to timely notify the Exchange that an enrollee requested a 
termination of coverage, the Exchange could reasonably determine that 
the QHP issuer is at fault and would not be eligible for advance 
payments and reimbursement for cost-sharing reductions provided during 
the period following the termination of coverage effective date and 
prior to the determination of the termination. Alternatively, if an 
individual was incorrectly enrolled in a QHP due to an error by the 
Exchange, the QHP issuer would not be at fault and would be eligible 
for advance payments and reimbursement for cost-sharing reductions 
provided during the period following the termination of coverage 
effective date and prior to the determination of the termination. We 
welcome comment on this proposal and other approaches, and seek comment 
on the relative equities of, incentives created by, and consequences of 
this proposal and other approaches, including the potential costs to 
HHS.
    In Sec.  156.430(f)(4), we propose that a QHP issuer would be 
eligible for advance payments and reimbursement of cost-sharing 
reductions provided during any period for resolution of inconsistencies 
in information required to determine eligibility for enrollment under 
Sec.  155.315(f). Under Sec.  155.315(f), if an Exchange cannot verify 
eligibility information for an individual, it must provide the 
individual at least 90 days to present satisfactory evidence of 
eligibility to resolve the inconsistency. In the interim, the Exchange 
must make an eligibility determination based upon the individual's 
attestation and other verified information in the application, 
including with respect to the cost-sharing reductions for which the 
individual is eligible. At the end of the inconsistency period, if the 
Exchange cannot confirm the attestation, the Exchange must make the 
eligibility determination based upon the data available, subject to 
certain exceptions. In the event the Exchange cannot confirm the 
attestation and determines the individual to be ineligible for cost-
sharing reductions provided during the inconsistency period, we propose 
to reimburse those cost-sharing reductions because there is no clear 
mechanism under the Affordable Care Act for seeking reimbursement of 
those amounts from the individual. We welcome comment on this proposal 
and other approaches, and seek comment on the relative equities of, 
incentives created by, and consequences of this proposal and other 
approaches, including the potential costs to HHS.
f. Plans Eligible for Advance Payments of the Premium Tax Credit and 
Cost-Sharing Reductions
    In Sec.  156.440, we clarify the applicability of advance payments 
of the premium tax credit and cost-sharing reductions to certain QHPs. 
We propose that the provisions of part 156 subpart E generally apply to 
qualified health plans offered in the individual market on the 
Exchange.
    However, we propose in Sec.  156.440(a) that the provisions not 
apply to catastrophic plans as described in Sec.  156.155 of the 
proposed Market Reform Rule to be consistent with 26 CFR 1.36B-1(c). 
Section 36B(c)(3)(A) of the Code defines a QHP to exclude catastrophic 
plans--a definition that also applies to section 1402 of the Affordable 
Care Act, by means of section 1402(f)(1) of the Affordable Care Act. 
Further, eligibility for cost-sharing reductions is tied to a 
``coverage month with respect to which a premium tax credit is paid,'' 
which would exclude months during which the individual is enrolled in a 
catastrophic health plan. Therefore, we propose that enrollment in a 
catastrophic plan precludes eligibility for cost-sharing reductions. 
Effectively, this proposal restricts the provision of cost-sharing 
reductions with respect to Indians only, because non-Indians can only 
receive cost-sharing reductions when enrolled in a silver plan 
variation.
    We propose in Sec.  156.440(b) that the provisions of this subpart 
E, including Sec.  156.410, Sec.  156.420, Sec.  156.425, Sec.  
156.430, and Sec.  156.470, to the extent each relate to cost-sharing 
reductions, not apply to stand-alone dental plans. Section 
1311(d)(2)(B)(ii) of the Affordable Care Act provides that an Exchange 
must allow a stand-alone dental plan that provides pediatric dental 
benefits that are EHB to be offered separately from or in conjunction 
with a QHP. However, section 1402(c)(5) of the Affordable Care Act 
states if an individual enrolls in both a QHP and a stand-alone dental 
plan, the provisions on cost-sharing reductions under sections 1402(a) 
and (c) of the Affordable Care Act do not apply to that portion of the 
cost-sharing reductions properly allocable to pediatric dental EHB, 
meaning that if an individual enrolls in both a QHP and a stand-alone 
dental plan offered on an Exchange, cost-sharing reductions are not 
payable with respect to pediatric dental benefits offered by the stand-
alone dental plan. However, cost-sharing reductions would be payable 
with respect to pediatric dental benefits provided by a QHP. Requiring 
payment of cost-sharing reductions on pediatric dental benefits within 
a stand-alone dental plan offered on an Exchange would create 
significant operational complexities. For example, stand-alone dental 
plans would be required to submit plan variations, and since the 
calculation of AV for stand-alone dental plans will not be 
standardized, the review and approval of the plan variations and 
advance estimates would be difficult to oversee.
    We propose to clarify in Sec.  156.440(c) that the provisions of 
this subpart E

[[Page 73178]]

apply to child-only plans. Section 1302(f) of the Affordable Care Act 
and Sec.  156.200(c)(2) of this subchapter provides that an issuer that 
offers a QHP at any level of coverage in an Exchange also must offer 
the plan at the same level of coverage in the Exchange only to 
individuals that have not attained age 21. Under section 1302(f) of the 
Affordable Care Act, the child-only plan is to be treated as a QHP, and 
is therefore subject to the provisions of this subpart E.
g. Reduction of Enrollee's Share of Premium To Account for Advance 
Payments of the Premium Tax Credit
    In Sec.  156.460(a), we propose to codify QHP issuer requirements 
set forth in section 1412(c)(2)(B) of the Affordable Care Act. The law 
authorizes the payment of advance tax credits to QHP issuers on behalf 
of certain qualified enrollees. The advance payment must be used to 
reduce the portion of the premium charged to enrollees. In Sec.  
156.460(a)(1), we propose to codify clause (i) of that subparagraph, 
which requires that a QHP issuer reduce the portion of the premium 
charged to the enrollee by the amount of the advance payment of the 
premium tax credit for the applicable month(s).
    In Sec.  156.460(a)(2), we propose to codify section 
1412(c)(2)(B)(ii) of the statute, which requires that the QHP issuer 
notify the Exchange of any reduction in the portion of the premium 
charged to the individual. This notification will be sent to the 
Exchange through the standard enrollment acknowledgment in accordance 
with Sec.  156.265(g). That information will then be submitted to the 
Secretary via enrollment information sent from the Exchange to HHS 
under Sec.  155.340(a)(1).
    In Sec.  156.460(a)(3), we propose to codify section 
1412(c)(2)(B)(iii), which requires that a QHP issuer display the amount 
of the advance payment of the premium tax credit for the applicable 
month(s) on an enrollee's billing statement. This requirement would 
ensure that the enrollee is aware of the total cost of the premium and 
would allow the enrollee to verify that the correct amount for the 
advance payment of the premium tax credit has been applied to his or 
her account.
    In Sec.  156.460(b), we propose that a QHP issuer may not refuse to 
commence coverage under a policy or terminate a policy on account of 
any delay in payment from the Federal government of an advance payment 
of the premium tax credit on behalf of an enrollee if the QHP issuer 
has been notified by the Exchange that it would receive an advance 
payment. We expect that monthly advance payments of the premium tax 
credit would be paid in the middle of the month, and propose to require 
that issuers not decline to cover individuals nor terminate policies 
for which the enrollee's payments have been timely made on account of 
the timing of the advance payments of the premium tax credit.
    We welcome comment on these proposals.
h. Allocation of Rates and Claims Costs for Advance Payments of Cost-
Sharing Reductions and the Premium Tax Credit
    As described in section III.E.2. of this proposed rule, we propose 
in Sec.  156.470 to direct issuers to allocate the rate or expected 
premium for each metal level health plan and stand-alone dental plan 
offered, or proposed to be offered, in the individual market on the 
Exchange, and the expected allowed claims costs for the metal level 
health plans, among EHB and additional benefits. Issuers must submit 
these allocations annually to the Exchange, along with an actuarial 
memorandum with a detailed description of the methods and specific 
bases used to perform the allocations. The Exchange and HHS will use 
this memorandum to verify that these allocations meet the standards set 
forth in paragraphs (c) and (d) of Sec.  156.470.
    We propose that issuers submit the allocation information to the 
Exchange as part of the QHP certification process and an annual 
submission process for QHPs that are already certified, though an 
Exchange may specify alternative submission channels. For example, for 
issuers interested in participating in a Federally-facilitated 
Exchange, we propose to collect the metal level health plan allocation 
information through the Effective Rate Review program. We proposed 
revisions to the rate review reporting requirements in the proposed 
Market Reform Rule to include the allocation submission. This approach 
should streamline the submission process for issuers. We note that 
multi-State plans, as defined in Sec.  155.1000(a), are subject to 
these provisions. OPM would determine the time and manner for multi-
State plans to submit the allocation information. We welcome comment on 
this proposal.
i. Special Cost-Sharing Reduction Rules for Indians
    We discuss in greater detail below a number of provisions 
throughout this proposed subpart E implementing section 1402(d) of the 
Affordable Care Act, which governs cost-sharing reductions for Indians.
    Interpretation of section 1402(d)(2) of the Affordable Care Act: 
Section 1402(d)(1) of the Affordable Care Act directs a QHP issuer to 
treat an Indian with household income not more than 300 percent of the 
FPL as an ``eligible insured''--a defined term in the statute 
triggering cost-sharing reductions for non-Indians--and to eliminate 
all cost sharing for those Indians. Conversely, section 1402(d)(2) of 
the Affordable Care Act, which prohibits cost sharing under a plan for 
items or services to an Indian enrolled in a QHP provided directly by 
the Indian Health Service, an Indian Tribe, Tribal Organization, or 
Urban Indian Organization, or through referral under contract health 
services, does not direct the issuer to treat the Indian as an 
``eligible insured.'' Section 1402(f)(2) of the Affordable Care Act 
permits cost-sharing reductions only for months in which the 
``insured''--which we interpret to be synonymous with the term 
``eligible insured''--is allowed a premium tax credit. The implications 
of this interpretation are that cost-sharing reductions under sections 
1402(a) and 1402(d)(1) of the Affordable Care Act are only available to 
individuals eligible for premium tax credits. However, cost-sharing 
reductions under section 1402(d)(2) of the Affordable Care Act would be 
available to Indians regardless of their eligibility for premium tax 
credits. This approach aligns with the typical practice today, under 
which cost sharing is not required with respect to services provided to 
an Indian by the IHS, an Indian Tribe, Tribal Organization, or Urban 
Indian Organization. Furthermore, as described in Sec.  155.350(b), an 
Exchange may determine an Indian eligible for cost-sharing reductions 
under section 1402(d)(2) of the Affordable Care Act without requiring 
the applicant to request an eligibility determination for insurance 
affordability programs. We welcome comment on our interpretation of 
sections 1402(d)(2) and 1402(f)(2) of the Affordable Care Act.
    We note also that section 1402(d) of the Affordable Care Act 
specifies that reductions in cost sharing must be provided to Indians 
who purchase coverage on the Exchange. Although section 1402(d)(1) of 
the Affordable Care Act applies only to the individual market, section 
1402(d)(2) of the Affordable Care Act does not contain this explicit 
restriction. We propose to interpret section 1402(d)(2) of the 
Affordable Care Act to apply only to the individual market because we 
believe section 1402(d)(2) flows from and builds upon the 
identification of ``any qualified health plans'' made in section 
1402(d)(1). Further, we believe that Congress did not intend for 
reductions

[[Page 73179]]

in cost sharing to be available outside the individual market 
Exchanges. We welcome comment on this interpretation and any other 
interpretation of this language.
    Finally, we note that section 1402(d)(2)(B) of the Affordable Care 
Act states that QHP issuers are not to reduce payments to the relevant 
facility or provider for an item or service by the amount of any cost 
sharing that would be due from an Indian but for the prohibition on 
cost sharing set forth in section 1402(d)(2) of the Affordable Care 
Act. We propose not to codify this provision in regulation because we 
believe it is clear and self-enforcing, and because we believe that it 
would also be impermissible for an issuer to reduce payments to a 
provider for any cost-sharing reductions required under sections 
1402(a) or 1402(d)(1) of the Affordable Care Act--particularly because 
these cost-sharing reductions are to be reimbursed by HHS. We also note 
that nothing in this section exempts an issuer from section 206 of the 
Indian Health Care Improvement Act, which provides that the United 
States, an Indian Tribe, Tribal organization, or urban Indian 
organization has the right to recover from third party payers, 
including QHPs, up to the reasonable charges billed for providing 
health services, or, if higher, the highest amount an insurer would pay 
to other providers.
    Proposed provisions of part 156 relating to Indians: Similar to 
cost-sharing reductions for non-Indians, we propose to use the concept 
of plan variations to describe how Indians would pay only a portion, or 
as appropriate, none of the total cost sharing required under that 
plan, with the Federal government bearing the remaining cost-sharing 
obligation. In Sec.  156.410(b)(2), we propose that a QHP issuer assign 
an Indian determined by the Exchange to have an expected household 
income that does not exceed 300 percent of the FPL to a zero cost 
sharing plan variation of the selected QHP (no matter the level of 
coverage) with no cost sharing, based on the enrollment and eligibility 
information submitted to the QHP issuer by the Exchange. In Sec.  
156.410(b)(3), we propose that a QHP issuer assign an Indian determined 
eligible by the Exchange for cost-sharing reductions under section 
1402(d)(2) of the Affordable Care Act to a limited cost sharing plan 
variation of the selected QHP (no matter the level of coverage) with no 
cost sharing required on benefits received from the IHS and certain 
other providers. The assignments to the plan variations would be 
subject to Sec.  155.305(g)(3), which governs plan variation placement 
decisions when a single policy covers two or more individuals who are 
eligible for different levels of cost-sharing reductions. We also 
considered an alternative approach to the provision of cost-sharing 
reductions for Indians. Rather than requiring QHP issuers to assign 
Indians to zero and limited cost sharing plan variations, QHP issuers 
would simply assign Indians to the standard plan (or as appropriate, 
silver plan variation), and would waive the cost-sharing requirements, 
as appropriate. We note that this latter approach would permit an 
Indian and non-Indian to enroll in the same plan, and for each to 
receive the cost-sharing reductions to which they would be individually 
entitled. We are proposing the approach described above in part because 
we believe that the use of plan variations will permit issuers to 
efficiently and effectively provide to all enrollees eligible for cost-
sharing reductions, especially Indians, their appropriate level of 
cost-sharing reductions. Because of technical constraints, we 
understand that complying with the alternative approach would be nearly 
impossible for many issuers for the 2014 benefit year. Due to these 
considerations, adopting the alternative approach could lead many 
issuers to implement cost-sharing waivers manually, which could lead to 
fewer cost-sharing reductions being available to Indians. In addition, 
we note that under the proposed Market Reform Rule at Sec.  
147.102(c)(1), the total premium for family coverage in a State that 
has not adopted community rating principles is to be determined by 
summing the premiums for each individual family member (but that 
premiums for no more than the three oldest family members who are under 
age 21 must be taken into account). Thus, in many instances, a family 
made up of Indians and non-Indians would lose no premium savings from 
enrolling in different policies to obtain the maximum cost-sharing 
reductions for which each family member is eligible. However, we seek 
comment on which approach HHS should adopt beginning January 1, 2016. 
We propose the approach first described above pending the adoption of 
any change in approach. We also seek comment on the burdens that may be 
imposed on individuals, providers and insurers under the proposed and 
alternative approaches. Finally, we will monitor whether providers are 
receiving less payment for Indians who choose to enroll in a family 
policy without the benefit of cost-sharing.
    In Sec.  156.420(b), we propose that QHP issuers submit to the 
Exchange the zero cost sharing plan variation and limited cost sharing 
plan variations for each of the QHPs (at any level of coverage) that it 
intends to offer on the Exchange. The zero cost sharing plan 
variation--addressing cost-sharing reductions under section 1402(d)(1) 
of the Affordable Care Act and available to Indians with expected 
household incomes that do not exceed 300 percent of the FPL, as 
determined under Sec.  155.350(a)--must have all cost sharing 
eliminated. The limited cost sharing plan variation--addressing cost-
sharing reductions under section 1402(d)(2) of the Affordable Care Act 
and available to all Indians as determined in Sec.  155.350(b)--must 
have no cost sharing on any item or service furnished directly by the 
IHS, an Indian Tribe, Tribal Organization, Urban Indian Organization, 
or through referral under contract health services, as defined in 25 
U.S.C. 1603. We note that unlike silver plan variations, zero cost 
sharing plan variation and limited cost sharing plan variations must 
only be submitted for certification when the standard plan is submitted 
for QHP certification. We welcome comment on this proposal.
    In Sec.  156.420(d), we propose language similar to that proposed 
in Sec.  156.420(c) for silver plan variations--that the zero cost 
sharing plan variation and limited cost sharing plan variations cover 
the same benefits and include the same providers as the standard QHP, 
and require the same out-of-pocket spending for benefits other than 
EHB. We also propose that a limited cost sharing plan variation, which 
would have no cost sharing on any item or service furnished directly by 
the IHS, Indian Tribe, Tribal Organization, or Urban Indian 
Organization, or through referral under contract health services, must 
have the same cost sharing on items or services not described in Sec.  
156.420(b)(2) as the QHP with no cost-sharing reductions. Lastly, we 
propose that zero cost sharing plan variation and limited cost sharing 
plan variations be subject to all standards applicable to the standard 
QHP (except for the requirement that the plan have an AV as set forth 
in 156.140(b)). We believe that these standards are appropriate, as a 
plan variation and a standard plan are meant to be the same QHP, except 
for the reductions in cost sharing. We welcome comment on this 
proposal.
    Section 1402(d)(3) of the Affordable Care Act directs the Secretary 
to pay a QHP issuer the amount necessary to reflect the increase in AV 
of a QHP

[[Page 73180]]

required by reason of the changes in cost sharing for Indians under 
section 1402(d) of the Affordable Care Act. We propose to use the same 
payment approach to reimburse cost-sharing reductions for Indians under 
sections 1402(d) as we propose to use for cost-sharing reductions 
provided to eligible individuals with household incomes between 100 and 
250 percent of the FPL under section 1402(a) of the Affordable Care 
Act. That is, we propose that QHP issuers submit estimates for the 
dollar value of the cost-sharing reductions to be provided under the 
zero cost sharing plan variation and limited cost sharing plan 
variations, to receive advance payments, and then reconcile the advance 
payments to the actual cost-sharing reduction amounts. This unified 
approach satisfies both the requirement for ``periodic and timely 
payments equal to the value of the reductions'' under section 
1402(c)(3) of the Affordable Care Act, and payment of ``the amount 
necessary to reflect the increase in AV of the plan'' under section 
1402(d)(3) of the Affordable Care Act. Because AV is a mechanism for 
identifying how much the plan pays for benefits compared to the costs 
paid by an enrollee, we believe reimbursement of the dollar value of 
the reductions satisfies the requirement to pay QHP issuers an amount 
necessary to reflect the increase in actuarial value of the qualified 
health plan as a result of the reductions. Furthermore, at this time, 
it would be difficult for issuers and HHS to accurately estimate the 
``increase in AV of the plan'' resulting from the cost-sharing 
reduction rules for Indians. Relevant data on Indian populations' cost 
sharing is not easily available, and issuers would not be able to use 
the AV calculator to estimate Indian-only cost-sharing features of a 
plan because the calculator is based on a standard population. Our 
proposed combined approach to reimbursing both cost-sharing reductions 
for eligible individuals with household incomes between 100 and 250 
percent of the FPL and cost-sharing reductions for Indians should 
reduce the operational and financial burden on issuers and HHS, who 
would otherwise be required to operate under and implement two separate 
reimbursement programs.
    In Sec.  156.430(a)(1)(ii) we propose that for each metal level QHP 
that an issuer offers or intends to offer in the individual market on 
the Exchange, the issuer must provide to the Exchange annually prior to 
the benefit year, for approval by HHS, estimates, and supporting 
documentation validating the estimates, of the per member per month 
dollar value of cost-sharing reductions to be provided under the zero 
cost sharing plan variation. These estimates must be developed using 
the methodology specified by HHS in the applicable annual HHS notice of 
benefit and payment parameters. We propose that issuers use the same 
methodology described above for estimating advance payments for the 
cost-sharing reductions provided under silver plan variations for 
estimating advance payments for the cost-sharing reductions provided 
under the zero cost sharing plan variation. This methodology would 
utilize data that QHP issuers submit for other requirements, such as 
Sec.  156.420 and Sec.  156.470. As a result, QHP issuers would not be 
required to submit separate estimates or supporting documentation to 
receive advance payments in benefit year 2014 for the value of the 
cost-sharing reductions that would be provided under the zero cost 
sharing plan variation.
    As in the case of silver plan variations, the following formula 
would be used:
[GRAPHIC] [TIFF OMITTED] TP07DE12.014

    In this formula, the monthly expected allowed claims cost for the 
zero cost sharing plan variation would equal one-twelfth of the 
expected allowed claims costs allocated to EHB, other than services 
described in Sec.  156.280(d)(1), for the standard plan, multiplied by 
a factor to account for the increased utilization that may occur under 
the zero cost sharing plan variation due to the elimination of the 
cost-sharing requirements. As described in Sec.  156.470, the QHP 
issuer should submit the expected allowed claims cost information to 
the Exchange annually. The Exchange would then review this allocation, 
and submit the approved allocation to HHS, as described in Sec.  
155.1030(b)(2), for use in the advance payment calculation. HHS would 
then multiply the monthly expected allowed claims cost by the induced 
utilization factor, to arrive at the monthly expected allowed claims 
cost for the zero cost sharing plan variation. We propose the following 
induced utilization factors for the zero cost sharing plan variation, 
based on our analysis of the HIC database from calendar year 2010.

  Table 17--Induced Utilization Factors for Advance Payments for Cost-
                     Sharing Reductions for Indians
------------------------------------------------------------------------
                                                               Induced
             Zero cost sharing plan  variation               utilization
                                                               factor
------------------------------------------------------------------------
Zero Cost Sharing Plan Variation of Bronze QHP............          1.15
Zero Cost Sharing Plan Variation of Silver QHP............          1.12
Zero Cost Sharing Plan Variation of Gold QHP..............          1.07
Zero Cost Sharing Plan Variation of Platinum QHP..........          1.00
------------------------------------------------------------------------

    In the second half of the formula, we propose to multiply the 
monthly expected allowed claims cost for the zero cost sharing plan 
variation by the difference in AV between the standard plan and the 
plan variation. The AV of the zero cost sharing plan variation would be 
100, because all cost sharing is eliminated for this plan variation. 
Lastly, the per enrollee per month estimate will be multiplied by the 
number of individuals assigned to the zero cost sharing plan variation 
(based on the most recent confirmed enrollment data) in a given month 
to arrive at the total advance payment that will be provided to the 
issuer for each QHP. We welcome comment on this methodology and the 
proposed induced utilization factor, as well as the value of increasing 
the complexity of the methodology versus the value of operational 
efficiency.
    In Sec.  156.430(a)(2), we discuss the process for estimating the 
value of cost-sharing reductions to be provided under the limited cost 
sharing plan variation open to Indians regardless of household income. 
We propose that QHP issuers have the option to forgo submitting an 
estimate of the value of these cost-sharing reductions if they believe 
the operational cost of developing the estimate is not worth the value 
of the

[[Page 73181]]

advance payment. If a QHP issuer chooses to not submit an estimate, the 
issuer would provide the cost-sharing reductions as required, and would 
be reimbursed by HHS after the close of the benefit year, as proposed 
in Sec.  156.430(c). If a QHP issuer does seek advance payments for the 
these cost-sharing reductions, the issuer must provide to the Exchange 
annually prior to the benefit year, for approval by HHS, an estimate, 
and supporting documentation validating the estimate, of the per member 
per month dollar value of the cost-sharing reductions to be provided 
under the limited cost sharing plan variation of the QHP. The estimate 
must be developed using the methodology specified by HHS in the 
applicable annual HHS notice of benefit and payment parameters. For the 
2014 benefit year, we simply propose that issuers submit a reasonable 
estimate of the value of the reductions, developed by a member of the 
American Academy of Actuaries in accordance with generally accepted 
actuarial principles and methodologies, and that the estimate should be 
no higher than the corresponding estimate for the zero cost sharing 
plan variation. We do not propose a standardized methodology because, 
unlike other plan variations, these cost-sharing reductions are to be 
provided for only a specific subset of providers, and the Affordable 
Care Act does not prescribe an AV for these reductions. As noted above, 
because the actuarial value calculator is based on a standard 
population, it will not have the functionality to generate an accurate 
AV for these plan variations. However, as in the case of the other plan 
variations, we plan to review the methodology for calculating the 
advance payments once more data is available. We also note that the 
payment reconciliation process described in Sec.  156.430(c) through 
(e) would ensure that the QHP issuer is made whole for the value of any 
cost-sharing reductions provided during the benefit year that may not 
be adequately covered by the advance payments.
    The Exchange will collect the estimate and supporting 
documentation, as described in Sec.  155.1030(b)(3), and submit the 
estimate and supporting documentation to HHS for review. Assuming the 
estimate is reasonable, HHS would make advance payments to the QHP 
issuer following the same procedure as for the other plan variations, 
and as discussed in Sec.  156.430(b).
    We welcome comment on this approach.

F. Provisions on User Fees for a Federally-Facilitated Exchange (FFE)

    Section 1311(d)(5)(A) of the Affordable Care Act contemplates an 
Exchange charging assessments or user fees to participating health 
insurance issuers to generate funding to support its operations. If a 
State is not an electing State or does not have an approved Exchange, 
section 1321(c)(1) directs HHS to operate an Exchange within the State. 
In addition, 31 U.S.C. 9701 permits an agency to establish a charge for 
a service provided by the agency. Circular No. A-25R establishes 
Federal policy regarding user fees, and specifies that a user charge 
will be assessed against each identifiable recipient for special 
benefits derived from Federal activities beyond those received by the 
general public. Based on section 1311(d)(5)(A) of the Affordable Care 
Act and Circular No. A-25, we are proposing that HHS collect a user fee 
from participating issuers (as defined in Sec.  156.50(a)) to support 
the operation of Federally-facilitated Exchanges. Participating issuers 
will receive two special benefits not available to the general public 
when they offer plans through a Federally-facilitated Exchange: (1) The 
certification of their plans as QHPs, and (2) the ability to sell 
health insurance coverage through a Federally-facilitated Exchange to 
individuals determined eligible for enrollment in a QHP. These special 
benefits are provided to participating issuers based on the following 
Federal operations in connection with the operation of Federally-
facilitated Exchanges:
     Provision of consumer assistance tools;
     Consumer outreach and education;
     Management of a Navigator program;
     Regulation of agents and brokers;
     Eligibility determinations;
     Administration of advance payments of the premium tax 
credit and cost-sharing reductions;
     Enrollment processes;
     Certification processes for QHPs (including ongoing 
compliance verification, recertification and decertification); and
     Administration of a SHOP Exchange.
    Activities performed by the Federal government that do not provide 
issuers participating in a Federally-facilitated Exchange with a 
special benefit will not be covered by this user fee.
    Circular No. A-25R states that user charges should generally be set 
at a level so that they are sufficient to recover the full cost to the 
Federal government of providing the service when the government is 
acting in its capacity as sovereign (as is the case when HHS operates a 
Federally-facilitated Exchange). However, Circular No. A-25R also 
allows for exceptions to this policy, if approved by OMB. To maintain a 
competitive balance between plans inside and outside the Exchanges, to 
align with the administrative cost structure of State-based Exchanges, 
and because we believe that growing enrollment is likely to increase 
user fee receipts in future years, we have requested an exception to 
the policy for 2014. As a result, in Sec.  156.50(c), we propose that a 
participating issuer offering a plan through a Federally-facilitated 
Exchange remit a user fee to HHS each month, in the time and manner 
established by HHS, equal to the product of the billable members 
enrolled through the Exchange in the plan offered by the issuer, and 
the monthly user fee rate specified in the annual HHS notice of benefit 
and payment parameters for the applicable benefit year. For purposes of 
this paragraph, billable members are defined under the proposed Sec.  
147.102(c)(1) as the number of members on a policy, with a limitation 
of three family members under age 21. This approach will ensure that 
the user fee generally aligns with the number of enrollees for each 
issuer.
    For the 2014 benefit year, we propose a monthly user fee rate equal 
to 3.5 percent of the monthly premium charged by the issuer for a 
particular policy under the plan. We seek to align this rate with rates 
charged by State-based Exchanges, and may adjust this rate to take into 
account comparable State-based Exchange rates in the final Payment 
Notice. We note that this policy does not affect the ability of a State 
to use grants described in section 1311 of the Affordable Care Act to 
develop functions that a State elects to operate under a Partnership 
Exchange, and to support State activities to build interfaces with a 
Federally-facilitated Exchange, as described in the ``State Exchange 
Implementation Questions and Answers,'' published November 29, 2011.
    Circular No. A-25R provides for a user fee to be collected 
simultaneously with the rendering of services, and thus we further 
propose to assess user fees throughout the benefit year in which 
coverage is offered. Additional guidance on user fee collection 
processes will be provided in the future; however, we anticipate that 
user fees will be calculated based on the number of billable members 
enrolled in a plan each month. We anticipate collecting

[[Page 73182]]

user fees by deducting the user fee from Exchange-related program 
payments. If an issuer does not receive any Exchange-related program 
payments, the issuer would be invoiced for the user fee on a monthly 
basis. We welcome comment on these proposals and the operational 
processes related to user fee assessment and collections.
    In addition, we welcome comments on a policy that we are 
considering that would provide for the pooling of Exchange user fees or 
all administrative costs across a particular market (however, the user 
fee would be collected only from issuers participating in the 
Federally-facilitated Exchange). The Market Reform proposed rule 
proposes an implementation of section 1312(c) of the Affordable Care 
Act under which the claims experience of all enrollees in health plans 
offered by an issuer in a State in the individual, small group, or 
combined market, as applicable, are to be pooled. We are considering 
further developing this policy, which we would codify in regulation at 
Sec.  156.80,\41\ by requiring that Exchange user fees also be subject 
to risk pooling. Specifically, we are considering proposing that 
issuers be allowed an adjustment to the index rate for the pooled, 
expected Exchange user fees for the set of health plans offered in a 
particular market. We are considering this additional specification to 
provide further protection against adverse selection for QHP coverage, 
and to ensure that the costs of Exchange user fees are spread evenly 
across the market. We seek comment on this policy, including whether it 
should apply to a broader set of administrative costs. For example, 
under this alternative, it could apply to both Exchange user fees and 
distribution costs, or all administrative costs. In addition, we seek 
comment on an alternative approach, under which the proposed risk 
pooling would apply across all health plans within a product (defined 
as a specific set of benefits), rather than across a market.
---------------------------------------------------------------------------

    \41\ We issued a proposed regulation on risk pooling at Sec.  
156.80 of the proposed Market Reform Rule.
---------------------------------------------------------------------------

G. Distributed Data Collection for the HHS-Operated Risk Adjustment and 
Reinsurance Programs

1. Background
    The Premium Stabilization Rule specifies at Sec.  153.20 that a 
risk adjustment methodology must include a risk adjustment data 
collection approach. Therefore, the Federally certified risk adjustment 
methodology described in this proposed rule must include such a data 
collection approach. As already discussed, we propose to add new Sec.  
153.420(a) to establish that an issuer of a reinsurance-eligible plan 
must submit or make accessible all required reinsurance data in 
accordance with the reinsurance data collection approach established by 
the State, or by HHS on behalf of the State. In addition, we propose to 
amend Part 153 by adding Subpart H, entitled ``Distributed Data 
Collection for HHS-Operated Programs.'' We intend to clarify in Subpart 
H the data collection process that HHS would use when operating a risk 
adjustment or reinsurance program on behalf of a State.
    In the preamble to the proposed Premium Stabilization Rule, we 
described a distributed approach as one in which each issuer formats 
its own data in a manner consistent with the risk assessment database, 
and then passes risk scores to the entity responsible for assessing 
risk adjustment charges and payments. In the preamble to the Premium 
Stabilization Rule, we indicated that we intend to use a distributed 
approach to collect data for the HHS-operated risk adjustment program. 
In the Reinsurance Bulletin, we stated that we will also use such an 
approach when we operate the reinsurance program. We believe that this 
approach minimizes issuer burden while protecting enrollees' privacy.
2. Issuer Data Collection and Submission Requirements
    Under the HHS-operated risk adjustment and reinsurance programs, 
HHS will use a distributed data collection approach to run software on 
enrollee-level and claims-level data that reside on an issuer's 
dedicated data environment. This approach will require close 
technological coordination between issuers and HHS.
    Distributed data environment: In Sec.  153.700(a), we propose that 
an issuer of a risk adjustment covered plan or a reinsurance-eligible 
plan in a State where HHS is operating the risk adjustment or 
reinsurance program on behalf of the State, must establish a dedicated 
data environment and provide data access to HHS, in a manner and 
timeframe specified by HHS, for risk adjustment and reinsurance 
operations. To accomplish the distributed data collection approach for 
both the reinsurance and risk adjustment programs, issuers would be 
required to establish secure, dedicated, electronic server environments 
to house medical and pharmacy claims, encounter data, and enrollment 
information. Issuers would be directed to make this data accessible to 
HHS in HHS-specified electronic formats, and to provide HHS with access 
to the data environment to install, update, and operate common software 
and specific reference tables for the purpose of executing risk 
adjustment and reinsurance program operations. Issuers would also be 
directed to correct submitted files to resolve problems detected by HHS 
during file processing. We will provide further technical details on 
these standards in the future.
    We note that HHS will store, in a private and secure HHS computing 
environment, aggregate plan summary data and reports based on 
activities performed on each issuer's dedicated server environment. 
Except for purposes of data validation and audit, HHS will not store 
any personally identifiable enrollee information or individual claim-
level information.
    We propose in Sec.  153.700(b) that issuers must establish the 
dedicated data environment (and confirm proper establishment through 
successfully testing the environment to conform with HHS standards for 
such testing) three months prior to the first date of full operation. 
For example, for benefit year 2014, implementation, including testing, 
will begin in March 2013, and continue through October 2013, in 
preparation for the commencement of risk adjustment and reinsurance 
program operations on January 1, 2014. HHS also plans to schedule 
technical assistance trainings for issuers in 2013.
    Data Requirements: In Sec.  153.710(a), we propose that an issuer 
of a risk adjustment covered plan or reinsurance-eligible plan in a 
State in which HHS is operating the risk adjustment or reinsurance 
program, as applicable, must provide to HHS, through the dedicated data 
environment, access to the enrollee-level plan enrollment data, 
enrollee claims data, and enrollee encounter data specified by HHS.
    We propose in Sec.  153.710(b) that all claims data submitted by an 
issuer of a risk adjustment covered plan or reinsurance-eligible plan 
in a State in which HHS is operating the risk adjustment or reinsurance 
program, as applicable, must have resulted in payment by the issuer. 
The enrollee-level data must include information from claims and 
encounter data (including data related to cost-sharing reductions, to 
permit HHS to calculate enrollee paid claims net of cost-sharing 
reductions) as sourced from all medical and pharmacy providers, 
suppliers, physicians, or other practitioners who furnished items or 
services to the issuer's health plan members for all permitted paid 
medical and pharmacy services during the benefit period. All

[[Page 73183]]

data must be provided at the level of aggregation specified by HHS.
    A listing of required data, proposed data formats, and data 
definitions for the HHS-operated distributed data approaches for the 
risk adjustment and reinsurance programs will be provided in the PRA 
approved under OMB Control Number (OCN) 0938-1155 with an October 31, 
2015 expiration date.
    In Sec.  153.710(c), we propose that an issuer that does not 
generate claims in the normal course of business \42\ must derive costs 
on all applicable provider encounters using their principal internal 
methodology for pricing those encounters (for example, a pricing 
methodology used for the Medicare Advantage encounter data collection). 
If a plan has no such methodology, or has an incomplete methodology, it 
would be permitted to implement a methodology or supplement the 
methodology in a manner that yields derived claims that are reasonable 
in light of the specific market that the plan is serving.
---------------------------------------------------------------------------

    \42\ Examples of such plans include staff-model health 
maintenance organizations and plans that pay providers on a 
capitated basis.
---------------------------------------------------------------------------

    Establishment and usage of masked enrollee identification numbers: 
We propose in Sec.  153.720(a) that an issuer of a risk adjustment 
covered plan or reinsurance-eligible plan in a State in which HHS is 
operating the risk adjustment or reinsurance program, as applicable, 
must establish an unique masked enrollee identification number for each 
enrollee, in accordance with HHS-defined requirements as described in 
this section, and maintain the same masked enrollee identification 
number for an enrollee across enrollments or plans within the issuer, 
within the State, during a benefit year. In Sec.  153.720(b), we 
propose that an issuer of a risk adjustment covered plan or 
reinsurance-eligible plan in a State in which HHS is operating the risk 
adjustment or reinsurance program, as applicable, may not include an 
enrollee's personally identifiable information in the masked enrollee 
identification number or use the same masked enrollee identification 
number for different enrollees enrolled with the issuer. The 
requirements here align the specific requirements for data collection 
with the requirements in Sec.  153.340(b) of the Premium Stabilization 
Rule and the proposed Sec.  153.240(d). As discussed above, the term 
``personally identifiable information'' is a broadly used term across 
Federal agencies, and has been defined in the Office of Management and 
Budget Memorandum M-07-16 (May 22, 2007).\43\ To reduce duplicative 
guidance or potentially conflicting regulatory language, we are not 
defining personally identifiable information in this proposed rule, and 
incorporate the aforementioned definition in to this proposed rule.
---------------------------------------------------------------------------

    \43\ Available at: http://www.whitehouse.gov/sites/default/files/omb/memoranda/fy2007/m07-16.pdf.
---------------------------------------------------------------------------

    Deadline for submission of data: We propose in Sec.  153.730 that 
an issuer of a risk adjustment covered plan or reinsurance-eligible 
plan in a State in which HHS is operating the risk adjustment or 
reinsurance program, as applicable, submit data to be considered for 
risk adjustment payments and charges and reinsurance payments for the 
applicable benefit year by April 30 of the year following the end of 
the applicable benefit year. This timeline will permit sufficient time 
for HHS to calculate and notify issuers of those payments and charges 
in time to meet the June 30 deadline set forth in Sec.  153.310(e), as 
proposed to be renumbered, and proposed in Sec.  153.240(b)(1).
    Proposed Sec.  153.240(b)(2) provides that States administering 
their own reinsurance program must notify issuers of reinsurance-
eligible plans of their expected requests for reinsurance payments on a 
quarterly basis. We believe that these interim reports will provide 
issuers in the individual market with information to assist in the 
development of premiums and rates in subsequent benefit years. 
Acceptable enrollment and claims/encounter data not submitted in a 
timely manner will be considered in the next quarter or during the 
annual processing period. The annual reinsurance payments will not be 
determined until after April 30 of the year following the applicable 
benefit year, once all requests for reinsurance payments have been 
submitted, and any adjustments have been made under proposed Sec.  
153.230(d). Therefore, for claims to be eligible for reinsurance 
payments, acceptable enrollment and paid claims or encounter data must 
be available on the issuer's environment prior to the April 30 
deadline, as specified in future guidance.
3. Risk Adjustment Data Requirements
    HHS's data collection approach is aligned with the HHS risk 
adjustment model and its calculation of payments and charges. This 
section describes the types of data that will be acceptable for risk 
adjustment.
    a. Data collection period: The data collection period will 
encompass enrollment and services for the applicable benefit year.
    (1) Claim-level service dates. Institutional and medical claims and 
encounter data where the discharge date or through date of service 
occurs in the applicable benefit year will be allowed for risk 
adjustment, provided that all other criteria defined under this section 
are met.
    (2) Enrollment periods. Issuers must provide data for all 
individuals enrolled in risk adjustment covered plans in the applicable 
benefit year with enrollment effective dates beginning on or after 
January 1 of that benefit year.
    b. Acceptable Risk Adjustment Data. Acceptable risk adjustment data 
for enrollee risk score calculation will be determined using the 
criteria listed below.
    (1) Acceptable claim types. Data to calculate enrollee risk scores 
will include diagnoses reported on institutional and medical claims 
that result in final payment action or encounters that result in final 
accepted status. The specific criteria for capturing a complete 
inpatient stay (across multiple bills) for single hospital admission 
will be provided in future guidance.
    (2) Acceptable provider types. Diagnoses reported on certain 
hospital inpatient facility, hospital outpatient and physician provider 
claims will be acceptable for risk adjustment. The risk adjustment 
model discussion provides HHS' description for identifying and 
excluding claims from providers based on these criteria.
    (3) Acceptable diagnoses. Diagnoses will be acceptable for enrollee 
risk score calculation if they are present on medical claims and 
encounters that meet criteria that are acceptable for HHS-operated risk 
adjustment data collection.
    c. Risk Adjustment Processing and Reporting. Issuers are 
responsible for correcting errors and problems identified by HHS in the 
distributed data environment.
4. Reinsurance Data Requirements
    This section describes the types of data that would be necessary 
for the evaluation of claims eligible for reinsurance payments to 
reinsurance-eligible plans as defined under Sec.  153.20. HHS would use 
the same distributed data collection approach used for risk adjustment; 
however, only data elements necessary for reinsurance claim selection 
will be considered for the purpose of determining a reinsurance 
payment. Data considered acceptable for reinsurance payment 
calculations are described below.
    a. Data collection period. Medical and pharmacy claims, where a 
claim was

[[Page 73184]]

incurred in the benefit year beginning on or after January 1 of the 
applicable benefit year and paid before the applicable data submission 
deadline (provided all other criteria are met) would be accepted for 
consideration.
    b. Acceptable Reinsurance Data. Acceptable reinsurance data leading 
to eligible claim selection for the reinsurance program will be 
determined using the criteria listed below.
    (1) Claim types. Data to identify eligible reinsurance paid claims 
would include medical and pharmacy claims. Claims that resulted in 
payment by the issuer as the final action and encounters priced in 
accordance with issuer pricing methodologies would be considered for 
payment. Replacement claims for the purposes of adjusting data elements 
submitted on prior claim submissions, including, but not limited to 
changes in payment amounts, services rendered, diagnosis, would be 
accepted, but interim bills and late charges would not be accepted. The 
specific criteria for submitting complete data for inpatient stays will 
be provided in future guidance.
    (2) Capitated plans: Encounter data submitted by issuers that do 
not generate claims in the normal course of business would be accepted 
for consideration when services were performed in the benefit year 
beginning on or after January 1, 2014 and submitted prior to the 
applicable data-submission deadline. Specific information related to 
the assessment and application of encounter claims for reinsurance 
calculations will be provided in future guidance.
    c. Reinsurance Processing and Reporting. HHS plans to provide each 
issuer with a periodic report on data functions performed in each 
issuer's distributed data environment, including the identification of 
reinsurance eligible claims by State. The reports would indicate 
whether HHS accepted or rejected submitted files and data, and errors 
detected by HHS. Issuers would need to provide corrected files and data 
to address errors identified in HHS-provided reports for those files 
and data to be eligible for identification during reinsurance 
processing. Timeframes for the processing and reporting of these 
reports, including receipt of corrected files or discrepancy 
resolution, will be provided in future guidance.

H. Small Business Health Options Program

1. Employee Choice in the Federally-Facilitated SHOP (FF-SHOP)
    Employee choice is a central SHOP concept, and facilitating 
employee choice at a single level of coverage selected by the 
employer--bronze, silver, gold, or platinum--is a required SHOP 
function.\44\ In addition, the SHOP may also allow a qualified employer 
to make QHPs available to employees by other methods.\45\ For the FF-
SHOP, we continue to consider whether to allow a qualified employer to 
offer its employees only a single QHP. We note that, once an employer 
has selected a single QHP and decided on a contribution toward that 
QHP, the employer can then offer employees a choice of all the other 
plans at the same metal level at no additional cost to the employer. 
Since adding employee choice would have no adverse financial impact on 
the employer, we propose that Federally-facilitated SHOPs will not 
offer a single QHP option to employers but will focus instead on the 
innovative features of a SHOP: A simpler employer experience and 
enhanced employee choice. In FF-SHOPs, we propose that employers will 
choose a level of coverage (bronze, silver, gold, or platinum) and a 
contribution, and employees can then choose any QHP at that level.
---------------------------------------------------------------------------

    \44\ Sec.  155.705(b)(2).
    \45\ Sec.  155.705(b)(3).
---------------------------------------------------------------------------

    In addition to this choice within single level of coverage, many 
employers expressed support for employer and employee choice across 
metal levels both in comments to the Exchange Establishment NPRM and in 
stakeholder discussions. Issuers, however, have expressed concern about 
the potential risk segmentation that may result. In comments submitted 
to HHS in connection with the Exchange Final Rule,\46\ issuers urged 
that employee choice be limited to a single level of coverage selected 
by the employer based on the potential for risk segmentation with a 
greater degree of employee choice. There was general agreement among 
these commenters that the degree of risk segmentation is small if 
employee choice is limited to a single metal level of coverage, 
particularly given the presence of risk adjustment, and increases as 
employee choice is extended across metal levels of coverage. Many 
commenters suggested that the risk segmentation associated with broad 
choice across all metal levels may adversely affect premiums.
---------------------------------------------------------------------------

    \46\ Patient Protection and Affordable Care Act; Establishment 
of Exchanges and Qualified Health Plans; Exchange Standards for 
Employers (CMS-9989), 77 FR 18310 (Mar. 27, 2012).
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    Some issuers expressed openness to allowing the employee to ``buy 
up'' to certain plans at the next higher level of coverage, thereby 
offering employees a broader range of health plans. Therefore, we seek 
comment on adding an additional employer option in the FF-SHOP that 
would allow a qualified employer to make available to employees all 
QHPs at the level of coverage selected by the employer plus any QHPs at 
the next higher level of coverage that a QHP issuer agrees to make 
available under this option. QHP issuers could decide whether or not to 
make available QHPs at the next higher level of coverage above the 
level of coverage selected by the employer.
    We note that concerns about risk selection will be mitigated both 
by the risk adjustment program which addresses risk selection directly 
and by consumer tools showing expected ``total costs'' of coverage 
(premium, deductibles, copayments and coinsurance) that help consumers 
compare the cost of a high premium/low cost sharing plan with a low 
premium/high cost sharing plan. Nonetheless, particularly in the early 
years of implementation, the FF-SHOP in each State will need to balance 
the fundamental goal of enhancing employer and employee choice against 
concerns about potential risk selection to achieve the broadest issuer 
participation, the best range of plan design choices, and the most 
effective competition in the small group market. Therefore, we seek 
comment on a transitional policy in which a Federally-facilitated SHOP 
would allow or direct employers to choose a single QHP from those 
offered through the SHOP.
2. Methods for Employer Contributions in the FF-SHOP
    Employers may elect a variety of ways to contribute toward health 
coverage that are consistent with Federal law. Because employees in the 
FF-SHOP will be choosing their own coverage and will need to know the 
net cost to them after the employer's contribution, the employer will 
need to choose a contribution method before employees select their 
qualified health plans. To facilitate this, each SHOP would offer 
``safe harbor'' methods of contributing toward the employee coverage--
methods that reflect a meaningful employer choice and that conform to 
existing Federal law. The safe harbor methods described below are not 
the only allowable methods of contribution, but are those that will be 
available initially to qualified employers participating in FF-SHOPs.
    Under this proposed rule at Sec.  155.705(b)(11), FF-SHOPs would 
base the employer contribution methods on the cost of a reference plan 
chosen by the qualified employer. This reference plan approach is one 
of the methods

[[Page 73185]]

described in section III.G. of IRS Notice 2010-82 regarding allowable 
ways an employer may contribute to the employees' premiums and qualify 
for the small business premium tax credit prior to 2014.\47\ We note 
that the IRS plans to issue additional guidance applicable to plan 
years beginning after 2013.
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    \47\ IRS Notice 2010-82, section III.G. describes employer 
contribution methods using a reference plan with a variety of 
different rating methods: Per member rating (referred to in the 
Notice as ``list billing''), composite rating (referred to as 
``composite billing''), and the hybrid method (referred to as an 
``employer-computed composite rate''). Although prepared as guidance 
regarding employer contributions eligible for the small business 
premium tax credit and applicable only through 2013, it provides a 
clear description of ``safe harbor'' methods that will be used in 
the FF-SHOP.
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    The IRS Notice describes two types of reference plan premiums--one 
in which the premium for the reference plan is a composite premium that 
is the same for each member and a second in which the premium for the 
reference plan varies with the age of the covered individual (or other 
permissible rating factor). In both cases, the small business can 
define its contribution toward a member's coverage as a percentage of 
the premium for the reference plan.
    Except in States that prohibit employee contributions that vary by 
age or require issuers to quote only composite premiums, the qualified 
employer would be asked the following question: ``Do you want each 
employee to contribute the same amount toward the reference plan 
premium, or do you want the employee's contribution to vary with age 
within the allowed limits?'' 48 49 This option to charge 
younger employees lower premiums for a given coverage may help attract 
younger individuals into the risk pool and may help employer groups 
meet any minimum participation rates. On the other hand, this option 
also results in higher premium contributions by older employees who are 
also more likely to incur higher out-of-pocket costs.\50\
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    \48\ Thus, the ratio of the employee contribution made by the 
oldest adult and the youngest adult toward the reference plan cannot 
exceed 3:1 before any tobacco use factor is applied.
    \49\ Because tobacco use information from employees will not be 
available when estimating total premiums for the group and average 
premiums per employee, tobacco use will always be a surcharge 
applied to an employee's or dependent's premium. See the proposed 
Health Insurance Market Rules (77 FR at 70595-70597) and the 
Incentives for Nondiscriminatory Wellness Programs in Group Health 
Plans Proposed Rule (77 FR 70620) for further discussion of the 
tobacco use surcharge and wellness programs.
    \50\ See 29 CFR 1625.10 for a description of the ways in which 
employee contributions toward premiums may vary according to 
employee age without constituting impermissible age discrimination.
---------------------------------------------------------------------------

    If the qualified employer decides that the employee's contribution 
should vary by age, then the employer contribution would be based on 
the reference plan, and the remaining employee contribution for the 
employee's plan would not be affected by other employees' decisions 
about participation. Once the employees have chosen their plans, the 
qualified employer would approve the final application and the FF-SHOP 
would enroll the employees in their chosen health plans.
    If the qualified employer decides that each employee pays the same 
amount for the reference plan coverage, regardless of age, the 
composite premium for the reference plan, and the employer contribution 
based on that plan, may change based on which employees choose to 
participate, just as composite premiums may need to be re-quoted by the 
issuer today. Operationally, once the employee choices have been made, 
the composite premium for the reference plan would be recalculated, and 
the employer and employees notified of any changes.
    We welcome comments on this approach.
3. Linking Issuer Participation in an FFE to Participation in an FF-
SHOP
    Consistent with the goal of ensuring choice of affordable insurance 
plans, in this proposed rule, we propose standards that we believe will 
help ensure that qualified employers and qualified employees enrolling 
through a FF-SHOP are offered a robust set of QHP choices in a 
competitive small group marketplace. We believe that a competitive 
marketplace offering qualified individuals, qualified employers, and 
qualified employees a choice of issuers and QHPs is a central goal of 
the Affordable Care Act, and that the SHOP can provide an effective way 
for small employers to offer their employees a choice of issuers and 
QHPs. We propose in Sec.  156.200(g) to leverage issuers' participation 
in an FFE to ensure participation in the FF-SHOP, provided that no 
issuer would be required to begin offering small group market products 
as a result of this provision.
    While a State-operated SHOP has a variety of options available to 
ensure a robust choice of QHPs and issuers, an FFE is limited to the 
QHP certification process. We propose in Sec.  156.200(g) that an FFE 
may certify a QHP in the individual market of an FFE only if the QHP 
issuer meets one of the following conditions: (1) The issuer offers 
through the FF-SHOP serving that State at least one small group market 
QHP at the silver level of coverage and one at the gold level of 
coverage; (2) the QHP issuer does not offer small group market plans in 
that State, but another issuer in the same issuer group (as defined 
below) offers through the FF-SHOP serving that State at least one small 
group market QHP at the silver level of coverage and one at the gold 
level of coverage; or (3) neither the issuer nor any issuer in the same 
issuer group offers a small group market product in the State. Thus, no 
issuer would be required to begin offering small group market plans to 
meet this requirement.
    We note that Sec.  156.515(c)(2) has already implemented similar 
provisions for the Consumer Operated and Oriented Plans (CO-OPs). A CO-
OP is not required to offer plans in the small group market, but if the 
CO-OP does offer a small group market plan, it must offer a silver and 
a gold QHP in each SHOP that serves the geographic regions in which the 
CO-OP offers coverage in the small group market.
    We propose to add to Sec.  156.20 a definition of ``issuer group'' 
that will be specific to this section of the regulations. The proposed 
definition includes both issuers affiliated by common ownership and 
control and issuers affiliated by the common use of a nationally 
licensed service mark. We believe that either of these elements--common 
control or common use of a licensed mark--would appropriately identify 
an issuer group. We define ``issuer group'' to help assure that the 
certification standard linking Exchange participation with SHOP 
participation has similar effects on small issuers and large issuer 
groups. We seek comment on this issue and whether or not the policy 
meets its three intended goals: Enhancing employer and employee choice, 
assuring similar effects on single issuers and issuer groups, and not 
requiring any issuer not already offering coverage, to begin offering 
coverage in the small group market.
4. Broker Compensation for Coverage Sold Through an FFE or FF-SHOP
    While a State also has a variety of policies it might adopt with 
regard to broker compensation that would help create a level playing 
field for enrollment inside and outside the SHOP due to the State's 
broad authority to regulate insurance markets, FFE and FF-SHOP options 
for creating a level playing field are again limited to QHP 
certification standards. In a new paragraph Sec.  156.200(f), we 
propose that QHP certification by an FFE and an FF-

[[Page 73186]]

SHOP be conditioned on the QHP issuer paying similar broker 
compensation for QHPs offered through a FFE or FF-SHOP that it would 
pay for similar health plans offered outside an FFE and an FF-SHOP. We 
request comment on whether ``similar health plans'' is a sufficient 
standard and if not, which factors should be considered in identifying 
``similar health plans.'' We also request comment on how this standard 
might apply when small group market product commissions are calculated 
on a basis other than an amount per employee or covered life or a 
percentage of premium.
5. Minimum Participation Rate in the FF-SHOP
    Section 155.705(b)(10) specifies that a SHOP may establish a 
uniform minimum participation rate for its QHPs. Further rulemaking is 
needed to establish a minimum participation rate in the FF-SHOP. We 
recognized in the proposed Exchange Establishment Rule, 76 FR at 41886, 
that minimum participation rates calculated at the level of the issuer 
are currently in wide use by issuers as one method to reduce the 
potential for adverse selection. We note here that the ability of a 
SHOP, including an FF-SHOP, to adopt a minimum participation rate as an 
exception to the guaranteed issue requirements of the Affordable Care 
Act is dependent on the final adoption of Sec.  147.104(b)(1) of the 
proposed Health Insurance Market Rule, (77 FR 70612), which conditions 
employer eligibility for the year-around open enrollment period in the 
SHOP (or FF-SHOP) on meeting any minimum participation rate that the 
SHOP (or FF-SHOP) might establish.
    Because we believe risk selection based on employee decisions to 
participate is likely without a minimum participation rate, we propose 
a minimum participation rate for the FF-SHOP of 70 percent, calculated 
at the level of the FF-SHOP. This rate is based on consultations with 
issuer organizations and regulators about customary minimum 
participation rates and would apply to all qualified employers in the 
FF-SHOP serving a given State. Because State law, regulation, and 
market practices vary from State to State, we also propose an option 
for the FF-SHOP to adopt a different uniform minimum participation rate 
in a State with a FF-SHOP if there is evidence that:
    (1) A State law sets the rate; or
    (2) A higher or lower rate is customarily used by the majority of 
QHP issuers in that State for products in the State's small group 
market outside the SHOP.
    In addition, in accordance with State laws, we propose that certain 
types of alternative coverage will exclude an employee entirely from 
the calculation of the minimum participation rate:
    (1) A group health plan offered by another employer; or
    (2) A governmental program such as Medicare, Medicaid, or TRICARE.
    We seek comment on the default minimum participation rate and the 
exceptions that will help ensure alignment with current State practice 
and standards inside and outside the SHOP.
6. Determining Employer Size for Purposes of SHOP Participation
    While the Exchange Establishment Rule did not finalize a method for 
determining employer size, we note that part-time employees must be 
taken into account in some reasonable way to be consistent with the 
Affordable Care Act standards for determining employer size. We propose 
to amend the definitions of ``small employer'' and ``large employer'' 
in Sec.  155.20 to specify the method for determining employer size and 
to add the definition of large employer to Sec.  157.20. In determining 
whether an employer is a small employer for purposes related to the 
SHOP, we propose that the full-time equivalent method used in section 
4980H(c)(2)(e) of the Code, as added by section 1513 of the Affordable 
Care Act, be used. We seek comment on the proposed definition. We 
believe that having a single method will provide greater clarity and 
simplicity both for employers and for States seeking to reconcile State 
methods of determining group size with Federal methods in the operation 
of Exchanges and for determining employer eligibility to participate in 
the SHOP. We discuss the timing of this action in the ``Transitional 
Policies'' section below.
7. Definition of a Full-Time Employee for Purposes of Exchanges and 
SHOPs
    Section 1312(f)(2)(A) of the Affordable Care Act defines a 
qualified employer as one ``that elects to make all full-time employees 
of such employer eligible for one or more qualified health plans 
offered in the small group market through an Exchange that offers 
qualified health plans.'' The Affordable Care Act does not define a 
full-time employee for purposes of this provision. We propose to add to 
Sec.  155.20 a definition of full-time employee that cross-references 
section 4980H(c)(4) of the Code, which provides that a full-time 
employee with respect to any month is generally an employee who is 
employed an average at least 30 hours of service per week, subject to 
the transitional policies discussed in the next paragraph. Under our 
proposal, this definition would control for purposes of the section 
1312(f)(2)(A) requirement that qualified employers offer coverage to 
all full-time employees.
8. Transitional Policies
    Most States currently use definitions of a full-time employee and 
methods of counting employees to determine employer size that differ 
from Federal definitions and methods. We believe that certain 
provisions of the Affordable Care Act that distinguish between the 
small group market and large group market and between large employers 
and small employers require that a Federal definition be used. We also 
note that section 1304(b)(3) of the Affordable Care Act provides States 
with some discretion in how they define their small group market in 
2014 and 2015. Because States will generally take legislative action 
before January 1, 2016, to redefine the upper limit of the small group 
market as 100 employees, we believe that States can also act at that 
time to adopt a counting method that is consistent with Federal law.
    Therefore, we propose that the definitions of small employer and 
full-time employee proposed above be effective January 1, 2016, for 
purposes of Exchange and SHOP administration. With respect to State-
operated SHOPs for 2014 and 2015 only, HHS will not take any 
enforcement actions against a State-operated SHOP for including a group 
in the small group market based on a State definition that does not 
include part-time employees when the group should have been classified 
as part of the large group market based on the Federal definition. 
Similarly, during 2014 and 2015, an employer and a State-operated SHOP 
may adopt a reasonable basis for their determination of whether they 
have met the SHOP requirement to offer coverage to all full-time 
employees, such as the definition of full-time employee from the 
State's small group market definition or the Federal definition from 
section 4980H of Chapter 43 of the Code.
    The FF-SHOP, however, must use a counting method that takes part-
time employees into account. We propose that these definitions will be 
effective October 1, 2013 for the FF-SHOP. To make an employer 
eligibility determination, the FF-SHOP will ask employers about the 
number of employees based on the full-time equivalent method used in 
section

[[Page 73187]]

4980H of Chapter 43 of the Code, as added by section 1513 of the 
Affordable Care Act. Thus, in FF-SHOP States, there may be a few 
employers who can purchase a small group market plan outside of the FF-
SHOP (because they have fewer than 50 full time employees) but will not 
be eligible to purchase through the FF-SHOP (because they have more 
than 50 full time equivalent employees).
    We request comment on the proposed definitions and on the proposed 
transition policies.
9. Web Site Disclosures Relating to Agents and Brokers
    We propose modifications to the Web site disclosure standards 
relating to brokers in Sec.  155.220(b). Specifically, we propose a new 
paragraph (b)(1) that would allow an Exchange or SHOP to limit the 
display of agent and broker information to include only those licensed 
agents and brokers who are registered with the Exchange or SHOP and a 
new paragraph (b)(2) that would specifically adopt this provision for 
an FFE and an FF-SHOP. We believe that listing only brokers who have 
registered with the Exchange is in the best interest of the consumer, 
both because the registration and training helps assure that the agent 
or broker is familiar with the Exchange policies and application 
process and because the proposed listing will not contain large numbers 
of licensed brokers who are not active in the market. We welcome 
comments on these proposals.
10. QHP Issuer Standards Specific to Shop
    We propose modifications to the QHP issuer standards specific to 
SHOP for enrollment in Sec.  156.285. Specifically, we propose a 
technical correction in paragraph (c)(7) such QHP issuers participating 
in the SHOP must enroll qualified employees if they are eligible for 
coverage. This correction aligns SHOP enrollment standards to Exchange 
enrollment standards.

I. Medical Loss Ratio Requirements Under the Patient Protection and 
Affordable Care Act

1. Treatment of Premium Stabilization Payments, and Timing of Annual 
MLR Reports and Distribution of Rebates
    Our previous rulemakings concerning PHS Act section 2718 did not 
address how issuers are to account for the premium stabilization 
programs in their MLR reports and in calculating their MLR and any 
rebates owing, given that the premium stabilization programs are 
effective beginning in 2014. This proposed rule would modify the 
definition of premium revenue in Sec.  158.130, the formula in Sec.  
158.221(c) for calculating an issuer's MLR, and the formula in Sec.  
158.240(c) for calculating an issuer's rebate if the MLR standard is 
not met, in the current MLR regulation to account for payments and 
receipts related to the premium stabilization programs. When the MLR 
annual reporting form is updated for the reporting year 2014 and later, 
premium stabilization amounts would be considered a part of total 
premium revenue reported to the Secretary, similar to other elements 
involved in the derivation of earned premium. The MLR annual reporting 
form would then account for premium stabilization amounts by removing 
them from adjusted earned premium, so that these amounts do not have a 
net impact on the adjusted earned premium used in calculating the MLR 
denominator and rebates. Additionally, this proposed rule would amend 
Sec.  158.140(b) to include premium stabilization amounts as an 
adjustment to incurred claims in calculating the MLR numerator as 
provided in Sec.  158.221. This approach would address stakeholder 
concerns that netting premium stabilization amounts directly against 
adjusted earned premium in MLR and rebate calculations would result in 
an issuer paying either a higher total amount or a lower total amount 
for rebates and the premium stabilization programs combined, depending 
on whether the issuer's net premium stabilization obligations resulted 
in payment or receipt of funds by the issuer. The approach in this 
proposed rule would also preserve consistency between the MLR and risk 
corridors programs by treating premium stabilization amounts in MLR and 
rebate calculations the same way section 1342(c) of the Affordable Care 
Act treats reinsurance and risk adjustment amounts in risk corridors 
calculations, by applying them as adjustments to cost, not revenue. 
Although PHS Act section 2718 provides that premium revenue should 
``account for'' collections or receipts for the premium stabilization 
programs, we believe the statutory language provides flexibility as to 
whether to account for the effects of such collections or receipts in 
determining revenue (the denominator) or costs (the numerator) of the 
MLR formula. We considered netting premium stabilization payments or 
receipts against revenue, but for the reasons discussed above, have not 
proposed that approach. We invite comment on this decision.
    In sum, the formula for calculating the MLR would be amended as 
follows to take into account payments for and receipts related to the 
premium stabilization programs:

Adjusted MLR = [(i + q + n - r)/{(p + n - r) - t - f - n + r{time} ] + 
c

Where,

i = incurred claims
q = expenditures on quality improving activities
p = earned premiums
t = Federal and State taxes
f = licensing and regulatory fees
n = reinsurance, risk corridors, and risk adjustment payments made 
by issuer
r = issuer's reinsurance, risk corridors, and risk adjustment 
related receipts
c = credibility adjustment, if any.

    Issuers must provide rebates to enrollees if their MLRs fall short 
of the applicable MLR standard for the reporting year. Rebates for a 
company whose adjusted MLR value in a State falls below the minimum MLR 
standard in a given market would be calculated using the following 
amended formula:

Rebates = (m - a) * [(p + n - r) - t - f - n + r]

Where,

m = the applicable minimum MLR standard for a particular State and 
market
a = issuer's adjusted MLR for a particular State and market.

    The amendments made by this proposed rule would be effective for 
MLR reporting years beginning in 2014.
    In addition, this proposed rule would change the MLR reporting and 
rebate deadlines, beginning with the 2014 MLR reporting year, to 
coordinate them with the reporting cycles of the premium stabilization 
programs. Currently, an issuer must file its annual MLR report by June 
1 and pay any rebates it owes to consumers by August 1 of the year that 
follows the MLR reporting year. However, looking ahead, the amounts 
associated with the premium stabilization programs that issuers must 
take into account in their MLR calculations will not be known until 
after June 1 each year. For example, a state, or HHS on behalf of a 
state, has until June 30 of the year following a benefit year to notify 
issuers of the risk adjustment and reinsurance payments due or charges 
owed for that benefit year (Sec.  153.310(e); Sec.  153.240(b)(1) as 
proposed in this proposed rule). As further specified above in section 
III.C. of this proposed rule issuers must submit risk corridors data 
and calculations by July 31 of the year following a benefit year (Sec.  
153.530(d) as proposed in this proposed rule). Accordingly, we propose 
to amend Sec.  158.110(b) to change the date of MLR

[[Page 73188]]

reporting to the Secretary from June 1 to July 31 beginning with the 
2014 MLR reporting year, and we propose to amend Sec.  158.240(d) to 
change the rebate due date from August 1 to September 30 to accommodate 
the schedule for the premium stabilization programs beginning with the 
2014 MLR reporting year. Similarly, we propose to amend Sec.  
158.241(a)(2) to change the due date for rebates provided by premium 
credit from August 1 to September 30, to apply to the first month's 
premium that is due on or after September 30 following the MLR 
reporting year, beginning with the 2014 MLR reporting year. In choosing 
these dates, we tried to balance consumers' and policyholders' 
interests in maintaining the dates for MLR reporting and rebates as 
close to the June 1 and August 1 dates as possible with issuers' 
interests in having the necessary data to submit their annual MLR 
report and sufficient time to disburse any rebates. Although we must 
provide issuers any reconciliation of their risk corridors calculations 
by August 31, as described above in Section C of this proposed rule, we 
believe that there will be few changes to the risk corridors 
calculations submitted by issuers to the Secretary by July 31. This 
would give issuers one additional month from any reconciliation to 
disburse any rebates owed, which we believe is sufficient time. 
Comments on the proposed timeline are welcome.
2. Deduction of Community Benefit Expenditures
    While we did not specifically solicit comments on the deduction 
from premium for community benefit expenditures in the MLR December 7, 
2011 final rule with comment period, we received a few comments that 
recommend that a tax exempt not-for-profit issuer should be able to 
deduct both community benefit expenditures and State premium tax. These 
commenters suggest that prior to publication of the final rule, the MLR 
interim final rule published on December 1, 2010 gave a tax exempt not-
for-profit issuer this flexibility. Two commenters assert that a 
Federal income tax exempt issuer is required to make community benefit 
expenditures to maintain its Federal income tax exempt status, and that 
allowing a deduction for community benefit expenditures takes the place 
of a Federal income tax deduction in the MLR calculation. Commenters 
have made clear that deducting both State premium taxes and community 
benefit expenditures would help level the playing field because it 
would allow a Federal income tax exempt issuer to deduct its community 
benefit expenditures in the same manner that a for-profit issuer is 
allowed to deduct its Federal income taxes. We agree, and this proposed 
rule would amend Sec.  158.162(b)(1)(vii) to allow a Federal income tax 
exempt issuer to deduct both State premium taxes and community benefit 
expenditures from earned premium in the MLR calculation. This proposed 
rule would not change the treatment of State premium taxes and 
community benefit expenditures for those issuers that are not exempt 
from paying Federal income tax. Comments are welcome on the merits of 
allowing a tax exempt issuer to deduct both State premium taxes and 
community benefit expenditures from earned premium.
    In its model MLR recommendation,\51\ the NAIC determined that the 
deduction from premium for community benefit expenditures should be 
limited to a reasonable amount to discourage fraud and abuse and that 
this limit should be the State premium tax rate. We applied this 
principle in allowing issuers exempt from State premium tax to deduct 
community benefit expenditure, up to the State premium tax rate, in 
their MLR calculation. However, the MLR final rule published on 
December 7, 2011 allowed issuers exempt from Federal income tax to 
deduct community benefit expenditures in lieu of State premium taxes, 
not Federal income taxes.
---------------------------------------------------------------------------

    \51\ Regulation for Uniform Definitions and Standardized 
Methodologies for Calculation of the Medical Loss Ratio for Plan 
Years 2011, 2012 and 2013 per Section 2718(b) of the Public Health 
Service Act, available at http://www.naic.org/documents/committees_ex_mlr_reg_asadopted.pdf.
---------------------------------------------------------------------------

    Commenters have suggested that a 3 percent limit on the deduction 
from premium for community benefit expenditures would be sufficient to 
allow a tax exempt issuer to maintain its current community benefit 
expenditure. The 2011 MLR data indicate that, of the not-for-profit 
issuers that reported non-zero community benefit expenditures, the 
average spent on community benefit expenditures (deductible and non-
deductible) was about 1.6 percent of premium. This suggests that a 3 
percent community benefit expenditure deduction limit would not 
discourage a tax exempt issuer from making community benefit 
expenditures. In light of the NAIC model rule and the comments 
received, we propose to limit the deduction from premium for community 
benefit expenditures for issuers that are exempt from Federal income 
tax to the higher of either 3 percent of premium or the highest premium 
tax rate charged in a State. Comments are solicited on the proposed 
community benefit expenditures deduction limit.
3. Summary of Errors in the MLR Regulation
a. Errors in the December 1, 2010 Interim Final Rule
    We are making two changes to the December 1, 2010 interim final 
rule (75 FR 74864) to make the language of the rule consistent with the 
NAIC's recommendations, which in the preamble we stated that we were 
adopting.
    On page 74924, in Sec.  158.140 (b)(5)(i), we mistakenly specified 
the date by which issuers must define the formula they use for the 
blended rate adjustment as ``January 1, 2011'' instead of ``January 1 
of the MLR reporting year.'' We are updating this date to ensure that 
all issuers are able to choose to make the blended rate adjustment 
going forward. We mistakenly omitted the words ``by the issuer'' 
following the words ``will be defined'' and mistakenly used the word 
``will'' instead of ``must'' in describing the objective formula to be 
used in reporting group coverage at a blended rate.
    On page 74928, in Sec.  158.232(d), we inadvertently used the word 
``For'' instead of ``Beginning with'' when describing the date after 
which partially-credible issuers that consistently fail to meet the MLR 
standard will not be allowed to use a credibility adjustment.
b. Error in the May 16, 2012 Correcting Amendment
    Section 158.232(c)(1)(i) of the MLR regulation was amended by the 
May 16, 2012 correcting amendment (77 FR 28788), which currently reads: 
``[t]he per person deductible for a policy that covers a subscriber and 
the subscriber's dependents shall be the lesser of: The sum of the 
deductible applicable to each of the individual family members; or the 
overall family deductible for the subscriber and subscriber's family, 
divided by two (regardless of the total number of individuals covered 
through the subscriber).'' In this correcting amendment, we further 
amend Sec.  158.232(c)(1)(i) by deleting the words ``The sum of'' after 
the words ``the lesser of:'' and the comma after the words 
``subscriber's family,'' which we inadvertently did not delete in the 
May 16, 2012 correcting amendment.

IV. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a

[[Page 73189]]

collection of information requirement is submitted to the Office of 
Management and Budget (OMB) for review and approval. To fairly evaluate 
whether an information collection should be approved by OMB, section 
3506(c)(2)(A) of the Paperwork Reduction Act of 1995 requires that we 
solicit comment on the following issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    The following sections of this document contain paperwork burden 
but not all of them are subject to the information collection 
requirements (ICRs) under the PRA for reasons noted.

A. Collections Related to State Operation of Reinsurance & Risk 
Adjustment Programs (Sec.  153.210 Through Sec.  153.240, Sec.  
153.310)

    Although the number of States that will elect to operate their own 
reinsurance or risk adjustment programs is unknown, we anticipate that 
fewer than nine States will choose to do so. Collections from fewer 
than 10 persons are exempt from the PRA under 44 U.S.C. 3502(3)(A)(i). 
Therefore, we do not plan to seek OMB approval for the following 
collections. However, in the event that, by the time of the final 
Payment Notice, we believe that the number of States will be greater 
than 9, we will seek PRA approval based on the burden estimates 
outlined below.
1. Reporting to HHS (Sec.  153.210)
    We are proposing under Sec.  153.210(e) that a State operating its 
own reinsurance program must ensure that its applicable reinsurance 
entity provide information regarding the requests for reinsurance 
payments under the national contribution rate made under Sec.  153.410 
of this part for all reinsurance-eligible plans for each quarter during 
the applicable benefit year. We estimate that it will take an 
operations analyst 2 hours (at $55 an hour) to gather information from 
applicable reinsurance entities and to submit this information to HHS, 
for a total burden of $110 per State selecting to run reinsurance.
2. Collection of Reinsurance Contribution Funds (Sec.  153.220)
    Under proposed Sec.  153.220(d), a State that operates its own 
reinsurance program and elects to collect additional reinsurance 
contributions for additional administrative expenses or supplemental 
reinsurance payments or use additional State funds for supplemental 
reinsurance payments must notify HHS of its intent to do so within 30 
days after publication of the draft annual HHS notice of benefit and 
payment parameters for the applicable benefit year. We believe that the 
burden associated with this requirement is the time and effort 
necessary for the State to provide this notification, and estimate it 
will take each State approximately 1 hour by an operations analyst (at 
$55 an hour) to submit this notification requirement. Consequently, we 
estimate a total burden of $55 for each State as a result of this 
requirement.
3. Collections Related to Reinsurance Payments Made Under a State 
Additional Contribution Rate (Sec.  153.232)
    Under Sec.  153.232(a), we propose to require a State running its 
own reinsurance program that chooses to collect additional 
contributions under Sec.  153.220(d) to set supplemental State 
reinsurance payment parameters and to ensure that reinsurance 
contributions collected and funds used are reasonably calculated to 
cover additional reinsurance payments that are projected to be made 
only under the supplemental reinsurance payment parameters. We estimate 
that it will take an operations analyst 8 hours (at $55 an hour) and a 
senior manager 2 hours (at $77 an hour) to determine appropriate 
supplemental payment parameters. Therefore, we estimate that it will 
cost each State choosing to collect additional contributions 
approximately $594 to comply with this requirement.
    Under Sec.  153.232(d), we propose that States that run their own 
reinsurance program and that choose to collect additional contributions 
under Sec.  153.220(d) calculate the supplemental reinsurance payments 
from their additional funds collected under the State additional 
contribution rate using supplemental payment parameters in conjunction 
with the national payment parameters to reimburse a particular portion 
of claims. Additionally, under Sec.  153.232(e), we propose that, if 
all requested reinsurance payments under the State supplemental 
reinsurance parameters calculated will exceed all reinsurance 
contributions collected under the additional State contribution rate 
for the benefit year, the State must determine a uniform pro rata 
adjustment to be applied to all requests for reinsurance payments. The 
State or the applicable reinsurance entity must reduce all such 
requests for reinsurance payments for the applicable benefit year by 
that adjustment. We estimate it will take an operations analyst 40 
hours (at $55 an hour) and a senior manager 12 hours (at $77 an hour) 
to determine appropriate payment calculations and, if necessary, a pro 
rata adjustment. Therefore, we estimate that it will cost each State 
choosing to collect additional contributions approximately $3,124 to 
comply with this requirement.
4. Collections Related to Disbursement of Reinsurance Payments (Sec.  
153.240)
    We propose to amend Sec.  153.240(a) to direct a State operating 
its own reinsurance program to ensure that the applicable reinsurance 
entity either collects data or is provided access to the data required 
to determine reinsurance payments as described in Sec. Sec.  153.230 
and 153.232. In Sec.  153.240(b) we propose that a State or HHS on 
behalf of the State notify issuers of the total amount of reinsurance 
payments that will be made no later than June 30 of the year following 
the benefit year, as well as an estimate to each reinsurance-eligible 
plan of expected requests for reinsurance payments from the plan on a 
quarterly basis during the applicable benefit year. We estimate it will 
take an operations analyst 40 hours (at $55 an hour), 10 hours per 
quarter, and a senior manager 12 hours (at $77 an hour), 3 hours per 
quarter, to determine appropriate quarterly estimates of expected 
reinsurance payments and to notify plans. Additionally, we expect it 
will take an operations analyst 40 hours (at $55 an hour) and a senior 
manager 12 hours (at $77 an hour) to determine the total amount of 
reinsurance payments for each reinsurance-eligible plan. Therefore, we 
estimate that it will cost each State choosing to run reinsurance 
approximately $6,248 to comply with this requirement. We will also 
revise the supporting statement of 0938-1155 to reflect the additional 
burden for States choosing to run reinsurance of providing quarterly 
estimates of expected reinsurance payments and notice of total 
reinsurance payments to reinsurance-eligible plans. At the final 
Payment Notice stage, we will revise the supporting statement of 0938-
1155 to clarify that a State has the option to ensure that the 
applicable reinsurance entity provides access to data required to 
determine reinsurance payments, and that the State is not required to 
verify that the reinsurance entity is collecting this data directly.
    In Sec.  153.240(a)(3), we propose that a State must provide a 
process through which an issuer of a reinsurance-eligible plan that 
does not generate individual

[[Page 73190]]

enrollee claims in the normal course of business, such as a capitated 
plan, may use estimated claims costs to make a request for payment (or 
to submit data to be considered for reinsurance payments) for such plan 
in accordance with the requirements of Sec.  153.410. In addition, the 
State must ensure that such requests for reinsurance payment are 
subject to validation. We estimate that our proposal will result in a 
small administrative cost to States associated with determining a 
format for submission of reinsurance payment data and notifying 
capitated plans of the acceptable method and format of data collection. 
We anticipate that a State will only need to establish this process 
once. On average, we estimate that it will take each State 
approximately 50 hours to comply with this requirement. We estimate it 
will take an operations analyst 40 hours (at $55 an hour) and a senior 
manager 10 hours (at $77 an hour) to determine an appropriate format 
for submission of reinsurance payment data for capitated plans and to 
notify plans of the acceptable method and format for data collection. 
Therefore, we estimate that it will cost each State choosing to run 
reinsurance approximately $2,970 to comply with this proposal.
    In Sec.  153.240(d)(1), we propose that, if a State establishes a 
reinsurance program, the State must ensure that the applicable 
reinsurance entity's collection of personally identifiable information 
is limited to information reasonably necessary for use in the 
calculation of reinsurance contributions or payments. Furthermore, in 
Sec.  153.240(d)(2), we propose that, if a State establishes a 
reinsurance program, it must ensure that the applicable reinsurance 
entity implements security standards that provide administrative, 
physical, and technical safeguards for the individually identifiable 
information consistent with the security standards. To comply with this 
requirement, we believe that most States will require the applicable 
reinsurance entity to comply with privacy and security standards that 
are similar to the Federal standards already established under the 
HIPAA and The Health Information Technology for Economic and Clinical 
Health Act (HITECH) (Pub. L. 104-191, 110 Stat. 1936, enacted August 
21, 1996) or with privacy and security standards that are already 
established under State law, rather than developing entirely new 
standards to apply to reinsurance entities. We further anticipate that 
most States will incorporate this requirement into their contracting 
process with reinsurance entities. We estimate it will take a contract 
administrator 2 hours (at $40 an hour) and a lawyer 2 hours (at $77 an 
hour) to establish privacy and security standards for reinsurance 
entities and to notify reinsurance entities of these standards. 
Therefore, we estimate a total burden of 4 hours and $234 for each 
State choosing to operate reinsurance to comply with this proposal.
5. HHS Approval of Risk Adjustment States (Sec.  153.310)
    Under Sec.  153.310(a)(4), we are proposing that a State that 
operates risk adjustment must be approved by HHS to do so. The burden 
associated with this process is the time and effort required by a State 
to submit evidence that it meets the approval standards set forth in 
Sec.  153.310(c). Note that these processes will start in benefit year 
2015--prior to that, HHS will engage in informal consultations with 
States. In any given benefit year after 2015, different States may 
apply for approval.
    We estimate it will take each State approximately 180 hours to 
complete the initial risk adjustment entity approval process. We 
estimate it will take an operations analyst 72 hours (at $55 an hour), 
a contract administrator 72 hours (at $40 per hour), a senior manager 
24 hours (at $77 an hour), and an attorney 12 hours (at $77 an hour) to 
meet the initial approval requirements. Therefore, we estimate a total 
burden of $9,612 for each entity, as a result of these approval 
requirements.

B. ICRs Regarding Calculation of Reinsurance Contributions (Sec.  
153.405)

    In Sec.  153.405, we propose an annual enrollment count of covered 
lives by contributing entities using counting methods derived from the 
PCORTF Rule. We propose requiring contributing entities to provide 
annual counts of their enrollment and reinsurance contributions to HHS 
based on their last reported PCORTF number as modified for reinsurance 
purposes. The burden associated with this requirement is the time and 
effort required by an issuer to derive an annual, enrollment count. 
Because issuers will already be under an obligation to determine a 
count of covered lives using a PCORTF method, the burden associated 
with this requirement is the additional burden of conducting these 
counts using the slightly modified counting methods specified in this 
proposed rule. On average, we estimate it will take each issuer 1 hour 
to reconcile and submit final enrollment counts to HHS. Assuming an 
hourly wage rate of $55 for an operations analyst, we estimate an 
aggregate burden of $110,000 for 2,000 reinsurance contributing 
entities subject to this requirement. We are revising supporting 
statement of OMB Control Number 0938-1155 to include the required data 
elements that issuers will need to submit their enrollment counts and 
to specify that issuers must follow the methodology when they derive 
enrollee counts for reinsurance contributions.

C. Requests for Reinsurance Payment (Sec.  153.410)

    As described in Sec.  153.410, we propose that issuers of 
reinsurance-eligible plans seeking reinsurance payment must request 
payment in accordance with the requirements of this proposed rule or 
the State notice of benefit and payment parameters, as applicable. To 
be eligible for reinsurance payments, issuers of reinsurance-eligible 
plans must submit or make accessible all necessary data to be 
considered for reinsurance payments for the applicable benefit year.
    Issuers operating reinsurance-eligible plans in the individual 
market that are subject to the reinsurance data collection requirements 
are eligible to make reinsurance payment requests. To minimize burden 
on issuers, HHS intends to collect data in an identical manner for the 
HHS-operated reinsurance program and HHS-operated risk adjustment 
programs. In addition, when HHS operates reinsurance on behalf of a 
State, the maximum out-of-pocket differential between a cost-sharing 
reduction plan variation and the national maximum out-of-pocket limit 
established by the Federal government would be factored into an 
issuer's reinsurance payment. Although we are clarifying the data 
elements issuers would be required to submit as part of the reinsurance 
payment request process, the burden associated with this requirement is 
already accounted for under OMB Control Number 0938-1155 with an 
October 31, 2015 expiration date. We are updating the supporting 
statement approved under 0938-1155 with an October 31, 2015 expiration 
date to reflect these clarified data elements.

D. Upload of Risk Adjustment and Reinsurance Data (Sec.  153.420)

    Under the HHS-operated risk adjustment and reinsurance programs, 
HHS proposes to use a distributed data collection approach to run 
software on enrollee-level plan enrollment, claims and encounter data 
that reside on an issuer's dedicated data environment. We propose in 
Sec.  153.700(a) to require that an issuer of a risk adjustment covered 
plan or a reinsurance-eligible plan in a

[[Page 73191]]

State where HHS is operating the risk adjustment or reinsurance program 
on behalf of the State, as applicable, must provide HHS, through the 
dedicated data environment, access to enrollee-level plan enrollment 
data, enrollee claims data, and enrollee encounter data as specified by 
HHS. Under Sec.  153.710(b), all claims data submitted by an issuer of 
a risk adjustment covered plan or a reinsurance-eligible plan in a 
State in which HHS is operating risk adjustment or reinsurance, as 
applicable, must have resulted in payment by the issuer. Under Sec.  
153.710(c), an issuer of a risk adjustment covered plan or a 
reinsurance-eligible plan in a State in which HHS is operating risk 
adjustment or reinsurance, as applicable, that does not generate 
individual enrollee claims in the normal course of business must derive 
costs on all applicable provider encounters using its principal 
internal methodology for pricing those encounters. Issuers will be 
directed to make risk adjustment and reinsurance data accessible to HHS 
in a way that conforms to HHS-established guidelines and applicable 
standards for electronic data collection and submission, storage, 
privacy and security, and processing. In addition, in Sec.  153.720(a), 
we propose requiring these issuers to establish a unique masked 
enrollee identification number for each enrollee, in accordance with 
HHS-defined requirements and maintain the same masked enrollee 
identification number for enrollees that enroll in different plans 
within the issuer, within the State, during a benefit year. Issuers 
must provide all data to HHS in the specified formats, and must correct 
submitted files to resolve problems detected by HHS during file 
processing. The burden associated with this requirement is the time and 
effort to ensure that information in the dedicated data environment 
complies with HHS requirements.
    We estimate that this data submission requirement will affect 1,800 
issuers, and will cost each issuer approximately $327,600 in total 
labor and capital costs (including the average cost of $15,000 for a 
data processing server) during the start-up year. This cost will be 
lower in future years when fixed costs decrease. This cost reflects an 
estimate of 3 full-time equivalent employees (5,460 hours per year) at 
an average hourly rate of $59.39 per hour. We anticipate that 
approximately 400 data processing servers will be established across 
the market in 2014, and these servers will process approximately 9 
billion claims and enrollment files. Therefore, we estimate an 
aggregate burden, including labor and capital costs, of $589,680,000 
for all issuers as a result of these requirements. We are revising the 
supporting statements associated with the submission of risk adjustment 
data and reinsurance enrollment data approved under OMB Control Number 
0938-1155 with an October 31, 2015 expiration date to account for this 
burden.

E. ICRs Regarding Data Validation Requirements When HHS Operates Risk 
Adjustment (Sec.  153.630)

    Under Sec.  153.630, an issuer that offers at least one risk 
adjustment covered plan in a State where HHS is operating risk 
adjustment on behalf of the State for the applicable benefit year must 
have an initial validation audit performed on its risk adjustment data. 
The burden associated with this requirement is the issuer's time and 
effort to provide HHS with source claims, records, and enrollment 
information to validate enrollee demographic information for initial 
and second validation audits, and the issuer's cost to employ an 
independent auditor to perform the initial validation audit on a 
statistically valid sample of enrollees.
    The statistically valid sample of enrollees provided to each issuer 
will consist of enrollees both with and without HCCs. We estimate that 
each issuer sample will consist of approximately 300 enrollees, with a 
disproportionate share of approximately two-thirds of the sample 
consisting of enrollees with HCCs. We also anticipate that this audit 
burden will affect about 1,800 issuers.
    Based on Truven Health Analytics 2010 MarketScan[reg] data, we have 
determined that for enrollees with HCCs, the average number of HCCs to 
be reviewed by an auditor per enrollee is approximately two. 
Additionally, based on HHS audit experience, we estimate that it may 
cost approximately $180 ($90 per hour for 2 hours) for an auditor to 
review the medical record documentation for one enrollee with roughly 
two HCCs. We expect that it may cost approximately $30 per enrollee 
($90 per hour for 20 minutes) to validate demographic information for 
all enrollees in the audit sample, totaling approximately $210 per 
enrollee with HCCs and $30 per enrollee with no HCCs. We assume that an 
initial validation audit will be performed on 180,000 enrollees without 
HCCs, and 360,000 enrollees with HCCs. We have developed this estimate 
assuming that medical records will not be reviewed for enrollees 
without HCCs, and that validation for these enrollees will be conducted 
using demographic data only. Based on the information above, we 
estimate that the total burden per issuer to retain initial validation 
auditors to perform the initial validation would cost approximately 
$45,000. Therefore, for 1,800 issuers, we anticipate that the total 
burden of conducting initial validation audits will be $81 million. We 
are revising the PRA currently approved OMB Control Number 0938-1155 
with an October 31, 2015 expiration date to account for this additional 
burden.
    Under Sec.  153.630(d), issuers will have the opportunity to appeal 
errors identified through the second validation audit process. Because 
we intend to provide further detail on this process in later guidance 
and rulemaking, we currently cannot estimate the number of issuers that 
will appeal HCC findings, or the cost per issuer for doing so. 
Therefore, we will seek OMB approval and solicit public comment on the 
appeal information collection requirements established under Sec.  
153.630(d) at a future date.

F. ICRs Regarding QHP Certification Standards Related to Advance 
Payments of the Premium Tax Credit and Cost-Sharing Reductions (Sec.  
155.1030)

    In Sec.  155.1030(a)(1), we propose that the Exchange ensure that 
each issuer that offers or seeks to offer a QHP in the individual 
market on the Exchange submit the required plan variations, as proposed 
in Sec.  156.420, for each of its health plans proposed to be offered 
as a QHP in the individual market on the Exchange. Further we propose 
that the Exchange must certify that the plan variations meet the 
requirements detailed in Sec.  156.420. We expect that an Exchange 
would collect prior to each benefit year the information necessary to 
validate that the issuer meets the requirements for silver plan 
variations, as detailed in Sec.  156.420(a), and collect for 
certification the information necessary to validate that the issuer 
meets the requirements for zero and limited cost sharing plan 
variations, as detailed in Sec.  156.420(b). We expect that this data 
collection would include the cost-sharing requirements for the plan 
variations, such as the annual limitation on cost sharing, and any 
reductions in deductibles, copayments or coinsurance. In addition, the 
Exchange would collect or calculate the actuarial values of each QHP 
and silver plan variation, calculated under Sec.  156.135 of the 
proposed EHB/AV Rule. We propose in Sec.  155.1030(a)(2) that the 
Exchange provide the actuarial values of the QHPs and silver plan 
variations to HHS. As proposed in Sec.  155.1030(b)(4), HHS may

[[Page 73192]]

use this information in connection with approving estimates for advance 
payment of cost-sharing reductions submitted by issuers under proposed 
Sec.  156.430. Because HHS will already have this information for 
Federally-facilitated Exchanges, the burden associated with this 
requirement is the time and effort for each Partnership or State-based 
Exchange to submit this information. We estimate that it will take each 
Partnership or State-based Exchange approximately 3.5 hours to collect, 
validate, and submit the data to HHS (3 hours by a database 
administrator at $47.70 per hour, and 0.5 hours by a manager at $75.15 
per hour). We estimate that this will cost each Exchange approximately 
$181 per year. We plan to revise the supporting statement published 
under CMS form number 10433, which is pending OMB approval, to account 
for this additional burden.
    In paragraph (b)(1) and (2), we propose that the Exchange collect, 
review, and submit the rate or expected premium allocation, the 
expected allowed claims cost allocation, and the actuarial memorandum 
that a metal level health plan or stand-alone dental plan issuer 
submits under Sec.  156.470. This collection will allow for the 
calculation of the advance payments of cost-sharing reductions and the 
premium tax credit. The Exchange must ensure that such allocations meet 
the standards set forth in Sec.  156.470(c) and (d). This allocation 
information must be collected and approved before a health plan or 
stand-alone dental plan can be certified for participation in the 
Exchange. We expect that the Exchange will collect the allocation 
information in conjunction with the rate and benefit information that 
the issuer submits under Sec.  156.210 and/or the rate information that 
the QHP issuers submits through the Effective Rate Review program. 
Therefore, we believe that the burden for Partnership Exchanges or 
State-based Exchanges to submit to HHS this information collected from 
QHPs is generally part of the burden that is accounted for in the PRA 
approved under OMB Control Number 0938-1141. We estimate that 
Partnership and State-based Exchanges will incur additional burden to 
submit allocation information to HHS for stand-alone dental plans. We 
estimate that it will take each Exchange 30 minutes to submit this 
information for each stand-alone dental plan, and assume that this 
submission will be performed at the hourly wage rate of $38.49 for an 
insurance analyst. Assuming 20 stand-alone dental plans across the 
market, we estimate an aggregate burden of approximately $385 for all 
Partnership or State-based Exchanges to submit this information to HHS. 
We plan to revise the supporting statement published under CMS form 
number 10433, which is pending OMB approval, to account for this 
additional burden.
    In subparagraph (b)(3), we propose that the Exchange must collect 
any estimates and supporting documentation that a QHP issuer submits to 
receive advance payments of certain cost-sharing reductions, as 
described in Sec.  156.430(a), and submit, in the manner and timeframe 
established by HHS, the estimates and supporting documentation to HHS 
for review. Because HHS will already have this information for 
Federally-facilitated Exchanges, the burden associated with this 
requirement is the time and effort for each Partnership or State-based 
Exchange to submit this information. We believe that this requirement 
will impose minimal burden, and that it will take an insurance analyst 
5 minutes (at an hourly wage rate of $38.49), to collect and submit 
this information to HHS for each Partnership or State-based Exchange. 
Therefore, we estimate a burden of $3.08 for each Partnership or State-
based Exchange as a result of this requirement.

G. ICRs Regarding QHP Participation Standards in SHOP (Sec.  156.200)

    In Sec.  156.200(g)(1), we propose that if the issuer of a QHP in 
an FFE also participates in the State's small group market, the QHP 
certification standard would be met if the issuer offers at least one 
small group market QHP at the silver level of coverage and one QHP at 
the gold level of coverage in an FF-SHOP serving that State. We also 
propose that, if neither the issuer nor any issuer in the same issuer 
group participates in the small group market of the State, the standard 
would be met. Therefore, no issuer would be required to begin offering 
small group market plans to meet this requirement. The burden 
associated with this requirement is the time and effort for an issuer 
to prepare a QHP certification application for a SHOP for at least one 
silver level and one gold level plan design. This burden would be 
incurred by issuers who, absent this requirement, would otherwise not 
have participated in a SHOP. We describe the burden associated with 
this requirement in the 30-day Federal Register Notice for the Initial 
Plan Data Collection published on November 21, 2012 (77 FR 69846).

H. ICRs Regarding Plan Variations (Sec.  156.420)

    In Sec.  156.420, we propose that issuers submit to the Exchange 
for certification the variations of the health plans that they offer or 
propose to offer in the individual market on the Exchange that include 
required levels of cost-sharing reductions. We provide an overview of 
the submission process associated with this requirement in this 
proposed rule. In paragraph (a), we propose that, for each silver 
health plan that an issuer offers or proposes to offer in the 
individual market on the Exchange, the QHP issuer must submit to the 
Exchange for certification the standard silver plan and three 
variations of the standard silver plan. In paragraph (b), we further 
propose that a QHP issuer must, for each of its health plans at any 
metal level of coverage, submit a zero cost sharing plan variation and 
a limited cost sharing plan variation of each health plan offered or 
proposed to be offered in the individual market on the Exchange.
    We estimate that 1,200 issuers will participate in an Exchange 
nationally, and that each issuer will offer one QHP per metal level 
with four zero cost sharing plan variations and four limited cost 
sharing plan variations (one per metal level QHP) and three plan 
variations for low-income populations, for a total of four standard 
plans and eleven plan variations. Our burden estimate assumes that each 
issuer will submit these plan variations as part of their electronic 
QHP application, which is described in further detail in the 
``Supporting Statement for Initial Plan Data Collection to Support QHP 
Certification and other Financial Management and Exchange Operations,'' 
which was provided for public comment on November 21, 2012 (77 FR 
69846). We estimate that it will take approximately 1.5 hours to submit 
the requisite information for a plan variation (0.75 hours by an 
actuary at a wage rate of $56.89, 0.5 hours by an insurance analyst at 
a wage rate of $38.49, and 0.25 hours by an insurance manager at a wage 
rate of $67.44). We estimate that each submission for a plan variation 
will cost an issuer $78.77, for a total estimated annual cost of 
$866.47 per issuer for the 11 plan variations. We estimate an aggregate 
burden of $1,039,764 for all issuers participating in the Exchange. We 
plan to revise the supporting statement published under CMS form number 
10433, which is pending final OMB approval, to account for this 
additional burden.

[[Page 73193]]

I. ICRs Regarding Payment of Cost-Sharing Reductions (Sec.  156.430)

    In Sec.  156.430(a)(1), we propose that for each silver plan 
variation and zero cost sharing plan variation that an issuer offers or 
proposes to offer in the individual market on the Exchange, the QHP 
issuer must provide to the Exchange, for approval by HHS, estimates, 
and supporting documentation validating the estimates, of the dollar 
value of cost-sharing reductions to be provided. However, we propose a 
simplified methodology for calculating the advance payments for the 
initial years of the cost-sharing reduction program. This methodology 
will utilize data that QHP issuers submit for other requirements, such 
as Sec.  156.420 and Sec.  156.470. As a result, there will be no 
additional burden associated with this requirement.
    In Sec.  156.430(a)(2), we discuss the process for estimating the 
value of cost-sharing reductions to be provided under the plan 
variation open to Indians with a household income above 300 percent of 
the FPL, described in Sec.  156.420(b)(2). If a QHP issuer seeks 
advance payments for the these cost-sharing reductions, the issuer must 
provide to the Exchange, for approval by HHS, an estimate, and 
supporting documentation validating the estimate, of the dollar value 
of the cost-sharing reductions to be provided under the limited cost 
sharing plan variation of the QHP. We estimate that 1,200 issuers will 
participate in Exchanges nationally, and that each issuer will offer 
one QHP per metal level, with one limited cost sharing plan variation 
for each metal level. For each plan variation, the issuer may submit an 
estimate and supporting documentation of the dollar value of the cost-
sharing reductions. We expect estimates and supporting documentation 
will be submitted as part of the electronic QHP application, which is 
described in further detail in the ``Supporting Statement for Initial 
Plan Data Collection to Support QHP Certification and other Financial 
Management and Exchange Operations,'' which was provided for public 
comment on November 21, 2012 (77 FR 69846). We estimate that it will 
take approximately 1.0 hours to submit each response for a plan 
variation (0.5 hours by an actuary at a wage rate of $56.89 and 0.5 
hours by an insurance analyst at a wage rate of $38.49. We estimate 
that each response for a plan variation will cost an issuer $47.69, for 
an estimated total issuer burden to submit responses for 4 plan 
variations of $228,912 for the year. We plan to revise the supporting 
statement published under CMS form number 10433, which is pending final 
OMB approval, to account for this additional burden.
    In Sec.  156.430(c), we propose that a QHP issuer submit to HHS, in 
the manner and timeframes established by HHS the actual amount of cost-
sharing reductions provided to each enrollee. This information is 
necessary so that HHS can reconcile advance payments made throughout 
the year to actual cost-sharing amounts. While these information 
collection requirements are subject to the Paperwork Reduction Act, the 
information collection process and instruments associated with this 
requirement are currently under development. We will seek OMB approval 
and solicit public comments upon their completion.

J. ICRs Regarding Reduction of an Enrollee's Share of Premium to 
Account for Advance Payment of the Premium Tax Credit (Sec.  156.460)

    In Sec.  156.460(a)(2), we propose that if a QHP issuer receives an 
advance payment of the premium tax credit on behalf of an individual, 
the QHP issuer must notify the Exchange of any reduction in premium 
through the standard enrollment acknowledgment in accordance with Sec.  
156.265(g). Because this notification will occur through the enrollment 
acknowledgement process that already exists under the final Exchange 
Establishment rule (77 FR 18310), we believe that this requirement will 
impose minimal burden on QHP issuers, and that it will take an 
insurance analyst 5 minutes (at an hourly wage of $38.49), to collect 
and submit this information to each Exchange Therefore, we estimate a 
burden of $3.20 for each QHP issuer, and an aggregate burden of $3,849 
for all 1,200 QHP issuers, as a result of this requirement.

K. ICRs Regarding Allocation of Rates and Claims Costs for Advance 
Payments of the Premium Tax Credit and Cost-Sharing Reductions (Sec.  
156.470)

    In Sec.  156.470(a), we propose that an issuer provide to the 
Exchange annually for approval, for each metal level health plan 
offered or proposed to be offered in the individual market on the 
Exchange, an allocation of the rate and the expected allowed claims 
costs for the plan, for EHB, other than services described in Sec.  
156.280(d)(1), and any other services or benefits offered by a health 
plan that do not meet the definition of EHB. In Sec.  156.470(b) we 
propose that an issuer of a stand-alone dental plan provide to the 
Exchange for approval a dollar allocation of the expected premium for 
the plan to the pediatric dental essential health benefit. In Sec.  
156.470(c) and (d), we propose that issuers ensure that the allocation 
described in paragraphs (a) and (b), respectively, are calculated 
following specific standards. Lastly, in Sec.  156.470(e), we propose 
that an issuer of a metal level health plan or stand-alone dental plan 
offered, or proposed to be offered, in the individual market on the 
Exchange, submit an actuarial memorandum with a detailed description of 
the methods and specific bases used to perform the allocations that 
would be required under paragraphs (a) and (b) of that section, 
demonstrating that the allocations meet the standards set forth in 
paragraphs (c) and (d).
    QHP issuers will submit these allocations and justifications 
through the Effective Rate Review program (Rate Increase Disclosure and 
Review Rule, 76 FR 29964). The Rate Increase Disclosure and Review Rule 
develops a process to ensure the public disclosure of all information 
and justifications relating to unreasonable rate increases. To that 
end, the regulation establishes various reporting requirements for 
health insurance issuers, including a Preliminary Justification for a 
proposed rate increase, a Final Justification for any rate increase 
determined by a State or HHS to be unreasonable, and a notification 
requirement for unreasonable rate increases that will not be 
implemented. The Preliminary Justification includes data supporting the 
potential rate increase as well as a written explanation of the rate 
increase. For those rates HHS will be reviewing, issuers' submissions 
also will include data and information that HHS will need to make a 
valid actuarial determination regarding whether a rate increase is 
unreasonable. Therefore, there will be no additional burden on QHP 
issuers that submit their rates through the Effective Rate Review 
program. The burden for the Effective Rate Review submission is already 
accounted for in OMB Control Number 0938-1141. We are additionally 
revising the supporting statement of the PRA approved under OMB Control 
Number 0938-1141 to clarify that we will be collecting this allocation 
information from metal plans to be offered on an Exchange, whether they 
are new or existing.
    This requirement will result in additional burden for stand-alone 
dental plans. We estimate that it will take each stand-alone dental 
plan 5 hours to prepare and submit this information to the Exchange. We 
assume that this requirement will require 3 hours of labor by an 
insurance analyst (at an

[[Page 73194]]

hourly wage rate of $38.49) and 2 hours of labor by an actuary (at an 
hourly wage rate of $56.89). Assuming 20 stand-alone dental plans 
across the market, we estimate an aggregate burden of approximately 
$4,585 for all stand-alone dental plans to submit these allocations and 
justifications to the Exchange. We plan to revise the supporting 
statement published under HHS form number 10433, which is pending final 
OMB approval, to account for this additional burden.

L. ICRs Regarding Medical Loss Ratio Reporting (Sec.  158.130, Sec.  
158.140, Sec.  158.162, Sec.  158.221, Sec.  158.240)

    This proposed rule would direct issuers to include all payments and 
receipt amounts related to the reinsurance, risk corridors and risk 
adjustment programs in the annual MLR report.
    The existing information collection requirement is approved under 
OMB Control Number 0938-1164. This includes the annual reporting form 
that is currently used by issuers to submit MLR information to HHS. 
Prior to the deadline for the submission of the annual MLR report for 
the 2014 MLR reporting year, and in accordance with the PRA, HHS plans 
to solicit public comment and seek OMB approval for an updated annual 
form that will include reporting of the premium stabilization payments 
and will reflect the changes in deduction for community benefit 
expenditures for federal income tax exempt not-for-profit issuers.

                                        Table 18--Estimated Fiscal Year Reporting Recordkeeping and Cost Burdens
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                         Hourly
                                                                             Burden per     Total      labor cost                  Total
  Regulation  sections     OMB Control  No./  Respondents     Responses       response      annual         of      Total labor    capital/    Total cost
                             CMS  Form No.                                    (hours)       burden     reporting     cost ($)   maintenance      ($)
                                                                                           (hours)      \52\ ($)                 costs ($)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sec.   153.405..........  0938-NEW..........        2,000            2,000         1.00        2,000        55.00      110,000            0      110,000
Sec.   153.420..........  0938-1155.........        1,800    9,000,000,000        0.001    9,828,000        59.39  583,680,000    6,000,000  589,680,000
Sec.   153.630(b).......  0938-1155.........        1,800          540,000         1.67      900,000        90.00   81,000,000            0   81,000,000
Sec.   155.1030(a)......  0938-NEW/CMS-10433           51               51         3.50          179        51.62        9,240            0        9,240
Sec.   155.1030(b)(2)...  0938-NEW/CMS-10433           20               20         0.50           10        38.49          385            0          385
Sec.   155.1030(b)(3)...  0938-NEW/CMS-10433           51               51         0.08          4.1        38.49          158            0          158
Sec.   156.420..........  0938-NEW/CMS-10433        1,200           13,200         1.50       19,800        52.51    1,039,698            0    1,039,698
Sec.   156.430(a)(2)....  0938-NEW/CMS-10433        1,200            4,800         1.00        4,800        47.69      228,912            0      228,912
Sec.   156.460(a)(2)....  0938-NEW..........        1,200            1,200         0.08           96        38.49        3,695            0        3,695
Sec.   156.470..........  0938-NEW/CMS-10433           20               20            5          100        45.85        4,585            0        4,585
                                             -----------------------------------------------------------------------------------------------------------
    Total...............  ..................        3,271  ...............  ...........  ...........  ...........  666,076,673    6,000,000  672,076,673
--------------------------------------------------------------------------------------------------------------------------------------------------------

V. Response to Comments

    Because of the large number of public comments we normally receive 
on Federal Register documents, we are not able to acknowledge or 
respond to them individually. We will consider all comments we receive 
by the date and time specified in the DATES section of this preamble, 
and, when we proceed with a subsequent document, we will respond to the 
comments in the preamble to that document.
---------------------------------------------------------------------------

    \52\ Bureau of Labor Statistics, U.S. Department of Labor, 
National Compensation Survey: Occupational Earnings in the United 
States, 2011. United States Government Printing Office. May 2011. 
Retrieved from http://www.bls.gov/ncs/ncswage2010.htm.
---------------------------------------------------------------------------

VI. Regulatory Impact Analysis

A. Statement of Need

    This proposed rule implements standards related to premium 
stabilization programs (reinsurance, risk adjustment, and risk 
corridors), consistent with the Affordable Care Act. The purpose of 
these three programs is to protect issuers from the negative effects of 
adverse selection and to protect consumers from increases in premiums 
due to issuer uncertainty. The Premium Stabilization Rule provided that 
further details on the implementation of these programs, including the 
specific parameters applicable to these programs, would be forthcoming 
in this proposed rule. This proposed rule also includes provisions 
governing the cost-sharing reductions program, the advance payment of 
the premium tax credit program, the medical loss ratio program, the 
SHOP Exchange, and user fees for Federally-facilitated Exchanges.

B. Overall Impact

    We have examined the impacts of this rule as required by Executive 
Order 12866 on Regulatory Planning and Review (September 30, 1993), 
Executive Order 13563 on Improving Regulation and Regulatory Review 
(January 18, 2011), the Regulatory Flexibility Act (RFA) (September 19, 
1980, Pub. L. 96-354), section 202 of the Unfunded Mandates Reform Act 
of 1995 (March 22, 1995, Pub. L. 104-4), Executive Order 13132 on 
Federalism (August 4, 1999), and the Congressional Review Act (5 U.S.C. 
804(2)).
    Executive Orders 12866 and 13563 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing rules, and of promoting 
flexibility. A regulatory impact analysis (RIA) must be prepared for 
rules with economically significant effects ($100 million or more in 
any 1 year).
    OMB has determined that this Payment Notice is ``economically 
significant'' within the meaning of section 3(f)(1) of Executive Order 
12866, because it is likely to have an annual effect of $100 million in 
any one year. Accordingly, we have prepared an RIA that presents the 
costs and benefits of this proposed rule.
    It is difficult to discuss the wide-ranging effects of these 
provisions in isolation, though the overarching goal of the premium 
stabilization and Exchange-related provisions and policies in the 
Affordable Care Act is to

[[Page 73195]]

make affordable health insurance available to individuals who do not 
have access to affordable employer-sponsored coverage. The provisions 
within this proposed rule are integral to the goal of expanding 
coverage. For example, the premium stabilization programs (risk 
adjustment, reinsurance, and risk corridors) decrease the risk of 
financial loss that health insurance issuers might otherwise expect in 
2014 and the cost-sharing reductions program and advanced payments of 
the premium tax credit assist low- and moderate-income consumers in 
purchasing health insurance. The combined impacts of these provisions 
affect the private sector, issuers, and customers, through increased 
access to health care services including preventive services, decreased 
uncompensated care, lower premiums, and increased plan (and thereby 
cost) transparency. Through the reduction of financial uncertainty for 
issuers and increased affordability for consumers, the provisions are 
expected to increase access to health coverage.
    Recent research \53\ analyzed the effects of increased insurance 
coverage. The analysis studied the health effects of expanded Medicaid 
eligibility in three States (New York, Maine, and Arizona) with 
comparable States that did not expand Medicaid over a multiyear time 
period. The study found that increased coverage resulted in:
---------------------------------------------------------------------------

    \53\ Sommers, Ben et al. ``Mortality and Access to Care among 
Adults after State Medicaid Expansions'' New England Journal of 
Medicine. No: 367 20121025-1034.
---------------------------------------------------------------------------

     Significant reduction in mortality (19.6 deaths per 
100,000);
     Increased rate of self-reported health status (by three 
percent); and
     Reduction in cost-related delays in care (by 21 percent).
    While these results may not be entirely generalizable given the 
population and coverage type, they do replicate other research findings 
\54\ of the importance of health coverage in improving health and 
reducing mortality.
---------------------------------------------------------------------------

    \54\ Finkelstein, A. et al. ``The Oregon Health Insurance 
Experiment: Evidence from the First Year.'' NBER Working Paper No. 
17190, July 2011.
---------------------------------------------------------------------------

    There are administrative costs to States to set up and administer 
these programs. For issuers not receiving payments, any contribution is 
an additional cost, which an issuer could pass on to beneficiaries 
through premium increases. There are also reporting costs for issuers 
to submit data and financial information. This RIA discusses in detail 
the benefits and costs of the provisions in this proposed rule.
    In this RIA, we discuss programs and requirements newly implemented 
by the proposed rule, such as certain provisions related to the cost-
sharing reductions program, the advance payment of the premium tax 
credit program, the medical loss ratio program, the SHOP Exchange, and 
user fees for a Federally-facilitated Exchange, as well as new 
regulatory provisions for the three premium stabilization programs 
(reinsurance, risk adjustment, and risk corridors) which had been 
introduced as part of the Premium Stabilization Rule (77 FR 17220). In 
addition to building on the RIA for that earlier rule, we are able, for 
the analysis of much of the proposed rule, to use the Congressional 
Budget Office's estimates of the Affordable Care Act's impact on 
federal spending, revenue collection, and insurance enrollment.

C. Impact Estimates of the Payment Notice Provisions and Accounting 
Table

    In accordance with OMB Circular A-4, Table 19 below depicts an 
accounting statement summarizing HHS' assessment of the benefits, 
costs, and transfers associated with this regulatory action.
    This proposed rule implements standards for programs that will have 
numerous effects, including providing consumers with affordable health 
insurance coverage, reducing the impact of adverse selection, and 
stabilizing premiums in the individual and small group health insurance 
markets and in an Exchange. We are unable to quantify benefits of the 
proposed rule--such as improved health and longevity due to increased 
insurance enrollment--and some costs--such as the cost to society of 
providing additional medical services to newly-enrolled individuals. 
Direct costs in the table below reflect administrative costs to States, 
health insurance issuers, and Exchanges. The effects in Table 19 
reflect estimated cost-sharing reduction payments, which are transfers 
from the General Fund of the U.S. Treasury to consumers who qualify for 
cost-sharing reductions. These transfer estimates are based on the 
Congressional Budget Office's March 2012 baseline estimates, and have 
been annualized over the 5 year period from FYs 2013-2017. Estimated 
transfers do not yet reflect any user fees paid by insurance issuers 
for the Federally-facilitated Exchange because we cannot estimate those 
fee totals until the number of States operating an Exchange is 
determined.

                                           Table 19--Accounting Table
----------------------------------------------------------------------------------------------------------------
                                                                                           Units
                                                                          --------------------------------------
                          Category                             Estimates                  Discount      Period
                                                                           Year dollar   rate  (%)     covered
----------------------------------------------------------------------------------------------------------------
Benefits
----------------------------------------------------------------------------------------------------------------
    Annualized Monetized ($millions/year)...................                     Not Estimated
                                                                                 Not Estimated
----------------------------------------------------------------------------------------------------------------
Costs
----------------------------------------------------------------------------------------------------------------
    Annualized Monetized ($millions/year)...................      $518.85         2013            7    2013-2017
                                                                  $529.56         2013            3    2013-2017
----------------------------------------------------------------------------------------------------------------
Transfers
----------------------------------------------------------------------------------------------------------------
    Federal Annualized Monetized ($millions/year)...........    $6,513.85         2013            7    2013-2017
                                                                $6,787.26         2013            3    2013-2017
----------------------------------------------------------------------------------------------------------------


[[Page 73196]]

    This impact analysis for the premium stabilization programs 
references estimates from CBO and CMS. CBO's estimates remain the most 
comprehensive accounting of all the interacting provisions pertaining 
to the Affordable Care Act, and contain Federal budget impact estimates 
of some provisions that have not been independently estimated by CMS. 
Based on our review, we expect that the provisions of this proposed 
rule will not significantly alter CBO's estimates of the budget impact 
of the reinsurance, risk corridors, and risk adjustment programs. The 
requirements of these programs are well within the parameters used in 
the modeling of the Affordable Care Act. Our review and analysis of the 
requirements indicate that the impacts are likely within the model's 
margin of error.
    For this RIA, we are updating the estimates for the reinsurance and 
risk adjustment programs to reflect the five-year period from fiscal 
years (FYs) 2013 through 2017. Table 20 includes the CBO estimates for 
outlays and receipts for the reinsurance and risk adjustment programs 
from FYs 2013 through 2017. These estimates for reinsurance and risk 
adjustment reflect CBO's scoring of these provisions. Unlike the 
current policy, CBO assumed risk adjustment payments and charges would 
begin to be made in 2014, when in fact these payments and charges will 
begin in 2015 as discussed above. Additionally, the CBO estimates do 
not reflect the $5 billion in reinsurance contributions that are 
submitted to the U.S. Treasury. There are no outlays and receipts for 
reinsurance and risk adjustment in 2013 because the provisions do not 
take effect until 2014.
    CBO did not separately estimate the program costs of risk 
corridors, but assumed aggregate collections from some issuers would 
offset payments made to other issuers. Table 20 summarizes the effects 
of the risk adjustment and reinsurance programs on the Federal budget, 
with the additional, societal effects of this proposed rule discussed 
in this Regulatory Impact Analysis.

  Table 20--Estimated Federal Government Outlays and Receipts for the Reinsurance and Risk Adjustment Programs
                                   From FYs 2013-2017, in Billions of Dollars
----------------------------------------------------------------------------------------------------------------
               Year                     2013         2014         2015         2016         2017      2013-2017
----------------------------------------------------------------------------------------------------------------
Reinsurance and Risk Adjustment     ...........           11           18           18           18           65
 Program Payments *...............
Reinsurance and Risk Adjustment     ...........           12           16           18           18           64
 Program Receipts *...............
----------------------------------------------------------------------------------------------------------------
* Risk adjustment program payments and receipts lag by one quarter. Receipt will fully offset payments over
  time.
Source: Congressional Budget Office. 2011. Letter to Hon. Nancy Pelosi. March 20, 2010.

Risk Adjustment
    Risk adjustment is a permanent program administrable by States that 
operate an HHS-approved Exchange, with risk adjustment criteria and 
methods established by HHS, with States having the option of proposing 
alternative methodologies. Risk adjustment is generally applied to non-
grandfathered health plans offered in the individual and small group 
markets, both inside and outside of the Exchange. A State that does not 
operate an Exchange cannot operate risk adjustment, although a State 
operating an Exchange can elect not to run risk adjustment. For States 
that do not operate an Exchange, do not elect to operate risk 
adjustment, or do not obtain HHS approval to operate risk adjustment, 
HHS will administer the risk adjustment functions on the State's 
behalf.
    The Exchange may operate risk adjustment, although a State may also 
elect to have an entity other than the Exchange perform the risk 
adjustment functions, provided that the State is approved by HHS to 
operate risk adjustment. Similar to the approach for reinsurance, 
multiple States may contract with a single entity to administer risk 
adjustment, provided that risk is pooled at the State level and that 
each State is approved to operate their risk adjustment program. Having 
a single entity administer risk adjustment in multiple States may 
provide administrative efficiencies. In this proposed rule, we propose 
to establish a risk adjustment State approval process. We describe 
these administrative costs in the Collection of Information 
Requirements section of this proposed rule.
    The details of the HHS-developed risk adjustment methodology are 
specified in this proposed rule. The HHS-developed risk adjustment 
methodology is based on a model that is concurrent and uses demographic 
and diagnosis information in a benefit year to predict total plan 
liability in the benefit year. The national payment transfer 
methodology is based on the State average premium to ensure that 
payments and charges net to zero.
    States may use this methodology or develop and propose alternate 
risk adjustment methodologies that meet Federal standards. Once HHS 
approves an alternate risk adjustment methodology, it will be 
considered a Federally certified risk adjustment methodology that any 
State may elect to use. In this proposed rule, we lay out the criteria 
that HHS will use to evaluate alternate risk adjustment methodologies. 
Approved Federally certified risk adjustment methodologies will be 
published in the final HHS notice of benefit and payment parameters.
    States that elect to develop their own risk adjustment 
methodologies are likely to have increased administrative costs. 
Developing a risk adjustment methodology requires complex data 
analysis, including population simulation, predictive modeling, and 
model calibration. States that elect to use the HHS developed 
methodology would likely reduce administrative costs. We describe these 
administrative costs in the Collection of Information Requirements 
section of this proposed rule.
    In the Premium Stabilization Rule, we defined a risk adjustment 
covered plan as any health insurance coverage offered in the individual 
or small group market with the exception of grandfathered health plans, 
group health insurance coverage described in Sec.  146.145(c) of this 
subchapter, individual health insurance coverage described in Sec.  
148.220 of this subchapter, and any other plan determined not to be a 
risk adjustment covered plan in the annual HHS notice of benefit and 
payment parameters. In this proposed rule, we clarify that plans not 
subject to certain market reforms and student health plans will not be 
subject to the issuer requirements in subparts G and H of 45 CFR part 
153.
    States have the flexibility to merge the individual and small group 
markets into one risk pool, or keep them separate for the purposes of 
risk adjustment. Risk adjustment must be conducted separately in 
unmerged markets. Developing the technology infrastructure required for 
data

[[Page 73197]]

submission will likely require an administrative investment. The risk 
adjustment process will require significant amounts of demographic and 
diagnostic data to run through a risk assessment model to determine 
individual risk scores that form the basis for plan and State averages. 
The Premium Stabilization Rule requires States to collect or calculate 
individual risk scores at a minimum. States may vary the amount and 
type of data collected, provided that States meet specified data 
collection standards.
    Administrative costs will vary across States and health insurance 
issuers depending on the type of data collection approach used in the 
State. In States opting to operate risk adjustment using a distributed 
model of data collection, the costs associated with mapping and storing 
the required data and, in some cases, the costs associated with running 
the risk adjustment software will likely be borne by the issuer.
    States and issuers that already have systems in place for data 
collection and reporting will have reduced administrative costs. For 
example, issuers that already report data for Medicare Advantage (MA) 
or Medicaid Managed Care may see minimal additional administrative 
burden for risk adjustment. Additionally, some States risk-adjust their 
Medicaid Managed Care programs. States with all-payer or multi-payer 
claims databases may need to modify their systems to meet the 
requirements of risk adjustment. However, these costs of modification 
will be less than the costs of establishing these systems. States and 
issuers that do not have existing technical capabilities will have 
larger administrative costs related to developing necessary 
infrastructure.
    Issuer characteristics, such as size and payment methodology, will 
also affect administrative costs. In general, national issuers will 
likely be better prepared for the requirements of risk adjustment than 
small issuers. Additionally, administrative costs may be greater for 
issuers whose providers are paid by capitation and who do not receive 
claims or encounter data, as they will have to modify their systems to 
account for the information required for risk adjustment methodology.
    In this proposed rule, we provide more details on the data 
collection approach when we operate risk adjustment on behalf of a 
State. The Premium Stabilization Rule established that when HHS 
operates risk adjustment on behalf of a State, it will use a 
distributed approach. We believe that this approach minimizes issuer 
burden while protecting enrollee privacy. Under a distributed approach, 
issuers will need to format risk adjustment data, and maintain that 
data in compliance with HHS-established guidelines and applicable 
standards. We describe these administrative costs in the Collection of 
Information Requirements section of this proposed rule.
    The Premium Stabilization Rule directs States to audit a sample of 
data from each issuer and to ensure proper implementation of risk 
adjustment software by all issuers that participate in risk adjustment. 
States may extrapolate results from the sample to adjust the average 
actuarial risk for the plan. This approach is consistent with the 
approach now used in Medicare Advantage, where audit sample error rates 
will be extrapolated to contract-level payments to recoup overpayment 
amounts.
    In this proposed rule, we propose data validation standards for 
when HHS operates risk adjustment on behalf of a State. We are 
proposing that HHS conduct a data validation program consisting of six 
stages: (1) Sample selection; (2) initial validation audit; (3) second 
validation audit; (4) error estimation; (5) appeals; and (6) payment 
adjustments. Issuers would engage independent initial auditors to 
conduct an initial audit of an HHS-selected sample of risk adjustment 
data. HHS would retain a second validation auditor to verify the 
findings of the initial validation audit and provide error estimates. 
However, in this proposed rule we propose that there be no adjustments 
to payments and charges based on the error estimates for benefit years 
2014 and 2015. We describe these administrative costs in the Collection 
of Information Requirements section of this proposed rule. We are also 
proposing a process to appeal data validation findings. Issuers will 
have an opportunity to appeal findings from both the initial validation 
audit and second validation audit.
    Risk adjustment transfers dollars from health plans with lower-risk 
enrollees to health plans with higher-risk enrollees. From 2014 through 
2016, it is estimated that $27 billion will be transferred between 
issuers. We are updating the cost estimates for this RIA to include 
2017, using CBO estimates.\55\ From 2014 through 2017, we estimate that 
there will be $45 billion transferred between issuers.
---------------------------------------------------------------------------

    \55\ Congressional Budget Office. 2011. Letter to Hon. Nancy 
Pelosi. March 20, 2010.
---------------------------------------------------------------------------

    Risk adjustment protects against adverse selection by allowing 
insurers to set premiums according to the average actuarial risk in the 
individual and small group market without respect to the type of risk 
selection the insurer would otherwise expect to experience with a 
specific product offering in the market. This should lower the risk 
premium and allow issuers to price their products closer to the average 
actuarial risk in the market. In addition, it mitigates the incentive 
for health plans to avoid unhealthy members.
    The risk adjustment program also serves to level the playing field 
inside and outside of the Exchange, as payments and charges are applied 
to all non-grandfathered individual and small group plans. This 
mitigates the potential for excessive premium growth within the 
Exchange due to anticipated adverse selection.
Reinsurance
    The Affordable Care Act creates a transitional reinsurance program 
for the years 2014, 2015, and 2016. Each State is eligible to establish 
a reinsurance program. If a State establishes a reinsurance program, 
the State must enter into a contract with an applicable reinsurance 
entity to carry out the program. If a State does not elect to establish 
its own reinsurance program, HHS will carry out the reinsurance program 
for that State.
    The Affordable Care Act requires a reinsurance pool of $10 billion 
in 2014, $6 billion in 2015, and $4 billion in 2016. It also requires 
annual contributions to the U.S. Treasury of $2 billion, $2 billion, 
and $1 billion for those years, respectively. These contributions are 
funded by health insurance issuers and third party administrators on 
behalf of self-insured group health plans. Section 1341(b)(3) of the 
Affordable Care Act directs the Secretary of HHS to establish the 
method for determining contribution levels for the program. HHS 
proposes to establish a national per capita contribution rate designed 
to collect the $12.02 billion in 2014 to cover the required $10 billion 
in reinsurance payments, the $2 billion contribution to the U.S. 
Treasury, and the additional $20.3 million to cover the Federal 
administrative expenses of operating the reinsurance program in 2014. 
We continue to estimate that we will collect these amounts authorized 
from 2014 through 2016 for the reinsurance pool, including the annual 
contributions to the U.S. Treasury.
    HHS proposes to collect the required contributions under the 
national contribution rate from health insurance issuers and self-
insured group health

[[Page 73198]]

plans.\56\ States establishing their own reinsurance program may 
collect additional contributions for administrative costs and/or 
reinsurance payments. Section 1341(a)(3)(B) of the Affordable Care Act 
requires that the reinsurance contribution amount for each issuer 
reflect each issuers' fully insured commercial book of business for all 
major medical products. In this proposed rule, we clarify which types 
of health insurance coverage and self-insured group health plans are to 
make reinsurance contributions, and which are not. This clarification 
does not affect the amounts authorized to be collected for reinsurance.
---------------------------------------------------------------------------

    \56\ The Department of Labor has reviewed this proposed rule and 
advised that paying required reinsurance contributions would 
constitute a permissible expense of the plan for purposes of Title I 
of the Employee Retirement Income Security Act (ERISA) because the 
payment is required by the plan under the Affordable Care Act as 
interpreted in this proposed rule. (See generally, Advisory Opinion 
2001-01A to Mr. Carl Stoney, Jr., available at www.dol.gov/ebsa 
discussing settlor versus plan expenses.)
---------------------------------------------------------------------------

    A State that establishes a reinsurance program may elect to collect 
additional contributions to provide funding for administrative expenses 
or supplemental reinsurance payments. Additional contributions for 
administrative expenses may be collected by the State's applicable 
reinsurance entity, at the State's election. Any additional 
contributions for reinsurance payments must be collected by the State's 
applicable reinsurance entity. In this proposed rule, we propose to 
collect administrative expenses for HHS-operated reinsurance programs. 
A State that operates the reinsurance program bears the administrative 
costs of the applicable reinsurance entity, and must ensure that the 
reinsurance entity complies with program requirements. HHS will share 
some of its collections for administrative costs with States that run 
the program. If a State operates its own reinsurance program, HHS would 
transfer $0.055 of the per capita administrative fee to the State for 
purposes of administrative expenses incurred in making reinsurance 
payments, and retain the remaining $0.055 to offset the costs of 
contribution collection. A State may have more than one reinsurance 
entity, and two or more States may jointly enter into an agreement with 
the same applicable reinsurance entity to carry out reinsurance in 
their State. Administrative costs will likely increase if multiple 
reinsurance entities are established within a State, whereas 
administrative efficiencies may be found if multiple States contract 
with one applicable reinsurance entity.
    We propose in this proposed rule an annual collections and payment 
cycle. We also considered a quarterly collections and payment cycle, as 
envisioned by the Premium Stabilization Rule. However, a quarterly 
cycle would impose significant costs on contributing entities. Because 
HHS and States operating reinsurance would likely need to hold back a 
significant portion of reinsurance funds until the end of the year to 
ensure equitable payment of requests for reinsurance payments. We 
believe that issuers would receive only limited benefits from a 
quarterly payment cycle.
    In Sec.  153.100(a), a State is required to issue an annual notice 
of benefit and payment parameters specific to that State if it elects 
to: (i) Modify the data requirements from the HHS-operated reinsurance 
program; (ii) collect additional reinsurance contributions, under Sec.  
153.220(d); or (iii) use more than one applicable reinsurance entity.
    States that establish a reinsurance program will also maintain any 
records associated with the reinsurance program, as set forth in Sec.  
153.240(c). In addition, a State will notify HHS if it intends to 
collect additional administrative expenses and provide justification 
for the additional collection. The Premium Stabilization Rule 
established that reinsurance contributions will be based on a per 
capita amount. The per capita approach would be less complex to 
administer in comparison to the percent of premium approach that HHS 
considered but ultimately decided not to pursue. Further, the per 
capita approach will better enable HHS to maintain the goals of the 
reinsurance program by providing issuers with a more straightforward 
approach to reinsurance contributions. States would be permitted to 
collect additional contributions towards supplemental reinsurance 
payments. We describe the administrative costs in the Collection of 
Information Requirements section of this proposed rule.
    In this proposed rule, we establish the methodology to be used for 
counting covered lives for purposes of calculating reinsurance 
contributions. This methodology is based upon counting methods 
permitted under the PCORTF Rule. We believe that relying on a 
previously established process set forth in the PCORTF Rule for 
counting enrollees will minimize issuer burden for conducting these 
counts. In the Collection of Information Requirements section of this 
proposed rule, we describe the administrative costs for issuers 
associated with the data requirements in Sec.  153.400(b) for all 
contributing entities both inside and outside the Exchange. The 
contributing entities would be required to provide enrollment data to 
HHS to substantiate contribution amounts.
    Reinsurance payments will be made to issuers of individual 
insurance coverage for high claims costs for enrollees. In this 
proposed rule, we propose a national attachment point, national 
reinsurance cap, and national coinsurance rate. In the Premium 
Stabilization Rule, we established that payments will be made on a 
portion of claims costs for enrollees in reinsurance eligible plans 
incurred above an attachment point, subject to a reinsurance cap.
    Use of a reinsurance cap, as well as the requirement for health 
insurance issuer costsharing above the attachment point and below the 
cap, may incentivize health insurance issuers to control costs. This 
approach based on claims costs is simpler to implement and more 
familiar to health insurance issuers, and therefore will likely result 
in savings in administrative costs as compared to a condition-based 
reinsurance approach. The program costs of reinsurance are expected to 
be reflected in changes to health insurance premiums.
    A State operating its own reinsurance program may opt to supplement 
the reinsurance parameters proposed by HHS only if the State elects to 
collect additional contributions for supplemental reinsurance payments 
or use additional State funds for supplemental reinsurance payments, 
and must specify these supplemental payment parameters in its State 
notice of benefit and payment parameters.
    In this proposed rule, we propose that States provide a process 
through which a reinsurance-eligible plan that does not generate 
individual enrollee claims may derive costs to request reinsurance 
payments. In addition, we clarify that when HHS operates a reinsurance 
program on behalf of a State that these plans may price encounters in 
accordance with its existing principal, internal encounter pricing 
methodology. Additionally, we propose in Sec.  153.240(b) of this 
proposed rule that States operating their own reinsurance program must 
notify issuers of reinsurance payments to be made, as well as provide 
reinsurance-eligible plans an estimate of expected requests for 
reinsurance payments. Moreover, we propose for both State- and HHS-
operated reinsurance programs, that only plans subject to the 2014 
market

[[Page 73199]]

reform rules would be eligible for reinsurance payment.
    In this proposed rule, we also provide more details on the data 
collection approach for HHS-operated reinsurance programs. HHS plans to 
use the same distributed data collection approach used for risk 
adjustment; however, only data elements necessary for reinsurance claim 
selection will be considered for the purpose of determining reinsurance 
payments. In the Collection of Information Requirements section, we 
describe the administrative costs required in Sec.  153.410 for issuers 
of reinsurance-eligible plans in States where HHS is operating 
reinsurance to receive reinsurance payments. We believe details on the 
reinsurance data collection approach proposed in the HHS notice of 
benefit and payment parameters are reflected in these cost estimates.
    All health insurance issuers contribute to the reinsurance pool, 
because successful implementation of the range of reforms in 2014 
benefit all of their enrollees (for example, those reforms should lead 
to fewer unreimbursed health costs, lowering the costs for all issuers 
and group health plans) while only health insurance issuers with plans 
in the individual market are eligible to receive payments. This serves 
to stabilize premiums in the individual market while having a minimal 
impact on large group issuers and plans. Reinsurance will attenuate 
individual market rate increases that might otherwise occur because of 
the immediate enrollment of higher risk individuals, potentially 
including those currently in State high-risk pools. It will also help 
prevent insurers from building in risk premiums to their rates given 
the unknown health of their new enrollees. It is expected that the cost 
of reinsurance contributions will be roughly equal to one percent of 
premiums in the total market in 2014, less in 2015 and 2016, and will 
end in 2017. In contrast, it is anticipated that reinsurance payments 
will result in premium decreases in the individual market of between 10 
and 15 percent.
    Evidence from the Healthy New York (Healthy NY) program \57\ 
supports the magnitude of these estimates. In 2001, the State of New 
York began operating Healthy NY and required all HMOs in the State to 
offer policies for which small businesses and low-income individuals 
would be eligible. The program contained a ``stop-loss'' reinsurance 
provision designed to lower premiums for enrollees. Under the program, 
if any enrollee incurred $30,000 in annual claims, his or her insurer 
was reimbursed for 90 percent of the next $70,000 in claims. Premiums 
for Healthy NY policies were about 15 percent to 30 percent less than 
those for comparable HMO policies in the small group market.
---------------------------------------------------------------------------

    \57\ Swartz, K. ``Health New York: Making Insurance More 
Affordable for Low-Income Workers.'' The Commonwealth Fund. November 
2001.
---------------------------------------------------------------------------

Medical Loss Ratio
    This proposed rule proposes to amend the MLR and rebate calculation 
methodologies to include payments and receipts related to the premium 
stabilization programs. The definition of premium revenue would be 
modified to account for these payments and receipts. When the MLR 
annual reporting form is updated for the reporting year 2014 and later, 
premium stabilization payment and receipt amounts would be considered a 
part of gross earned premium reported to the Secretary, similar to 
other elements involved in the derivation of earned premium. The MLR 
annual reporting form would then account for premium stabilization 
payment and receipt amounts by removing them from adjusted earned 
premium, so that these amounts do not have a net impact on the adjusted 
earned premium used in calculating the MLR denominator and rebates. 
Additionally, this proposed rule proposes to amend the MLR calculation 
methodology to add or subtract premium stabilization payment(s) and 
receipt amounts in the MLR numerator, consistent with the way the 
statute prescribes the calculation methodology for risk corridors. 
These adjustments will reduce or increase issuers' MLRs, and may 
increase or reduce issuers' rebates, respectively. The amended 
methodology will result in a more accurate calculation of MLR and 
rebate amounts, since it will reflect issuers' actual claims-related 
expenditures. This approach will also support the effectiveness of both 
the MLR and the premium stabilization programs by correctly offsetting 
the premium stabilization payment and receipt amounts against rebates, 
consistently with the risk corridors calculation methodology adopted in 
Sec.  153.530.
    Based on HHS's experience with the 2011 MLR reporting year, there 
are 466 health insurance issuers \58\ offering coverage in the 
individual and group markets to almost 80 million enrollees that will 
be affected by the proposed amendment to account for premium 
stabilization payments in MLR and rebate calculations. In 2012, an 
estimated 54 issuers paid $396 million in rebates for the 2011 MLR 
reporting year to approximately 4 million enrollees in the individual 
markets, while 59 issuers in the small group market provided 
approximately $289 million in rebates to policyholders and subscribers 
on behalf of over 3 million enrollees, and 47 issuers in the large 
group market provided approximately $403 million in rebates to 
policyholders and subscribers on behalf of almost 6 million enrollees. 
Lack of data makes it difficult to predict how high-risk enrollees will 
be distributed among issuers and, therefore, how MLRs and total rebates 
would be affected. Issuers with relatively low-risk enrollees are 
likely to have positive net premium stabilization payments (that is, 
payments would be greater than receipts) and, if so, their MLRs will 
increase as a result of the amended MLR calculation methodology. If any 
of these issuers fail to meet the MLR standard, taking the premium 
stabilization payments and receipts into account in the MLR 
calculations will result in lower rebate payments. Issuers with 
relatively high-risk enrollees are likely to have positive net receipts 
(that is, receipts would be greater than payments) and, if so, their 
MLRs would decrease as a result. If any such issuer fails to meet the 
MLR standard, its rebate amount will increase. Since such issuers are 
likely to have high claims expenditures and therefore, high MLRs, they 
would be less likely to owe rebates. So we do not anticipate that 
rebates will go up for such issuers.
---------------------------------------------------------------------------

    \58\ Issuers represent companies (for example, NAIC company 
code). These estimates do not include issuers of plans with total 
annual limits of $250,000 or less (sometimes referred to as ``mini-
med'' plans) or expatriate plans.
---------------------------------------------------------------------------

    The Payment Notice proposes to also change the deadlines for MLR 
report submission and rebate payments so that the deadlines occur after 
all the premium stabilization payment and receipt amounts are 
determined. The change in the deadlines will allow issuers to calculate 
the MLR and rebate amounts based on actual calculated payments and 
receipts rather than estimated amounts and will improve the accuracy of 
the rebate payments and reports. This will also reinforce the 
effectiveness of the premium stabilization programs, since issuers are 
less likely to pay higher or lower rebates based on inaccurate payment 
and receipt estimations. Accordingly, we propose to change the date of 
MLR reporting to the Secretary from June 1 to July 31, and the rebate 
due date from August 1 to September 30.
    Issuers will also have to report their payments and receipts 
related to the premium stabilization programs in the

[[Page 73200]]

annual MLR report beginning in the 2014 MLR reporting year. Once 
issuers calculate these amounts, which they will be required to do 
regardless of the MLR reporting requirements, the administrative cost 
of including these amounts in the report will be minimal.
    The current MLR calculation methodology allows an issuer to deduct 
from premiums in the calculation of an issuer's MLR and rebates either 
the amount it paid in State premium taxes, or the amount of its 
community benefit expenditures up to a maximum of the highest premium 
tax rate in the State, whichever is greater, as provided in the final 
rule with comment period (76 FR 76574) published on December 7, 2011. 
This proposed rule proposes to amend the MLR methodology and allow a 
federal income tax exempt not-for-profit issuer to deduct from premium 
both community benefit expenditures and State premium taxes, limited to 
the higher of the State's highest premium tax rate or 3 percent of 
premium. Other issuers would continue to use the current methodology. 
This would create a level playing field for Federal income tax exempt 
not-for-profit issuers, who are required to make community benefit 
expenditures to maintain their federal income tax exempt status and 
would not discourage community benefit expenditures. This is likely to 
increase the MLRs for tax exempt not-for-profit issuers. If any of 
these issuers fail to meet the MLR standard, then this will result in 
lower rebate payments.
    Based on MLR annual reports submitted by issuers for the 2011 MLR 
reporting year, we estimate that there are 132 not-for-profit issuers 
that will be affected by this proposed amendment. In the absence of 
data on tax exempt not-for-profit issuers, we use the estimates for 
not-for-profit issuers in our analysis. Therefore, the actual impact is 
likely to be lower. For the 20 not-for-profit issuers that submitted 
data on community benefit expenditures, such expenditures as a 
percentage of earned premiums ranged from 0.04 percent to 4.11 percent 
with an average of 1.57 percent, which is likely to be less than the 
current limit for most of the issuers and is less than the proposed 
limit as well. We assume that issuers will maintain the level of 
community benefit expenditures as reported in their MLR annual reports 
for the 2011 MLR reporting year. We estimate that under the current 
policy, in the 2012 MLR reporting year, 17 not-for-profit issuers will 
owe approximately $182 million in rebates to approximately 1.5 million 
enrollees. The proposed change in treatment of community benefit 
expenditures for such issuers will have minimal effect on their MLRs 
and rebates under this assumption, since their current expenditures are 
below the current deduction limits.
    Issuers with lower rebate payments as a result of these adjustments 
would need to send fewer rebate notices, and therefore, would have 
lower administrative costs related to rebates and rebate notices.
Risk Corridors
    The Affordable Care Act creates a temporary risk corridors program 
for the years 2014, 2015, and 2016 that applies to QHPs. The risk 
corridors program creates a mechanism for sharing risk for allowable 
costs between the Federal government and QHP issuers. The Affordable 
Care Act establishes the risk corridors program as a Federal program; 
consequently, HHS will operate the risk corridors program under Federal 
rules with no State variation. The risk corridors program will help 
protect against inaccurate rate setting in the early years of the 
Exchanges by limiting the extent of issuer losses and gains.
    QHP issuers must submit to HHS data on premiums earned, allowable 
claims and quality costs, and allowable administrative costs, 
reflecting data categories required under the Medical Loss Ratio 
Interim Final Rule (75 FR 74918). In designing the program, HHS has 
sought to leverage existing data reporting for Medical Loss Ratio 
purposes as much as possible.
    As noted above, the risk corridors program is intended to protect 
QHP issuers in the individual and small group market against inaccurate 
rate setting. Due to uncertainty about the population during the first 
years of Exchange operation, issuers may not be able to predict their 
risk accurately, and their premiums may reflect costs that are 
ultimately lower or higher than predicted. To determine whether an 
issuer pays into, or receives payments from, the risk corridors 
program, HHS will compare allowable costs (essentially, claims costs) 
and the target amount--the difference between a plan's earned premiums 
and allowable administrative costs. In this proposed rule, we have 
provided for adjustments to the risk corridors calculation to account 
for taxes and profits within its allowable administrative costs. The 
threshold for risk corridor payments and charges is reached when a QHP 
issuer's allowable costs exceed, or fall short of, the target amount by 
at least three percent. A QHP with allowable costs that are at least 
three percent less than its target amount will pay into the risk 
corridors program. Conversely, HHS will pay a QHP with allowable costs 
that exceed its target amount by at least 3 percent. Risk corridor 
payments and charges are a percentage of the difference between 
allowable costs and target amount and therefore are not on a ``first 
dollar'' basis.
    In this proposed rule, HHS also specified the annual schedule for 
the risk corridors program, including dates for claims run-out, data 
submission, and notification of risk corridors payments and charges.
    We believe the proposals on the risk corridors program in this 
proposed rule have a negligible effect on the impact of the program 
established by and described in the Premium Stabilization Rule.
Advance Payments of the Premium Tax Credit and Cost-Sharing Reductions
    The impact analysis for Payment Notice provisions relating to 
advance payments of the premium tax credit and cost-sharing reductions 
references estimates from the CBO's March 2012 baseline projections. 
Based on our review, we expect that those proposed provisions will not 
alter CBO's March 2012 baseline estimates of the budget impact of those 
two programs. The requirements are well within the parameters used in 
the modeling of the Affordable Care Act. Our review and analysis of the 
requirements indicate that the impacts are likely within the model's 
margin of error. The Affordable Care Act provides for premium tax 
credits and the reduction or elimination of cost sharing for certain 
individuals enrolled in QHPs offered through the Exchanges. This 
assistance will help many low- and moderate-income individuals and 
families obtain health insurance--for many people, cost sharing is a 
barrier to obtaining needed health care.\59\
---------------------------------------------------------------------------

    \59\ Brook, et al., at footnote 5 above.
---------------------------------------------------------------------------

    Section 1402(a)-(c) of the Affordable Care Act directs issuers to 
reduce cost sharing for essential health benefits for individuals with 
household incomes between 100 and 400 percent of the FPL who are 
enrolled in a QHP offered at the silver level of coverage in the 
individual market on the Exchange and are eligible for a premium tax 
credit or advance payment of premium tax credits. The Affordable Care 
Act, at section 1402(d), also directs issuers to eliminate cost sharing 
for Indians (as defined in Sec.  155.300) with a household income at or 
below 300 percent of the FPL who are enrolled in a QHP of any metal 
level in the individual market on the Exchange, and prohibits issuers 
from requiring cost sharing for Indians, regardless of household 
income, for items or services

[[Page 73201]]

furnished directly by the IHS, an Indian Tribe, a Tribal Organization, 
or an Urban Indian Organization or through referral under contracted 
health services. Finally, the Affordable Care Act, at section 1412, 
provides for the advance payments of the premium tax credit and cost-
sharing reductions.
    A subset of the persons who enroll in QHPs in the individual market 
through the Exchanges beginning in 2014 will be affected by the 
provisions relating to advance payments of premium tax credit and cost-
sharing reductions (those with household incomes below 400 percent of 
the FPL and Indians enrolled in QHPs). In March 2012, CBO estimated 
that there will be approximately 20 million enrollees in Exchange 
coverage by 2016, including approximately 16 million Exchange enrollees 
who will be receiving subsidies.\60\ Participation rates among 
potential enrollees are expected to be lower in the first few years of 
Exchange availability as employers and individuals adjust to the 
features of the Exchanges.\3\
---------------------------------------------------------------------------

    \60\ ``Updated Estimates for the Insurance Coverage Provisions 
of the Affordable Care Act,'' Congressional Budget Office, March 
2012.
    \3\ Congressional Budget Office, ``Letter to the Honorable Evan 
Bayh: An Analysis of Health Insurance Premiums under the Patient 
Protection and Affordable Care Act,'' Washington, DC, 2009.
---------------------------------------------------------------------------

    In this proposed rule, we provide additional details for Exchanges 
and issuers on the administration of advance payments of premium tax 
credit and cost-sharing reductions for individuals and families. We 
clarify the approach to providing for cost-sharing reductions to 
individuals who purchase a family policy. We also propose standards 
applicable to Exchanges when setting effective dates for changes in 
eligibility, collecting premiums from enrollees, and administering 
advance payments of cost-sharing reductions and the premium tax credit. 
We describe these administrative costs in the Collection of Information 
Requirements section of this proposed rule.
    Finally, we direct QHP issuers to enroll individuals in the plan 
variation with the correct cost-sharing structure, and to provide those 
individuals with the cost-sharing reductions for which they are 
eligible. QHP issuers are responsible for submitting plan variations 
containing the cost-sharing structures proposed by HHS as required by 
the Affordable Care Act. We also clarify which plans are eligible for 
cost-sharing reductions, and we propose standards relating to advance 
payments of cost-sharing reductions and reconciliation of those advance 
payments against actual cost-sharing reduction provided. In addition, 
we propose that QHP issuers reduce an enrollee's share of premium to 
account for advance payments of the premium tax credit, and submit 
allocations of rates and claims costs to allow for the calculation of 
advance payments of cost-sharing reductions and the premium tax credit. 
We describe these administrative costs in the Collection of Information 
Requirements section of this proposed rule.
    The cost-sharing reduction and advance payment of the premium tax 
credit policies will apply to all issuers that choose to seek 
certification to offer QHPs through the Exchanges for the individual 
market. QHP issuers will experience costs related to preparing and 
submitting to HHS data to support the administration of cost-sharing 
reductions. We anticipate that the provisions for advance payments of 
the premium tax credit and cost-sharing reductions will result in 
transfers from the General Fund of the Treasury to people receiving 
cost-sharing reductions and advance payments of the premium tax credit.
User Fees
    To support certain Federal operations of Federally-facilitated 
Exchanges, we propose in this proposed rule, under section 
1311(d)(5)(A) of the Affordable Care and 31 U.S.C. 9701, that a 
participating issuer offering a plan through a Federally-facilitated 
Exchange remit a user fee to HHS each month equal to the product of the 
billable members (that is, members that count towards the premium) 
enrolled in the QHP offered by the issuer in the Exchange, and the 
monthly user fee rate specified in the annual HHS notice of benefit and 
payment parameters for the applicable benefit year. In this proposed 
rule we set forth our intention to have the Federally-facilitated 
Exchange user fee generally reflect the user fee in place by State-
based Exchanges in 2014. For the 2014 benefit year, we propose a 
monthly user fee rate equal to 3.5 percent of the monthly premium 
charged by the issuer for a particular policy under the QHP. Because we 
seek to align this rate with rates charged by State-based Exchanges, we 
may adjust this rate to conform with State-based Exchange rates in the 
final Payment Notice. We do not have an aggregate estimate of the 
collections from the user fee at this time because we do not yet have a 
count of the number of States in which HHS will run a Federally-
facilitated Exchange. We anticipate that this user fee collection will 
be sufficient to cover the majority of costs related to the operation 
of Federally-facilitated Exchanges and maintain balance within the 
market.
SHOP
    The Small Business Health Options Program (SHOP) facilitates the 
enrollment of small businesses into small group health insurance plans. 
A qualitative analysis of the costs and benefits of establishing a SHOP 
was included in the RIA published in conjunction with the Exchange 
Establishment Rule.\61\ This Impact Analysis addresses the additional 
costs and benefits of the proposed modifications in this proposed rule 
to the SHOP sections of the Exchange Final Rule.
---------------------------------------------------------------------------

    \61\ Available at: http://cciio.cms.gov/resources/files/Files2/03162012/hie3r-ria-032012.pdf.
---------------------------------------------------------------------------

    In this proposed rule, we propose to implement policies for FF-
SHOPs designed to prevent significant adverse selection while promoting 
robust plan choice for employees. These policies include methods a 
qualified employer may use to make QHPs available to its employees, 
rules to ensure parity with a market's group participation 
requirements, rules to permit the display of agent and broker 
information on FF-SHOP Web sites, alignment of market definitions with 
other applicable rules, and incentives for issuers to participate in 
FF-SHOPs. Many of these proposed policies are expected to create no 
significant new costs.
    The Affordable Care Act permits a qualified employer participating 
in a SHOP to select a metal level of coverage and make all plans in 
that level of coverage available to its employees. This represents an 
increase in plan choice over what many employees of small employers 
have today. Limiting this choice to a single level of coverage reduces 
potential adverse selection within the group and therefore any 
additional cost due to expanded choice. In the Exchange Establishment 
Rule, we did not quantify either the small risk premium or the modest 
additional consumer benefit resulting from employee choice at a single 
level of coverage. We seek comment on both limiting employee choice to 
prevent adverse selection and allowing for choice across two rather 
than one metal level.
    The Exchange Final Rule permits a SHOP to set a minimum 
participation rate; such authority is limited to the extent the minimum 
participation rate is permissible under the PHS Act and applicable 
State law. Minimum participation rates require participation in the 
health plan by a substantial portion of the employer's group, thereby

[[Page 73202]]

assuring a more representative risk pool and reducing adverse 
selection. Setting a minimum participation rate that is too low would 
make it ineffective, while setting it too high would reduce the number 
of employers offering coverage. This proposed rule proposes, subject to 
permissibility under the PHS Act, that FF-SHOPs use a default 
participation rate of 70 percent that may be modified if there is 
evidence that a higher or lower rate is either customary in the State 
or required by State statute. Because this policy results in no change 
in market dynamics, it places no additional costs on employers or 
issuers.
    This proposed rule proposes new incentives for some health 
insurance issuers to participate in the FF-SHOP. Health insurance 
issuers that offer coverage in both the individual and small group 
markets and wish to sell QHPs in an FFE must also offer QHPs in an FF-
SHOP. This policy promotes robust issuer participation in the FF-SHOP 
which will help small employers offer their employees a broad choice of 
health plan.
    The benefits of broad plan choice are quite significant. One study 
suggests expanding plan choice while holding premiums constant for 
employees results in a median increase in consumer surplus by 20 
percent of the premium cost of coverage.\62\ Some of this benefit is 
due to expanded choice in plan type and health insurance issuer. There 
are two costs associated with this policy. The first is the cost for 
the QHP issuer of submitting plans for certification in the FF-SHOP, 
which is described in the 30-day Federal Register Notice for the 
Initial Plan Data Collection published on November 21, 2012 (77 FR 
69846). The second is the cost of additional user fees QHP issuers must 
pay for participating in the FF-SHOP.
---------------------------------------------------------------------------

    \62\ Dafny, L., Ho, K., & Varela, M. (2010). Let them have 
choice: Gains from shifting away from employer-sponsored health 
insurance and toward an individual exchange (No. w15687). National 
Bureau of Economic Research.
---------------------------------------------------------------------------

D. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) 
requires agencies to prepare an initial regulatory flexibility analysis 
to describe the impact of the final rule on small entities, unless the 
head of the agency can certify that the rule will not have a 
significant economic impact on a substantial number of small entities. 
The RFA generally defines a ``small entity'' as (1) A proprietary firm 
meeting the size standards of the Small Business Administration (SBA), 
(2) a not-for-profit organization that is not dominant in its field, or 
(3) a small government jurisdiction with a population of less than 
50,000. States and individuals are not included in the definition of 
``small entity.'' HHS uses a change in revenues of more than three to 
five percent as its measure of significant economic impact on a 
substantial number of small entities.
    This proposed rule contains proposed rules for premium 
stabilization programs required of health plan issuers including the 
risk adjustment program as well as the transitional reinsurance program 
and temporary risk corridors programs. Because we believe that few 
insurance firms offering comprehensive health insurance policies fall 
below the size thresholds for ``small entities'' established by the 
SBA, we do not believe that an initial regulatory flexibility analysis 
is required with respect to such firms.
    For purposes of the RFA, we expect the following types of entities 
to be affected by this proposed rule: (1) Health insurance issuers; (2) 
health insurance plan sponsors; (3) reinsurance entities; (4) risk 
adjustment entities; and (5) third-party administrators. We believe 
that health insurance issuers and plan sponsors would be classified 
under the North American Industry Classification System (NAICS) code 
524114 (Direct Health and Medical Insurance Carriers); reinsurance 
entities, risk adjustment entities and third party administrators would 
be classified under NAICS codes 524130 (Reinsurance Carriers), 524298 
(Actuarial Services) and 524292 (Third Party Administration of 
Insurance). According to SBA size standards, entities with average 
annual receipts of $7 million or less would be considered small 
entities for these NAICS codes. Issuers could possibly be classified in 
621491 (HMO Medical Centers) and, if this is the case, the SBA size 
standard would be $10 million or less.
    Based on data from Medical Loss Ratio annual report submissions for 
the 2011 MLR reporting year, there are 22 small entities (companies), 
each with less than $7 million in earned premiums, that offer 
individual or group health insurance coverage and would therefore be 
subject to the provisions related to MLR. These small entities account 
for less than 5 percent of the estimated 466 issuers that would be 
affected by the provisions of this rule. Thirty six percent of these 
small issuers belong to holding groups, and many if not all of these 
small issuers are likely to have other lines of business that would 
result in their revenues exceeding $7 million.
    In this proposed rule, we propose requirements on employers that 
choose to participate in a SHOP Exchange. As discussed above, the SHOP 
is limited by statute to employers with at least one but not more than 
100 employees. For this reason, we expect that many employers would 
meet the SBA standard for small entities. We do not believe that the 
regulation imposes requirements on employers offering health insurance 
through SHOP that are more restrictive than the current requirements on 
small employers offering ESI. For example, we propose to generally 
match existing minimum participation rates in the outside market. 
Additionally, as discussed in the Regulatory Impact Analysis, we 
believe the proposed policy will provide greater choice for the 
employee among plans and issuers, benefitting both employer and 
employee and simplify the process for the employer of administering 
multiple health benefit plans. We believe the processes that we have 
established constitute the minimum amount of requirements necessary to 
implement statutory mandates and accomplish our policy goals, and that 
no appropriate regulatory alternatives could be developed to further 
lessen the compliance burden.
    We believe that a substantial number of sponsors of self-insured 
group health plans could qualify as ``small entities.'' This proposed 
rule specifies the reinsurance contributions that would be required 
from third-party administrators on behalf of such entities. However, we 
do not believe that these contributions are likely to result in a 
change in revenues of more than 3 to 5 percent. We request comment on 
whether the small entities affected by this proposed rule have been 
fully identified. We also request comment and information on potential 
costs for these entities and on any alternatives that we should 
consider.

E. Unfunded Mandates

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits and take 
certain other actions before issuing a final rule that includes any 
Federal mandate that may result in expenditures in any one year by a 
State, local, or Tribal governments, in the aggregate, or by the 
private sector, of $100 million in 1995 dollars, updated annually for 
inflation. In 2012, that threshold is approximately $139 million. Since 
the impact on State, local, or Tribal governments and the private 
sector is below the threshold, no analysis under UMRA is required.

[[Page 73203]]

F. Federalism

    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a final rule that imposes 
substantial direct costs on State and local governments, pre-empts 
State law, or otherwise has Federalism implications. Because States 
have flexibility in designing their Exchange and Exchange-related 
programs, State decisions will ultimately influence both administrative 
expenses and overall premiums. States are not required to establish an 
Exchange. For States electing to operate an Exchange, risk adjustment 
and reinsurance, much of the initial cost of creating Exchanges and 
Exchange-related programs will be funded by Exchange Planning and 
Establishment Grants. After establishment, Exchanges will be 
financially self-sustaining, with revenue sources at the discretion of 
the State. Current State Exchanges charge user fees to issuers.
    In HHS's view, while this proposed rule does not impose substantial 
direct requirement costs on State and local governments, this 
regulation has Federalism implications due to direct effects on the 
distribution of power and responsibilities among the State and Federal 
governments relating to determining standards relating to health 
insurance that is offered in the individual and small group markets. 
Each State electing to establish an Exchange must adopt the Federal 
standards contained in the Affordable Care Act and in this Payment 
Notice, or have in effect a State law or regulation that implements 
these Federal standards. However, HHS anticipates that the Federalism 
implications (if any) are substantially mitigated because under the 
statute, States have choices regarding the structure and governance of 
their Exchanges. Additionally, the Affordable Care Act does not require 
States to establish an Exchange; if a State elects not to establish an 
Exchange or the State's Exchange is not approved, HHS, either directly, 
or through agreement with a non-profit entity, must establish and 
operate an Exchange in that State.
    In compliance with the requirement of Executive Order 13132 that 
agencies examine closely any policies that may have Federalism 
implications or limit the policy making discretion of the States, HHS 
has engaged in efforts to consult with and work cooperatively with 
affected States, including participating in conference calls with and 
attending conferences of the National Association of Insurance 
Commissioners, and consulting with State insurance officials on an 
individual basis.
    Throughout the process of developing this proposed rule, HHS has 
attempted to balance the States' interests in regulating health 
insurance issuers, and Congress' intent to provide access to Affordable 
Insurance Exchanges for consumers in every State. By doing so, it is 
HHS's view that we have complied with the requirements of Executive 
Order 13132.

G. Congressional Review Act

    This proposed rule is subject to the Congressional Review Act 
provisions of the Small Business Regulatory Enforcement Fairness Act of 
1996 (5 U.S.C. 801 et seq.), which specifies that before a rule can 
take effect, the Federal agency promulgating the rule shall submit to 
each House of the Congress and to the Comptroller General a report 
containing a copy of the rule along with other specified information, 
and has been transmitted to Congress and the Comptroller General for 
review.

List of Subjects

45 CFR Part 153

    Administrative practice and procedure, Adverse selection, Health 
care, Health insurance, Health records, Organization and functions 
(Government agencies), Premium stabilization, Reporting and 
recordkeeping requirements, Reinsurance, Risk adjustment, Risk 
corridors, Risk mitigation, State and local governments.

45 CFR Part 155

    Administrative practice and procedure, Health care access, Health 
insurance, Reporting and recordkeeping requirements, State and local 
governments, Cost-sharing reductions, Advance payments of premium tax 
credit, Administration and calculation of advance payments of the 
premium tax credit, Plan variations, Actuarial value.

45 CFR Part 156

    Administrative practice and procedure, Advertising, Advisory 
committees, Brokers, Conflict of interest, Consumer protection, Grant 
programs--health, Grants administration, Health care, Health insurance, 
Health maintenance organization (HMO), Health records, Hospitals, 
American Indian/Alaska Natives, Individuals with disabilities, Loan 
programs--health, Organization and functions (Government agencies), 
Medicaid, Public assistance programs, Reporting and recordkeeping 
requirements, State and local governments, Sunshine Act, Technical 
assistance, Women, and Youth.

45 CFR Part 157

    Employee benefit plans, Health insurance, Health maintenance 
organization (HMO), Health records, Hospitals, Indians, Individuals 
with disabilities, Organization and functions (Government agencies), 
Medicaid, Public assistance programs, Reporting and recordkeeping 
requirements, Safety, State and local governments, Sunshine Act, 
Technical Assistance, Women, and Youth.

45 CFR Part 158

    Administrative practice and procedure, Claims, Health care, Health 
insurance, Health plans, penalties, Reporting and recordkeeping 
requirements, Premium revenues, Medical loss ratio, Rebating.

    For the reasons set forth in the preamble, the Department of Health 
and Human Services proposes to amend 45 CFR parts 153, 155, 156, 157, 
and 158 as set forth below:

PART 153--STANDARDS RELATED TO REINSURANCE, RISK CORRIDORS, AND 
RISK ADJUSTMENT UNDER THE AFFORDABLE CARE ACT

    1. The authority citation for part 153 continues to read as 
follows:

    Authority:  Secs. 1321, 1341-1343, Pub. L. 111-148, 24 Stat. 
119.

    2. Section 153.20 is amended by revising the definitions of ``Risk 
adjustment covered plan'' and ``Risk adjustment data collection 
approach'' as follows:


Sec.  153.20  Definitions.

* * * * *
    Risk adjustment covered plan means, for the purpose of the risk 
adjustment program, any health insurance coverage offered in the 
individual or small group market with the exception of grandfathered 
health plans, group health insurance coverage described in Sec.  
146.145(c) of this subchapter, individual health insurance coverage 
described in Sec.  148.220 of this subchapter, and any plan determined 
not to be a risk adjustment covered plan in the applicable Federally 
certified risk adjustment methodology.
* * * * *
    Risk adjustment data collection approach means the specific 
procedures by which risk adjustment data is to be stored, collected, 
accessed, transmitted, and validated and the applicable timeframes, 
data formats, and privacy and security standards.
* * * * *

[[Page 73204]]

    3. Section 153.100 is amended by--
    A. Revising paragraph (a)(1).
    B. Removing paragraph (a)(2).
    C. Redesignating paragraphs (a)(3) and (4) as paragraphs (a)(2) and 
(3).
    D. Revising newly designated paragraph (a)(2).
    E. Removing paragraph (a)(5).
    F. Revising paragraph (c).
    G. Revising paragraph (d)(1).
    H. Removing paragraph (d)(2).
    I. Redesignating paragraphs (d)(3) and (4) as paragraphs (d)(2) and 
(3).
    J. Revising newly designated paragraph (d)(2).
    K. Removing paragraph (d)(5).
    L. Redesignating paragraph (d)(6) as paragraph (d)(4).
    The revisions read as follows:


Sec.  153.100  State notice of benefit and payment parameters.

    (a) * * *
    (1) Modify the data requirements for health insurance issuers to 
receive reinsurance payments from those specified in the annual HHS 
notice of benefit and payment parameters for the applicable benefit 
year;
    (2) Collect additional reinsurance contributions under Sec.  
153.220(d) or use additional funds for reinsurance payments under Sec.  
153.220(d)(3); or
* * * * *
    (c) State notice deadlines. If a State is required to publish an 
annual State notice of benefit and payment parameters for a particular 
benefit year, then with respect to benefit year 2014, it must do so by 
March 1, 2013, or by the 30th day following the publication of the 
final HHS notice of benefit and payment parameters, whichever is later. 
With respect to subsequent benefit years, a State must do so by March 1 
of the calendar year prior to the benefit year for which the notice 
applies.
    (d) * * *
    (1) Adhere to the data requirements for health insurance issuers to 
receive reinsurance payments that are specified in the annual HHS 
notice of benefit and payment parameters for the applicable benefit 
year;
    (2) Forgo the collection of additional reinsurance contributions 
under Sec.  153.220(d) and the use of additional funds for reinsurance 
payments under Sec.  153.220(d)(3);
* * * * *
    4. Section 153.110 is amended by:
    A. Revising paragraph (a).
    B. Removing paragraph (b).
    C. Redesignating paragraph (c) as paragraph (b) and revising newly 
designated paragraph (b).
    D. Redesignating paragraph (d) as paragraph (c).
    E. Removing newly designated paragraph (c)(2).
    F. Removing newly designated paragraph (c)(4).
    G. Removing newly designated paragraph (c)(5).
    H. Redesignating paragraph (c)(6) as paragraph (c)(3).
    I. Removing paragraph (e).
    J. Redesignating paragraph (f) as paragraph (d).
    The revisions read as follows:


Sec.  153.110  Standards for the State notice of benefit and payment 
parameters.

    (a) Data requirements. If a State that establishes a reinsurance 
program elects to modify the data requirements for health insurance 
issuers to receive reinsurance payments from those specified in the 
annual HHS notice of benefit and payment parameters for the applicable 
benefit year, the State notice of benefit and payment parameters must 
specify those modifications.
    (b) Additional collections. If a State that establishes a 
reinsurance program elects to collect additional funds under Sec.  
153.220(d) or use additional funds for reinsurance payments under Sec.  
153.220(d)(3), the State must publish in the State notice of benefit 
and payment parameters the following:
    (1) A description of the purpose of the additional collection, 
including whether it will be used to cover reinsurance payments made 
under Sec.  153.232, administrative costs, or both;
    (2) The additional contribution rate at which the funds will be 
collected; and
    (3) If the purpose of the additional collection includes 
reinsurance payments (or if the State is using additional funds for 
reinsurance payments under Sec.  153.220(d)(3)), the State supplemental 
reinsurance payment parameters required under Sec.  153.232.
* * * * *
    5. Section 153.210 is amended by revising paragraph (a)(2) and 
adding paragraph (e) to read as follows:


Sec.  153.210  State establishment of a reinsurance program.

    (a) * * *
    (2) If a State contracts with more than one applicable reinsurance 
entity, the State must ensure that each applicable reinsurance entity 
operates in a distinct geographic area with no overlap of jurisdiction 
with any other applicable reinsurance entity.
* * * * *
    (e) Reporting to HHS. Each State that establishes a reinsurance 
program must ensure that each applicable reinsurance entity provides 
information regarding requests for reinsurance payments under the 
national contribution rate made under Sec.  153.410 for all 
reinsurance-eligible plans for each quarter during the applicable 
benefit year in a manner and timeframe established by HHS.
    6. Section 153.220 is amended by--
    A. Revising paragraph (a).
    B. Removing paragraph (b).
    C. Redesignating paragraph (c) as paragraph (b).
    D. Removing paragraph (d).
    E. Redesignating paragraph (e) as paragraph (c).
    F. Revising newly designated paragraph (c)(2).
    G. Removing paragraph (f).
    H. Redesignating paragraph (g) as paragraph (d).
    I. Revising newly designated paragraph (d).
    J. Removing paragraph (h).
    The revisions read as follows:


Sec.  153.220  Collection of reinsurance contribution funds.

    (a) Collections. If a State establishes a reinsurance program, HHS 
will collect all reinsurance contributions from all contributing 
entities for that State under the national contribution rate.
* * * * *
    (c) * * *
    (2) Payments to the U.S. Treasury as described in paragraph (b)(2) 
of this section; and
* * * * *
    (d) Additional State collections. If a State establishes a 
reinsurance program:
    (1) The State may elect to collect more than the amounts that would 
be collected based on the national contribution rate set forth in the 
annual HHS notice of benefit and payment parameters for the applicable 
benefit year to provide:
    (i) Funding for administrative expenses of the applicable 
reinsurance entity; or
    (ii) Additional funds for reinsurance payments.
    (2) The State must notify HHS within 30 days after publication of 
the draft annual HHS notice of benefit and payment parameters for the 
applicable benefit year of the additional contribution rate that it 
elects to collect for any additional contributions under paragraph 
(d)(1) of this section.
    (3) A State may use additional funds which were not collected as 
additional reinsurance contributions under this part for reinsurance 
payments under the State supplemental payment parameters under Sec.  
153.232.
* * * * *
    7. Section 153.230 is revised to read as follows:

[[Page 73205]]

Sec.  153.230  Calculation of reinsurance payments made under the 
national contribution rate.

    (a) Eligibility for reinsurance payments under the national 
reinsurance parameters. A health insurance issuer of a non-
grandfathered individual market plan becomes eligible for reinsurance 
payments from contributions under the national contribution rate when 
its claims costs for an individual enrollee's covered benefits in a 
benefit year exceed the national attachment point.
    (b) National reinsurance payment parameters. The national 
reinsurance payment parameters for each year commencing in 2014 and 
ending in 2016 set forth in the annual HHS notice of benefit and 
payment parameters for an applicable benefit year will apply with 
respect to reinsurance payments made from contributions received under 
the national contribution rate.
    (c) National reinsurance payments. Each reinsurance payment made 
from contributions received under the national contribution rate will 
be calculated as the product of the national coinsurance rate 
multiplied by the health insurance issuer's claims costs for an 
individual enrollee's covered benefits that the health insurance issuer 
incurs between the national attachment point and the national 
reinsurance cap.
    (d) Uniform adjustment to national reinsurance payments. If HHS 
determines that all reinsurance payments requested under the national 
payment parameters from all reinsurance-eligible plans in all States 
for a benefit year will exceed all reinsurance contributions collected 
under the national contribution rate in all States for an applicable 
benefit year, HHS will determine a uniform pro rata adjustment to be 
applied to all such requests for reinsurance payments for all States. 
Each applicable reinsurance entity, or HHS on behalf of a State, must 
reduce all requests for reinsurance payments for the applicable benefit 
year by any adjustment required under this paragraph (d).
    8. Section 153.232 is added to read as follows:


Sec.  153.232  Calculation of reinsurance payments made under a State 
additional contribution rate.

    (a) State supplemental reinsurance payment parameters. (1) If a 
State establishes a reinsurance program and elects to collect 
additional contributions under Sec.  153.220(d)(1)(ii) or use 
additional funds for reinsurance payments under Sec.  153.220(d)(3), 
the State must set supplemental reinsurance payment parameters using 
one or more of the following methods:
    (i) Decreasing the national attachment point;
    (ii) Increasing the national reinsurance cap; or
    (iii) Increasing the national coinsurance rate.
    (2) The State must ensure that additional reinsurance contributions 
and funds projected to be received under Sec.  153.220(d)(1)(ii) and 
Sec.  153.220(d)(3), as applicable, for any applicable benefit year are 
reasonably calculated to cover additional reinsurance payments that are 
projected to be made only under the supplemental reinsurance payment 
parameters (that will not be paid under the national payment 
parameters) for the given benefit year.
    (3) All applicable reinsurance entities in a State collecting 
additional reinsurance contributions must apply the State supplemental 
reinsurance payment parameters established under paragraph (a)(1) of 
this section when calculating reinsurance payments.
    (b) General requirement for payments under State supplemental 
reinsurance parameters. Contributions collected under Sec.  
153.220(d)(1)(ii) or funds under Sec.  153.220(d)(3), as applicable, 
must be applied towards requests for reinsurance payments made under 
the State supplemental reinsurance payments parameters for each benefit 
year commencing in 2014 and ending in 2016.
    (c) Eligibility for reinsurance payments under State supplemental 
reinsurance parameters. If a State establishes supplemental State 
reinsurance payment parameters under Sec.  153.232(a)(1), a health 
insurance issuer of a non-grandfathered individual market plan becomes 
eligible for reinsurance payments from contributions under Sec.  
153.220(d)(1)(ii) or funds under Sec.  153.220(d)(3), as applicable, if 
its incurred claims costs for an individual enrollee's covered benefits 
in a benefit year:
    (1) Exceed the supplemental State attachment point set forth in the 
State notice of benefit and payment parameters for the applicable 
benefit year if a State has established such a supplemental attachment 
point under Sec.  153.232(a)(1)(i);
    (2) Exceed the national reinsurance cap set forth in the annual HHS 
notice of benefit and payment parameters for the applicable benefit 
year if a State has established a supplemental State reinsurance cap 
under Sec.  153.232(a)(1)(ii); or
    (3) Exceed the national attachment point set forth in the annual 
HHS notice of benefit and payment parameters for the applicable benefit 
year if a State has established a supplemental coinsurance rate under 
Sec.  153.232(a)(1)(iii).
    (d) Payments under State supplemental reinsurance parameters. Each 
reinsurance payment made from contributions received under Sec.  
153.220(d)(1)(ii) or funds under Sec.  153.220(d)(3), as applicable, 
will be calculated with respect to a health insurance issuer's claims 
costs for an individual enrollee's covered benefits as the sum of the 
following:
    (1) If the State has established a supplemental State attachment 
point, to the extent the issuer's incurred claims costs for such 
benefits exceed the supplemental State attachment point but do not 
exceed the national attachment point, the product of such claims costs 
between the supplemental State attachment point and the national 
attachment point multiplied by the national coinsurance rate (or, if 
the State has established a supplemental State coinsurance rate, the 
supplemental State coinsurance rate);
    (2) If the State has established a supplemental State reinsurance 
cap, to the extent the issuer's incurred claims costs for such benefits 
exceed the national reinsurance cap but do not exceed the supplemental 
State reinsurance cap, the product of such claims costs between the 
national reinsurance cap and the supplemental State reinsurance cap 
multiplied by the national coinsurance rate (or, if the State has 
established a supplemental State coinsurance rate, the supplemental 
State coinsurance rate); and
    (3) If the State has established a supplemental coinsurance rate, 
the product of the issuer's incurred claims costs for such benefits 
between the national attachment point and the national reinsurance cap 
multiplied by the difference between the supplemental coinsurance rate 
and the national coinsurance rate.
    (e) Uniform adjustment to payments under State supplemental 
reinsurance payment parameters. If all requested reinsurance payments 
under the State supplemental reinsurance parameters calculated in 
accordance with paragraph (a)(1) of this section from all reinsurance-
eligible plans in a State for a benefit year will exceed all 
reinsurance contributions collected under Sec.  153.220(d)(1)(ii) or 
funds under Sec.  153.220(d)(3) for the applicable benefit year, the 
State must determine a uniform pro rata adjustment to be applied to all 
such requests for reinsurance payments. Each applicable reinsurance 
entity in the State must reduce all such requests for reinsurance

[[Page 73206]]

payments for the applicable benefit year by that adjustment.
    (f) Limitations on payments under State supplemental reinsurance 
parameters. A State must ensure that:
    (1) The payments made to issuers must not exceed the issuer's total 
paid amount for the reinsurance-eligible claim(s); and
    (2) Any remaining additional funds for reinsurance payments 
collected under Sec.  153.220(d)(1)(ii) must be used for reinsurance 
payments under the State supplemental reinsurance payment parameters in 
subsequent benefit years.
    9. Section 153.234 is added to read as follows:


Sec.  153.234  Eligibility under health insurance market rules.

    A reinsurance-eligible plan's covered claims costs for an enrollee 
incurred prior to the application of the following provisions do not 
count towards either the national reinsurance parameters or the State 
supplemental reinsurance parameters: 45 CFR 147.102, 147.104 (subject 
to 147.145), 147.106 (subject to 147.145), 156.80, and subpart B of 
part 156.
    10. Section 153.235 is added to read as follows:


Sec.  153.235  Allocation and distribution of reinsurance 
contributions.

    (a) Allocation of reinsurance contributions. HHS will allocate and 
distribute reinsurance contributions collected from contributing 
entities under the national contribution rate for reinsurance payments 
to each State based on total requests for reinsurance payments made 
under the national reinsurance payment parameters in all States and 
submitted under Sec.  153.410, net of any adjustment under Sec.  
153.230(d).
    (b) Excess reinsurance contributions. Any reinsurance contributions 
collected from contributing entities under the national contribution 
rate for reinsurance payments for any benefit year but unused for the 
applicable benefit year will be used for reinsurance payments under the 
national reinsurance payment parameters for subsequent benefit years.
    11. Section 153.240 is amended by revising paragraphs (a) and (b) 
and by adding a new paragraph (d) to read as follows:


Sec.  153.240  Disbursement of reinsurance payments.

    (a) Data collection. If a State establishes a reinsurance program, 
the State must ensure that the applicable reinsurance entity:
    (1) Collects data required to determine reinsurance payments as 
described in Sec.  153.230 and Sec.  153.232, as applicable, from an 
issuer of reinsurance-eligible plans or is provided access to such 
data, according to the data requirements specified by the State in the 
State notice of benefit and payment parameters described in subpart B 
of this part.
    (2) Makes reinsurance payments to the issuer of a reinsurance-
eligible plan after receiving a valid claim for payment from that 
health insurance issuer in accordance with the requirements of Sec.  
153.410.
    (3) Provides a process through which an issuer of a reinsurance-
eligible plan that does not generate individual enrollee claims in the 
normal course of business may use estimated claims costs to make a 
request for payment (or to submit data to be considered for reinsurance 
payments) in accordance with the requirements of Sec.  153.410. The 
State must ensure that such requests for reinsurance payment (or a 
subset of such requests) are subject to validation.
    (b) Notification of reinsurance payments. For each applicable 
benefit year,
    (1) A State, or HHS on behalf of the State, must notify issuers 
annually of:
    (i) Reinsurance payments under the national payment parameters, and
    (ii) Reinsurance payments under the State supplemental payment 
parameters if applicable, to be made for the applicable benefit year no 
later than June 30 of the year following the applicable benefit year.
    (2) A State must provide to each reinsurance-eligible plan the 
expected requests for reinsurance payments made under:
    (i) The national payment parameters, and
    (ii) State supplemental payments parameters if applicable, from 
such plan on a quarterly basis during the applicable benefit year in a 
timeframe and manner determined by HHS.
* * * * *
    (d) Privacy and security. (1) If a State establishes a reinsurance 
program, the State must ensure that the applicable reinsurance entity's 
collection of personally identifiable information is limited to 
information reasonably necessary for use in the calculation of 
reinsurance payments, and that use and disclosure of personally 
identifiable information is limited to those purposes for which the 
personally identifiable information was collected (including for 
purposes of data validation).
    (2) If a State establishes a reinsurance program, the State must 
ensure that the applicable reinsurance entity implements security 
standards that provide administrative, physical, and technical 
safeguards for the personally identifiable information consistent with 
the security standards described at 45 CFR 164.308, 164.310, and 
164.312.
    12. Section 153.310 is amended by:
    A. Redesignating paragraphs (c) and (d) as paragraphs (e) and (f), 
respectively.
    B. Adding new paragraphs (a)(4), (c) and (d).
    The additions read as follows:


Sec.  153.310  Risk adjustment administration.

    (a) * * *
    (4) Beginning in 2015, any State that is approved to operate an 
Exchange and elects to operate risk adjustment but has not been 
approved by HHS to operate risk adjustment prior to publication of its 
State notice of benefit and payment parameters for the applicable 
benefit year, will forgo implementation of all State functions in this 
subpart, and HHS will carry out all of the provisions of this subpart 
on behalf of the State.
* * * * *
    (c) State responsibility for risk adjustment. (1) A State operating 
a risk adjustment program for a benefit year must administer the 
applicable Federally certified risk adjustment methodology through an 
entity that--
    (i) Is operationally ready to implement the applicable Federally 
certified risk adjustment methodology and process the resulting 
payments and charges; and
    (ii) Has experience relevant to operating the risk adjustment 
program.
    (2) The State must ensure that the risk adjustment entity complies 
with all applicable provisions of subpart D of this part in the 
administration of the applicable Federally certified risk adjustment 
methodology.
    (3) The State must conduct oversight and monitoring of its risk 
adjustment program.
    (d) Certification for a State to operate risk adjustment. (1) To be 
approved by HHS to operate risk adjustment under a particular Federally 
certified risk adjustment methodology for a benefit year, a State must 
establish that it and its risk adjustment entity meet the standards set 
forth in paragraph (c) of this section.
    (2) To obtain such approval, the State must submit to HHS, in a 
form and manner specified by HHS, evidence that its risk adjustment 
entity meets these standards.
    13. Section 153.320 is amended by revising paragraphs (a)(1) and 
(a)(2) to read as follows:

[[Page 73207]]

Sec.  153.320  Federally certified risk adjustment methodology.

* * * * *
    (a) * * *
    (1) The risk adjustment methodology is developed by HHS and 
published in the applicable annual HHS notice of benefit and payment 
parameters; or
    (2) An alternate risk adjustment methodology is submitted by a 
State in accordance with Sec.  153.330, reviewed and certified by HHS, 
and published in the applicable annual HHS notice of benefit and 
payment parameters.
* * * * *
    14. Section 153.330 is amended by--
    A. Redesignating paragraph (b) as paragraph (c).
    B. Adding new paragraph (b).
    The additions read as follows:


Sec.  153.330  State alternate risk adjustment methodology.

* * * * *
    (b) Evaluation criteria for alternate risk adjustment methodology. 
An alternate risk adjustment methodology will be certified by HHS as a 
Federally certified risk adjustment methodology based on the following 
criteria:
    (1) The criteria listed in paragraph (a)(2) of this section;
    (2) Whether the methodology complies with the requirements of this 
subpart D;
    (3) Whether the methodology accounts for risk selection across 
metal levels; and
    (4) Whether each of the elements of the methodology are aligned.
* * * * *
    15. Section 153.340 is amended by revising paragraph (b)(3) to read 
as follows:


Sec.  153.340  Data collection under risk adjustment.

* * * * *
    (b) * * *
    (3) If a State is operating a risk adjustment program, the State 
must ensure that any collection of personally identifiable information 
is limited to information reasonably necessary for use in the 
applicable risk adjustment model, calculation of plan average actuarial 
risk, or calculation of payments and charges. Except for purposes of 
data validation, the State may not collect or store any personally 
identifiable information for use as a unique identifier for an 
enrollee's data, unless such information is masked or encrypted by the 
issuer, with the key to that masking or encryption withheld from the 
State. Use and disclosure of personally identifiable information is 
limited to those purposes for which the personally identifiable 
information was collected (including for purposes of data validation).
* * * * *
    16. Section 153.360 is added to subpart D to read as follows:


Sec.  153.360  Application of risk adjustment to the small group 
market.

    Enrollees in a risk adjustment covered plan must be assigned to the 
applicable risk pool in the State in which the enrollee's policy was 
filed and approved.
    17. Section 153.400 is revised to read as follows:


Sec.  153.400  Reinsurance contribution funds.

    (a) General requirement. Each contributing entity must make 
reinsurance contributions annually: at the national contribution for 
all reinsurance contribution enrollees, in a manner specified by HHS; 
and at the additional State supplemental contribution rate if the State 
has elected to collect additional contributions under Sec.  153.220(d), 
in a manner specified by the State.
    (1) A contributing entity must make reinsurance contributions for 
its self-insured group health plans and health insurance coverage 
except to the extent that:
    (i) Such plan or coverage is not major medical coverage;
    (ii) In the case of health insurance coverage, such coverage is not 
considered to be part of an issuer's commercial book of business;
    (iii) In the case of health insurance coverage, such coverage is 
not issued on a form filed and approved by a State.
    (2) Accordingly, as specified in paragraph (a)(1) of this section, 
a contributing entity is not required to make contributions on behalf 
of the following:
    (i) A self-insured group health plan or health insurance coverage 
that consists solely of excepted benefits as defined by section 2791(c) 
of the PHS Act;
    (ii) Coverage offered by an issuer under contract to provide 
benefits under any of the following titles of the Social Security Act:
    (A) Title XVIII (Medicare);
    (B) Title XIX (Medicaid); or
    (C)Title XXI (Children's Health insurance Program);
    (iii) A Federal or State high-risk pool, including the Pre-Existing 
Condition Insurance Plan Program;
    (iv) Basic health plan coverage offered by issuers under contract 
with a State as described in section 1331 of the Affordable Care Act;
    (v) A health reimbursement arrangement within the meaning of IRS 
Notice 2002-45 (2002-2 CB 93) or any subsequent applicable guidance, 
that is integrated with a self-insured group health plan or health 
insurance coverage;
    (vi) A health savings account within the meaning of section 223(d) 
of the Code;
    (vii) A health flexible spending arrangement within the meaning of 
section 125 of the Code;
    (viii) An employee assistance plan, disease management program, or 
wellness program that does not provide major medical coverage;
    (ix) A stop-loss policy or an indemnity reinsurance policy;
    (x) TRICARE and other military health benefits for active and 
retired uniformed services personnel and their dependents;
    (xi) A plan or coverage provided by an Indian Tribe to Tribal 
members and their spouses and dependents (and other persons of Indian 
descent closely affiliated with the Tribe), in the capacity of the 
Tribal members as Tribal members (and not in their capacity as current 
or former employees of the Tribe or their dependents); or
    (xii) Health programs operated under the authority of the Indian 
Health Service.
    (b) Data requirements. Each contributing entity must submit to HHS 
data required to substantiate the contribution amounts for the 
contributing entity, in the manner and timeframe specified by HHS.
    18. Section 153.405 is added to read as follows:


Sec.  153.405  Calculation of reinsurance contributions.

    (a) In general. The reinsurance contribution required from a 
contributing entity for its reinsurance contribution enrollees during a 
benefit year is calculated by multiplying:
    (1) The average number of covered lives of reinsurance contribution 
enrollees during the applicable benefit year for all plans and coverage 
described in Sec.  153.400(a)(1) of the contributing entity; by
    (2) The contribution rate for the applicable benefit year.
    (b) Annual enrollment count. No later than November 15 of benefit 
year 2014, 2015, or 2016, as applicable, a contributing entity must 
submit an annual enrollment count of the average number of covered 
lives of reinsurance contribution enrollees for the applicable benefit 
year to HHS. The count must be determined as specified in paragraphs 
(d) or (e) of this section, as applicable.
    (c) Notification and payment. (1) Within 15 days of the submission 
of the annual enrollment count described in

[[Page 73208]]

paragraph (b) of this section or by December 15 of the applicable 
benefit year, whichever is later HHS will notify the contributing 
entity of the reinsurance contribution amount to be paid for the 
applicable benefit year.
    (2) A contributing entity must remit reinsurance contributions to 
HHS within 30 days after the date of the notification.
    (d) Procedures for counting covered lives for health insurance 
issuers. To determine the average number of covered lives of 
reinsurance contribution enrollees under a health insurance plan for a 
benefit year, a health insurance issuer must use one of the following 
methods:
    (1) Adding the total number of lives covered for each day of the 
first nine months of the benefit year and dividing that total by the 
number of days in the first nine months;
    (2) Adding the total number of lives covered on any date (or more 
dates, if an equal number of dates are used for each quarter) during 
the same corresponding month in each of the first three quarters of the 
benefit year, and dividing that total by the number of dates on which a 
count was made. For this purpose, the same months must be used for each 
quarter (for example January, April and July) and the date used for the 
second and third quarter must fall within the same week of the quarter 
as the corresponding date used for the first quarter; or
    (3) Multiplying the average number of policies in effect for the 
first nine months of the benefit year by the ratio of covered lives per 
policy in effect, calculated using the prior National Association of 
Insurance Commissioners (NAIC) Supplemental Health Care Exhibit (or a 
form filed with the issuer's State of domicile for the most recent time 
period).
    (e) Procedures for counting covered lives for self-insured group 
health plans. To determine the number of covered lives of reinsurance 
contribution enrollees under a self-insured group health plan for a 
benefit year, a plan must use one of the following methods:
    (1) One of the methods specified in either paragraph (d)(1) or 
paragraph (d)(2) of this section;
    (2) Adding the total number of lives covered on any date (or more 
dates, if an equal number of dates are used for each quarter) during 
the same corresponding month in each of the first three quarters of the 
benefit year (provided that the date used for the second and third 
quarters must fall within the same week of the quarter as the 
corresponding date used for the first quarter), and dividing that total 
by the number of dates on which a count was made, except that the 
number of lives covered on a date is calculated by adding the number of 
participants with self-only coverage on the date to the product of the 
number of participants with coverage other than self-only coverage on 
the date and a factor of 2.35. For this purpose, the same months must 
be used for each quarter (for example, January, April, and July);
    (3) Using the number of lives covered for the benefit year 
calculated based upon the ``Annual Return/Report of Employee Benefit 
Plan'' filed with the Department of Labor (Form 5500) for the last 
applicable time period. For purposes of this paragraph (e)(3), the 
number of lives covered for the benefit year for a plan offering only 
self-only coverage equals the sum of the total participants covered at 
the beginning and end of the benefit year, as reported on the Form 
5500, divided by 2, and the number of lives covered for the benefit 
year for a plan offering self-only coverage and coverage other than 
self-only coverage equals the sum of the total participants covered at 
the beginning and the end of the benefit year, as reported on the Form 
5500; and
    (f) Procedures for counting covered lives for group health plans 
with a self-insured coverage option and an insured coverage option. To 
determine the number of covered lives of reinsurance contribution 
enrollees under a group health plan with a self-insured coverage option 
and an insured coverage option for a benefit year, a plan must use one 
of the methods specified in either paragraph (d)(1) or paragraph (d)(2) 
of this section.
    (g) Multiple group health plans maintained by the same plan 
sponsor--(1) General rule. If a plan sponsor maintains two or more 
self-insured group health plans (including one or more group health 
plans that provide health insurance coverage) that collectively provide 
major medical coverage for the same covered lives, then those multiple 
plans shall be treated as a single self-insured group health plan for 
purposes of calculating any reinsurance contribution amount due under 
paragraph (d) of this section.
    (2) Plan Sponsor. For purposes of this paragraph (g), the term 
``plan sponsor'' means:
    (i) The employer, in the case of a plan established or maintained 
by a single employer;
    (ii) The employee organization, in the case of a plan established 
or maintained by an employee organization;
    (iii) The joint board of trustees, in the case of a multiemployer 
plan (as defined in section 414(f) of the Code);
    (iv) The committee, in the case of a multiple employer welfare 
arrangement;
    (v) The cooperative or association that establishes or maintains a 
plan established or maintained by a rural electric cooperative or rural 
cooperative association (as such terms are defined in section 3(40)(B) 
of ERISA);
    (vi) The trustee, in the case of a plan established or maintained 
by a voluntary employees' beneficiary association (meaning that the 
association is not merely serving as a funding vehicle for a plan that 
is established or maintained by an employer or other person);
    (vii) In the case of a plan, the sponsor of which is not described 
in paragraph (g)(2)(i) through (g)(2)(vi) of this section, the person 
identified by the terms of the document under which the plan is 
operated as the plan sponsor, or the person designated by the terms of 
the document under which the plan is operated as the plan sponsor, 
provided that designation is made, and that person has consented to the 
designation, by no later than the date by which the count of covered 
lives for that benefit year is required to be provided, after which 
date that designation for that benefit year may not be changed or 
revoked, and provided further that a person may be designated as the 
plan sponsor only if the person is one of the persons maintaining the 
plan (for example, one of the employers that is maintaining the plan 
with one or more other employers or employee organizations); or
    (viii) In the case of a plan, the sponsor of which is not described 
in paragraph (g)(2)(i) through (g)(2)(vi) of this section, and for 
which no identification or designation of a plan sponsor has been made 
under paragraph (g)(2)(i)(vii) of this section, each employer that 
maintains the plan (with respect to employees of that employer), each 
employee organization that maintains the plan (with respect to members 
of that employee organization), and each board of trustees, cooperative 
or association that maintains the plan.
    (3) Exception. A plan sponsor is not required to include as part of 
a single self-insured group health plan as determined under paragraph 
(g)(1) of this section any self-insured group health plan (including a 
group health plan that provides health insurance coverage) that 
consists solely of excepted benefits as defined by section 2791(c) of 
the PHS Act, or that only provides benefits related to prescription 
drugs.
    (4) Procedures for counting covered lives for multiple group health 
plans treated as a single group health plan.

[[Page 73209]]

The rules in this paragraph (g)(4) govern the determination of the 
average number of covered lives in a benefit year for any set of 
multiple self-insured group health plans or health insurance plans (or 
a combination of one or more self-insured group health plans and one or 
more health insurance plans) that are treated as a single group health 
plan under paragraph (g)(1) of this section.
    (i) Multiple group health plans including an insured plan. If at 
least one of the multiple plans is an insured plan, the average number 
of covered lives of reinsurance contribution enrollees must be 
calculated using one of the methods specified in either paragraph 
(d)(1) or paragraph (d)(2) of this section, applied across the multiple 
plans as a whole. The following information must be determined by the 
plan sponsor and reported to HHS, in a manner and timeframe specified 
by HHS:
    (A) The average number of covered lives calculated;
    (B) The counting method used; and
    (C) The names of the multiple plans being treated as a single group 
health plan as determined by the plan sponsor and reported to HHS.
    (ii) Multiple group health plans not including an insured plan. If 
each of the multiple plans is a self-insured group health plan, the 
average number of covered lives of reinsurance contribution enrollees 
must be calculated using one of the methods specified either in 
paragraph (e)(1) or paragraph (e)(2) of this section, applied across 
the multiple plans as a whole. The following information must be 
determined by the plan sponsor and reported to HHS, in a manner and 
timeframe specified by HHS:
    (A) The average number of covered lives calculated;
    (B) The counting method used; and
    (C) The names of the multiple plans being treated as a single group 
health plan as determined by the plan sponsor.
    19. Section 153.410 is amended by revising paragraph (a) as 
follows:


Sec.  153.410  Requests for reinsurance payments.

    (a) General requirement. An issuer of a reinsurance-eligible plan 
may make a request for payment when an enrollee of that reinsurance-
eligible plan has met the criteria for reinsurance payment set forth in 
subpart B of this part and the HHS notice of benefit and payment 
parameters and State notice of benefit and payment parameters for the 
applicable benefit year, if applicable.
* * * * *
    20. Section 153.420 is added to subpart E to read as follows:


Sec.  153.420  Data collection.

    (a) Data requirement. To be eligible for reinsurance payments, an 
issuer of a reinsurance-eligible plan must submit or make accessible 
all required reinsurance data in accordance with the reinsurance data 
collection approach established by the State, or by HHS on behalf of 
the State.
    (b) Deadline for submission of data. An issuer of a reinsurance-
eligible plan must submit or make accessible data to be considered for 
reinsurance payments for the applicable benefit year by April 30 of the 
year following the end of the applicable benefit year.
    21. Section 153.500 is amended by--
    A. Revising the definitions of ``Administrative costs'' and 
``Allowable administrative costs.''
    B. Adding the definitions of ``After-tax premiums earned,'' 
``Profits,'' and ``Taxes'' in alphabetical order.
    The revisions and additions read as follows:


Sec.  153.500  Definitions.

* * * * *
    Administrative costs mean, with respect to a QHP, total non-claims 
costs incurred by the QHP issuer for the QHP, including taxes.
    After-tax premiums earned mean, with respect to a QHP, premiums 
earned with respect to the QHP minus taxes.
    Allowable administrative costs mean, with respect to a QHP, the sum 
of administrative costs of the QHP, other than taxes plus profits 
earned by the QHP, which sum is limited to 20 percent of after-tax 
premiums earned with respect to the QHP (including any premium tax 
credit under any governmental program), plus taxes.
* * * * *
    Profits mean, with respect to a QHP, the greater of:
    (1) Three percent of after tax premiums earned, and
    (2) Premiums earned of the QHP minus the sum of allowable costs and 
administrative costs of the QHP.
* * * * *
    Taxes mean, with respect to a QHP, Federal and State licensing and 
regulatory fees paid with respect to the QHP as described in Sec.  
158.161(a) of this subchapter, and Federal and State taxes and 
assessments paid with respect to the QHP as described in Sec.  
158.162(a)(1) and (b)(1) of this subchapter.
* * * * *
    22. Section 153.510 is amended by adding new paragraph (d) to read 
as follows:.


Sec.  153.510  Risk corridors establishment and payment methodology.

* * * * *
    (d) Charge submission deadline. A QHP issuer must remit charges to 
HHS within 30 days after notification of such charges.
    23. Section 153.530 is amended by--
    A. Revising paragraphs (a), (b) introductory text, (b)(2)(iii), and 
(c).
    B. Adding new paragraph (d).
    The revisions and additions read as follows:


Sec.  153.530  Risk corridors data requirements.

    (a) Premium data. A QHP issuer must submit to HHS data on the 
premiums earned with respect to each QHP that the issuer offers in a 
manner specified by HHS.
    (b) Allowable costs. A QHP issuer must submit to HHS data on the 
allowable costs incurred with respect to each QHP that the QHP issuer 
offers in a manner specified by HHS. For purposes of this subpart, 
allowable costs must be--
* * * * *
    (2) * * *
    (iii) Any cost-sharing reduction payments received by the issuer 
for the QHP to the extent not reimbursed to the provider furnishing the 
item or service.
    (c) Allowable administrative costs. A QHP issuer must submit to HHS 
data on the allowable administrative costs incurred with respect to 
each QHP that the QHP issuer offers in a manner specified by HHS.
    (d) Timeframes. For each benefit year, a QHP issuer must submit all 
information required under this section by July 31 of the year 
following the benefit year.
    24. Section 153.630 is added to subpart G to read as follows:


Sec.  153.630  Data validation requirements when HHS operates risk 
adjustment.

    (a) General requirement. An issuer of a risk adjustment covered 
plan in a State where HHS is operating risk adjustment on behalf of the 
State for the applicable benefit year must have an initial and second 
validation audit performed on its risk adjustment data as described in 
this section.
    (b) Initial validation audit.
    (1) An issuer of a risk adjustment covered plan must engage one or 
more independent auditors to perform an initial validation audit of a 
sample of its risk adjustment data selected by HHS.
    (2) The issuer must ensure that the initial validation auditors are 
reasonably capable of performing an initial data validation audit 
according to the standards established by HHS for such audit, and must 
ensure that the audit is so performed.
    (3) The issuer must ensure that each initial validation auditor is 
reasonably

[[Page 73210]]

free of conflicts of interest, such that it is able to conduct the 
initial validation audit in an impartial manner and its impartiality is 
not reasonably open to question.
    (4) The issuer must ensure validation of the accuracy of risk 
adjustment data for a sample of enrollees selected by HHS. The issuer 
must ensure that the initial validation audit findings are submitted to 
HHS in a manner and timeframe specified by HHS.
    (c) Second validation audit. HHS will select a subsample of the 
risk adjustment data validated by the initial validation audit for a 
second validation audit. The issuer must comply with, and must ensure 
the initial validation auditor complies with, standards for such audit 
established by HHS, and must cooperate with, and must ensure that the 
initial validation auditor cooperates with, HHS and the second 
validation auditor in connection with such audit.
    (d) Data validation appeals. An issuer may appeal the findings of a 
second validation audit or the application of a risk score error rate 
to its risk adjustment payments and charges.
    (e) Adjustment of payments and charges. HHS may adjust payments and 
charges for issuers that do not comply with audit requirements and 
standards, as specified in part (b) and (c) of this section.
    (f) Data security and transmission.
    (1) An issuer must submit the risk adjustment data and source 
documentation for the initial and second validation audits specified by 
HHS to HHS or its designee in the manner and timeframe specified by 
HHS.
    (2) An issuer must ensure that it and its initial validation 
auditor comply with the security standards described at 45 CFR 164.308, 
164.310, and 164.312 in connection with the initial validation audit, 
the second validation audit, and any appeal.
    25. Subpart H is added to read as follows:
Subpart H--Distributed Data Collection for HHS-Operated Programs
Sec.
153.700 Distributed data environment.
153.710 Data requirements.
153.720 Establishment and usage of masked enrollee identification 
numbers.
153.730 Deadline for submission of data.

Subpart H--Distributed Data Collection for HHS-Operated Programs


Sec.  153.700  Distributed data environment.

    (a) Dedicated distributed data environments. For each benefit year 
in which HHS operates the risk adjustment or reinsurance program on 
behalf of a State, an issuer of a risk adjustment covered plan or a 
reinsurance-eligible plan in the State, as applicable, must establish a 
dedicated data environment and provide data access to HHS, in a manner 
and timeframe specified by HHS, for any HHS-operated risk adjustment 
and reinsurance program.
    (b) Timeline. An issuer must establish the dedicated data 
environment (and confirm proper establishment through successfully 
testing the environment to conform with applicable HHS standards for 
such testing) three months prior to the first date of full operation.


Sec.  153.710  Data requirements.

    (a) Enrollment, claims, and encounter data. An issuer of a risk 
adjustment covered plan or a reinsurance-eligible plan in a State in 
which HHS is operating the risk adjustment or reinsurance program, as 
applicable, must provide to HHS, through the dedicated data 
environment, access to enrollee-level plan enrollment data, enrollee 
claims data, and enrollee encounter data as specified by HHS.
    (b) Claims data. All claims data submitted by an issuer of a risk 
adjustment covered plan or a reinsurance-eligible plan in a State in 
which HHS is operating the risk adjustment or reinsurance program, as 
applicable, must have resulted in payment by the issuer.
    (c) Claims data from capitated plans. An issuer of a risk 
adjustment covered plan or a reinsurance-eligible plan in a State in 
which HHS is operating the risk adjustment or reinsurance program, as 
applicable, that does not generate individual enrollee claims in the 
normal course of business must derive the costs of all applicable 
provider encounters using its principal internal methodology for 
pricing those encounters. If the issuer does not have such a 
methodology, or has an incomplete methodology, it must supplement the 
methodology in a manner that yields derived claims that are reasonable 
in light of the specific service and insurance market that the plan is 
serving.


Sec.  153.720  Establishment and usage of masked enrollee 
identification numbers.

    (a) Enrollee identification numbers. An issuer of a risk adjustment 
covered plan or a reinsurance-eligible plan in a State in which HHS is 
operating the risk adjustment or reinsurance program, as applicable, 
must--
    (1) Establish a unique masked enrollee identification number for 
each enrollee; and
    (2) Maintain the same masked enrollee identification number for an 
enrollee across enrollments or plans within the issuer, within the 
State, during a benefit year.
    (b) Prohibition on personally identifiable information. An issuer 
of a risk adjustment covered plan or a reinsurance-eligible plan in a 
State in which HHS is operating the risk adjustment or reinsurance 
program on behalf of the State, as applicable, may not--
    (1) Include enrollee's personally identifiable information in the 
masked enrollee identification number; or
    (2) Use the same masked enrollee identification number for 
different enrollees enrolled with the issuer.


Sec.  153.730  Deadline for submission of data.

    A risk adjustment covered plan or a reinsurance-eligible plan in a 
State in which HHS is operating the risk adjustment or reinsurance 
program, as applicable, must submit data to be considered for risk 
adjustment payments and charges and reinsurance payments for the 
applicable benefit year by April 30 of the year following the 
applicable benefit year.

PART 155--EXCHANGE ESTABLISHMENT STANDARDS AND OTHER RELATED 
STANDARDS UNDER THE AFFORDABLE CARE ACT

    26. The authority citation for part 155 continues to read as 
follows:

    Authority:  Secs. 1301, 1302, 1303, 1304, 1311, 1312, 1313, 
1321, 1322, 1331, 1334, 1401, 1402, 1411, 1412, 1413.

    27. Section 155.20 is amended by--
    A. Revising the definitions of ``Large employer'' and ``Small 
employer''.
    B. Adding definitions of ``Federally-facilitated Exchange,'' 
``Federally-facilitated SHOP,'' and ``Full-time employee'' in 
alphabetical order.
    The revisions and additions read as follows:


Sec.  155.20  Definitions.

* * * * *
    Federally-facilitated Exchange means an Exchange established and 
operated within a State by the Secretary under section 1321(c)(1) of 
the Affordable Care Act.
    Federally-facilitated SHOP means a Small Business Health Options 
Program established and operated within a State by the Secretary under 
section 1321(c)(1) of the Affordable Care Act.
    Full-time employee has the meaning given in section 4980H (c)(4) of 
the Code effective for plan years beginning on or after January 1, 
2016, except for operations of a Federally-facilitated

[[Page 73211]]

SHOP for which it is effective for plan years beginning on or after 
October 1, 2013.
* * * * *
    Large employer means, in connection with a group health plan with 
respect to a calendar year and a plan year, an employer who employed an 
average of at least 101 employees on business days during the preceding 
calendar year and who employs at least 1 employee on the first day of 
the plan year. In the case of plan years beginning before January 1, 
2016, a State may elect to define larger employer by substituting ``51 
employees'' for ``101 employees.'' The number of employees shall be 
determined using the method set forth in section 4980H (c)(2)(E) of the 
Code, effective for plan years beginning on or after January 1, 2016, 
except for operations of a Federally-facilitated SHOP for which the 
method shall be used for plan years beginning on or after October 1, 
2013.
* * * * *
    Small employer means, in connection with a group health plan with 
respect to a calendar year and a plan year, an employer who employed an 
average of at least 1 but not more than 100 employees on business days 
during the preceding calendar year and who employs at least 1 employee 
on the first day of the plan year. In the case of plan years beginning 
before January 1, 2016, a State may elect to define small employer by 
substituting ``50 employees'' for ``100 employees.'' The number of 
employees shall be determined using the method set forth in section 
4980H (c)(2)(E) of the Code, effective for plan years beginning on or 
after January 1, 2016, except for operations of a Federally-facilitated 
SHOP for which the method shall be used for plan years beginning on or 
after October 1, 2013.
* * * * *
    28. Section 155.220 is amended by revising paragraph (b) to read as 
follows--


Sec.  155.220  Ability to States to permit agents and brokers to assist 
qualified individuals, qualified employers, or qualified employees 
enrolling in QHPs.

* * * * *
    (b)(1) Web site disclosure. The Exchange or SHOP may elect to 
provide information regarding licensed agents and brokers on its Web 
site for the convenience of consumers seeking insurance through that 
Exchange and may elect to limit the information to information 
regarding licensed agents and brokers who have completed any required 
Exchange or SHOP registration and training process.
    (2) A Federally-facilitated Exchange or SHOP will limit the 
information provided on its Web site regarding licensed agents and 
brokers to information regarding licensed agents and brokers who have 
completed registration and training.
* * * * *
    29. Section 155.305 is amended by revising paragraph (g)(3) to read 
as follows:


Sec.  155.305  Eligibility standards.

* * * * *
    (g) * * *
    (3) Special rule for family policies. To the extent that an 
enrollment in a QHP in the individual market offered through an 
Exchange under a single policy covers two or more individuals who, if 
they were to enroll in separate individual policies would be eligible 
for different cost sharing, the Exchange must deem the individuals 
under such policy to be collectively eligible only for the category of 
eligibility last listed below for which all the individuals covered by 
the policy would be eligible:
    (i) Individuals not eligible for changes to cost sharing;
    (ii) Individuals described in Sec.  155.350(b) (the special cost-
sharing rule for Indians regardless of income);
    (iii) Individuals described in paragraph (g)(2)(iii) of this 
section;
    (iv) Individuals described in paragraph (g)(2)(ii) of this section;
    (v) Individuals described in paragraph (g)(2)(i) of this section; 
and
    (vi) Individuals described in Sec.  155.350(a) (the cost-sharing 
rule for Indians with household incomes under 300 percent of the FPL).
* * * * *
    30. Section 155.330 is amended by adding paragraph (g) to read as 
follows:


Sec.  155.330  Eligibility redetermination during a benefit year.

* * * * *
    (g) Recalculation of advance payments of the premium tax credit and 
cost-sharing reductions. (1) When recalculating the amount of advance 
payments of the premium tax credit for which a tax filer is determined 
eligible as a result of an eligibility redetermination in accordance 
with this section, the Exchange must --
    (i) Account for any advance payments already made on behalf of the 
tax filer for the benefit year for which information is available to 
the Exchange, such that the recalculated advance payment amount is 
projected to result in total advance payments for the benefit year that 
correspond to the tax filer's total projected premium tax credit for 
the benefit year, calculated in accordance with 26 CFR 1.36B-3; and
    (ii) Ensure that that the advance payment provided on the tax 
filer's behalf is greater than or equal to zero and is calculated in 
accordance with 26 CFR 1.36B-3(d)(1).
    (2) When redetermining eligibility for cost-sharing reductions in 
accordance with this section, the Exchange must determine an individual 
eligible for the category of cost-sharing reductions that corresponds 
to his or her expected annual household income for the benefit year 
(subject to the special rule for family policies set forth in Sec.  
155.305(g)(3).
    31. Section 155.340 is amended by adding paragraphs (e) and (f) to 
read as follows:


Sec.  155.340  Administration of advance payments of the premium tax 
credit and cost-sharing reductions.

* * * * *
    (e) Allocation of advance payments of the premium tax credit 
between policies. If advance payments of the premium tax credit are to 
be made on behalf of a tax filer (or two tax filers who are a married 
couple), and individuals in the tax filer's tax household are enrolled 
in more than one QHP or stand-alone dental plan, then the advance 
payments must be allocated as follows:
    (1) That portion of the advance payment of the premium tax credit 
that is less than or equal to the aggregate adjusted monthly premiums, 
as defined in 26 CFR Sec.  1.36B-3(e), for the QHP policies properly 
allocated to EHB must be allocated among the QHP policies in proportion 
to the respective portions of the premiums for the policies properly 
allocated to EHB; and
    (2) Any remaining advance payment of the premium tax credit must be 
allocated among the stand-alone dental policies (if any) in proportion 
to the respective portions of the adjusted monthly premiums for the 
stand-alone dental policies properly allocated to the pediatric dental 
essential health benefit.
    (f) Reduction of enrollee's portion of premium to account for 
advance payments of the premium tax credit. If an Exchange is 
facilitating the collection and payment of premiums to QHP issuers and 
stand-alone dental plans on behalf of enrollees under Sec.  155.240, 
and if a QHP issuer or stand-alone dental plan has been notified that 
it will receive an advance payment of the premium tax credit on behalf 
of an enrollee for whom the Exchange is facilitating such functions, 
the Exchange must--

[[Page 73212]]

    (1) Reduce the portion of the premium for the policy collected from 
the individual for the applicable month(s) by the amount of the advance 
payment of the premium tax credit; and
    (2) Include with each billing statement, as applicable, to or for 
the individual the amount of the advance payment of the premium tax 
credit for the applicable month(s) and the remaining premium owed for 
the policy.
    32. Section 155.705 is amended by revising paragraph (b)(3) and by 
adding new paragraphs (b)(10)(i), (b)(10)(ii), (b)(11)(i) and 
(b)(11)(ii) to read as follows:


Sec.  155.705  Functions of a SHOP.

* * * * *
    (b) * * *
    (3) (i) SHOP options with respect to employer choice requirements. 
With regard to QHPs offered through the SHOP, the SHOP may allow a 
qualified employer to make one or more QHPs available to qualified 
employees by a method other than the method described in paragraph 
(b)(2) of this section.
    (ii) A Federally-facilitated SHOP will only permit a qualified 
employer to make available to qualified employees all QHPs at the level 
of coverage selected by the employer as described in paragraph (b)(2) 
of this section.
* * * * *
    (10) * * *
    (i) Subject to sections 2702 and 2703 of the Public Health Service 
Act, a Federally-facilitated SHOP must use a minimum participation rate 
of 70 percent, calculated as the number of qualified employees 
accepting coverage under the employer's group health plan, divided by 
the number of qualified employees offered coverage, excluding from the 
calculation any employee who, at the time the employer submits the SHOP 
application, is enrolled in coverage through another employer's group 
health plan or through a governmental plan such as Medicare, Medicaid, 
or TRICARE.
    (ii) Notwithstanding paragraph (b)(10)(i) of this section, a 
Federally-facilitated SHOP may utilize a different minimum 
participation rate in a State if there is evidence that a State law 
sets a minimum participation rate or that a higher or lower minimum 
participation rate is customarily used by the majority of QHP issuers 
in that State for products in the State's small group market outside 
the SHOP.
    (11) * * *
    (i) To determine the employer and employee contributions, a SHOP 
may establish one or more standard methods that employers may use to 
define their contributions toward employee and dependent coverage.
    (ii) A Federally-facilitated SHOP must use the following method for 
employer contributions:
    (A) The employer will select a level of coverage as described in 
paragraph (b)(2) and (b)(3) of this section.
    (B) The employer will select a QHP within that level of coverage to 
serves as a reference plan on which contributions will be based.
    (C) The employer will define a percentage contribution toward 
premiums for employee-only coverage under the reference plan and, if 
dependent coverage is offered, a percentage contribution toward 
premiums for dependent coverage under the reference plan.
    (D) An employer may establish, to the extent allowed by Federal and 
State law, different percentages for different employee categories.
    (E) Either State law or the employer may require that a Federally-
facilitated SHOP base contributions on a calculated composite premium 
for the reference plan for employees, for adult dependents, and for 
dependents below age 21.
    (F) The resulting contribution amounts for each employee's coverage 
may then be applied toward the QHP selected by the employee.
    33. Section 155.1030 is added to read as follows:


Sec.  155.1030  QHP certification standards related to advance payments 
of the premium tax credit and cost-sharing reductions.

    (a) Review of plan variations for cost-sharing reductions. (1) The 
Exchange must ensure that each issuer that offers or seeks to offer a 
health plan at any level of coverage in the individual market on the 
Exchange submits the required plan variations for the health plan as 
described in Sec.  156.420 of this subchapter. The Exchange must 
certify that the plan variations meet the requirements of Sec.  
156.420.
    (2) The Exchange must provide to HHS the actuarial values of each 
QHP and silver plan variation, calculated under Sec.  156.135 of this 
subchapter, in the manner and timeframe established by HHS.
    (b) Information for administering advance payments of the premium 
tax credit and advance payments of cost-sharing reductions. (1) The 
Exchange must collect and review annually the rate allocation, the 
expected allowed claims cost allocation, and the actuarial memorandum 
that an issuer submits to the Exchange under Sec.  156.470 of this 
subchapter, to ensure that such allocations meet the standards set 
forth in Sec.  156.470(c) and (d).
    (2) The Exchange must submit, in the manner and timeframe 
established by HHS, to HHS the approved allocations and actuarial 
memorandum underlying the approved allocations for each health plan at 
any level of coverage or stand-alone dental plan offered, or proposed 
to be offered in the individual market on the Exchange.
    (3) The Exchange must collect annually any estimates and supporting 
documentation that a QHP issuer submits to receive advance payments of 
certain cost-sharing reductions, under Sec.  156.430(a) of this 
subchapter, and submit, in the manner and timeframe established by HHS, 
the estimates and supporting documentation to HHS for review.
    (4) HHS may use the information provided to HHS by the Exchange 
under this section for the approval of the estimates that an issuer 
submits for advance payments of cost-sharing reductions, as described 
in Sec.  156.430 of this subchapter, and the oversight of the advance 
payments of cost-sharing reductions and premium tax credits programs.

PART 156--HEALTH INSURANCE ISSUER STANDARDS UNDER THE AFFORDABLE 
CARE ACT, INCLUDING STANDARDS RELATED TO EXCHANGES

    34. The authority citation for part 156 is revised to read as 
follows:

    Authority: Title I of the Affordable Care Act, sections 1301-
1304, 1311-1312, 1321-1322, 1324, 1334, 1342-1343, 1401-1402, and 
1412, Pub. L. 111-148, 124 Stat. 119 (42 U.S.C. 18021-18024, 18031-
18032, 18041-18042, 18044, 18054, 18061, 18063, 18071, 18082, 26 
U.S.C. 36B, and 31 U.S.C. 9701).

    35. Section 156.20 is amended by adding definitions for 
``Federally-facilitated SHOP'' and ``Issuer group'' in alphabetical 
order to read as follows:


Sec.  156.20  Definitions.

* * * * *
    Federally-facilitated SHOP has the meaning given to the term in 
Sec.  155.20 of this subchapter.
* * * * *
    Issuer group means all entities treated under subsection (a) or (b) 
of section 52 of the Internal Revenue Code of 1986 as a member of the 
same controlled group of corporations as (or under common control with) 
a health insurance issuer, or issuers affiliated by the common use of a 
nationally licensed service mark.
* * * * *

[[Page 73213]]

    36. Section 156.50 is amended by revising paragraph (b) and by 
adding paragraph (c) to read as follows:


Sec.  156.50  Financial support.

* * * * *
    (b) Requirement for State-based Exchange user fees. A participating 
issuer must remit user fee payments, or any other payments, charges, or 
fees, if assessed by a State-based Exchange under Sec.  155.160 of this 
subchapter.
    (c) Requirement for Federally-facilitated Exchange user fee. To 
support the functions of Federally-facilitated Exchanges, a 
participating issuer offering a plan through a Federally-facilitated 
Exchange must remit a user fee to HHS each month, in the timeframe and 
manner established by HHS, equal to the product of the billable members 
enrolled through the Exchange in the plan offered by the issuer, and 
the monthly user fee rate specified in the annual HHS notice of benefit 
and payment parameters for the applicable benefit year. For purposes of 
this paragraph, billable members are defined under 45 CFR 147.102(c)(1) 
as each family member in a policy, with a limitation of three family 
members under age 21.
    37. Section 156.200 is amended by adding paragraphs (f) and (g) to 
read as follows:


Sec.  156.200  QHP issuer participation standards.

* * * * *
    (f) Broker compensation in a Federally-facilitated Exchange. A QHP 
issuer must pay the same broker compensation for QHPs offered through a 
Federally-facilitated Exchange that the QHP issuer pays for similar 
health plans offered in the State outside a Federally-facilitated 
Exchange.
    (g) Certification standard specific to a Federally-facilitated 
Exchange. A Federally-facilitated Exchange may certify a QHP in the 
individual market of a Federally-facilitated Exchange only if the QHP 
issuer meets one of the conditions below:
    (1) The QHP issuer also offers through a Federally-facilitated SHOP 
serving that State at least one small group market QHP at the silver 
level of coverage and one at the gold level of coverage as described in 
section 1302(d) of the Affordable Care Act;
    (2) The QHP issuer does not offer small group market products in 
that State, but another issuer in the same issuer group offers through 
a Federally-facilitated SHOP serving that State at least one small 
group market QHP at the silver level of coverage and one at the gold 
level of coverage; or
    (3) Neither the issuer nor any other issuer in the same issuer 
group offers a small group market product in that State.
    38. Section 156.215 is added to read as follows:


Sec.  156.215  Advance payments of the premium tax credit and cost-
sharing reduction standards.

    (a) Standards relative to advance payments of the premium tax 
credit and cost-sharing reductions. In order for a health plan to be 
certified as a QHP initially and to maintain certification to be 
offered in the individual market on the Exchange, the issuer must meet 
the requirements related to the administration of cost-sharing 
reductions and advance payments of the premium tax credit set forth in 
subpart E of this part.
    (b) [Reserved]
    39. Section 156.285 is amended by adding paragraph (c)(7) to read 
as follows:


Sec.  156.285  Additional standards specific to SHOP.

* * * * *
    (c) * * *
    (7) A QHP issuer must enroll a qualified employee only if the 
Exchange--
    (i) Notifies the QHP issuer that the employee is a qualified 
employee; and
    (ii) Transmits information to the QHP issuer as provided in Sec.  
155.400(a) of this subchapter.
* * * * *
    40. Subpart E is added to read as follows:
Subpart E--Health Insurance Issuer Responsibilities With Respect to 
Advance Payments of the Premium Tax Credit and Cost-Sharing Reductions
Sec.
156.400 Definitions.
156.410 Cost-sharing reductions for enrollees.
156.420 Plan variations.
156.425 Changes in eligibility for cost-sharing reductions.
156.430 Payment for cost-sharing reductions.
156.440 Plans eligible for advance payments of the premium tax 
credit and cost-sharing reductions.
156.460 Reduction of enrollee's share of premium to account for 
advance payments of the premium tax credit.
156.470 Allocation of rates and claims costs for advance payments of 
cost-sharing reductions and the premium tax credit.

Subpart E--Health Insurance Issuer Responsibilities With Respect to 
Advance Payments of the Premium Tax Credit and Cost-Sharing 
Reductions


Sec.  156.400  Definitions.

    The following definitions apply to this subpart:
    Advance payments of the premium tax credit has the meaning given to 
the term in Sec.  155.20 of this subchapter.
    Affordable Care Act has the meaning given to the term in Sec.  
155.20 of this subchapter.
    Annual limitation on cost sharing means the annual dollar limit on 
cost sharing required to be paid by an enrollee that is established by 
a particular qualified health plan.
    De minimis variation means the allowable variation in the AV of a 
health plan that does not result in a material difference in the true 
dollar value of the health plan as established in Sec.  156.140(c)(1).
    De minimis variation for a silver plan variation means a single 
percentage point.
    Federal poverty level or FPL has the meaning given to the term in 
Sec.  155.300(a) of this subchapter.
    Indian has the meaning given to the term in Sec.  155.300(a) of 
this subchapter.
    Limited cost sharing plan variation means, with respect to a QHP at 
any level of coverage, the variation of such QHP described in Sec.  
156.420(b)(2).
    Maximum annual limitation on cost sharing means the highest annual 
dollar amount that qualified health plans (other than QHPs with cost-
sharing reductions) may require in cost sharing for a particular year, 
as established for that year under Sec.  156.130.
    Most generous or more generous means, between a QHP (including a 
standard silver plan) or plan variation, and one or more other plan 
variations of the same QHP, the QHP or plan variation designed for the 
category of individuals last listed in Sec.  155.305(g)(3) of this 
subchapter.
    Plan variation means a zero cost sharing plan variation, a limited 
cost sharing plan variation, or a silver plan variation.
    Reduced maximum annual limitation on cost sharing means the dollar 
value of the maximum annual limitation on cost sharing for a silver 
plan variation that remains after applying the reduction, if any, in 
the maximum annual limitation on cost sharing required by section 1402 
of the Affordable Care Act as announced in the annual HHS notice of 
benefit and payment parameters.

[[Page 73214]]

    Silver plan variation means, with respect to a standard silver 
plan, any of the variations of that standard silver plan described in 
Sec.  156.420(a).
    Stand-alone dental plan means a plan offered through an Exchange 
under Sec.  155.1065 of this subchapter.
    Standard plan means a QHP offered at one of the four levels of 
coverage, defined at Sec.  156.140, with an annual limitation on cost 
sharing that conforms to the requirements of Sec.  156.130(a). A 
standard plan at the bronze, silver, gold, or platinum level of 
coverage is referred to as a standard bronze plan, a standard silver 
plan, a standard gold plan, and a standard platinum plan, respectively.
    Zero cost sharing plan variation means, with respect to a QHP at 
any level of coverage, the variation of such QHP described in Sec.  
156.420(b)(1).


Sec.  156.410  Cost-sharing reductions for enrollees.

    (a) General requirement. A QHP issuer must ensure that an 
individual eligible for cost-sharing reductions, as demonstrated by 
assignment to a particular plan variation, pay only the cost sharing 
required of an eligible individual for the applicable covered service 
under the plan variation. The cost-sharing reduction for which an 
individual is eligible must be applied when the cost sharing is 
collected.
    (b) Assignment to applicable plan variation. If an individual is 
determined to be eligible to enroll in a QHP in the individual market 
offered through an Exchange and elects to do so, the QHP issuer must 
assign the individual under enrollment and eligibility information 
submitted by the Exchange as follows--
    (1) If the individual is determined eligible by the Exchange for 
cost-sharing reductions under Sec.  155.305(g)(2)(i), (ii), or (iii) of 
this subchapter (subject to the special rule for family policies set 
forth in Sec.  155.305(g)(3) of this subchapter) and chooses to enroll 
in a silver health plan, the QHP issuer must assign the individual to 
the silver plan variation of the selected silver health plan described 
in Sec.  156.420(a)(1), (2), or (3), respectively.
    (2) If the individual is determined eligible by the Exchange for 
cost-sharing reductions for Indians with lower household income under 
Sec.  155.350(a) of this subchapter (subject to the special rule for 
family policies set forth in Sec.  155.305(g)(3) of this subchapter), 
and chooses to enroll in a QHP, the QHP issuer must assign the 
individual to the zero cost sharing plan variation of the selected QHP 
with all cost sharing eliminated described in Sec.  156.420(b)(1).
    (3) If the individual is determined by the Exchange to be eligible 
for cost-sharing reductions for Indians regardless of household income 
under Sec.  155.350(b) of this subchapter (subject to the special rule 
for family policies set forth in Sec.  155.305(g)(3) of this 
subchapter), and chooses to enroll in a QHP, the QHP issuer must assign 
the individual to the limited cost sharing plan variation of the 
selected QHP with the prohibition on cost sharing for benefits received 
from the Indian Health Service and certain other providers described in 
Sec.  156.420(b)(2).
    (4) If the individual is determined by the Exchange not to be 
eligible for cost-sharing reductions (including eligibility under the 
special rule for family policies set forth in Sec.  155.305(g)(3) of 
this subchapter), and chooses to enroll in a QHP, the QHP issuer must 
assign the individual to the selected QHP with no cost-sharing 
reductions.


Sec.  156.420  Plan variations.

    (a) Submission of silver plan variations. For each of its silver 
health plans that an issuer seeks to offer or to continue to offer in 
the individual market on an Exchange, the issuer must submit annually 
to the Exchange for certification prior to each benefit year the 
standard silver plan and three variations of the standard silver plan, 
as follows--
    (1) For individuals eligible for cost-sharing reductions under 
Sec.  155.305(g)(2)(i) of this subchapter, a variation of the standard 
silver plan with:
    (i) An annual limitation on cost sharing no greater than the 
reduced maximum annual limitation on cost sharing specified in the 
annual HHS notice of benefit and payment parameters for such 
individuals, and
    (ii) Other cost-sharing reductions such that the AV of the silver 
plan variation is 94 percent plus or minus the de minimis variation for 
a silver plan variation;
    (2) For individuals eligible for cost-sharing reductions under 
Sec.  155.305(g)(2)(ii) of this subchapter, a variation of the standard 
silver plan with:
    (i) An annual limitation on cost sharing no greater than the 
reduced maximum annual limitation on cost sharing specified in the 
annual HHS notice of benefit and payment parameters for such 
individuals, and
    (ii) Other cost-sharing reductions such that the AV of the silver 
plan variation is 87 percent plus or minus the de minimis variation for 
a silver plan variation; and
    (3) For individuals eligible for cost-sharing reductions under 
Sec.  155.305(g)(2)(iii) of this subchapter, a variation of the 
standard silver plan with:
    (i) An annual limitation on cost sharing no greater than the 
reduced maximum annual limitation on cost sharing specified in the 
annual HHS notice of benefit and payment parameters for such 
individuals, and
    (ii) Other cost-sharing reductions such that the AV of the silver 
plan variation is 73 percent plus or minus the de minimis variation for 
a silver plan variation (subject to Sec.  156.420(h)).
    (b) Submission of zero and limited cost sharing plan variations. 
For each of its health plans at any level of coverage that an issuer 
seeks QHP certification for the individual market on an Exchange, the 
issuer must submit to the Exchange for certification the health plan 
and two variations of the health plan, as follows--
    (1) For individuals eligible for cost-sharing reductions under 
Sec.  155.350(a) of this subchapter, a variation of the health plan 
with all cost sharing eliminated; and
    (2) For individuals eligible for cost-sharing reductions under 
Sec.  155.350(b) of this subchapter, a variation of the health plan 
with no cost sharing on any item or service that is an EHB furnished 
directly by the Indian Health Service, an Indian Tribe, Tribal 
Organization, or Urban Indian Organization (each as defined in 25 
U.S.C. 1603), or through referral under contract health services.
    (c) Benefit and network equivalence in silver plan variations. A 
standard silver plan and each silver plan variation thereof must cover 
the same benefits and providers, and require the same out-of-pocket 
spending for benefits other than essential health benefits. Each silver 
plan variation is subject to all requirements applicable to the 
standard silver plan (except for the requirement that the plan have an 
AV as set forth in Sec.  156.140(b)(2)).
    (d) Benefit and network equivalence in zero and limited cost 
sharing plan variations. A QHP and each zero cost sharing plan 
variation or limited cost sharing plan variation thereof must cover the 
same benefits and providers, and require the same out-of-pocket 
spending for benefits other than essential health benefits. A limited 
cost sharing plan variation must have the same cost sharing on items or 
services not described in paragraph (b)(2) of this section as the QHP 
with no cost-sharing reductions. Each zero cost sharing plan variation 
or limited cost sharing plan variation is subject to all requirements 
applicable to the QHP (except for the requirement that the plan have an 
AV as set forth in Sec.  156.140(b)).

[[Page 73215]]

    (e) Decreasing cost sharing in higher AV silver plan variations. 
The cost sharing required of enrollees under any silver plan variation 
of a standard silver plan for an essential health benefit from a 
provider (including a provider outside the plan's network) may not 
exceed the corresponding cost sharing required in the standard silver 
plan or any other silver plan variation thereof with a lower AV.
    (f) Minimum AV differential between 70 percent and 73 percent 
silver plan variations. Notwithstanding any permitted de minimis 
variation in AV for a health plan or permitted de minimis variation for 
a silver plan variation, the AVs of a standard silver plan and the 
silver plan variation thereof described in paragraph (a)(3) of this 
section must differ by at least 2 percentage points.


Sec.  156.425  Changes in eligibility for cost-sharing reductions.

    (a) Effective date of change in assignment. If the Exchange 
notifies a QHP issuer of a change in an enrollee's eligibility for 
cost-sharing reductions (including a change in the individual's 
eligibility under the special rule for family policies set forth in 
Sec.  155.305(g)(3) of this subchapter due to a change in eligibility 
of another individual on the same policy), then the QHP issuer must 
change the individual's assignment such that the individual is assigned 
to the applicable standard plan or plan variation of the QHP as 
required under Sec.  156.410(b) as of the effective date of eligibility 
required by the Exchange.
    (b) Continuity of deductible and out-of-pocket amounts. In the case 
of a change in assignment to a different plan variation (or standard 
plan without cost-sharing reductions) of the same QHP in the course of 
a benefit year under this section, the QHP issuer must ensure that any 
cost sharing paid by the applicable individual under previous plan 
variations (or standard plan without cost-sharing reductions) for that 
benefit year is taken into account in the new plan variation (or 
standard plan without cost-sharing reductions) for purposes of 
calculating cost sharing based on aggregate spending by the individual, 
such as for deductibles or for the annual limitations on cost sharing.


Sec.  156.430  Payment for cost-sharing reductions.

    (a) Estimates of value of cost-sharing reductions for purposes of 
advance payments. (1) For each health plan that an issuer offers, or 
intends to offer, in the individual market on an Exchange as a QHP, the 
issuer must provide to the Exchange annually prior to the benefit year, 
for approval by HHS, an estimate of the dollar value of the cost-
sharing reductions to be provided over the benefit year. The estimate 
must:
    (i) If the QHP is a silver health plan, identify separately the per 
member per month dollar value of the cost-sharing reductions to be 
provided under each silver plan variation identified in Sec.  
156.420(a)(1), (2), and (3);
    (ii) Regardless of the level of coverage of the QHP, identify the 
per member per month dollar value of the cost-sharing reductions to be 
provided under the zero cost sharing plan variation;
    (iii) Be accompanied by supporting documentation validating the 
estimate; and
    (iv) Be developed using the methodology specified by HHS in the 
applicable annual HHS notice of benefit and payment parameters.
    (2) If an issuer seeks advance payments for the cost-sharing 
reductions to be provided under the limited cost sharing plan variation 
of a health plan it offers, or seeks to offer, in the individual market 
on the Exchange as a QHP at any level of coverage, the issuer must 
provide to the Exchange annually prior to the benefit year, for 
approval by HHS, an estimate of the per member per month dollar value 
of the cost-sharing reductions to be provided over the benefit year 
under such limited cost sharing plan variation. The estimate must:
    (i) Be accompanied by supporting documentation validating the 
estimate; and
    (ii) Be developed using the methodology specified by HHS in the 
annual HHS notice of benefit and payment parameters.
    (3) HHS's approval of the estimate will be based on whether the 
estimate is made consistent with the methodology specified by HHS in 
the annual HHS notice of benefit and payment parameters.
    (b) Advance payments. A QHP issuer will receive periodic advance 
payments based on the approved advance estimates provided under 
paragraph (a) of this section and the actual enrollment in the 
applicable plan variation.
    (c) Submission of actual amounts. A QHP issuer must submit to HHS, 
in the manner and timeframe established by HHS, the following--
    (1) In the case of a benefit for which the QHP issuer compensates 
the applicable provider in whole or in part on a fee-for-service basis, 
the total allowed costs for essential health benefits charged for an 
enrollees' policy for the benefit year, broken down by what the issuer 
paid, what the enrollee paid, and the amount reimbursed to the provider 
by the QHP issuer for the amount that the enrollee would have paid 
under the standard QHP without cost-sharing reductions; and
    (2) In the case of a benefit for which the QHP issuer compensates 
the applicable provider in any other manner, the total allowed costs 
for essential health benefits charged for an enrollees' policy for the 
benefit year, broken down by what the issuer paid, what the enrollee 
paid, and what the enrollee would have paid under the standard QHP 
without cost-sharing reductions.
    (d) Reconciliation of amounts. HHS will perform periodic 
reconciliations of any advance payments of cost-sharing reductions 
provided to a QHP issuer under paragraph (b) of this section against--
    (1) The actual amount of cost-sharing reductions provided to 
enrollees and reimbursed to providers by the QHP issuer for benefits 
for which the QHP issuer compensates the applicable providers in whole 
or in part on a fee-for-service basis; and
    (2) The actual amount of cost-sharing reductions provided to 
enrollees for benefits for which the QHP issuer compensates the 
applicable providers in any other manner.
    (e) Payment of discrepancies. If the actual amounts of cost-sharing 
reductions described in paragraphs (d)(1) and (2) of this section are--
    (1) More than the amount of advance payments provided and the QHP 
issuer has timely provided the actual amounts of cost-sharing 
reductions as required under paragraph (c) of this section, HHS will 
reimburse the QHP issuer for the difference; and
    (2) Less than the amount of advance payments provided, the QHP 
issuer must repay the difference to HHS in the manner and timeframe 
specified by HHS.
    (f) Cost-sharing reductions during special periods. (1) 
Notwithstanding the reconciliation process described in paragraphs (c) 
through (e) of this section, a QHP issuer will not be eligible for 
reimbursement of any cost-sharing reductions provided following a 
termination of coverage effective date with respect to a grace period 
as described in Sec.  155.430(b)(2)(ii)(A) or (B) of this subchapter. 
However, the QHP issuer will be eligible for reimbursement of cost-
sharing reductions provided prior to the termination of coverage 
effective date. Advance payments of cost-sharing reductions will be 
paid to a QHP issuer prior to a determination of termination (including 
during any grace period, but the QHP issuer will be

[[Page 73216]]

required to repay any advance payments made with respect to any month 
after any termination of coverage effective date during a grace 
period).
    (2) Notwithstanding the reconciliation process described in 
paragraphs (c) through (e) of this section, if the termination of 
coverage effective date is prior to the determination of termination 
other than in the circumstances described in paragraph (f)(1) of this 
section, and if the termination (or the late determination thereof) is 
the fault of the QHP issuer, as reasonably determined by the Exchange, 
the QHP issuer will not be eligible for advance payments and 
reimbursement for cost-sharing reductions provided during the period 
following the termination of coverage effective date and prior to the 
determination of the termination.
    (3) Subject to the requirements of the reconciliation process 
described in paragraphs (c) through (e) of this section, if the 
termination of coverage effective date is prior to the determination of 
termination other than in the circumstances described in paragraph 
(f)(1) of this section, and if the reason for the termination (or late 
determination thereof) is not the fault of the QHP issuer, as 
reasonably determined by the Exchange, the QHP issuer will be eligible 
for advance payments and reimbursement for cost-sharing reductions 
provided during such period.
    (4) Subject to the requirements of the reconciliation process 
described in paragraphs (c) through (e) of this section, a QHP issuer 
will be eligible for advance payments and reimbursement for cost-
sharing reductions provided during any period of coverage pending 
resolution of inconsistencies in information required to determine 
eligibility for enrollment under Sec.  155.315(f) of this subchapter.


Sec.  156.440  Plans eligible for advance payments of the premium tax 
credit and cost-sharing reductions.

    Except as noted in paragraph (a) through (c) of this section, the 
provisions of this subpart apply to qualified health plans offered in 
the individual market on the Exchange.
    (a) Catastrophic plans. The provisions of this subpart do not apply 
to catastrophic plans as described in Sec.  156.155.
    (b) Stand-alone dental plans. The provisions of this subpart, to 
the extent relating to cost-sharing reductions, do not apply to stand-
alone dental plans. The provisions of this subpart, to the extent 
relating to advance payments of the premium tax credit, apply to stand-
alone dental plans.
    (c) Child-only plans. The provisions of this subpart apply to 
child-only QHPs, as described in Sec.  156.200(c)(2).


Sec.  156.460  Reduction of enrollee's share of premium to account for 
advance payments of the premium tax credit.

    (a) Reduction of enrollee's share of premium to account for advance 
payments of the premium tax credit. A QHP issuer that receives notice 
from the Exchange that an individual enrolled in the issuer's QHP is 
eligible for an advance payment of the premium tax credit must--
    (1) Reduce the portion of the premium charged to or for the 
individual for the applicable month(s) by the amount of the advance 
payment of the premium tax credit;
    (2) Notify the Exchange of the reduction in the portion of the 
premium charged to the individual in accordance with Sec.  156.265(g); 
and
    (3) Include with each billing statement, as applicable, to or for 
the individual the amount of the advance payment of the premium tax 
credit for the applicable month(s), and the remaining premium owed.
    (b) Delays in payment. A QHP issuer may not refuse to commence 
coverage under a policy or terminate coverage on account of any delay 
in payment of an advance payment of the premium tax credit on behalf of 
an enrollee if the QHP issuer has been notified by the Exchange under 
Sec.  155.340(a) of this subchapter that the QHP issuer will receive 
such advance payment.


Sec.  156.470  Allocation of rates and claims costs for advance 
payments of cost-sharing reductions and the premium tax credit.

    (a) Allocation to additional health benefits for QHPs. An issuer 
must provide to the Exchange annually for approval, in the manner and 
timeframe established by HHS, for each health plan at any level of 
coverage offered, or proposed to be offered in the individual market on 
an Exchange, an allocation of the rate and the expected allowed claims 
costs for the plan, in each case, to:
    (1) EHB, other than services described in Sec.  156.280(d)(1), and
    (2) Any other services or benefits offered by the health plan not 
described paragraph (a)(1) of this section.
    (b) Allocation to additional health benefits for stand-alone dental 
plans. An issuer must provide to the Exchange annually for approval, in 
the manner and timeframe established by HHS, for each stand-alone 
dental plan offered, or proposed to be offered, in the individual 
market on the Exchange, a dollar allocation of the expected premium for 
the plan, to:
    (1) The pediatric dental essential health benefit, and
    (2) Any benefits offered by the stand-alone dental plan that are 
not the pediatric dental essential health benefit.
    (c) Allocation standards for QHPs. The issuer must ensure that the 
allocation described in paragraph (a) of this section--
    (1) Is performed by a member of the American Academy of Actuaries 
in accordance with generally accepted actuarial principles and 
methodologies;
    (2) Reasonably reflects the allocation of the expected allowed 
claims costs attributable to EHB (excluding those services described in 
Sec.  156.280(d)(1));
    (3) Is consistent with the allocation applicable to State-required 
benefits to be submitted by the issuer under Sec.  155.170(c) of this 
subchapter, and the allocation requirements described in Sec.  
156.280(e)(4) for certain services; and
    (4) Is calculated under the fair health insurance premium standards 
described at 45 CFR 147.102, the single risk pool standards described 
at 45 CFR 156.80, and the same premium rate standards described at 45 
CFR 156.255.
    (d) Allocation standards for stand-alone dental plans. The issuer 
must ensure that the dollar allocation described in paragraph (b) of 
this section--
    (1) Is performed by a member of the American Academy of Actuaries 
in accordance with generally accepted actuarial principles and 
methodologies;
    (2) Is consistent with the allocation applicable to State-required 
benefits to be submitted by the issuer under Sec.  155.170(c) of this 
subchapter;
    (3) Is calculated under the fair health insurance premium standards 
described at 45 CFR 147.102, except for the provision related to age 
set forth at Sec.  147.102(a)(1)(ii); the single risk pool standards 
described at 45 CFR 156.80; and the same premium rate standards 
described at 45 CFR 156.255 (in each case subject to paragraph (d)(4) 
of this section); and
    (4) Is calculated so that the dollar amount of the premium 
allocable to the pediatric dental essential health benefit for an 
individual under the age of 19 years does not vary, and the dollar 
amount of the premium allocable to the pediatric dental essential 
health benefit for an individual aged 19 years or more is equal to 
zero.
    (e) Disclosure of attribution and allocation methods. An issuer of 
a health plan at any level of coverage or a stand-alone dental plan 
offered, or proposed to be offered in the individual

[[Page 73217]]

market on the Exchange must submit to the Exchange annually for 
approval, an actuarial memorandum, in the manner and timeframe 
specified by HHS, with a detailed description of the methods and 
specific bases used to perform the allocations set forth in paragraphs 
(a) and (b), and demonstrating that the allocations meet the standards 
set forth in paragraphs (c) and (d) of this section, respectively.

PART 157--EMPLOYER INTERACTIONS WITH EXCHANGES AND SHOP 
PARTICIPATION

    41. The authority citation for part 157 continues to read as 
follows:

    Authority:  Title I of the Affordable Care Act, sections 1311, 
1312, 1321, 1411, 1412, Pub. L. 111-148, 124 Stat. 199.

    42. Section 157.20 is amended by adding the definitions for 
``Federally-facilitated SHOP,'' ``Full-time employee,'' and ``Large 
employer'' in alphabetical order to read as follows:


Sec.  157.20  Definitions.

* * * * *
    Federally-facilitated SHOP has the meaning given to the term in 
Sec.  155.20 of this subchapter.
    Full-time employee has the meaning given to the term in Sec.  
155.20 of this subchapter.
    Large employer has the meaning given to the term in Sec.  155.20 of 
this subchapter.
* * * * *

PART 158--ISSUER USE OF PREMIUM REVENUE: REPORTING AND REBATE 
REQUIREMENTS

    43. The authority citation for part 158 continues to read as 
follows:

    Authority:  Section 2718 of the Public Health Service Act (42 
U.S.C. 300gg-18), as amended.

    44. Section 158.110 is amended by revising paragraph (b) to read as 
follows:


Sec.  158.110  Reporting requirements related to premiums and 
expenditures.

* * * * *
    (b) Timing and form of report. The report for each of the 2011, 
2012, and 2013 MLR reporting years must be submitted to the Secretary 
by June 1 of the year following the end of an MLR reporting year, on a 
form and in the manner prescribed by the Secretary. Beginning with the 
2014 MLR reporting year, the report for each MLR reporting year must be 
submitted to the Secretary by July 31 of the year following the end of 
an MLR reporting year, on a form and in the manner prescribed by the 
Secretary.
* * * * *
    45. Section 158.130 is amended by adding paragraph (b)(5) to read 
as follows:


Sec.  158.130  Premium revenue.

* * * * *
    (b) * * *
    (5) Account for the net payments or receipts related to risk 
adjustment, risk corridors, and reinsurance programs under sections 
1341, 1342, and 1343 of the Patient Protection and Affordable Care Act, 
42 U.S.C. 18061, 18062, 18063.
    46. Section 158.140 is amended by adding paragraph (b)(4)(ii) and 
revising paragraph (b)(5)(i) to read as follows:


Sec.  158.140  Requirements for clinical services provided to 
enrollees.

* * * * *
    (b) * * *
    (4) * * *
    (ii) Net payments or receipts related to risk adjustment, risk 
corridors, and reinsurance programs under sections 1341, 1342, and 1343 
of the Patient Protection and Affordable Care Act, 42 U.S.C. 18061, 
18062, 18063.
    (5) * * *
    (i) Affiliated issuers that offer group coverage at a blended rate 
may choose whether to make an adjustment to each affiliate's incurred 
claims and activities to improve health care quality, to reflect the 
experience of the issuer with respect to the employer as a whole, 
according to an objective formula that must be defined by the issuer 
prior to January 1 of the MLR reporting year, so as to result in each 
affiliate having the same ratio of incurred claims to earned premium 
for that employer group for the MLR reporting year as the ratio of 
incurred claims to earned premium calculated for the employer group in 
the aggregate.
* * * * *
    47. Section 158.162 is amended by revising paragraph (b)(1)(vii) 
and adding paragraph (b)(1)(viii) to read as follows:


Sec.  158.162  Reporting of Federal and State taxes.

* * * * *
    (b) * * *
    (1) * * *
    (vii) Payments made by a Federal income tax exempt issuer for 
community benefit expenditures as defined in paragraph (c) of this 
section, limited to the highest of either:
    (A) Three percent of earned premium; or
    (B) The highest premium tax rate in the State for which the report 
is being submitted, multiplied by the issuer's earned premium in the 
applicable State market.
    (viii) In lieu of reporting amounts described in paragraph 
(b)(1)(vi) of this section, an issuer that is not exempt from Federal 
income tax may choose to report payment for community benefit 
expenditures as described in paragraph (c) of this section, limited to 
the highest premium tax rate in the State for which the report is being 
submitted multiplied by the issuer's earned premium in the applicable 
State market.
* * * * *
    48. Section 158.221 is amended by revising paragraph (c) to read as 
follows:


Sec.  158.221  Formula for calculating an issuer's medical loss ratio.

* * * * *
    (c) Denominator. The denominator of an issuer's MLR must equal the 
issuer's premium revenue, as defined in Sec.  158.130, excluding the 
issuer's Federal and State taxes and licensing and regulatory fees, 
described in Sec. Sec.  158.161(a) and 158.162(a)(1) and (b)(1), and 
after accounting for payments or receipts for risk adjustment, risk 
corridors, and reinsurance, described in Sec.  158.130(b)(5).
    49. Section 158.232 is amended by revising paragraph (c)(1)(i) and 
paragraph (d) introductory text to read as follows:


Sec.  158.232  Calculating the credibility adjustment.

* * * * *
    (c) * * *
    (1) * * *
    (i) The per person deductible for a policy that covers a subscriber 
and the subscriber's dependents shall be the lesser of: the deductible 
applicable to each of the individual family members; or the overall 
family deductible for the subscriber and subscriber's family divided by 
two (regardless of the total number of individuals covered through the 
subscriber).
* * * * *
    (d) No credibility adjustment. Beginning with the 2013 MLR 
reporting year, the credibility adjustment for and MLR based on 
partially credible experience is zero if both of the following 
conditions are met:
* * * * *
    50. Section 158.240 is amended by revising paragraphs (c) and (d) 
to read as follows:


Sec.  158.240  Rebating premium if the applicable medical loss ratio 
standard is not met.

* * * * *
    (c) Amount of rebate to each enrollee. (1) For each MLR reporting 
year, an

[[Page 73218]]

issuer must rebate to the enrollee the total amount of premium revenue, 
as defined in Sec.  158.130 of this part, received by the issuer from 
the enrollee, after subtracting Federal and State taxes and licensing 
and regulatory fees as provided in Sec. Sec.  158.161(a) and 
158.162(a)(1) and (b)(1), and after accounting for payments or receipts 
for risk adjustment, risk corridors, and reinsurance as provided in 
Sec.  158.130(b)(5), multiplied by the difference between the MLR 
required by Sec.  158.210 or Sec.  158.211, and the issuer's MLR as 
calculated under Sec.  158.221.
    (2) For example, an issuer must rebate a pro rata portion of 
premium revenue if it does not meet an 80 percent MLR for the 
individual market in a State that has not set a higher MLR. If an 
issuer has a 75 percent MLR for the coverage it offers in the 
individual market in a State that has not set a higher MLR, the issuer 
must rebate 5 percent of the premium paid by or on behalf of the 
enrollee for the MLR reporting year after subtracting taxes and fees 
and accounting for payments or receipts related to reinsurance, risk 
adjustment and risk corridors. In this example, an enrollee may have 
paid $2,000 in premiums for the MLR reporting year. If the issuer 
received net payments related to reinsurance, risk adjustment and risk 
corridors of $200, the gross earned premium would be $2,200. If the 
Federal and State taxes and licensing and regulatory fees that may be 
excluded from premium revenue as described in Sec. Sec.  158.161(a), 
158.161(a)(1), and 158.162(b)(1) are $150 and the net payments related 
to reinsurance, risk adjustment and risk corridors that must be 
accounted for in premium revenue as described in Sec. Sec.  
158.130(b)(5), 158.221 and 158.240 are $200, then the issuer would 
subtract $150 and $200 from gross premium revenue of $2,200, for a base 
of $1,850 in premium. The enrollee would be entitled to a rebate of 5 
percent of $1,850, or $92.50.
    (d) Timing of rebate. For each of the 2011, 2012, and 2013 MLR 
reporting years, an issuer must provide any rebate owing to an enrollee 
no later than August 1 following the end of the MLR reporting year. 
Beginning with the 2014 MLR reporting year, an issuer must provide any 
rebate owing to an enrollee no later than September 30 following the 
end of the MLR reporting year.
* * * * *
    51. Section 158.241 is amended by revising paragraph (a)(2) to read 
as follows:


Sec.  158.241  Form of rebate.

    (a) * * *
    (2) For each of the 2011, 2012, and 2013 MLR reporting years, any 
rebate provided in the form of a premium credit must be provided by 
applying the full amount due to the first month's premium that is due 
on or after August 1 following the MLR reporting year. If the amount of 
the rebate exceeds the premium due for August, then any overage shall 
be applied to succeeding premium payments until the full amount of the 
rebate has been credited. Beginning with the 2014 MLR reporting year, 
any rebate provided in the form of a premium credit must be provided by 
applying the full amount due to the first month's premium that is due 
on or after September 30 following the MLR reporting year. If the 
amount of the rebate exceeds the premium due for October, then any 
overage shall be applied to succeeding premium payments until the full 
amount of the rebate has been credited.
* * * * *

    Dated: November 28, 2012.
Marilyn Tavenner,
Acting Administrator, Centers for Medicare & Medicaid Services.

    Approved: November 28, 2012.
Kathleen Sebelius,
Secretary, Department of Health and Human Services.
[FR Doc. 2012-29184 Filed 11-30-12; 11:15 am]
BILLING CODE 4120-01-P