[Federal Register Volume 75, Number 230 (Wednesday, December 1, 2010)]
[Rules and Regulations]
[Pages 74864-74934]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-29596]
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Part III
Department of Health and Human Services
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45 CFR Part 158
Health Insurance Issuers Implementing Medical Loss Ratio (MLR)
Requirements Under the Patient Protection and Affordable Care Act;
Interim Final Rule
Federal Register / Vol. 75 , No. 230 / Wednesday, December 1, 2010 /
Rules and Regulations
[[Page 74864]]
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DEPARTMENT OF HEALTH AND HUMAN SERVICES
45 CFR Part 158
[OCIIO-9998-IFC]
RIN 0950-AA06
Health Insurance Issuers Implementing Medical Loss Ratio (MLR)
Requirements Under the Patient Protection and Affordable Care Act
AGENCY: Office of Consumer Information and Insurance Oversight,
Department of Health and Human Services.
ACTION: Interim final rule with request for comments.
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SUMMARY: This document contains the interim final regulation
implementing medical loss ratio (MLR) requirements for health insurance
issuers under the Public Health Service Act, as added by the Patient
Protection and Affordable Care Act (Affordable Care Act).
DATES: Effective date: This interim final regulation is effective
January 1, 2011.
Comment date: Comments are due on or before January 31, 2011.
Applicability dates: This interim final regulation generally
applies beginning January 1, 2011, to health insurance issuers offering
group or individual health insurance coverage.
ADDRESSES: Written comments may be submitted to the address specified
below.
All comments will be made available to the public. Warning: Do not
include any personally identifiable information (such as name, address,
or other contact information) or confidential business information that
you do not want publicly disclosed. All comments are posted on the
Internet exactly as received, and can be retrieved by most Internet
search engines. No deletions, modifications, or redactions will be made
to the comments received, as they are public records. Comments may be
submitted anonymously.
In commenting, please refer to file code OCIIO-9998-IFC. 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 instructions under
the ``More Search Options'' tab.
2. By regular mail. You may mail written comments to the following
address only: Office of Consumer Information and Insurance Oversight,
Department of Health and Human Services, Attention: OCIIO-9998-IFC,
Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW.,
Washington, DC 20201.
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: Office of Consumer Information and
Insurance Oversight, Department of Health and Human Services,
Attention: OCIIO-9998-IFC, Room 445-G, Hubert H. Humphrey Building, 200
Independence Avenue, SW., Washington, DC 20201.
4. By hand or courier. If you prefer, you may deliver (by hand or
courier) your written comments before the close of the comment period
to the following address: Office of Consumer Information and Insurance
Oversight, Department of Health and Human Services, Attention: OCIIO-
9998-IFC, 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 OCIIO 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.)
Comments mailed to the addresses indicated as appropriate for hand
or courier delivery may be delayed and received after the comment
period.
Submission of comments on paperwork requirements. You may submit
comments on this document's paperwork requirements by following the
instructions at the end of the ``Collection of Information
Requirements'' section in this document.
FOR FURTHER INFORMATION CONTACT: Carol Jimenez, Office of Consumer
Information and Insurance Oversight, Department of Health and Human
Services, at (301) 492-4457.
SUPPLEMENTARY INFORMATION: Inspection of Public Comments: Comments
received timely will also be available for public inspection as they
are received, generally beginning approximately three 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.
Customer Service Information: Individuals interested in obtaining
information on health reform can be found http://www.healthcare.gov.
Table of Contents
I. Background
II. Provisions of the Interim Final Rule
A. Introduction and Overview
B. Scope, Applicability and Definitions
1. Scope and Applicability (Sec. Sec. 158.101-158.102)
2. Definitions (Sec. 158.103)
C. Subpart A--Disclosure and Reporting
1. Reporting Requirements (Sec. 158.110)
2. Aggregate Reporting (Sec. 158.120)
a. Attribution of State-of-Issue
b. Attribution to Health Insurance Markets Within States
c. Associations or Trusts
d. Expatriate Plans
e. ``Mini-med'' Plans
3. Newer Experience (Sec. 158.121)
4. Premium Revenue (Sec. 158.130)
5. Reimbursement for Clinical Services Provided to Enrollees
(Sec. 158.140)
6. Expenditures on Activities To Improve Quality (Sec. Sec.
158.150-158.151)
7. Other Non-Claims Activities (Sec. 158.160)
8. Federal and State Taxes and Licensing and Regulatory Fees
(Sec. Sec. 158.161-158.162)
9. Allocation of Expenses (Sec. 158.170)
D. Subpart B--Calculating and Providing the Rebate
1. Applicable MLR and States With Higher MLR (Sec. Sec.
158.210-158.211)
2. Calculating an Issuer's MLR (Sec. Sec. 158.220-158.221)
3. Credibility Adjustment (Sec. Sec. 158.230-158.232)
4. Rebating Premium if MLR Standard Not Met (Sec. 158.240)
5. Form of Rebate (Sec. 158.241)
6. Recipients of Rebates (Sec. 158.242)
7. De Minimis Rebates (Sec. 158.243)
8. Unclaimed Rebates (Sec. 158.244)
9. Notice of Rebates to Enrollees (Sec. 158.250)
10. Reporting Rebates to the Secretary (Sec. 158.260)
11. Effect of Rebate Payments on Solvency (Sec. 158.270)
E. Subpart C--Potential Adjustment to the Medical Loss Ratio for
a State's Individual Market
1. Introduction
2. Subpart C's Approach and Framework
3. Who May Request Adjustment to the MLR (Sec. Sec. 158.310-
158.311)
4. Required Information (Sec. Sec. 158.320-158.323)
5. Assessment Criteria (158.330)
6. Process (Sec. Sec. 158.340-158.350)
7. Public Comments
F. Subparts D-F--HHS Enforcement, Additional Requirements on
Issuers, and Federal Civil Penalties
III. Response to Comments
IV. Waiver of Proposed Rulemaking
V. Collection of Information Requirements
A. ICRs Regarding MLR and Rebate Reporting Requirement
(Sec. Sec. 158.101-158.170)
B. ICRs Regarding Notice to Enrollees (Sec. 158.250)
[[Page 74865]]
C. ICRs Regarding Retention of Records (Sec. Sec. 158.501-
158.502)
D. ICRs Regarding State Request for MLR Adjustment (Sec. Sec.
158.301-158.350)
VI. Regulatory Impact Analysis
A. Summary
B. Executive Order 12866
1. Need for Regulatory Action
2. Summary of Impacts
3. Qualitative Discussion of Anticipated Benefits, Costs, and
Transfers
a. Benefits
b. Costs
c. Transfers
4. Overview of Data Sources, Methods, and Limitations
5. Estimated Number of Affected Entities Subject to the MLR
Provisions
6. Estimated Transfers Related to MLR Rebate Payments
a. Data Limitations and Modeling Assumptions
b. Methods for Estimating MLR Rebates
c. Estimated Number of Issuers and Individuals Affected by the
MLR Rebate Requirements
d. Impact of Adjustments on MLRs
e. Estimated Range of MLR Rebates
f. Potential Impact of Destabilization Adjustment Requests on
MLR Rebates
7. Estimated Costs
a. Methodology and Assumptions for Estimating Administrative
Costs
b. Estimated Costs Related to MLR Reporting
c. Estimated Costs Related to MLR Record Retention
d. Estimated Costs Related to MLR Rebate Notifications and
Payments
C. Regulatory Alternatives
1. Credibility Adjustment
2. Federal Taxes
3. Activities That Improve Quality
4. Level of Aggregation
D. Regulatory Flexibility Act
E. Unfunded Mandates Reform Act
F. Federalism
G. Congressional Review Act
I. Background
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). In
this preamble we refer to the two statutes collectively as the
Affordable Care Act. The Affordable Care Act reorganizes, amends, and
adds to the provisions of Part A of title XXVII of the Public Health
Service Act (PHS Act) relating to group health plans and health
insurance issuers in the group and individual markets.
The Department of Health and Human Services (HHS, or the
Department) is issuing regulations in several phases in order to
implement revisions to the PHS Act made by the Affordable Care Act. All
of the previous regulations were issued jointly with the Departments of
Labor and the Treasury. A request for information relating to the
medical loss ratio (MLR) provisions of PHS Act section 2718 was
published in the Federal Register on April 14, 2010 (75 FR 19297)
(notice, or request for information). Additionally, a series of interim
final regulations were published earlier this year implementing PHS Act
provisions added by the Affordable Care Act. Specifically, interim
final rules were published implementing (1) section 2714 (requiring
dependent coverage of children to age 26) (75 FR 27122 (May 13, 2010));
(2) section 1251 of the Affordable Care Act (relating to status as a
grandfathered health plan) (75 FR 34538 (June 17, 2010)); (3) sections
2704 (prohibiting preexisting condition exclusions), 2711 (regarding
lifetime and annual dollar limits on benefits), 2712 (regarding
restrictions on rescissions), and 2719A (regarding patient protections)
(75 FR 37188 (June 28, 2010)); (4) section 2713 (regarding preventive
health services) (75 FR 41726 (July 19, 2010)); and (5) section 2719
(regarding internal claims and appeals and external review processes)
(75 FR 43330 (July 23, 2010)). Most recently, HHS, Department of Labor,
and Department of the Treasury published an amendment to the interim
final regulations relating to status as a grandfathered health plan
(regarding change in health insurance issuers) in the Federal Register
on November 17, 2010 (75 FR 70114). The Departments have also published
sub-regulatory guidance regarding various issues related to the
implementation of the Affordable Care Act, available at http://www.dol.gov/ebsa and http://www.hhs.gov/ociio.
This interim final regulation adopts and certifies in full all of
the recommendations in the model regulation of the National Association
of Insurance Commissioners (NAIC) regarding MLRs. It is being published
to implement section 2718(a) through (c) of the PHS Act, relating to
bringing down the cost of health care coverage through a new MLR
standard. Subpart A implements the requirements for reporting the data
to be considered in determining that ratio. Subpart B addresses the
requirements for health insurance issuers (issuers) in the group or
individual market, including grandfathered health plans, to provide an
annual rebate to enrollees, if the issuer's MLR fails to meet minimum
requirements: Generally, 85 percent in the large group market and 80
percent in the small group or individual market. In Subpart C, this
interim final regulation provides a process and criteria for the
Secretary of Health and Human Services (the Secretary) to determine
whether application of the 80 percent MLR in the individual market in a
State may destabilize that individual market. Finally, enforcement of
the reporting and rebate requirements of section 2718(a) and (b) are
addressed in Subparts D-F, as specifically authorized in section
2718(b)(3). This interim final regulation is generally applicable for
plan years beginning on or after January 1, 2011. Self-insured plans
are not a health insurance issuer, as defined by section 2791(b)(2) of
the PHS Act, and thus are not subject to this interim final regulation.
II. Provisions of the Interim Final Rule
A. Introduction and Overview
Section 2718 of the PHS Act includes two provisions designed to
achieve the objective in the section title: ``Bringing down the cost of
health care coverage.'' The first is the establishment of greater
transparency and accountability around the expenditures made by health
insurance issuers. The law requires that issuers publicly report on
major categories of spending of policyholder premium dollars, such as
clinical services provided to enrollees and activities that will
improve health care quality. The second is the establishment of MLR
standards for issuers, which are intended to help ensure policyholders
receive value for their premium dollars. Issuers will provide rebates
to enrollees when their spending for the benefit of policyholders on
reimbursement for clinical services and quality improving activities,
in relation to the premiums charged, is less than the MLR standards
established pursuant to the statute. The rebate provisions of section
2718 are designed not just to provide value to policyholders, but also
to create incentives for issuers to become more efficient in their
operations. Section 2718 also contains provisions which allow for
modifications to the standards under certain circumstances, which are
described in this regulation. To inform decisions about definitions and
methodologies for calculating MLRs, the Affordable Care Act directed
the NAIC to make recommendations to the Secretary, subject to
certification by the Secretary. As described below, this interim final
regulation adopts to these recommendations.
As to the reporting provisions, section 2718(a) requires health
insurance issuers to ``submit to the Secretary a report concerning the
ratio of the incurred loss (or incurred claims) plus the loss
adjustment expense (or change in contract reserves) to earned
premiums.'' The statute, as implemented by this interim final
regulation, requires health insurance issuers to submit data
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to the Secretary that will allow enrollees of health plans, consumers,
regulators, and others to take into consideration MLRs as a measure of
health insurance performance as described in section 2718 of the PHS
Act. More specifically, this interim final regulation is intended to
provide consumers with information needed to better understand how much
of the premium paid to the issuer is used to reimburse providers for
covered services, to improve health care quality, and to pay for the
``non-claims,'' or administrative expenses, incurred by the issuer. The
caption of subsection (a) reflects this purpose, which is to provide
the Secretary and other parties with a ``clear accounting for costs.''
As quoted above, the statute requires issuers to submit a report
that ``concerns'' the ratio of the ``incurred loss'' to ``earned
premium.'' The statute does not simply require the issuer to report the
numeric ratio of the incurred loss to earned premium. In addition,
subsection (a)(3) requires issuers to provide an explanation of the
``nature'' of ``non-claims costs.'' This interim final regulation
accordingly describes the type of information that is to be included in
the report to the Secretary and made available to consumers, in
addition to the numerical ratio. To increase transparency and avoid
confusion, this interim final regulation provides that the data to be
reported according to section 2718(a) of the PHS Act will include all
of the elements of revenue and expenditures that will be needed to
calculate the amount of rebates under subsection 2718(b).
For this information to be meaningful to consumers, the report
provided to the Secretary and made available to the public must include
the amount of premium revenue received as well as the amount expended
on each of the types of activity identified in subparagraphs (1), (2),
and (3) of section 2718(a) of the PHS Act:
(1) Reimbursement for clinical services provided to enrollees under
the health insurance plan (subparagraph (1));
(2) Activities that improve health care quality for enrollees
(subparagraph (2));
(3) All other ``non-claims'' costs (subparagraph (3)); and
(4) Federal and State taxes and licensing or regulatory fees
(subparagraph (3)).
In addition, the rebate requirements established by section 2718(b)
allow for a State to provide for higher ratios than those required by
section 2718(b)(1)(A)(i) and (ii) of the PHS Act. In order to allow a
State to do so, the reporting required of health insurance issuers
under subsection (a) must be done on a State level. Section 2718(b)
also requires a separate calculation of the MLR for the large group
market, the small group market, and the individual market.
Consequently, the data required under subsection (a) must be reported
for the large group market, the small group market, and the individual
market within each State.
NAIC model regulation and recommendations. Section 2718(c) of the
PHS Act directs the NAIC, subject to certification by the Secretary, to
establish:
(1) Uniform definitions of the activities reported under section
2718(a);
(2) standardized methodologies for calculating measures of the
activities reported under section 2718(a); and
(3) definitions of which activities and in what regard such
activities constitute activities that improve health care quality.
Section 2718(c) also directs that the standardized methodologies
for calculating measures of the activities reported under section
2718(a) ``shall be designed to take into account the special
circumstances of smaller plans, different types of plans, and newer
plans.''
The NAIC provided its recommendations to the Secretary on October
27, 2010 regarding the above three areas, and made additional
recommendations regarding other aspects of section 2718, in the form of
a model regulation entitled 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 (hereinafter ``NAIC model regulation'') (http://www.naic.org/documents/committees_ex_mlr_reg_asadopted.pdf). The
NAIC model regulation is discussed in more detail in connection with
the specific provisions of this interim final regulation. The NAIC, in
discharging its statutory obligations, conducted a thorough and
transparent process in which the views of regulators and stakeholders
were discussed, analyzed, addressed and documented in numerous open
forums held by staff from State insurance departments, by NAIC staff,
and by the commissioners, directors, and superintendents of insurance
from the States. This interim final regulation certifies and adopts the
NAIC's model regulation in full.
The NAIC model regulation includes definitions to be used for
purposes of reporting the types of activities mandated by section
2718(a), and standardized methodologies for calculating measures of
such activities including those that improve health care quality. This
interim final regulation certifies and adopts these definitions in the
NAIC model regulation. Consistent with the mandate of section 2718(b),
the NAIC and this interim final regulation require that health
insurance issuers aggregate data at the State level by the large group
market, small group market, and individual market, and define these
markets. The reporting requirements, which follow NAIC's
recommendations, are discussed in connection with Subpart A.
The NAIC model regulation addresses in several different ways, as
does this interim final regulation, the statutory requirement that the
methodologies used to calculate the measures of the activities reported
``shall be designed to take into account the special circumstances of
smaller plans, different types of plans, and newer plans.'' The NAIC
recommendations address the special circumstance of newer plans and
smaller plans. They address newer plans by adjusting when newer plans'
experience is to be reported, which is addressed in Subpart A. The
special circumstance of smaller plans, which do not have sufficient
experience to be statistically valid for purposes of the rebate
provisions, are addressed by the NAIC through credibility adjustments
to the calculation of the MLR. Because credibility adjustments are
necessary to calculate the rebates under section 2718(b), they are
addressed in Subpart B of this interim final regulation. The NAIC model
regulation does not address the special circumstances of different
types of plans such as so-called mini-med plans or expatriate plans,
although it does address expatriate plans in a letter to the Secretary.
HHS addresses both mini-med plans and expatriate plans in this interim
final regulation, and discusses them in connection with Subpart A.
The NAIC model regulation details the MLR rebate calculation for
each of the next three MLR reporting years and notes the incurred
claims and expenses related to improving health care quality that may
be included. HHS has adopted these provisions in Subpart B.
As noted above, the statute directs the NAIC, subject to
certification by the Secretary, to establish uniform definitions and
methodologies for calculating measures of activities that are used to
calculate an issuer's MLR. HHS has reviewed these recommended
definitions and methodologies and has decided to certify and adopt the
NAIC recommendations in its October 27 model regulation. The NAIC held
public, weekly meetings for several months during which interested
parties
[[Page 74867]]
were encouraged to provide both written and oral comments, and the
details surrounding the reporting requirements were thoroughly
analyzed. In making the determination to certify the NAIC's
recommendations, HHS also considered the NAIC's Issue Resolution
Documents, which were produced as a result of the NAIC's process and
which contain the NAIC's position regarding numerous related issues. In
addition, HHS considered the public comments received by the NAIC as
well as comments submitted to HHS in response to its request for
information published on April 14, 2010 in the Federal Register. HHS
also considered the letters submitted by the NAIC to the Secretary with
respect to MLR issues, which are also public records.
Organization of this regulation. The basis, scope, applicability,
and definitions for this interim final regulation are set forth in
Sec. Sec. 158.101 through 158.103. The structure of Subpart A of this
interim final regulation follows the organization of section 2718(a).
The obligation to report is established in Sec. 158.110. The way in
which issuers are to aggregate data in the required reports is
explained in Sec. 158.120. The special circumstances of mini-med plans
and expatriate plans are also included in Sec. 158.120. Newer
experience is addressed in Sec. 158.121. Section 158.130 addresses
provisions that relate to premium revenue. Section 158.140 clarifies
what may be reported as reimbursement for clinical services provided to
enrollees, also known as incurred claims. Sections 158.150 through
158.151 explain the criteria for determining whether expenditures are
for activities that improve health care quality, allocation of such
expenses, and treatment of health information technology (HIT) expenses
required to accomplish such activities. Section 158.160 clarifies
reporting of non-claims costs. Sections 158.161 and 158.162 address the
Federal and State taxes and licensing or regulatory fees that may be
excluded from non-claims costs pursuant to PHS Act section 2718(a)(3).
Section 158.170 addresses allocation of expenses among categories
reported as well as an issuer's lines of business.
Similarly, the structure of Subpart B of this interim final
regulation follows the organization of section 2718(b). The applicable
MLR standards for the large group, small group and individual markets
are addressed in Sec. 158.210. States are permitted to establish a
higher MLR standard than provided by the Affordable Care Act, and if a
State has done so, the State's standard applies, as stated in Sec.
158.211. Section 158.220 explains which MLR reporting year's data is to
be used to calculate an issuer's MLR, and Sec. 158.221 directs which
data elements should be in the ratio's numerator and which should be in
the denominator. Credibility adjustments are delineated in Sec.
158.230, and the details as to how to calculate them are addressed in
Sec. 158.231 and Sec. 158.232. Sections 158.240 through 158.242
provide that enrollees must receive a rebate if the applicable MLR
standard is not met, and establish who receives the rebate in certain
circumstances, and the manner in which the rebate must be made. The de
minimis amount below which a rebate need not be provided and how to
handle de minimis rebates are addressed in Sec. 158.243. Section
158.250 establishes a requirement for issuers to provide rebate
recipients with an explanatory notice, while Sec. 158.260 establishes
a requirement for issuers to report to the Secretary data regarding
rebate payments.
Subpart C of this interim final regulation addresses the
Secretary's discretion in section 2718(b)(A)(ii) to adjust the MLR
percentage for the individual market in a State if the Secretary
determines that application of an 80 percent MLR standard may
destabilize the individual market in such State. This interim final
regulation provides that such determinations will be made pursuant to a
State request and based on standards that include recommendations made
to HHS in a letter from the NAIC on October 13, 2010.
Subparts D, E and F of this interim final regulation implement
section 2718(b)(3), Enforcement, which directs the Secretary to
promulgate regulations for enforcing section 2718, and allows for
providing appropriate penalties as part of the enforcement scheme.
Subpart D addresses the enforcement scheme. Subpart E sets forth the
requirements for maintaining records and information. Subpart F,
Federal Civil Penalties, details the basis for imposing civil
penalties, factors that HHS will consider in assessing civil penalties,
the amount of the penalties, and the process for assessing them.
B. Scope, Applicability and Definitions
1. Scope and Applicability (Sec. Sec. 158.101 Through 158.102)
Section 158.101 sets forth the topics and issues covered in Part
158 of this interim final regulation.
Section 158.102 provides that Part 158 applies to health insurance
issuers offering group or individual health insurance coverage. Section
2718(a) of the PHS Act expressly provides that this includes
grandfathered health plans. Grandfathered health plans are defined in
26 CFR 54.9815-1251T, 29 CFR Sec. Sec. 2590.715 through 1251, and 45
CFR 147.140, which implements the provisions in the Affordable Care Act
regarding status as a grandfathered health plan (see Interim Final
Rules for Group Health Plans and Health Insurance Coverage Relating to
Status as a Grandfathered Health Plan Under the Affordable Care Act, 75
FR 34538 (June 17, 2010), as amended, 75 FR 70114 (November 17, 2010)).
Although Section 2718(a) of the PHS Act does not exempt specific
categories of plans from its requirements, subparagraph (c) requires
that the reporting requirements and methodologies for calculating
measures of the activities reported ``be designed to take into account
the special circumstances of smaller plans, different types of plans,
and newer plans.'' Smaller plans, different types of plans, and newer
plans are subject to this interim final rule, and their special
circumstances are addressed through the reporting requirements and
calculation of the MLR provisions in Subparts A and B.
2. Definitions (Sec. 158.103)
Section 2718(c) of the PHS Act directs the NAIC, subject to
certification by the Secretary, to ``establish uniform definitions of
the activities reported under subsection (a) and standardized
methodologies for calculating measures of such activities, including
definitions of which activities, and in what regard such activities,
constitute activities described in section (a)(2).''
The NAIC model regulation includes definitions of the activities
reportable under section 2718(a) of the PHS Act and this interim final
regulation adopts those definitions. Many of the terms defined in the
NAIC model regulation refer to specific lines on NAIC financial
reporting forms that are broader than the reporting required for the
PHS Act MLR provisions.
Any defined term that is used in only one section of this Subpart
is defined in that section and is not also contained in the
``Definitions'' section of the regulation. Such terms include
``aggregation,'' ``incurred claims,'' and ``quality improving
activities.'' Thus, these terms are discussed in the preamble section
regarding that topic, rather than here. For example, ``aggregation'' is
addressed in Sec. 158.120, ``incurred claims'' is defined in Sec.
158.140, and ``quality improving activities'' is defined in Sec.
158.150. Each of these terms is discussed in the section of the
preamble regarding the regulation pertaining to it.
[[Page 74868]]
Definitions that are used in the regulation as commonly used in the
health care industry are not of particular note and therefore are not
discussed here. We do discuss several definitions that are unique to
this regulation or that may be of particular interest to enrollees,
health plans, consumers, regulators and others. The definitions in
Sec. 158.103 apply to all of Part 158. Also, in the public comments
regarding uniform definitions for activities reported on under section
2718(a) of the PHS Act, the only definition we received any significant
amount of comments on is ``plan year.'' Those comments are discussed
below with regard to MLR reporting year. Finally, we note that the
interim final regulation uses the term ``market'' as it is used in the
statute, to differentiate the small group, large group, and individual
market, even if in some contexts these are also referred to as ``market
segments.''
``MLR reporting year.'' Section 2718(a) requires each health
insurance issuer to submit a report to the Secretary ``with respect to
each plan year.'' The NAIC has recommended, and HHS concurs, that for
purposes of MLR reporting and calculation, the term ``plan year'' in
section 2718 should be interpreted to refer to the calendar year for
that plan, and not necessarily the plan year that applies for other
purposes. In adopting the NAIC's definition, HHS uses the term ``MLR
reporting year.'' Accordingly, this regulation interprets ``plan
year,'' as used in section 2718(a), as referring to the ``MLR reporting
year,'' and defines the MLR reporting year as the calendar year. We
recognize that this definition is different than the definition of the
term ``plan year'' currently in the regulations implementing the PHS
Act. This current regulatory definition of ``plan year'' would continue
to apply for all purposes other than the period to be used for MLR
reporting and rebate calculation. Specifically, for purposes other than
the period for MLR reporting and rebate calculation, the term plan year
is defined as ``the year that is designated as the plan year in the
plan document of a group health plan,'' although the plan year may
under certain conditions be the deductible year, the policy year, the
employer's tax year, or the calendar year. We also note that, in the
case of individual health insurance coverage, a similar term--``policy
year''--is defined. Under these definitions, the ``plan year'' or
``policy year'' is specific to the group or individual policy, and can
be determined by the issuer. The NAIC recognized that requiring
reporting of MLR data for each plan year under this generally
applicable definition would be problematic. Meaningful reporting of the
data required by section 2718 of the PHS Act requires aggregation of an
issuer's experience across health insurance policies and policy forms
in each State's large group, small group, and individual markets.
As stated above, the NAIC recommends and requires calendar-year
reporting and we adopt this recommendation and require reporting on a
calendar-year basis. Issuers will report the premium earned, claims,
quality improvement expenses and other non-claims costs incurred under
health insurance that is in force during the calendar year. Calendar
year reporting will increase the reliability of the experience data
that will be reported and that will be used as the basis for rebate
calculations. It will reduce the reporting burden on issuers, as they
will be required to prepare and file a single loss ratio report and to
calculate and pay rebates only once each calendar year. All enrollees
under any of the health insurance coverage whose experience is
reflected in the report to the Secretary will be eligible for rebates
on the premiums paid during that calendar year. To avoid confusion with
other uses of the term ``plan year,'' and to make for a clearer
presentation and discussion of the MLR reporting requirements, we have
adopted the term ``MLR reporting year'' to refer to the ``plan year''
referenced in section 2718 for use in the regulation.
The Secretary invited the public to comment on uniform definitions
for activities to be reported to the Secretary pursuant to section
2718(a). The only comments received regarding the terms defined in
Sec. 158.103 were with respect to ``plan year.''
Since section 2718 of the PHS Act uses the term ``plan year''
without specifying whether it means a plan-specific year or a generally
applicable reporting period, several commenters requested that we
simply clarify its meaning. As explained above, we have done so. A
minority of commenters preferred reporting to correspond to the
effective dates of each health plan, arguing that non-calendar year
plans may have difficulty gathering data on a calendar year basis as
health plans are issued at various times throughout the calendar year.
However, the calendar year reporting method used in this regulation was
supported by several State regulators, health insurance issuers and
others because it allows issuers to combine experiences across all
policies and will therefore produce more uniform and reliable premium,
claims and cost data. They also supported such a calendar-year based
reporting period because it is consistent with current industry
financial reporting practices, is simpler for consumers to comprehend,
and allows States to get the data at one time.
``Enrollee.'' Section 158.103 defines the term ``enrollee'' as ``an
individual who is enrolled, within the meaning of 45 CFR 144.103, in
group health insurance coverage, or an individual who is covered by
individual insurance coverage, at any time during an MLR reporting
year.'' The NAIC does not define the term ``enrollee.'' However, we
believe it is important to clarify that, for reporting purposes,
``enrollee'' refers to anyone covered by a group plan, including
dependents of the subscriber or employee, as well as anyone covered by
an individual policy, despite the fact that this term is not ordinarily
used in the individual market.
``Small group market'' and ``Large group market.'' The reporting
regulations require in general that issuers report data for the large
group market, small group market, and individual market, as that
separation of data will be required in order to calculate the ratios
and rebates provided for in PHS Act section 2718(b). There is currently
more than one option for how to distinguish the small group market and
the large group market. The small and large group markets,
respectively, refer to coverage sold to a ``small employer'' or a
``large employer.'' The determination of whether an employer is large
or small depends on how many employees it has at particular times.
Prior to the Affordable Care Act, the PHS Act defined a small group in
terms of 2-50 employees, and a large group in terms of 51 or more
employees, while a group with only one employee was considered to be in
the individual market. However, the States were permitted to regulate
very small groups (``groups of one'') in the small group market rather
than the individual market. While most States used the statutory
definition, several States have chosen to regulate these very small
groups in the small group market.
Section 1304(b) of the Affordable Care Act amended the definitions
of large and small employer in the PHS Act, defining a small employer
as 1-100 employees and a large employer as 101 or more employees.
However, section 1304(b)(3) of the Affordable Care Act also allows
States to continue to define an employer with up to 50 employees as a
``small employer'' until 2016.
This interim final regulation provides that for purposes of section
2718 of the PHS Act, consistent with the provisions
[[Page 74869]]
in the Affordable Care Act, until 2016 a State may continue to provide
a definition of small group as having a maximum of 50 members, and that
for States that do so, that definition shall apply to the MLR reporting
and rebate requirements set forth in section 2718. This regulation does
not address the definition of the term ``small employer'' as used in
ERISA or the Internal Revenue Code, or how the definition in these
statutes interact with the definition in the PHS Act for purposes other
than the MLR provisions in section 2718. We anticipate that these
provisions will be addressed in future guidance.
C. Subpart A--Disclosure and Reporting
1. Reporting Requirements (Sec. 158.110)
Section 2718(a) of the statute requires issuers to submit a report
to the Secretary for each plan year concerning information related to
earned premiums and expenditures in various categories, including
reimbursement for clinical services provided to enrollees, activities
that improve health care quality, and all other non-claims costs. In
Sec. 158.110 of this interim final regulation, HHS requires that the
report be submitted to the Secretary by June 1 of the year following
the end of an MLR reporting year. This allows issuers to include in the
report claims for services provided during the MLR reporting year that
are processed and paid in the three months following the end of the MLR
reporting year, as provided in Sec. 158.140(a)(1), and gives issuers
another two months to compile and submit the required data. As
discussed in sections 4. and 5. below, mini-med plans and expatriate
plans wishing to receive the ``special circumstances'' adjustment
discussed in those sections would be required under Sec. 158.110(b)(1)
to submit data on an accelerated schedule.
The precise form and content of the data that issuers must report
to the Secretary will be announced in a subsequent Federal Register
notice. It is anticipated that the data to be submitted will be closely
coordinated with the data included on the Supplemental MLR Exhibit that
is filed by issuers with State departments of insurance as part of
their Annual Statement.
A common practice in insurance is the sale or transfer of blocks of
policies between issuers. This practice creates two issues for the
reporting requirements under section 2718 of the PHS Act. Consistent
with the NAIC's recommendation, Sec. 158.110(c) requires an issuer
that has ceded all of the risk associated with a block of policies to
another issuer to exclude any experience under those policies from its
report. As specified in Sec. 158.110(c), the issuer acquiring the
policies must report all of the claims, premium and expenses associated
with the acquired policies, including claims and costs incurred and
premiums earned during the MLR reporting year by the ceding issuer
prior to the effective date of the agreement to transfer responsibility
for the policies. The ceding issuer must not include experience under
these policies in its report to the Secretary. A second practice in
insurance with implications for the reporting requirements under
section 2718 of the PHS Act is the use of so-called ``assumption
reinsurance'' to transfer a block of business or group of insurance
policies from one issuer to another.
2. Aggregate Reporting (Sec. 158.120)
Section 158.120 of this interim final regulation requires issuers
to report premium, claims and other expenses for all group and
individual health insurance coverage (as defined above) on an aggregate
basis by State and health insurance market. This follows the approach
recommended by the NAIC. That is, a health insurance issuer will
submit, for each State in which it writes coverage, data on the
aggregate premiums, claims experience, quality-improvement
expenditures, and non-claims costs it incurs in connection with the
policies it issues in the large group, small group, and individual
markets. HHS believes that reporting by State is clearly intended in
section 2718 of the PHS Act, which allows a State to set a higher MLR
standard than the 80 or 85 percent required by the statute. Reporting
by health insurance market--i.e., by large group, small group, and
individual markets--is also required by section 2718 of the PHS Act,
which requires that MLR standards be met for each such market. The
experience for group coverage issued by a single issuer that covers
employees in multiple States must be attributed to the State that
regulates the insurance contract between the employer and the issuer,
as stated in Sec. 158.120(b) of this interim final regulation. Section
158.120(d) also (1) specifies how to attribute experience related to
policies sold through associations and trusts, (2) establishes special
rules that should be followed in reporting experience under group
health insurance coverage offered by multiple affiliated issuers in
connection with a single group health plan that gives participants a
choice of coverage options, and (3) provides for separate reporting in
2011 for mini-med plans that have a total annual limit of $250,000 or
less and for expatriate plans.
The aggregation rules adopted in the regulation are designed to
accomplish several objectives. First, the data that are reported and
subsequently used to calculate MLRs and rebates should be based on
sufficient experience to provide a reliable estimate of the issuer's
administrative performance and pricing strategy. To the extent
possible, the data used to calculate the MLRs and rebates should not
simply represent unpredictable fluctuations in use of services by those
covered by the issuer. Second, the reported data should reflect the
responsibility of State insurance departments to (1) license issuers to
sell insurance within a State (and, where applicable, to approve the
products that can be offered in the State by the issuer), and (2)
exercise oversight over the premium amounts that are charged for
coverage. Third, HHS sought to minimize the burden associated with
reporting MLR data, including the quality-improvement expense and non-
claims costs that would be reported in connection with each
``aggregation.''
In developing the regulation, a rule was considered that would
disaggregate products by type of coverage--for example, HMO, PPO, and
high-deductible coverage--even if offered by the same licensed issuer.
The purpose of such a disaggregation would be to have the reported MLRs
and rebates reflect experience under more uniform product designs, and
to reduce possible inequities in the treatment of different types of
plans. However, disaggregation would increase the number of reporting
aggregations since one licensed issuer could have to report multiple
aggregations, thus reducing the reliability of reported experience and
rebates. HHS agrees with the NAIC and has decided against this type of
disaggregation. In response to the Request for Comments, commenters
generally supported aggregation by State and, within State, by the
three market segments identified in the statute: The large group
market, the small group market, and the individual market. Consumer
advocacy groups generally noted that aggregation would tend to mask
variations in MLRs across products. However, other commenters noted
that aggregation across policies is needed to calculate reliable MLRs
and to reflect the pooling of risk across policies or policy forms.
After considering the arguments presented by the commenters, as well as
public comments submitted to the NAIC, HHS decided to follow the
recommendations submitted to the Secretary by the NAIC
[[Page 74870]]
and aggregate at the market level within each State, for reasons
described below.
a. Attribution to State-of-Issue
The regulation requires issuers to report experience based on the
State-of-issue for each policy that it writes. This requirement is
intended to result in a report that describes experience under policies
whose benefits and premiums either are regulated, or could be
regulated, by a State, since it is at the State level that insurance
regulation occurs. The regulation generally defines the State-of-issue
based on the ``situs'' of the insurance contract between the issuer and
the policyholder. HHS defines ``situs'' as the State in which the
contract is issued or delivered as stated in the contract. Consistent
with NAIC guidance, HHS interprets this as the State that has primary
jurisdiction over, or governs, the policy. Special rules that apply to
determining the ``situs'' of a policy marketed to individuals and
employers through associations or trusts are discussed below.
The NAIC concluded, and the Department agrees with its conclusion,
that the State is the appropriate level of geographic aggregation.
Regulation of insurance has been and continues to be primarily the
responsibility of States. Benefits offered, premiums, and marketing
activities are all regulated under State law. It is the States that
review and approve rates, and oversee solvency, and rebates are
essentially a retrospective adjustment or correction to premiums. In
addition, the statute specifically provides an opportunity for
individual States to adopt loss ratio standards that are higher than
those required by section 2718(b). It also allows for State-by-State
adjustments to the medical loss ratio standard when justified by
potential destabilization in the individual market. Applying State-
level and State-specific MLR standards would be difficult if experience
were aggregated across States that may have different MLR standards.
Adopting the State as the basic unit of geographic aggregation will
make the reports submitted under section 2718 more meaningful to the
exchanges. The Department agrees with the NAIC determination and has
decided not to aggregate the experience of a single issuer across
States. A rule that would permit aggregation of experience across
issuers with common ownership was also considered. Under such a rule,
the experience of all issuers owned by a common holding company or
corporate group would be combined. Aggregation across such affiliated
issuers would have two possible advantages: It would increase the total
experience used to prepare the report, thereby increasing the
reliability of the data for smaller issuers; and it would combine
similar coverage provided in the same market by two related companies.
However, aggregation across affiliated issuers might also combine the
experience of issuers offering dissimilar coverage or that use
different pricing policies. HHS has concluded, as did the NAIC, that
reporting should not be done at the level of the holding company in
this interim final regulation.
In response to both the April request for information notice and
the NAIC's solicitation of comments, extensive comments were received
from issuers, regulators, and consumers. In general, comments received
from regulators and consumers supported aggregation at no higher than
the State level. The reasons given for State aggregation included
consistency with the statute, greater meaningfulness of State-level
information to consumers and purchasers, consistency with the
responsibility of the States for regulation of issuers and oversight of
insurance premiums, and the calculation of rebates that appropriately
reflect the relationship between premium and claims experience. Many
health issuers also recommended aggregation at the State level,
although some recommended aggregation at the national level for
coverage sold to large employers. Advocates of aggregation at a
national level pointed to the greater reliability of reported loss
ratios when based on the experience of the combined national enrollment
of an issuer and, in the case of large group coverage, the use of
experience rating for national or regional employers, and the
complexity of allocating certain expenses, particularly Federal taxes,
to experience within a single State. Several comments addressed
aggregation at a geographic region smaller than a State. Reasons
identified for regional aggregation within a State included claims of
geographic variations within States of utilization and expenditure
patterns and differences across issuers in geographic adjustments that
are used to set premiums.
The NAIC considered the arguments made for different approaches to
geographic aggregation, including the issues related to multi-State
level employers, and decided that aggregation should be at the State
level. HHS agrees with and adopts the NAIC's approach. As discussed
previously, particularly as to the individual and small group markets,
State aggregation is most consistent with the requirements of the
statute, particularly provisions permitting State-level exceptions to
the minimum loss ratio, and will result in information that is more
meaningful to consumers. In addition, aggregation at a national level
would preclude States' flexibility to set higher MLR standards as
prescribed in the Affordable Care Act. Aggregation at the State level
will also ensure value for their health care dollars for consumers in
every State.
Some issuers have expressed concern that the reporting and rebate
requirements recommended by the NAIC, and adopted in this regulation,
would disadvantage large or multi-state employers, including those with
a small number of employees in one State and a larger presence in
another. This regulation does not require these businesses to change
the manner in which they operate, and accommodates issuers that provide
coverage to such employers in a number of ways.
First, where an issuer insures employees of a business located in
multiple States, the NAIC recommended and HHS agrees that MLR reporting
should be based on the ``situs of the contract.'' Under this approach,
incorporated in this regulation, the premiums and claims experience
attributable to employees in multiple States are combined and reported
by the issuer in the MLR report for the State identified in the
insurance policy or certificate as having primary jurisdiction over the
policy--often the headquarters of the company. This avoids separating
the experience of employees from a single company in multiple States.
Second, the NAIC recommended, and HHS adopts, combined reporting
across affiliates for ``dual contracts.'' Under these types of
insurance contracts, a single group health plan obtains coverage from
two affiliated issuers, one providing in-network coverage, and a second
affiliate providing out-of-network benefits to the plan. The experience
of these two affiliated issuers providing coverage to a single employer
can be combined and reported on a consolidated basis as if it were
entirely provided by the in-network issuer. This maintains the
experience of employees in a single reporting entity.
Thirdly, where affiliated issuers offer blended insurance rates to
an employer--rates based on the combined experience of the affiliates
serving the employer--the NAIC recommended and HHS agrees that the
incurred claims and expenses for quality improving activities can be
adjusted among affiliates to reflect the experience of the employer as
a whole.
Taken together, these provisions recommended by the NAIC and
adopted by HHS are a reasonable
[[Page 74871]]
accommodation of the needs of affiliated issuers and the multi-state
employers for which the issuers provide coverage.
b. Attribution to Health Insurance Markets Within States
The interim final regulation requires issuers to report experience
within a State for each of the three markets referenced by the statute:
The individual market, the small group market and the large group
market. Experience under a health insurance policy or certificate is to
be attributed to the individual market if the policy is not offered in
connection with a group health plan, as defined by the PHS Act.
In response to the April request for information notice, HHS
received extensive comments on a separate aggregation question: Whether
to combine the small group and individual markets. In general, comments
supported separate reporting for the individual, small group, and large
group markets. Concern was expressed that merging any of these markets
would tend to conceal differences in medical loss ratios and perpetuate
the pricing of individual or small group policies to achieve a medical
loss ratio substantially below the minimums specified in the statue. On
the other hand, HHS received comments from both regulators and industry
supporting the consolidation of the individual and small group markets,
and some comments recommended giving issuers the option of combining or
not combining the individual and small group markets. Consolidated
reporting could increase the reliability of reported loss ratios by
reflecting a larger base of experience. However, it could also deprive
consumers in one of these markets of the value of the statutory MLR
standard.
The NAIC, in its model regulation, permits an issuer to combine the
individual and small group markets for purposes of calculating the MLR
rebate if the State in which the coverage is issued requires that the
two markets be combined for rating purposes. HHS adopts this approach.
This exception is consistent with section 1312(c)(3) of the Affordable
Care Act, which allows a State to require the merger of the individual
and small group markets. Under such a merger, risk is pooled between
individuals and small groups, and it would be appropriate to base
rebates on the combined experience in the two markets. While we agree
with this approach, it is important that the experience of the small
group and individual markets be reported separately even if experience
is combined for purposes of calculating the MLR, for a number of
reasons. The statute allows the Secretary to adjust the MLR percentage
in the individual market of a State if the Secretary determines that
the application of the 80 percent MLR may destabilize the individual
market in that State. Also, the law states that the Secretary may
adjust the MLR ``if the Secretary determines appropriate on account of
the volatility of the individual market due to the establishment of
State Exchanges.'' In order for the Secretary to make these
determinations, reporting of data for the individual market is needed.
Separately reported data will also enable HHS to evaluate the impact of
the MLR standards on the market, consumers, and the industry, and to
consider making changes to the interim final regulation as appropriate
based on actual experience.
HHS has considered the arguments made for different approaches to
aggregation across markets. It has decided to follow the recommendation
to the Secretary submitted by the NAIC and require separate reporting
of experience by the three markets.
c. Associations or Trusts
The aggregation rules, in Sec. 158.120(d), adopts the NAIC's
approach and also provide guidance for insurance coverage offered
through associations or trusts. Under the definition of ``group health
insurance coverage,'' only coverage offered to individuals through
associations or trusts that are offered in connection with a group
health plan should be attributed to the group market. Coverage obtained
through an association or trust that is not offered in connection with
a group health plan should be attributed to the individual market.
Although such coverage is generally considered to be ``group'' coverage
under the conventions of statutory accounting, it is to be reported as
individual coverage consistent with the requirements of the PHS Act.
This is consistent with ERISA's definition of group health plan, as
incorporated in title XXVII of the PHS Act, as well as the NAIC's
recommended approach. Although such coverage is generally considered to
be ``group'' coverage for other purposes (for example, the conventions
of statutory accounting), this interim final regulation requires non-
employment based coverage to be reported as individual coverage
consistent with the requirements of the PHS Act. As noted earlier, this
interim final regulation does not apply to self-insured plans,
including self-insured plans offered through an association or trust.
d. Expatriate Plans
The NAIC model regulation does not address the special
circumstances of different types of plans, such as expatriate plans and
plans with low annual limits, commonly called ``mini-med'' plans.
However, in a letter dated October 13, 2010 to the Secretary of Health
and Human Services, the NAIC expressed its opinion that expatriate
plans should be excluded from the requirements of section 2718. HHS has
considered the NAIC's views, as well as the public comments received by
HHS and by the NAIC regarding these types of plans. Expatriate policies
generally cover: Employees working outside their country of
citizenship; employees working outside of their country of citizenship
and outside the employer's country of domicile; and citizens working in
their home country. Their unique nature results in a higher percentage
of administrative costs in relation to premiums than plans that provide
coverage primarily within the United States, for two reasons. One,
administrative costs are related to identifying and credentialing
providers worldwide in countries with different licensing and other
requirements from those found in the United States, processing claims
submitted in various languages that follow various billing procedures
and standards, providing translation and other services to enrollees,
and helping subscribers locate qualified providers in different
countries. Two, because these plans primarily cover care in other
countries, issuers are less able to provide quality improving
activities.
We note initially that some expatriate plans are not subject to the
provisions of the Affordable Care Act, including the MLR reporting and
rebate provisions of section 2718. Policies issued by non-U.S. issuers
for services rendered outside of the U.S. are not subject to the
Affordable Care Act. Therefore, if an expatriate policy is written on a
form that was not filed and approved by any State insurance department,
or its equivalent, experience under that policy would not be reported
for purposes of calculating an issuer's MLR.
HHS agrees with the NAIC that expatriate policies that are issued
by U.S. domestic issuers on forms approved by a State insurance
department have special circumstances that should be addressed in this
interim final regulation. Therefore, the experience of these expatriate
policies is to be reported separately from other coverage, as provided
in Sec. 158.120(d)(4), and the calculation of claims and quality
improving activities is to be
[[Page 74872]]
multiplied by a factor of two, as provided in Sec. 158.221(b). HHS
believes that this factor is sufficient to account for the special
circumstances of expatriate plans, while still requiring that they meet
the statutory MLR standards. However, because HHS thinks additional
data is necessary to inform this adjustment, this special circumstance
adjustment applies for 2011 only. Also, in order to determine whether,
and if so what type of, an adjustment may be appropriate for 2012,
expatriate plans that wish to avail themselves of this special
circumstances adjustment in Sec. 158.221(b)(4) for 2011 will be
required to report MLR data on a quarterly schedule under Sec.
158.110(b). We will revisit the special filing circumstances for
expatriate plans after reviewing the quarterly filings.
e. ``Mini-med'' Plans
HHS has received requests from issuers of so-called mini-med plans
to be exempted entirely from the MLR and rebate provisions of section
2718. The term ``mini-med'' plan does not have a statutory basis, and
we use it here to generally refer to policies that often cover the same
types of medical services as comprehensive medical plans but have
unusually low annual benefit limits, often capping coverage on an
annual basis for one or more benefits at $5,000 or $10,000, although
some have limits above $50,000 or even $250,000. Our analysis of this
segment of the insurance market suggests that a large majority of such
plans have limits at or below $250,000. As discussed below, we
therefore are using this figure as a proxy for capturing this type of
plan.
Issuers of mini-med plans assert that their administrative costs
are higher as a percentage of the premium collected than is the case
for plans having higher annual limits and thus a higher premium base.
They assert that they have special administrative burdens because the
populations they serve generally have high turnover rates. This high
turnover rate may also result in lower claims costs. Mini-med plans are
also less likely to spend as much on quality improving activities
because of their lower annual limits. Both of these factors would
result in administrative costs being a higher percentage of premium
dollars than for plans with higher amounts of coverage. These issuers
therefore ask that mini-med coverage be exempted entirely from the
requirements of section 2718, and have indicated that in the absence of
an exemption some may no longer be able to offer coverage. Some
consumer groups have disagreed, suggesting that mini-med plans have
higher profit margins than do traditional plans with significantly
higher limits and should not be exempt from the MLR standards. The Blue
Cross and Blue Shield Association sent a letter to Secretary Sebelius
on November 1, 2010 in which it urged that HHS not grant ``any MLR
exceptions for particular companies or product types.'' However, an
issuer, which according to company materials has a relationship with
the Blue Cross and Blue Shield system and provides coverage to at least
one large employer, asserted that the company would be forced to drop
this coverage without an exemption.
The application of the Affordable Care Act to mini-med plans has
already arisen in the context of restrictions on annual benefit limits
under section 2711 of the PHS Act. HHS has established a process under
which certain health plans with annual limits below those established
in the interim final regulation implementing section 2711 may be
granted a temporary waiver from the application of higher limits if
compliance with the standards would result in a significant decrease in
access to benefits or a significant increase in premiums. See 26 CFR
54.9815-2711T; 29 CFR 2590.715-2711; 45 CFR 147.126; and OCIIO Sub-
Regulatory Guidance (OCIIO 2010-1), September 3, 2010. Data from the
applications for waivers described above suggest that over one million
individuals have coverage in mini-med plans. There are little publicly
available data on these plans because current financial reporting to
the States does not separate mini-med experience from other experience
on which issuers report.
HHS is concerned about the possibility of the over one million
individuals who have coverage through mini-med plans losing that
coverage. Based on this concern and the limited data that indicate
mini-med plans may have a higher percentage of administrative costs due
to lower claims and quality improving activities, HHS has decided to
exercise its authority in section 2718(c) to ``take into account the
special circumstances of smaller plans, different types of plans, and
newer plans.''
Therefore, for the reporting year 2011, HHS will apply a
methodological change to address the special circumstances of mini-med
plans. The mini-med issuers, for policies that have a total of $250,000
or less in annual limits, will be permitted to apply an adjustment to
their reported experience to address the unusual expense and premium
structure of these plans. Specifically, under Sec. 158.221(b)(3), in
the case of a plan with a total of $250,000 or less in annual limits,
the total of the incurred claims and expenditures for activities that
improve health care quality reported under Sec. 158.221(b) are
multiplied by a factor of two. We believe this factor is sufficient to
account for the special circumstances of mini-med plans based on the
limited data available.
Because little information is available to inform this adjustment,
this special circumstances adjustment applies for 2011 only. Also, in
order to determine whether, and if so what type of, an adjustment may
be appropriate for 2012, mini-med plans that wish to avail themselves
of this special circumstances adjustment in Sec. 158.221(b)(3) for
2011 will be required to report MLR data on a quarterly schedule under
Sec. 158.110(b). We will revisit the special filing circumstances for
mini-med plans after reviewing the quarterly filings.
3. Newer Experience (Sec. 158.121)
Section 2718(c) specifically charges the NAIC with establishing
methodologies that take into consideration the special circumstances of
newer plans. HHS follows the NAIC's approach in the model regulation,
which allows an issuer to defer the experience associated with newly
issued health insurance policies under certain circumstances.
Specifically, an issuer may defer to the next MLR reporting year the
premium and claims experience, as well as the life-years, associated
with policies first issued after the start of the MLR reporting period
if these policies account for more than half of the issuer's experience
in a market segment for an individual State. This condition means that
more than half of an issuer's overall premium revenue for a market
sector within a State would have to be from newly issued policies that
are issued after the first of the year.
The rationale for this provision, as set forth by the NAIC and
certified and adopted herein by HHS, has two parts: (1) The rationale
for deferring experience under newly issued policies; and (2) the
rationale for limiting the deferral of experience to issuers that
derive more than half of their premium revenue from newly issued
policies. The rationale for deferring experience under newly issued
policies is that claims experience is generally expected to be
substantially less than the premium revenue from those policies during
the year in which the coverage is issued. This is particularly true for
policies with substantial deductibles. Applying the rebate provision to
these policies would create a substantial barrier to the entry of new
issuers into a market.
[[Page 74873]]
The rationale for allowing the deferral of experience only when
more than half of the premium revenue is derived from newly issued
policies is twofold. First, if newly issued policies account for a
small percentage of an issuer's total experience in a market, they
would have a very limited effect on the aggregated MLR for an issuer.
Second, the principal purpose of allowing the deferral of newly issued
business in the MLR calculation is to reduce barriers to market entry.
Because claims experience is generally low compared to premiums under
newly issued policies, including new business would generally result in
lowering an issuer's MLR simply because of the new business. Deferral
of reporting new business encourages companies to enter new markets,
and new companies to enter the market.
In response to the HHS notice requesting public comments regarding
section 2718 of the PHS Act, HHS received comments from issuers,
consumer advocates, and providers urging that special consideration be
given to newer plans. Reasons for this included concern both about the
effect on the market if newer plans are not given special
consideration, and about the impact on the reliability of reported MLRs
if newer plans' experience is included. HHS agrees with these concerns
and addresses them by adopting, in Sec. 158.121, the NAIC's method for
recognizing the special circumstances of issuers that have substantial
new business.
4. Premium Revenue (Sec. 158.130)
Section 2718(a) of the PHS Act requires health insurance issuers to
report information concerning ``earned premium,'' and section 2718(b)
provides that these reported data would be used in determining rebates
to enrollees. Section 2718(c) charges the NAIC with establishing a
uniform definition of premium revenue, subject to certification by the
Secretary. HHS is adopting the NAIC definition of premium revenue, as
described below.
The NAIC defines ``earned premium'' as the sum of all monies paid
by a policyholder as a condition of receiving coverage from a health
insurance issuer subject to section 2718, including any fees or other
contributions associated with the health plan, and accounting for
unearned premiums. HHS is adopting this NAIC approach in Sec.
158.130(a), and these adjustments to earned premium are discussed
below. The NAIC calls for reporting of premium on a direct basis as set
forth in Sec. 158.130(a)(1). Earned premium is addressed in Sec.
158.130 and includes any fees or other contributions associated with
the health plan.
Adjustments to premium revenue are addressed in Sec. 158.130.
Unearned premium is that portion of the premium paid in the MLR
reporting year for coverage during a period beyond the MLR reporting
year. Any premium for a period outside of the MLR reporting year must
not be reported in earned premium for the MLR reporting year. Earned
premium is net of premiums associated with group conversion charges
that the issuer collects in connection with transfers between group and
individual lines of business. Group conversion charges are the portion
of earned premium allocated to providing the privilege for a
certificate holder terminated from a group health plan to purchase
individual health insurance without providing evidence of insurability.
In addition, earned premium excludes premium assessments paid to or
subsidies received from Federal and State high risk pools. High risk
pool subsidies include grants provided under section 2745 of the PHS
Act. Earned premium excludes adjustments for experience rating refunds,
as provided in Sec. 158.130(b). Experience rating refunds are
retrospective premium adjustments arising from retrospectively rated
contracts.
Earned premium is to be reported prior to deducting premium refunds
to enrollees for health and wellness promotion. These refunds are
considered quality improvement expenditures, so they should not be
double counted as a reduction in premium, as provided in Sec.
158.130(b)(4).
We have adopted the NAIC's approach to assumption and indemnity
reinsurance, in Sec. 158.130(a)(2) and (3). Earned premium for
policies that originally were issued by one entity and later assumed by
another entity via assumption reinsurance are to be reported as direct
earned premium by the assuming entity and are to be excluded from
premium revenue reported by the ceding entity. Similarly, if a block of
business was subject to indemnity reinsurance and administrative
agreements effective prior to the effective date of the Affordable Care
Act, such that the assuming entity is responsible for 100 percent of
the ceding entity's financial risk and takes on all of the
administration of the block, then the assuming entity and not the
ceding entity should report the reinsured earned premium as part of its
premium revenue.
Section 2718 makes specific reference to ``Federal and State taxes
and licensing or regulatory fees'' in two places: First, in the
reporting requirements of subsection (a) it excludes these items from
``all other non-claims costs''; second, it excludes these costs from
premium revenue in determining the ratio of expenditures on claims and
activities to improve quality health care to premium revenue. For
reporting purposes, therefore, taxes are excluded from ``all other non-
claims costs,'' and are addressed in Sec. Sec. 158.161 and 158.162,
separate from but immediately following the requirements set forth in
Sec. 158.160 related to reporting of non-claims costs. Taxes are also
discussed in the section of this preamble describing calculation of the
MLR.
The PHS Act section 2718(a) requires reporting of ``premium
revenue, after accounting for collections or receipts for risk
adjustment and risk corridors and payments of reinsurance.'' Because
this language so closely parallels the three programs added by the
Affordable Care Act (the transitional reinsurance program established
by section 1341; the risk-corridor program established by section 1342;
and risk-adjustments under section 1343 of the Affordable Care Act), we
interpret this requirement as applying exclusively to payments under
those provisions, which are not effective until 2014. HHS anticipates
providing guidance on these provisions at a later time. Consistent with
the statute, Sec. 158.130(b)(v) of this interim final regulation
treats payments and collections under these provisions of the
Affordable Care Act as adjustments to premium revenue.
In response to the HHS notice requesting public comments regarding
section 2718 of the PHS Act, HHS received a number of comments from the
industry regarding premium revenue. A few industry commenters
recommended adjusting premium revenue for the change in unearned
premium reserves. HHS agrees that changes in unearned premium reserves
should be reflected in premium revenue, and has provided for this in
Sec. 158.130(a). A few industry commenters recommended adjusting
premium revenue for commercial reinsurance ceded and assumed. HHS is
not adjusting premium revenue for commercial reinsurance (with the
exception of 100 percent assumption reinsurance) because this largely
would provide a tool for issuers to manipulate reported premiums.
The NAIC considered allowing an adjustment to premium for
commercial stop-loss or similar reinsurance, but rejected allowing such
adjustments. We adopt the reasoning and recommendation of the NAIC. The
argument for allowing such adjustments
[[Page 74874]]
for reinsurance was that it might increase the reliability of the
medical loss ratio that is used for purposes of calculating rebates.
However, the NAIC concluded that allowing adjustments for reinsurance
created too much of an opportunity for manipulation of the reported
loss ratio and would require extensive and complex regulation of the
use of reinsurance. An industry commenter suggested subtracting
experience rating refunds from premium revenue. The NAIC recommended,
and HHS agrees, that there should be an adjustment for experience
rating refunds. A consumer advocate suggested that total revenue
(including investment income) be used in place of premium revenue, so
consumers would know the universe of funds available to be spent on
medical services. However, the commenter points out--and both the NAIC
and we agree--that the statute instructs issuers to report ``premium
revenue'' and not total revenue.
5. Reimbursement for Clinical Services Provided to Enrollees (Sec.
158.140)
Section 2718(a)(1) of the PHS Act requires reporting of
``reimbursement for clinical services provided to enrollees under such
coverage.'' The Affordable Care Act charges the NAIC with establishing
a uniform definition of reimbursement for clinical services. The NAIC
defines reimbursement for clinical services as direct claims paid and
incurred claims during the applicable MLR reporting year. In this
interim final regulation, HHS is adopting this NAIC approach, at Sec.
158.140. The definition and guidance regarding adjustments to claims
are discussed below.
The interim final regulation defines incurred claims as the sum of
direct paid claims incurred in the MLR reporting year, unpaid claim
reserves associated with claims incurred during the MLR reporting year,
the change in contract reserves, reserves for contingent benefits, the
claim portion of lawsuits, and any experience rating refunds paid or
received. Experience rating refunds exclude rebates based on an
issuer's MLR, as required by Sec. 158.140. If there are any group
conversion charges for a health plan, the conversion charges should be
subtracted from the incurred claims for the aggregation that includes
the conversion policies, and this same amount should be added to
incurred claims for the aggregation that provides coverage that is
intended to be replaced by the conversion policies. Incurred claims
must not include claims recovered as a result of fraud and abuse
programs. Treatment of the amount expended to reduce fraudulent claims
is discussed below in the section regarding quality improving
activities. Additionally, if the issuer transfers portions of earned
premium associated with group conversion privileges between group and
individual lines of business in its Annual Statement accounting, these
amounts should be added to or subtracted from incurred claims.
Unpaid claims reserves are included in incurred claims. Unpaid
claim reserves are the reserves for claims that were incurred during
the reporting period but that had not been paid by the date on which
the report was prepared. To minimize reliance on estimates for the
amount of the reserve, unpaid claim reserves shall be calculated based
on claims that have been processed within three months after the end of
the MLR reporting year. This claims collection period provides a better
estimate of outstanding liability than the reserve established at the
end of the MLR reporting year. Claims reserves are included in incurred
claims in order for claims to be paid effectively and to allow for the
insurance company to continue operating year after year.
The NAIC includes the change in contract reserves in reimbursement
for clinical services, and HHS has followed this approach. The NAIC and
this interim final regulation define contract reserves as reserves that
are established which, due to the gross premium pricing structure at
the time of issue, account for the value of the future benefits that at
any time exceeds the value of any appropriate future valuation of net
premiums at that time. In the early years of a new product being
introduced, reserves are established to cover losses in the future, but
as reserves are drawn down to cover current losses the amount collected
from reserves will be deducted from claims. An issuer may establish
contract reserves to reduce the need to increase premiums for a newly
introduced product as the experience under that policy matures. As a
policy matures, the reserves that were set aside in the beginning of
the policy's existence are used to cover claims that are incurred in
the future.
Contract reserves must not include premium deficiency reserves.
Premium deficiency reserves are reserves that are established when
premium is no longer adequate to cover losses. They are excluded
because contract reserves would provide for these future losses over
time to the extent that such losses were anticipated and factored into
the premiums charged during the reporting period. Contract reserves
shall not include reserves for expected MLR rebates.
Guidance is also provided as to types of expenses or revenue that
are to be treated as adjustments to claims. The NAIC recommended that
prescription drug costs should be included in incurred claims and
prescription drug rebates should be deducted from incurred claims.
Prescription drug rebates are rebates that pharmaceutical companies pay
to issuers based upon the drug utilization of the issuer's enrollees at
participating pharmacies. We agree with the NAIC that drug rebates
should be accounted for, and under Sec. 158.140(b)(1)(i) we treat such
rebates as an adjustment to incurred claims.
The NAIC allows an adjustment to claims for State stop loss, market
stabilization, and claims/census based assessments. HHS agrees that
these types of expenses should be allowed as an adjustment to incurred
claims. These assessments include:
(1) Any market stabilization payments or receipts by issuers that
are directly tied to claims incurred and other claims based or census
based assessments;
(2) State subsidies based on a stop-loss payment methodology; and
(3) unsubsidized State programs designed to address distribution of
health risks across health issuers via charges to low risk issuers that
are distributed to high risk issuers.
The NAIC also considered but rejected the inclusion of an
adjustment to incurred claims for so-called ``large claim pooling'' as
a means of reducing the need for and magnitude of credibility
adjustments. NAIC rejected large claim pooling for two reasons. First,
it would not have not addressed the needs of issuers that either are
not part of a holding company or company group or that are operate in a
single State. Second, it would require extensive and complex
regulations and close oversight. We have accepted the NAIC's
recommendations.
Incurred medical incentive pools and bonuses to incurred claims are
also allowed as an adjustment to incurred claims, and this is reflected
in Sec. 158.140(b)(2)(iii) of the interim final regulation. Medical
incentive pools are arrangements with providers and other risk sharing
arrangements whereby the reporting entity agrees to either share
savings or make incentive payments to providers. These payments may not
be counted under quality improvement expenditures.
HHS received numerous comments from consumer groups, issuers, and
regulators regarding whether, and to what extent, reserves should be
included in incurred claims. A consumer advocacy group felt that only
[[Page 74875]]
paid claims should be used, arguing that the use of actual claims paid
is reasonable because the review is historical; this would avoid the
possibility of issuers gaming the system by manipulating reserves.
However, several issuers and regulators support the inclusion of unpaid
claims reserves in incurred claims. A State regulator indicates that
the advantage of such inclusion is that it deals only with data for the
one year in which claims are incurred, and avoids any distortion due to
possible errors in the estimate of the unpaid claim reserve as of the
beginning of the year. The disadvantage is that the result is unduly
influenced by the unpaid claim reserve as of the end of the year.
HHS acknowledges the consumer group concern for the potential that
reserves can be manipulated, and in particular overstated, and can thus
produce a reported MLR for a given calendar year that is higher than
the true MLR for that year. Nevertheless, over the long run such over-
reserving for one year necessarily results in a reduction, or
``releasing,'' of reserves in future years. HHS concurs with the NAIC
that including contract reserves in claims is fair to consumers over
the long run, and has adopted this approach.
6. Activities That Improve Health Care Quality (Sec. Sec. 158.150
Through 158.151)
Section 2718(a)(2) of the PHS Act requires health insurance issuers
to submit an annual report to the Secretary concerning the percent of
total premium revenue that is spent on activities that improve health
care quality. Section 2718(c) of the PHS Act directs the NAIC, subject
to certification by the Secretary, to establish uniform definitions of
activities that improve health care quality. In developing the
definition of a quality improvement activity, the NAIC has relied upon
section 2717 of the PHS Act. HHS concurs with the NAIC in this approach
and has followed the recommendations of the NAIC.
Section 2717 provides for the development of ``reporting
requirements for use by a group health plan, and a health insurance
issuer offering group or individual health insurance coverage, with
respect to plan or coverage benefits and health care provider
reimbursement structures that--
(A) improve health outcomes through the implementation of
activities such as quality reporting, effective case management,
care coordination, chronic disease management, and medication and
care compliance initiatives, including through the use of the
medical homes model as defined for purposes of section 3602 of the
Patient Protection and Affordable Care Act, for treatment or
services under the plan or coverage;
(B) implement activities to prevent hospital readmissions
through a comprehensive program for hospital discharge that includes
patient-centered education and counseling, comprehensive discharge
planning, and post-discharge reinforcement by an appropriate health
care professional;
(C) implement activities to improve patient safety and reduce
medical errors through the appropriate use of best clinical
practices, evidence-based medicine, and health information
technology under the plan or coverage; and
(D) implement wellness and health promotion activities.
The NAIC model regulation contains definitions of activities that
improve health care quality that track the categories set forth in
section 2717. After considering the NAIC's definitions, and public
comments thereon, HHS has decided to certify and adopt them. In
addition, the NAIC provided examples to illustrate activities that
qualify as quality improving activities and these are also certified
and adopted in toto in this interim final regulation. Finally, the NAIC
designated certain activities as not qualifying as quality improving,
and we certify and adopt these exclusions as well.
As recommended by the NAIC, this interim final regulation allows a
non-claims expense incurred by a health insurance issuer to be
accounted for as a quality improvement activity only if the activity
falls into one of the categories set forth in section 2717 and meets
all of the following requirements:
(1) It must be designed to improve health quality;
(2) It must be designed to increase the likelihood of desired
health outcomes in ways that are capable of being objectively measured
and of producing verifiable results and achievements;
(3) It must be directed toward individual enrollees or incurred for
the benefit of specified segments of enrollees or provide health
improvements to the population beyond those enrolled in coverage as
long as no additional costs are incurred due to the non-enrollees; and
(4) It must be grounded in evidence-based medicine, widely accepted
best clinical practice, or criteria issued by recognized professional
medical associations, accreditation bodies, government agencies or
other nationally recognized health care quality organizations. These
criteria are recommended by the NAIC in its model regulation.
In this interim final regulation HHS recognizes that some quality
improvement activities may be what are sometimes referred to as
``population-directed'' and may not involve face-to-face interaction
between an employee of the health insurance issuer (or a contractor of
the issuer) and the enrollee. However, such activities must be directed
to identified segments of the issuer's enrollees. The issuer must be
able to measure the level of engagement with these enrollees in
addition to tracking the effect(s) of these activities on health
outcomes in this population through a process that is well defined,
well developed, and utilized.
Any quality improvement activity that results in cost savings to an
issuer should not, by itself, cause expenditures on that activity to be
classified as non-quality improving expenditures, if they meet the
criteria set forth in this interim final regulation. However, if the
activity is designed primarily to control or contain costs, then
expenditures for it may not be included as a quality improvement
activity, as provided in Sec. 158.150(d). This approach follows the
NAIC's model regulation.
As many quality improvement activities are fluid in nature, they
may properly be classified in more than one quality improvement
activity category. However, following the recommendation of the NAIC,
the interim final regulation does not permit issuers to count any
occurrence of a quality improvement activity more than once, as
explained in Sec. 158.170(a). Moreover, shared expenses among related
entities as well as expenses that are for or benefit lines of business
or products other than those being reported, including self-funded
plans, must be apportioned among the entities and among the lines of
business or products. For example, a quality improvement program that
is developed and implemented for self-funded plans and fully insured
plans must be pro-rated among the lines of business, and the portion of
expenditures for the program that are for the self-funded plans may not
be included in quality improvement activities reported under section
2718(a) of the PHS Act.
The NAIC recommended, and HHS adopts in its entirety, the list of
activities that are not to be reported as a quality improving activity.
Section 158.150(c) sets forth types of activities that are not to be
reported as a quality improvement activity. These include:
(1) Those activities which are designed primarily to control or
contain costs;
(2) Concurrent and retrospective Utilization Review;
(3) Fraud Prevention activities (beyond the scope of those
activities which recover incurred claims);
[[Page 74876]]
(4) Development, execution, and management of a provider network;
(5) Provider credentialing;
(6) Marketing expenses;
(7) Costs associated with calculating/administering individual
enrollee or employee incentives;
(8) Clinical data collection without any subsequent data analysis;
(9) Establishment and/or maintenance of a claims adjudication
system; and
(10) 24-hour customer service/or health care professional hotline
addressing non-clinical member questions.
HHS requested public comments regarding the types of activities
that would improve the quality of health care. Numerous consumer
advocacy groups, issuers, State regulators, and other interested
parties responded with various suggestions as to the type of activities
that should be included in the definition of quality improving
activities.
Many issuers and interest groups advocated for a broad definition
for ``quality improving activities'' that allows for future
innovations. However, numerous providers and consumer advocacy groups
asserted that HHS should develop a definition for `quality improving
activities' that is not so broad that issuers may improperly classify
administrative activities as improving quality. Several commenters also
advocated for a definition that requires issuers to clearly articulate
the activity's purpose and to provide detailed accounts of the
underlying activity with measurable evidence as to the effects of the
activity on the quality of care received by enrollees.
This interim final regulation provides a set of criteria in Sec.
158.150 which issuers must comply with in order for the activity in
question to be treated as improving quality. The definition, or
foundational criteria, of a quality improvement activity should be
specific enough so as to provide clear guidance without overly
prescribing acceptable activities and possibly stifling future
innovative quality improving activities; the NAIC's definition which we
have adopted achieves these goals.
Numerous consumer groups advocated for a definition that includes
only evidence-based quality improving initiatives, and excludes alleged
quality-improving activities that have not been demonstrated to improve
quality. Some consumers and providers want issuers to provide specific
data illustrating the success of a proposed quality improving measure
prior to HHS acknowledging the validity of such an activity. Issuers
argue, however, that imposing a specific data requirement prior to
engaging in a quality improvement activity will stifle development in
future innovations, as data demonstrating the effectiveness of such
activity may not yet be available.
The NAIC recommended and HHS agreed that, as provided in Sec.
158.150, a quality improvement activity is ``grounded in evidence-based
medicine, widely accepted best clinical practice, or criteria issued by
recognized medical associations, accreditation bodies, government
agencies, or other nationally recognized health care quality
organizations.'' This interim final regulation further requires any
proposed quality improving activities to be designed to improve the
quality of care received by an enrollee and capable of being
objectively measured (taking into account the individual needs of the
patient) and of producing verifiable results and achievements. While an
issuer does not have to present initial evidence proving the
effectiveness of a quality improvement activity, the issuer will have
to show measurable results stemming from the executed quality
improvement activity.
A consumer advocacy group called for issuers to be required to
spend a specified percentage of premiums on preventive and health-
lifestyle promotional activities. Several interested parties, including
issuers, other interest groups and providers, asserted that capping or
limiting quality improvement initiatives would deter issuers from
engaging in such activities. Issuers further commented that although
these types of activities ``add value to the health care system,''
issuers would be deterred from engaging in such activities if HHS
limited the amount an issuer could spend on quality improving
activities.
The Affordable Care Act does not dictate the amount an issuer must
expend on quality improving activities, nor did the NAIC make a
recommendation in this regard, nor does this interim final regulation.
Section 158.150 requires that a quality improvement activity be
provided by an issuer or through a third party to whom it delegated
such responsibilities by contract in connection with which the issuer
remains ultimately responsible for the underlying insurance policy. In
calculating its MLR, an issuer may allocate any percentage of its
expenses to quality improvement activities, so long as the activities
comply with the criteria established under Sec. 158.150.
Some industry groups argued that network fees associated with third
party provider networks should be classified as quality improving
activities, because they increase enrollees' access to providers.
Consumer groups argued that these fees are traditional administrative
expenses which should not be classified as improving quality. While HHS
agrees that administrative expenses such as network fees should not be
counted as quality improving, some traditional administrative
activities can qualify as quality improving if they meet the criteria
set forth in Sec. 158.150. For example, expenses for prospective
utilization review and fraud recovery activities up to the amount of
fraudulent claims recovered may be classified as expenses for quality
improving activities. Prospective utilization review is considered a
quality improving activity because it is rendered before care is given
and can help ensure that the most appropriate medical treatment is
given in the most appropriate setting. In contrast, the network fees
associated with third party provider networks do not stem from a
quality improving activity and therefore only count as an
administrative expense.
Issuers pointed out that the recovery of fraudulently paid claims
reduces their MLR. They argued, therefore, that costs of preventing and
discovering fraud should be counted as a quality improving activity;
otherwise, there would be a reduced incentive to incur these costs. We
agree with this concern. The NAIC model regulation addresses this
concern by allowing fraud recovery expenses as a quality improving
activity expense up to the amount of fraudulent claims recovered. This
treatment would help mitigate whatever disincentive might occur if
fraud recovery expenses were treated solely as non-claims and non-
quality improving expenses. We adopt the NAIC's approach.
HHS also adopts the NAIC's recommendation to exclude the conversion
of International Classification of Disease code sets from ICD-9 to ICD-
10 as a quality improvement activity with the following qualification.
As a general matter, the development and maintenance of claims
adjudication systems are not designed primarily to improve the quality
of care received by an individual and, therefore, are not classified as
a quality improvement activity. However, there is general recognition
that the conversion to ICD-10 will enhance the provision of quality
care through the collection of better and more refined data. The
difficulty is in parsing expenses associated with ICD-10 conversions
that may be solely ``development and maintenance of claims adjudication
systems'' as opposed to those that are uniquely conversion costs. As
with some other reporting categories defined in this regulation, little
public data currently exist to guide decision making
[[Page 74877]]
regarding this distinction. Although the NAIC excluded these costs as a
quality improving activity, the NAIC supplemental forms allow for the
collection of data relating to the conversion for the calendar year
2010 that will be reported in 2011. HHS intends to examine the reported
conversion costs along with other quality activity costs and other
administrative costs in the NAIC supplemental form in 2011 to determine
whether the policy in this regulation should be revisited. HHS solicits
further comments on whether ICD-10 expenses should be included as a
quality improving activity.
Health Information Technology (Section 158.151). Section 158.151 of
this interim final regulation provides guidance on the use of Health
Information Technology (``HIT'') in conjunction with quality improving
activities. Although HIT is not specifically addressed in section
2718(a) of the PHS Act, it is addressed in other provisions within the
Affordable Care Act, and HHS has determined that it is important to
address HIT's role in quality improvement activity. HHS recognizes HIT
as its own separate category of quality improving activities, provided
that the use of HIT meets certain requirements. In doing so, HHS has
followed the approach of the NAIC.
HIT offers providers, issuers and patients the capability to share
clinical information in a real-time setting. Any HIT expenditure that
is attributable to improving health care, preventing hospital
readmissions, improving patient safety and reducing errors, or
promoting health activities and wellness to an individual or an
identified segment of the population, is classified as a quality
improvement activity. HIT resources that are designed to improve the
quality of care received by an enrollee include the provision of
electronic health records and patient portals, as well as the
monitoring, measuring, and reporting of clinical effectiveness
measures. As indicated in Sec. 158.151, HIT expenses that are
consistent with Medicare/Medicaid meaningful use requirements may be
treated as an expenditure to improve health care quality. This
treatment of HIT is also recommended by the NAIC.
7. Other Non-Claims Costs (Sec. 158.160)
The report required by section 2718(a) of the PHS Act must include
information on expenditures for ``all other non-claims costs, including
an explanation of the nature of such costs, and excluding Federal and
State taxes and licensing or regulatory fees.'' ``Other non-claims
costs'' refers to expenditures that are not used to adjust premiums,
incurred claims, or activities that improve quality care. HHS
interprets this to mean that issuers must account for the use of all
premium revenue, not just claims expenses and expenses to improve
quality. The NAIC includes in these non-claims expenses sales expenses,
agents' and brokers' fees and commissions, other taxes, community
benefit expenditures, and general administrative expenses. HHS supports
the NAIC approach to defining non-claims costs and has followed it in
Sec. 158.160 of this interim final regulation. For example, direct
sales salaries and work force salaries and benefits should be allocated
as non-claims costs unless a specific position can be directly
correlated with an activity that improves health care quality, as
defined in this regulation. The NAIC's inclusion of ``other taxes'' as
non-claims expenses does not refer to taxes that section 2718(a) of the
PHS Act excludes from ``all other non-claims costs'' and which section
2718(b) allows to be excluded from premium revenue. Rather, ``other
taxes'' refers to taxes that may not be excluded from premium revenue,
such as taxes of a foreign country and sales taxes (excluding State
sales taxes) if an issuer does not exercise the option of including
such taxes with the cost of goods and services produced. Another type
of expense included in non-claims costs is cost containment expenses
not included as an expenditure related to a quality improving activity
under Sec. 158.150.
Notably, in correspondence with HHS, the NAIC raised concerns
regarding the potential impact of this regulation on agents' and
brokers' fees and commissions. Some companies in some States may be
particularly reliant on producers to distribute their products. Agents
and brokers perform a range of functions on behalf of consumers and
companies. In some cases, issuers may have entered into longer term
compensation arrangements with agents and brokers which the MLR
standard may stress. The NAIC considered, but declined to incorporate
in the model regulation, special treatment for such expenses in the MLR
calculations. The NAIC opted instead to establish a working group with
HHS to address the impact of the Affordable Care Act on agents and
brokers, especially during years leading up to 2014. As discussed
below, the potential impact of the MLR standard on agents and brokers
merits recognition, and in this regulation the impact of the MLR
standard on agents and brokers will be a factor in considering whether
a particular individual markets would be destabilized. HHS seeks
comments on the approach taken in this regulation and on the issues
related to agents and brokers during years leading up to 2014.
Loss adjustment expense is part of other non-claims costs that
cannot be excluded from premium revenue and cannot be considered part
of reimbursement for clinical services to enrollees or a quality
improving activity. Loss adjustment expense is referred to as ``claims
adjustment expenses'' in the forms the NAIC has developed for reporting
by issuers. Claims adjustment expenses are not reported as an
adjustment to premium revenue or as an adjustment to claims. Instead,
they are expenses associated with claims and are reported as ``other
non-claims costs.'' One type of claims adjustment expenses is cost
containment expenses. Such expenses reduce either the number of health
services provided or the cost of such services. They may include: Post
and concurrent claim case management activities associated with past or
ongoing specific care; utilization review; detection and prevention of
payment for fraudulent requests for reimbursement; expenses for
internal and external appeals processes; and network access fees to
preferred provider organizations and other network-based health plans
(including prescription drug networks), and allocated internal salaries
and related costs associated with network development and/or provider
contracting.
Examples of other types of claims adjustment expenses include:
Estimating the amounts of losses and disbursing loss payments;
maintaining records, general clerical, and secretarial; office
maintenance, occupancy costs, utilities, and computer maintenance;
supervisory and executive duties; and supplies and postage. As
previously explained, claims adjustment expenses are other non-claims
costs.
8. Federal and State Taxes and Licensing and Regulatory Fees
(Sec. Sec. 158.161-158.162)
Section 2718 of the PHS Act requires that Federal and State taxes
and licensing and regulatory fees be reported. Section 2718(a) lists
these expenses as an exclusion from non-claims costs. Section
2718(b)(1)(A) requires that Federal and State taxes and licensing or
regulatory fees be excluded from the total amount of premium revenue
when calculating an issuer's MLR. Section 2718(b)(1)(B)(i)(II) also
requires that such taxes and fees be excluded from the total amount of
premium revenue when determining
[[Page 74878]]
any rebates. However, section 2718 does not specifically define what is
included in Federal and State taxes.
The NAIC defines Federal taxes as all Federal taxes and assessments
allocated to health insurance coverage reported under section 2718 of
the PHS Act, excluding Federal income taxes on investment income and
capital gains. This interim final regulation adopts the NAIC
recommendation that Federal income taxes on investment income and
capital gains are not taxes based on premium revenues, and thus should
not be used to adjust premium revenues, as specified in Sec. 158.162,
while all other Federal taxes allocated to health insurance coverage
should be excluded from non-claims costs for purposes of the report
required by section 2718. Section 158.162 also makes clear that Federal
taxes which are excluded from non-claims costs are to be excluded from
premium revenue when calculating an issuer's MLR.
We have adopted the NAIC's recommended approach to reporting State
taxes and assessments. State taxes and assessments that must be
separately identified and reported to the Secretary include: Any
industry-wide (or subset) assessments (other than surcharges on
specific claims) paid to the State directly, or premium subsidies that
are designed to cover the costs of providing indigent care or other
access to health care throughout the State; assessments of State
industrial boards or other boards for operating expenses or for
benefits to sick unemployed persons in connection with disability
benefit laws or similar taxes levied by States; advertising required by
law, regulation or ruling, except advertising associated with
investments; State income, excise, and business taxes other than
premium taxes; State premium taxes plus State taxes based on policy
reserves, if in lieu of premium taxes; State sales taxes, if the issuer
does not exercise the option of including such taxes with the cost of
goods and services purchased; and any portion of commissions or
allowances on reinsurance assumed that represents specific
reimbursement of premium taxes.
The NAIC has interpreted the language in section 2718(a)(3) that
refers to ``excluding Federal and State taxes and licensing or
regulatory fees'' from non-claims costs as encompassing the community
benefit expenditures by not-for-profit health plans that they are
required to make in lieu of State and Federal taxes. As discussed
below, we adopt the NAIC's approach.
Under the NAIC's recommendation, ``community benefit expenditures''
are limited to expenditures that the non-profit issuer is required to
make under State law in lieu of State taxes that would otherwise apply,
or that the Federal government requires them to make in order to
preserve their Federal tax exempt status, and that they report to the
Federal government. The proceeds of such expenditures fund activities
or programs that seek to achieve the objectives of improving access to
health services, enhancing public health and relief of government
burden.
Under the NAIC's interpretation, these mandated community benefit
expenditures are essentially deemed to be the equivalent of State and
Federal taxes for non-profit issuers for purposes of the exclusion in
section 2718(a)(3). The NAIC recommended that non-profit issuers be
permitted to report community benefit expenditures as a deduction from
premium revenue, and further recommended that they be permitted to
split such expenditures between Federal and State taxes as applicable,
but not to report them more than once.
HHS believes that NAIC's interpretation avoids an inequity between
for-profit and non-profit plans, and that it is reasonable to interpret
community benefit expenditures by non-profits that they are required by
the State or Federal government to make as the equivalent of taxes for
purposes of the exclusion in section 2718(a)(3). Thus, in Sec.
158.162(c) and (e), HHS has adopted the NAIC's approach and allows such
mandatory community benefit expenditures by not-for-profit plans, made
in lieu of income taxes, to be excluded from premium revenue to the
same extent as State taxes. In order to implement the NAIC-recommended
approach that community benefit expenditures may be split between
Federal and State taxes as applicable, Sec. 158.162(e) of this interim
final regulation provides that the NAIC's approach applies equally to
Federal and to State taxes, and that community benefit expenditures
made in lieu of income taxes, whether Federal or State, may be reported
as a deduction from premium revenue.
A commenter representing not-for-profit plans asserted that
community benefit expenditures should be more broadly recognized in the
MLR calculation, and not be limited to the amount required to be paid
in lieu of taxes. This commenter pointed out that not all States impose
a premium tax, that the amount of premium tax varies among States, and
that the NAIC rule would discourage not-for-profits from making these
contributions to the community.
Although the NAIC did not recognize community benefit expenditures
beyond the amount of taxes that would have been paid, we share the
concern that the MLR standard should not create a disincentive for not-
for-profits to make community benefit expenditures beyond those
required in lieu of taxes. Thus, we invite comments on the proper
treatment of community benefit expenses.
The NAIC defines and specifies the licensing and regulatory fees
that must be reported and whether they may be included as an adjustment
to premium revenue. In Sec. 158.161, we adopted the NAIC approach
under which statutory assessments to defray operating expenses of any
State or Federal department, and examination fees in lieu of premium
taxes as specified by State law are included in the licensing and
regulatory fees that may be used as an adjustment to premium revenue.
HHS believes that, consistent with the Affordable Care Act, examination
fees under State law should also be included as an adjustment to
premium revenue, and Sec. 158.161 of the interim final regulation has
such a provision. Fines and penalties of regulatory authorities and
fees for examinations by State and Federal departments other than
referenced above must be separately reported, but may not be used as an
adjustment to premium revenue.
9. Allocation of Expenses (Sec. 158.170)
Section 2718(a)(3) of the PHS Act requires health insurance issuers
to submit an annual report to the Secretary concerning the percentage
of total premium revenue spent ``on all other non-claims costs,
including an explanation of the nature of such costs, and excluding
Federal and State taxes and licensing or regulatory fees.'' However,
section 2718(a) does not provide a standardized method for allocating
such expenditures. Section 2718(c) directs the NAIC to develop
definitions and methodologies, which are subject to the certification
of the Secretary, to assist issuers in reporting the information
stipulated under section 2718(a). The NAIC's model regulation and this
interim final regulation require issuers to report their expenses by
State and by line of business. Section 158.170 of this interim final
regulation addresses the allocation of claims and non-claim related
expenses as well as expenses stemming from quality improving
activities. Issuers operating within the individual market, small group
market, and large group market who also offer products, such as
Medicare supplemental insurance, or services, such as administration of
group health
[[Page 74879]]
plans, must report and properly allocate all related expenses stemming
from each individual line of business.
There are several different methods for allocating costs incurred
by health issuers allowable under statutory accounting principles. The
NAIC model regulation requires issuers to allocate costs consistent
with these principles. HHS has therefore not prescribed a standardized
method for allocating costs beyond the allocation method designated in
Sec. 158.170. All costs reported by issuers must be allocated
according to generally accepted accounting methods that yield the most
accurate results and are well documented. An issuer's allocation method
must illustrate the costs associated with a specific activity and any
resulting effect the activity has had on a particular line of business.
Section 158.170(d) further provides that issuers must maintain records
containing an explanation of all incurred expenditures allocated as
non-claims costs and quality improving activities. If the expense is
related to a specific activity, the allocation of such expenditure must
be on a direct basis. If an expense is not easily attributable to a
specific activity, then the expenses must be apportioned based on
pertinent factors or ratios, such as studies of employment activities,
salary ratios or similar analyses. Section 158.170(b) provides that any
shared expenses between two or more affiliated entities must be
``apportioned pro rata to the entities incurring the expense'' even if
the expense has been paid solely by one of the incurring entities.
Each expense that is allocated by an issuer for each State in which
it is licensed to conduct an insurance business must be appropriately
attributed using a generally accepted accounting method to each line of
business in each State, as designated in Sec. 158.170(b). However, all
Federal taxes paid by a health insurance issuer must be attributed
proportionately and appropriately to each State in which the issuer
reports. While Federal taxes are not typically allocated to health
insurance issuers on a State-by-State basis, for purposes of complying
with the reporting requirements in Sec. 158.110 all health insurance
issuers are required to report some percentage of Federal taxes paid on
their behalf.
HHS received a number of comments regarding allocation issues in
response to the April Federal Register solicitation. Several State
regulators and issuers noted that issuers currently have considerable
flexibility in establishing and utilizing product and State-by-State
allocation methods and that such flexibility should be maintained.
Numerous regulators and issuers also advocated for allowing multiple
methods of approved allocation, including the current financial
reporting requirements provided by statutory accounting principles. A
few State regulators, medical providers and other interested parties
called for a standardized methodology for allocating administrative and
quality improvement expenses among States and lines of business. In
contrast, issuers stated that a revamped reporting methodology would be
costly, administratively burdensome and less efficient in
distinguishing a subcontractor's medical versus administrative
expenses. A few industry groups also indicated that HHS should not
develop an allocation methodology that is inflexible and inconsistent
with current statutory accounting requirements and the accounting
guidance provided under generally accepted accounting principles.
The NAIC did not mandate the use of a specific methodology for
apportioning non-claims costs to health insurance issuers. Section
158.170 adopts this flexible approach and requires health insurance
issuers to explain how premium revenue is used to pay for non-claims
expenditures (as provided for in Sec. 158.160). Health insurance
issuers are required to allocate their non-claims and quality improving
expenses on a State-by-State basis, and further allocate such expenses
to each line of business within a State, as stated in Sec. 158.170. If
an expense is attributable to a specific activity, then an issuer
should allocate the expense to that particular activity. However, if it
is not feasible for an issuer to allocate such expenditure to a
specific activity, then the issuer must apportion the costs using a
generally accepted accounting method that yields the most accurate
results. Each reporting health insurance issuer must identify in its
required report under Sec. 158.110 the specific basis used to allocate
to each State its reported expenses, and within each State, to each
line of business which the issuer operates. HHS believes that a clear
allocation method for all expenses stemming from services provided by
issuers includes allocation to each line of business as designated in
Sec. 158.170(c). This level of detailed expense reporting is crucial
in order to verify that issuers are properly allocating and reporting
such expenses.
D. Subpart B--Calculating and Providing the Rebate
1. Applicable MLR Standard and States With Higher MLR Standards
(Sec. Sec. 158.210-158.211)
Section 158.210 mirrors PHS Act section 2718(b)(1)(A)(i) and (ii)
by stating the general requirement that issuers must provide their
enrollees a rebate if their MLR is less than 85 percent in the large
group market or less than 80 percent in the small group market and
individual market. While explained in greater detail in subsequent
sections of Subpart B of this interim final regulation, this means that
issuers must spend at least 85 or 80 percent, respectively, of each
premium dollar, as adjusted for taxes and regulatory and licensing
fees, on reimbursement for clinical services provided to enrollees and
activities that improve health care quality. Additionally, Sec.
158.210 acknowledges that the Secretary may, in her discretion, adjust
the MLR standard that applies in the individual market in a State if
the Secretary determines, upon application by the State, that the
application of the 80 percent MLR may destabilize the individual market
in such State. The requirements related to that statutory provision are
delineated in Subpart C of this interim final regulation.
Section 158.211 provides that in States that have established under
State law a higher MLR standard than that prescribed by section 2718,
such higher percentage applies to issuers in that State and should be
substituted for the percentages set forth in Sec. 158.210. In States
that have established, under State law, a lower MLR standard than that
of section 2718, the higher percentage set forth in section 2718
applies to issuers.
2. Calculating an Issuer's MLR (Sec. Sec. 158.220 Through 158.221)
The NAIC model regulation addresses the calculation of an issuer's
MLR, and HHS has certified and adopted the NAIC's uniform definitions
and methodologies. The NAIC, in its model regulation, combines
calculating the MLR with instructions related to how an issuer should
aggregate data in certain instances, such as in connection with
employer groups with blended rates, newer experience (deferring
reporting of business with less than 12 months' experience), and other
related issues such as a credibility, or statistical adjustment for
smaller issuers. The requirements for reporting data and handling
special circumstances, such as group policies with blended rates, mini-
med plans, expatriate plans, and issuers
[[Page 74880]]
with newer experience, are set forth in Subpart A of this interim final
regulation. These special circumstances are discussed in section II.B
of the preamble.
Sections 158.220 and 158.221 of this interim final regulation
contain the instructions for calculating an issuer's MLR for each MLR
reporting year for purposes of determining whether any rebate is owed
and, if so, in what amount. In the 2013 MLR reporting year, an issuer's
MLR is calculated using the data for a three-year period, consisting of
the MLR reporting year whose MLR is being calculated, and the data for
the two prior MLR reporting years. Numerous commenters strongly support
the use of a three year, rolling average MLR calculation in determining
rebates, and some also support beginning it with the first MLR
reporting year, or 2011. One commenter questioned whether the three
year MLR was based on averaging three different one-year MLR values or
based on accumulating experiences over the three-year period and
calculating an MLR for that three-year period. The Department adopts
the recommendation that the data should consist of the accumulated
experience, rather than the average three MLRs.
For the 2011 and 2012 MLR reporting years, there will not be
sufficient data reported to use a three-year average. The NAIC has
addressed this in its model regulation, and in Sec. 158.220(b), HHS
has adopted the NAIC's approach. For the 2011 MLR reporting year, an
issuer's MLR will be calculated using only the data reported for the
2011 MLR reporting year. For the 2012 MLR reporting year, the data that
should be used in calculating an issuer's MLR depends in part upon
whether the issuer's experience is credible. Credible experience refers
to whether an issuer insures a sufficiently large number of lives to be
statistically valid, and is defined and discussed later in this
preamble. If an issuer's experience for the 2012 MLR reporting year is
fully credible, then its MLR for that year is calculated using only the
data reported for the 2012 MLR reporting year. If an issuer's
experience for the 2012 MLR reporting year is partially credible or
non-credible, then its MLR is calculated using the data reported for
both the 2011 and 2012 MLR reporting years. To prevent double counting,
an adjustment will be made to incurred claims when any rebate owed for
the 2012 and 2013 MLR reporting years is calculated using data from
2011 or 2012, as provided in Sec. 158.221(b)(1).
With respect to the issue of which portions of the data reported by
an issuer are to be used to determine the numerator of the MLR and
which portions of the data reported are to be used to determine the
denominator of the MLR, the numerator equals the issuer's incurred
claims and expenditures for activities that improve health care
quality, and the reporting of data for these categories of expenses is
detailed in Sec. Sec. 158.140, 158.150 and 158.151. As discussed
above, Section 158.221(b)(3) provides, for 2011 only, in the case of a
mini-med plan reporting separately under Sec. 158.120(d)(3) and an
expatriate plan reporting separately under Sec. 158.120(d)(4), that
the numerator amount specified in Sec. 158.221(b) shall be multiplied
by a factor of two. The purpose of this adjustment is to recognize the
``special circumstances'' applicable to these plans by restating claims
and quality improvement expense (if any) associated with these types of
plans so that they are commensurate with the higher administrative
expenses of these plans relative to premium. These types of plans are
discussed at greater length under Subpart A.
The denominator of the MLR equals the issuer's premium revenue
minus the issuer's Federal and State taxes and licensing and regulatory
fees. The reporting of data for premium revenue is detailed in Sec.
158.130 and the reporting of data regarding Federal and State taxes and
licensing and regulatory fees is set forth in Sec. Sec. 158.161 and
158.162. Section 2718(b)(1)(A) also provides that the total amount of
premium revenue used for the denominator of the MLR shall take into
account payments or receipts for risk adjustment, risk corridors, and
reinsurance. However, in the reporting requirements related to premium
revenue in Sec. 158.130, the Department has provided that the premium
revenue reported be adjusted for these types of payments or expenses.
Because these issues have been addressed in the cited earlier sections
of this interim final regulation, there is no need to address them
again in Sec. 158.221 regarding the calculation of an issuer's MLR.
This interim final regulation also provides that an issuer's MLR
must be rounded to the nearest one-tenth of one percentage point, after
dividing the numerator by the denominator when calculating the MLR. HHS
has adopted the NAIC's approach in this regard.
3. Credibility Adjustment (Sec. Sec. 158.230-158.232)
Section 2718(c) of the PHS Act charges the NAIC with developing
uniform methodologies for calculating measures of the expenditures that
make up the MLR calculation, and provides that ``such methodologies
shall be designed to take into account the special circumstances of
smaller plans, different types of plans, and newer plans.'' To address
the special circumstances of smaller plans, the NAIC model regulation
allows smaller plans to adjust their MLRs by applying a so-called
``credibility adjustment.'' HHS adopts this method of ``credibility
adjustment'' in Sec. 158.230.
A credibility adjustment is a method to address the impact of
claims variability on the experience of smaller plans. All issuers
experience some random claims variability, where actual claims
experience deviates from expected claims experience. In a health plan
with a large customer base the impact of such random deviations is less
than in plans with fewer insureds. One source of variability is the
impact of large claims, which are infrequent, but have greater impact
on financial experience than average or typical claims. Large claims
have a disproportionate impact on small plans because the higher claim
cost is spread across a smaller premium base. These random variations
in the claims experience for enrollees in a smaller plan may cause an
issuer's reported MLR to be below or above the statutory standard in
any particular year, even though the issuer estimated in good faith
that the combination of the premium it projected it would collect and
the claims it projected would produce an MLR that meets the statutory
standard.
The credibility adjustment is a method to address the problem
associated with this random variation. A credibility adjustment serves
to modify the reported MLR of an issuer by adding to the reported
percentage additional percentage points in recognition of the
statistical unreliability of the reported number. A number of
stakeholders in the NAIC proceedings have supported credibility
adjustments in concept, including the American Academy of Actuaries and
a number of the consumer representatives to the NAIC.
In evaluating the desirability of including a credibility
adjustment, it is important to emphasize that health insurance rates
are the product of assumptions, estimates, and projections, and not of
calculations based entirely on hard data. When an actuary projects that
the rate it has calculated will produce an 80 percent MLR, whether in
fact it will produce an 80 percent MLR depends on whether the
assumptions the actuary has made--such as those concerning the mix of
business it will attract, the intensity and frequency with
[[Page 74881]]
which its insureds will use health care services, and unit costs--turn
out to be correct. All things being equal, it is more likely that those
assumptions will turn out to be correct when an issuer insures a large
number of risks rather than a small number.
Credibility adjustments have advantages and disadvantages. Issuers
benefit from credibility adjustments because such adjustments--and thus
the ability to report a higher MLR than what the issuer's MLR would be
using the methodology that applies to other plans--make it less likely
that an issuer will be required to pay a rebate. For consumers, on the
other hand, credibility adjustments eliminate some rebates that would
otherwise have been paid.
In general, the smaller the size of the insured population whose
experience is used to calculate the MLR, the more variable the reported
MLR will be. Statistical analysis conducted for the NAIC by an
independent actuarial consulting firm based on historical data for
companies offering coverage in the group and individual markets
examined the statistical variation that would be expected in reported
MLR. The consultants concluded that if a company estimates that its
premium will produce an MLR of 80 percent, random variation would cause
the company to pay a rebate of:
0.9 percent or more in 1 out of every 4 years if it
insures 75,000 lives,
2.6 percent or more in 1 out of every 4 years if it
insures 10,000 lives, and
8.8 percent or more in 1 out of every 4 years if it
insures only 1,000 lives.
After extensive analysis and public discussion, the NAIC adopted a
credibility adjustment table designed to result in an issuer that
charges premiums intended to produce an 80 percent MLR to pay a rebate
less than 25 percent of the time. Toward the conclusion of its public
proceedings on these issues, the NAIC gave some consideration to
setting the base credibility factors so that such an issuer would be
required to pay a rebate less than ten percent of the time. The
credibility factors in that case would have been roughly twice as large
as the factors the NAIC adopted. The argument made in favor of making
this change is that it would reduce the likelihood of requiring a plan
to pay a rebate simply because of chance variation in claims
experience. However, it would also have increased the likelihood that a
plan setting premiums to achieve an MLR that is less than the
applicable MLR standard would avoid paying a rebate, and it would have
reduced the size of the rebates that plans pricing below the MLR
standard would have to pay. The NAIC concluded, and HHS agrees, that
the credibility factors it adopted more equitably balance the
consumers' interest in requiring plans that should pay rebates to pay
rebates against the issuers' interest in minimizing the risk of paying
rebates as a result of chance variations.
HHS adopts the NAIC credibility adjustment methodology in Sec.
158.230. The NAIC recommends that the credibility factors be evaluated
and updated as the Affordable Care Act reforms are implemented over the
next several years. HHS concurs with this recommendation and notes its
intention both to monitor the effects of the credibility adjustment
and, as appropriate, to update the credibility adjustment method.
This interim final regulation adopts the approach taken by the NAIC
by, in Sec. 158.230(c)(3), designating as ``non-credible'' any
reported MLR that is based on experience from fewer than 1,000 life-
years. Thus, Sec. 158.240(a)(1) provides that issuers with non-
credible experience do not owe rebates because there is no valid data
to determine that the issuer has failed to meet the MLR standard.
This interim final regulation also adopts the NAIC's assumption
that variations of less than approximately one percent are reasonably
to be expected based on ordinary variation in claims experience of very
large plans. The experience of such plans is ``fully credible,'' and
such a plan therefore should be required to pay a rebate based on its
reported MLR. The model regulation designates as ``fully credible'' any
reported MLR that is based on experience from 75,000 or more life-
years, and this definition is adopted, as provided in Sec.
158.230(b)(1) of this interim final regulation.
The NAIC model regulation provides that a reported MLR that is
based on experience from 1,000 to 75,000 life-years is ``partially
credible'' and entitled to a credibility adjustment, as stated in Sec.
158.230(b)(2) of the interim final regulation. The magnitude of the
``credibility adjustment'' for ``partially credible'' aggregations is
intended to represent the amount by which an issuer's reported MLR
would be expected to vary as a result of random variation in claims
experience. Under the credibility provisions of the NAIC model
regulation, which HHS adopts in Sec. 158.232 of the interim final
regulation, the ``credibility adjustment'' for a specific issuer is the
product of two components: A ``base credibility factor,'' determined by
the number of life-years of experience used to calculate the issuer's
reported MLR; and a ``deductible factor,'' determined by the average
deductible of the policies whose experience went into the reported MLR.
The credibility adjustment will be added to the reported MLR, as
provided in Sec. 158.221(a), before calculating rebates. As stated
above, the credibility adjustment applies to partially credible
issuers.
The base credibility factor recommended by the NAIC is based on an
actuarial analysis of anticipated claims experience. The results of
this analysis are summarized in Table 1, below.
[[Page 74882]]
[GRAPHIC] [TIFF OMITTED] TR01DE10.062
The deductible factor recommended by the NAIC is also based on the
independent actuarial consulting firm's analysis. It is intended to
recognize that the variability of claims experience is greater under
health insurance policies with higher deductibles than under policies
with lower deductibles. Few people incur claims above $10,000, which
means that high cost claims represent a much larger portion of the
total claims experience in a higher deductible policy than in a lower
deductible policy. As a result, issuers who write a small number of
high deductible policies are more likely to report a low MLR than an
issuer who covers the same number of lives under a low deductible
policy, even if the premium they establish is set to achieve the MLR
required by section 2718. Therefore, the deductible factor takes into
account greater variability among high deductible plans. The deductible
factors recommended by the NAIC are shown in Table 2.
[GRAPHIC] [TIFF OMITTED] TR01DE10.063
Under the NAIC model regulation, an issuer would use the deductible
factors from Table 2 to determine a deductible factor for the average
deductible of the coverage whose experience was used to calculate the
reported MLR. The factors included in Table 2 were developed by the
actuarial consultants to the NAIC using methods consistent with
standards of professional actuarial practice.
NAIC methodology uses ``linear interpolation'' to determine life
year factors for experience between the life year categories in table
1. HHS adopts this methodology in Sec. 158.230. When the number of
life-years reported by an issuer falls between two numbers on Table 1,
the base credibility factor is calculated by first determining where,
by percentage of the difference between those two numbers, the reported
number of lives falls. Thus if Issuer X reports 4,000 life-years, its
number of life-years falls 60 percent of the way between 2,500 and
5,000. To calculate the interpolated adjustment factor it is necessary
to determine the base credibility factor for the number of lives 60
percent of the way between 2,500 and 5,000. Therefore, this percentage
is multiplied by the difference between the base credibility factor
corresponding to the number of life-years on Table 1; 0.60 x
(.052-.037) = .009. To find the base credibility factor, this amount is
then subtracted from the factor corresponding to the lower number of
lives on Table 1. Thus, 0.052 - .09 is equal to .043, which is the base
credibility factor for an issuer covering 4,000 lives.
The deductible factor is based on the average deductible of all
policies whose experience is included in the reported MLR. When the
average deductible is greater than $2,500 and is between two of the
deductible categories shown in Table 2, the NAIC model regulation calls
for the deductible adjustment to be calculated by linear interpolation.
In Sec. 158.232 of this interim final regulation, HHS adopts the
methodology using linear interpolation.
The NAIC specifies that the number of life-years used to calculate
the base credibility factor matches the number of life-years that
comprise an issuer's experience as reported under subpart A. HHS adopts
this approach in Sec. 158.231. An issuer's credibility adjustment for
the 2011 MLR reporting year is based on the life-years and weighted-
average deductible for the 2011 MLR reporting year. An issuer's 2012
MLR reporting year credibility adjustment is based on experience from
the 2012 MLR reporting year, unless issuer experience for 2012 is less
than 75,000 life-years. In that circumstance, the 2012 MLR reporting
year experience is combined with 2011 MLR reporting year experience to
calculate the 2012 credibility adjustment.
An issuer's credibility adjustment for 2013 is based on three
years' experience, comprised of the current MLR reporting year and the
two previous MLR reporting years. In 2013, an issuer is not eligible
for a credibility adjustment if (1) the MLR (prior to any
[[Page 74883]]
credibility adjustment) in each of the three MLR reporting years was
below the MLR standard for each year, and (2) each of the three MLR
reporting years included 1,000 life-years or more. This exception
prevents issuers from receiving a credibility adjustment when the
issuer consistently sets its prices to produce an MLR below the
statutory 80 percent MLR standard.
In responding to HHS's request for comments, many issuers, industry
associations, and State departments of insurance emphasize that to
avoid requiring issuers to pay rebates due to statistical variations,
rather than due to their underlying pricing and benefits structure, it
is important to assess MLRs on sufficient numbers of lives for
statistical credibility. Commenters also argue that requiring issuers
to pay rebates when statistical variations lead to surpluses (low MLRs)
but requiring issuers to absorb losses when statistical variations lead
to losses (high MLRs) will lead to product volatility, market exit, and
inadequate levels of surplus to ensure solvency. HHS agrees that
rebates should be based on the underlying premium pricing, rather than
chance variation in claims experience. But as noted above, any
credibility adjustment can also serve to deprive insureds of rebates to
which they would otherwise be entitled under the Affordable Care Act.
HHS has concluded that the NAIC credibility adjustment methodology
provides an acceptable balance between the interests issuers have in
not paying rebates when a low MLR is the result of ordinary variation
in claims experience, and the interests consumers have in receiving
rebates when issuers provide coverage and establish prices that do not
result in MLRs, and therefore the value, required by the Affordable
Care Act.
4. Rebating Premium if MLR Standard Not Met (Sec. 158.240)
Section 158.240, subsections (a), (b) and (c), delineates the
general requirement regarding rebates, the calculation of the rebate
amount, and the time frame for payment of any rebate that may be due.
Section 158.240(a) simply provides that if an issuer does not meet the
applicable MLR standard set forth in Sec. 158.210 and, if applicable,
Sec. 158.211, then the issuer must provide a rebate to each enrollee
unless the issuer has too little experience to calculate a reliable
MLR. As discussed above, because an issuer that has fewer than 1,000
covered lives does not have sufficiently credible data to determine
that the MLR standard has not been met, a non-credible issuer is not
required to pay any rebates.
Section 158.240 explains the amount of the rebate due to enrollees.
The Affordable Care Act provides a rebate that is the amount by which
the applicable MLR standard exceeds the issuer's actual MLR multiplied
by ``the total amount of premium revenue (excluding Federal and State
taxes and licensing or regulatory fees and after accounting for
payments or receipts for risk adjustment, risk corridors, and
reinsurance * * *).'' This language describing premium revenue as the
premium paid minus taxes and other adjustments is the same as statutory
language describing the denominator of the MLR. The NAIC model
regulation matches the statutory methodology, and HHS adopts this
methodology. Therefore, the rebate paid to each enrollee is based on
the earned premium paid by or on behalf of the enrollee minus taxes and
other permissible adjustments.
The Affordable Care Act requires the issuer to ``provide an annual
rebate to each enrollee under such coverage, on a pro rata basis.'' The
NAIC determined, and the Department concurs, that this requirement is
most simply met by requiring the rebate returned to the enrollee to be
proportional to the amount of premium paid by or on behalf of the
enrollee. As noted above, the total rebate owed by the issuer is
required, by statute, to be a percentage of the issuer's total earned
premium. An individual who was covered by an issuer for only three
months would have paid substantially less than an individual who was
covered by the issuer for the entire MLR reporting year. It would be
unfair to pay both individuals the same dollar rebate. Similarly, an
individual or group that purchases coverage from the issuer that has a
higher deductible but lower premium should not receive the same dollar
rebate as an individual or group that paid a higher premium for a
product with a lower deductible. The rebate paid to a policyholder or
enrollee would be based upon the amount of premium paid minus taxes and
other permissible adjustments, multiplied by the amount by which the
issuer MLR is below the applicable MLR standard; the result is the
actual rebate.
For example, take an issuer who owes a five percent rebate to its
enrollees in the individual market. An enrollee may have paid $2,000 in
premiums for the MLR reporting year. If the Federal and State taxes and
licensing and regulatory fees that may be excluded from premium revenue
as provided in Sec. Sec. 158.161(a), 158.162(a)(1) and 158.162(b)(1)
are $150 for a premium of $2,000, then the issuer would subtract $150
from premium revenue, for a base of $1,850 in premium. The enrollee
would be entitled to a rebate of five percent of $1,850, or $92.50.
Section 158.240(d) requires issuers to provide any rebates that are
due no later than August 1 following the end of the MLR reporting year.
Since the report is due by June 1 of the year following the MLR
reporting year, this allows issuers two full months (a) to provide any
rebate that may be due, (b) for the group market, to notify their
employer clients to arrange for the distribution of the rebates, if
applicable, and (c) to prepare and send the notice of rebate that is
required by Sec. 158.250.
5. Form of Rebate (Sec. 158.241)
While the NAIC model regulation does not specifically address some
of the administrative details of section 2718(b)(1)(A) of the PHS Act,
which requires an issuer offering group or individual health insurance
coverage to provide an annual rebate to each enrollee if the issuer's
MLR is less than the statutory minimum, the NAIC advisory group's
proposals in this regard have been adopted. The statute does not
specify the particular form of rebate that is to be provided to
enrollees. For example, must the rebate be provided in the form of cash
or check, or may it be provided through a credit to premium? Does the
requirement differ based on whether the enrollee to whom a rebate is
owed is a current or former enrollee? Section 158.241 of this interim
final regulation addresses the method by which an issuer must provide
any rebate owing to enrollees and the issuer has the choice as to form
of the rebate for then-current enrollees but not for former enrollees,
who must receive an actual payment.
Several commenters addressed the administrative expenses involved
in distributing rebates. Although the NAIC model regulation does not
specifically address the form in which an issuer must disburse rebates,
an NAIC advisory group suggested that an issuer should be able to
choose whether to disburse rebate payments to current enrollees as a
premium credit or a cash lump sum. The NAIC advisory group also
proposed that an issuer should have to disburse rebate checks to former
enrollees. HHS considered the comments it received and has concluded
that the proposals made by the NAIC advisory group may reduce the
administrative burden felt by an issuer in providing rebates to its
enrollees.
Section 158.241(a) of this interim final regulation thus states
that an issuer may choose to provide current enrollees with a rebate in
the form of a premium credit (i.e., reduction in a premium
[[Page 74884]]
owed), lump-sum check, or, if an enrollee paid by credit card or debit
card, by lump-sum reimbursement to the same account that the enrollee
used to pay the premium. We believe that this ensures that enrollees
receive any rebate owing while giving issuers the ability to provide
the rebate in a way that has the least administrative burden. If an
issuer chooses to provide a premium credit to a recipient, the issuer
must apply the full amount of the rebate owing to the first premium due
on or after August 1. If the rebate exceeds the amount of the first
premium due on or after August 1, the issuer must apply any overage to
succeeding premium payments until the entire rebate has been credited.
With respect to rebates owing to former enrollees, Sec. 158.241(b)
requires the rebate to be made in a lump-sum, but allows an issuer the
flexibility to provide it by check or using the same method that was
used for payment of the premium, such as credit card or debit card.
Regardless of the method used to pay rebates, all enrollees eligible
for rebates must be notified as required by Sec. 158.250.
6. Recipients of Rebates (Sec. 158.242)
Section 2718(b) requires an issuer to provide a rebate to each
enrollee on a pro rata basis if the issuer has not met the applicable
MLR standard. However, it does not prescribe how rebates must be
distributed. This interim final regulation establishes methods for
distributing rebates that are efficient and cost-effective, and that
ensure that enrollees receive any rebate to which they may be entitled.
The NAIC, in an Issue Resolution Document on which it did not vote,
discussed that the rebates should be provided to the group policyholder
and that the group policyholder should be advised that enrollees may
have a claim to some or all of the rebate to the extent that they have
contributed to the premium. Numerous commenters also suggested that any
rebate should go to the company or person who actually paid the
premium, and not to the enrollee. They point out that under a group
policy the employer often pays a portion, or even all, of the premium.
In addition, when an employee pays a portion of the premium, it is
generally the employee and not every enrollee in the employee's family
who makes payment. This concept applies in the individual market as
well; it is often one family member who pays the premium on behalf of
all enrollees in the family. The Department agrees with the NAIC's and
the commenters' concerns. A technical reading of section 2718(b)(1)(A)
requires that the rebate shall be provided ``to each enrollee under
such coverage, on a pro rata basis.'' However, the purpose of the
section 2718 is to ensure that value is achieved for the premium paid.
It would frustrate the purpose of the section to deprive those who
actually paid premiums of the rebate, and to instead provide a windfall
to those who did not pay premiums with the ``value'' that was returned
by the issuer. Consistent with the NAIC discussion, HHS therefore
interprets this provision as requiring any rebate be provided on a pro
rata basis to the person or entity that paid the premium on behalf of
the enrollee. This requirement is addressed in Sec. 158.242.
Several comments HHS received in response to its April request for
information pertaining to this regulation also pointed out that group
policyholders may be in a better position to determine the rebate
amount each individual enrollee should receive. They suggested that
issuers be permitted to pay rebates to group policyholders for
distribution to enrollees. The Department agrees that group
policyholders and subscribers are in a better position than issuers to
fairly distribute rebates to individual enrollees given that it is the
group policyholders and subscribers, and not the issuers, who know the
extent to which the enrollees made the original premium payments.
However, the statute provides that it is the issuer's obligation to
provide the rebate, if any.
HHS has adopted an approach which satisfies both the statutory
requirement that an issuer provide any rebates and the practical
reality that group policyholders and subscribers are in a better
position to distribute any rebates. Section 158.242 of this interim
final regulation allows an issuer to enter into an agreement with a
group policyholder to distribute the rebates on behalf of the issuer.
HHS invites public comment on to whom rebates should be paid.
The regulation specifies that, regardless of whether an issuer
provides rebates to enrollees directly or indirectly through a group
policyholder, an issuer must take steps to ensure that each enrollee
receives a rebate that is proportional to the amount of premium paid by
that enrollee and that the group policyholder does not retain more of
the rebate than is proportional to the amount of premium it paid.
Therefore, this interim final regulation allows an issuer to
delegate its rebate distribution functions to a group policyholder, but
provides that the issuer remains liable for complying with all of its
obligations under the statute and maintains records received from the
group policyholder demonstrating that rebates were accurately
distributed.
7. De Minimis Rebates (Sec. 158.243)
Although the NAIC model regulation does not specifically address de
minimis rebate payments because the distribution of rebates was outside
the scope of the NAIC's statutory mandate, an NAIC actuarial subgroup
suggested that issuers should not be required to provide rebates in
minimal amounts that are largely of symbolic value. It argued that
setting the minimum threshold somewhere in the range of $1 to $20
should be sufficient to avoid requiring largely symbolic rebates to
enrollees. HHS agrees with this approach.
Section 2718(b) is also silent on the subject of whether there is a
de minimis amount below which issuers need not pay a rebate to an
enrollee. Without a minimum threshold, each enrollee would receive the
rebate owed to him or her, but the cost of processing and distributing
the rebate might be greater than the amount of the rebate.
The Department received several comments from issuers and others
who recommended that HHS set a minimum threshold for issuer payment of
rebates because of this potential for relatively high administrative
expenses associated with the provision of very small rebates.
We agree that it does not make sense for issuers to provide rebates
when the administrative cost of providing them exceeds their value to
enrollees. Thus, Sec. 158.243 provides that an issuer need not provide
rebates when the combined dollar amount of a rebate owed to the
policyholder and subscribers under a group policy, or to the subscriber
in the individual market, is less than five dollars per subscriber
covered by the policy. Five dollars is an amount that is commonly used
by States when setting de minimis levels for issuer refunds.
Although each de minimis rebate may seem insignificant, the
aggregate amount of such rebates by market type may be quite
substantial. Thus, consistent with the rebate requirements of the
Affordable Care Act, issuers should not be allowed to retain these
unpaid rebate funds, which belong to enrollees. Furthermore, if issuers
retained the unpaid rebate funds, it would in essence lower their MLR.
Instead, issuers must aggregate the de minimis rebates and distribute
them in equal amounts to all then-current enrollees who receive a
premium credit.
8. Unclaimed Rebates (Sec. 158.244)
The Affordable Care Act does not specifically address the situation
of rebates being unclaimed. This situation
[[Page 74885]]
is likely to occur either because an issuer has not been able to locate
certain enrollees, or enrollees have not redeemed their rebate
payments.
Some consumer representatives recommended that an issuer be
required to make all reasonable efforts to provide a rebate to an
enrollee and that an issuer be prohibited from keeping any unclaimed
funds. At least one consumer group recommended that such funds be
directed to a State consumer assistance program that has been approved
by the Department, or if such a program is unavailable, to the
Department itself. Another group recommended that rebates for any
individuals who cannot be located should be applied toward reduction of
premiums for all policyholders in the subsequent plan year.
We agree that an issuer should be required to make a good faith
effort to locate enrollees and to distribute to them any rebate that is
owed. This requirement is reflected in Sec. 158.244. We also believe
that an issuer should be prohibited from retaining unclaimed rebates.
However, unclaimed rebates will be subject to relevant State law
provisions.
9. Notice of Rebates to Enrollees (Sec. 158.250)
The Affordable Care Act and the NAIC model regulation provide that
an issuer must provide enrollees with rebates if its MLR falls below
the statutory standard, but neither specifies what information should
accompany a rebate. Section 158.250 of this interim final regulation
requires issuers to provide enrollees with a rebate notification along
with any rebate check or premium credit.
There are several reasons for this notification. Enrollees may not
understand why they are receiving a rebate and may not be familiar with
the significance of the MLR and the rebate requirement in the
Affordable Care Act. Without the information provided by this
notification, enrollees have no explanation as to how rebates are
calculated. In addition, MLR transparency is a way to educate consumers
and promote informed decision-making in the purchasing of health
insurance.
The rebate notification must accompany the rebate check or be sent
at the same time as the premium credit is applied. The rebate
notification must include a brief explanation of what an MLR is, why
the Affordable Care Act created the policy (for example, increased
transparency, incentive to lower premiums), and why the enrollee is
receiving a rebate. It must also include the aggregate amount of
premium revenue reported by the issuer during the MLR reporting year,
the issuer's MLR (taking into account any adjustment allowed by the
regulation), the required MLR threshold, the percentage of premium
being rebated, and the total amount being paid or credited to
enrollees, including the amount paid or credited to an employer based
on its having paid all or a portion of the premium. In addition, the
notification to enrollees must explain that rebates to current
enrollees are being provided in the form of premium credit, and that
rebates to former enrollees are being provided either by check or in
the same form as the premium was paid. For example, an issuer has the
option of reimbursing enrollees who paid the premium by credit card or
debit card by applying the rebate amount back to the credit or debit
card. The form of the rebate notification will be established by the
Secretary and published in guidance.
HHS is not requiring issuers who do not have to provide a rebate to
provide notification to enrollees about the MLR and the fact that no
rebate is owed. However, issuers who do meet the MLR standard may
choose to provide such notice to their enrollees.
10. Reporting Rebates to the Secretary (Sec. 158.260)
Section 2718(b) of the PHS Act is meant to ensure that consumers
receive value for their premium payments, and does so by requiring an
issuer that does not meet a specified MLR to rebate a portion of the
premium to enrollees. In order to provide for appropriate oversight and
enforcement for which regulations are specifically authorized by
section 2718(b)(3), HHS needs the ability to validate an issuer's
calculation and distribution of rebates. Accordingly, the interim final
regulation prescribes certain data retention, data access, and
reporting requirements.
Subpart A of this interim final regulation requires an issuer to
report to the Secretary data concerning premium revenue, how premium
revenue is spent, and the various categories of expenses that go into
determining the issuer's MLR. In Subpart B, the Department implements
the statutory requirement for rebates to enrollees, and as part of this
implementation, requires issuers to report to the Secretary certain
information regarding rebates.
The interim final regulation requires issuers to report, for each
MLR reporting year, information regarding the rebates it makes to
enrollees. Consistent with the reporting requirements in Subpart A,
Sec. 158.260(b) requires that the information reported regarding
rebates be aggregated by State, and by the large group, small group,
and individual markets within a State. The information required
includes:
(1) the number and percent of enrollees who receive a rebate;
(2) the amount of rebates provided to enrollees, including a
breakdown of how much of the rebates were paid to policyholders and how
much of the rebates were paid to subscribers;
(3) the amount of de minimis rebates that were aggregated and a
breakdown of how they were disbursed to enrollees; and
(4) the amount of unclaimed rebates, a description of the good
faith efforts that were made to locate the applicable enrollees, and a
description of how the unclaimed rebates were disbursed.
HHS considered several options for the timing of reporting the
information required by Sec. 158.260. In doing so, HHS has tried to
balance the need for timely information and the desire to minimize the
administrative burden on issuers. Almost all of the information
required by Sec. 158.260 should be available to issuers at the time
they submit the report required under Sec. 158.110 for each MLR
reporting year. Thus, for that set of information, the Department is
requiring that it be submitted with the report required under Sec.
158.110. The amount of unclaimed rebates would be the only information
that would not be available to the issuer at the time it reports its
data for the MLR reporting year, since the issuer needs time to make a
good faith effort to locate former enrollees and to know if certain
enrollees fail to cash their rebate checks. HHS is requiring that this
information be submitted with the report required under Sec. 158.110
for the subsequent MLR reporting year.
11. Effect of Rebate Payments on Solvency (Sec. 158.270)
Section 158.270 addresses concerns expressed in some comments that
the obligation to pay rebates might cause an issuer's surplus to
decline to levels threatening its solvency. The NAIC also raised
concerns about issuer solvency in its October 13, 2010 letter to the
Secretary. Issuer solvency is, of course, an important consideration
and is a major focus of State insurance regulators. Consistent with the
NAIC's concern, this interim final regulation provides, therefore, that
the Secretary may permit the payment of rebates by an issuer to be
deferred if the insurance commissioner in its State of domicile informs
the Secretary that the timely payment of rebates would cause the
issuer's risk based capital (RBC) level to
[[Page 74886]]
fall to a level that causes concern about its solvency.
Section 158.270 provides that a State's insurance commissioner,
superintendent, or other responsible official must notify the Secretary
if the payment of rebates by a domestic issuer will cause the issuer's
RBC level to fall below specific regulatory thresholds. The State must
provide the Secretary with the domestic issuer's RBC reports for the
current year and the prior two years, along with a calculation of the
amount of rebates that would be owed by the issuer.
Section 158.270 provides that the Secretary will review this
information, along with any other information requested from the
issuer, and will determine whether the timely payment of rebates would
cause the issuer's RBC level to fall below the specified regulatory
action level. When the Secretary makes this determination, the
Secretary will provide that the issuer must pay these rebates, with
interest, in a future year in which payment of the rebates would not
cause the issuer's RBC level to fall below the specified regulatory
action level.
E. Subpart C--Potential Adjustment to the Medical Loss Ratio for a
State's Individual Market
1. Introduction
Section 2718(b)(1)(A) of the PHS Act establishes MLR standards for
insurance coverage sold in the individual market, the small group
market, and the large group market. For the small group and individual
markets, the MLR standard is 80 percent. For the large group market,
the MLR standard is 85 percent. However, if a State sets a higher MLR
within its State, that higher MLR must be met.
Section 2718(b)(1)(A)(ii) also provides that ``the Secretary may
adjust'' the 80 percent level with respect to the individual market of
a State ``if the Secretary determines that the application of such 80
percent may destabilize the individual market in such State.'' The PHS
Act does not, however, define ``destabilize the individual market'' or
provide the process or criteria for making a determination regarding
potential destabilization of that market. In addition, the section does
not specify the kind or amount of adjustment the Secretary may make.
Subpart C of this interim final regulation implements this
provision of section 2718(b)(1)(A)(ii) by addressing these important
considerations, and adopts the recommendations of the NAIC on this
issue. It sets forth the process by which the Secretary may exercise
the authority provided under section 2718(b)(1)(A)(ii). It also
establishes the criteria the Secretary will apply in determining
whether to lower the MLR standard applicable to the individual market
in a State.
2. Subpart C's Approach and Framework
HHS has received comments from many interested parties regarding
the application of MLR standards in the individual market and the
process for granting requests to adjust the required standard.
Notably, in an October 13, 2010 letter to the Secretary, the NAIC
observed that the MLR standard ``may enhance the value of plans for
consumers and improve carrier accountability for spending and pricing
decisions,'' but also that improper application of it ``could threaten
the solvency of insurers or significantly reduce competition in some
insurance markets.'' The NAIC further stated that ``the threshold
consumer protection is ensuring a health insurance company is
solvent.'' HHS agrees with the NAIC on the importance of maintaining
issuer solvency. If an insurance company does not have enough money to
pay claims, then any MLR standard becomes irrelevant.
Further, while the focal point of any market destabilization
analysis must be the manner in which any requested MLR adjustment may
affect consumers, as the NAIC points out, consumers have numerous
interests that extend beyond whether they will receive rebates,
including an interest in multiple health insurance options. To that
end, this interim final regulation adopts the recommendation the NAIC
Consumer Representatives made in an October 25, 2010 letter to the
Secretary, that the Secretary ``establish a formal process that
provides ample opportunity for consumers and consumer advocate input
and involvement in determining whether and to what extent adjustments
should be made in any State.'' The Department believes the
recommendation by the Consumer Representatives should apply to all
stakeholders, including issuers, agents and brokers, health care
providers, as well as consumers, and has therefore established a
process by which all stakeholders may provide information and input.
This interim final regulation does not require the Secretary to
find that adherence to the 80 percent MLR standard is certain to result
in market destabilization in order to grant an adjustment from it. Nor
does it allow the Secretary to grant an adjustment in the case where
market destabilization is a remote possibility. Rather, this interim
final regulation both allows and requires an adjustment to a State's
MLR to be granted when there is a reasonable likelihood that market
destabilization, and thus harm to consumers, will occur.
Subpart C establishes the procedure and criteria the Secretary will
use to assess requests to adjust the MLR standard that applies in the
individual market in a State. We note that the law allows adjustments
of the MLR for the individual market in a State and does not apply to
the small group market or to the large group market.
Section 158.301 states the criteria the Secretary will apply in
considering requests to adjust the minimum individual market MLR
standard applicable to a State. Subpart C then proceeds to address the
four major issues that HHS believes are relevant to any potential
requests for adjustments to the statutory MLR standard. The first is
who may submit a request and the duration of such a request. The second
is the information the submitter of such a request will be required to
supply. The third is the criteria the Secretary will use in making her
decision regarding the request. The fourth is the process by which the
Secretary will receive information and make her determination. Each of
those issues is discussed separately below.
Finally, in its October 13, 2010 letter, the NAIC did not recommend
a national transition, but instead wrote that ``while some states seek
national relief from the 2011 MLR, all states recognize that
transitional relief may be appropriate for some state insurance
markets.'' (Emphasis added.) Commenters in the industry have also
advocated for a ``national'' transition or ``national'' relief from the
MLR standards. As indicated above, the Affordable Care Act does not
contemplate or provide for such relief in the context of Sec. 158.301
which, as required by section 2718(b)(1)(A)(ii), provides for State-
specific relief.
However, it is clear that other sections of this regulation do in
fact provide for national rather than State-specific relief from the
immediate application of the MLR standards, and not just in the
individual market. The credibility adjustments provided for in
Sec. Sec. 158.230-158.231 are national in scope and apply without
regard to State-specific market conditions. First, the credibility
adjustments result in many issuers being presumed to meet the MLR
standards altogether because of their small size. Second, the
adjustments add up to 8.3 percent to an issuer's reported MLR for
smaller plans that are not
[[Page 74887]]
presumed to meet the MLR standard already. Third, issuers with policies
that have large deductibles may receive an additional adjustment of up
to 6.1 percent on top of the 8.3 percent. Other components of the MLR
formula, such as treatment of expenses for quality improving activities
and treatment of Federal and State taxes, also better enable issuers to
meet the MLR standard. In addition, the process set out in Subpart C
provides further opportunity to modify MLR standards in the individual
market to address state-specific circumstances. The rationale for a
national transition--which is to provide accommodation for issuers to
meet the MLR standards--we believe is satisfied by these many
adjustments.
3. Who May Request Adjustment to the MLR and Duration of Request
(Sec. Sec. 158.310-158.311)
Section 158.310 provides that a request for an adjustment to the
MLR standard for a State must be submitted by that State's insurance
commissioner or other applicable State official. State insurance
commissioners have valuable local knowledge of their State's insurance
market and share a responsibility to protect consumers, which makes
them best qualified to attest to the impact of the MLR standard on
consumers within their State. State insurance regulators also often
have considerable power to compel or influence issuers to take steps
that may reduce the risk of market destabilization.
It is appropriate for three reasons that requests for an adjustment
to the MLR standard come from State insurance commissioners on behalf
of the State individual insurance market as a whole. First, the statute
allows such an adjustment only for all issuers in the individual market
in a State; it does not allow an adjustment for specific issuers.
Second, only the State commissioner has knowledge of all issuers'
experience and market conduct in the State and as to any action the
State might deem appropriate to address any potential for market
destabilization. Third, State insurance commissioners have
responsibility for protecting the interests of the general public,
policyholders, and enrollees within their respective States.
Section 158.311 provides that a request for an adjustment to the
MLR standard may be for one, two, or three MLR reporting years. This
permits a State to request an adjustment for up to three years, as
deemed appropriate by the State, based on the condition of its
individual health insurance market. Allowing for multi-year
adjustments, when necessary, will provide certainty to issuers within
the State regarding the applicable MLR standard, which in turn enhances
stability of the market.
4. Required Information (Sec. Sec. 158.320-158.323)
Subpart C requires the applicable State official to provide the
Secretary with information on the applicant State and the market that
is the subject of the request. Section 158.323 requests contact
information for the person submitting the State's request. This
information is needed because the Secretary anticipates working closely
with individual States regarding their requests.
The remaining information requested by Subpart C falls into two
general categories. The first is information about how the individual
health insurance market is organized and functions in the State.
Section 158.321 requests the following structural and operational
information about the submitting State's individual health insurance
market:
[dec221] The State's current MLR standard for the individual
market, if any. Such an MLR is relevant to determining the effect the
statute's 80 percent MLR may have in the State.
[dec221] Any requirements that an issuer seeking to withdraw from
the State's individual health insurance market must meet before doing
so.
[dec221] Any limitations imposed by the State on issuers regarding
rating based on health status.
[dec221] Mechanisms available in the State to provide consumers
with options in the event an issuer in the individual market withdraws
from the State, such as a guaranteed-issue or issuer-of-last-resort
requirement or a State-operated high-risk pool.
[dec221] Operational and financial information about the issuers
operating in the State's individual market, including the capacity of
incumbent issuers to write additional business, the premiums such
issuers charge and the benefits they offer, and the amount they pay to
agents and brokers.
Notably, in its October 13, 2010 letter to the Secretary, the NAIC
stated that among the factors State regulators would consider in making
their own determinations as to whether application of the statutory 80
percent MLR standard would destabilize the individual market are the
``potential impact on premiums paid by current policyholders,'' the
``potential impact on benefits and cost-sharing of existing products,''
and ``the potential impact on consumer access to agents and brokers.''
This information will assist the Secretary in understanding the
insurance market in the State submitting a request and will enable her
to better address the criteria for assessing the request set forth in
this subpart.
The second general category of information a State must provide is
its own assessment of how best to address any risk of destabilization
through an adjustment to the MLR standard. In its October 13 letter,
the NAIC stated that ``when recommending to HHS that a transitional
exception should be applied to a state or insurance market, the
regulator shall also propose a solution to the factors on which the
recommendation is based.'' The NAIC also suggested that HHS give
deference to its analysis and recommendations. HHS agrees with the NAIC
that, just as a State commissioner is best qualified to request an
adjustment to the MLR standard, a State commissioner seeking an MLR
adjustment is also best qualified to suggest an appropriate alternative
MLR standard for each of the reporting years for which the State is
requesting an adjustment. Thus, Sec. 158.322 further requires any
request for an MLR adjustment to estimate the rebates that would be
paid under the 80 percent individual market MLR standard and under the
alternate proposal a State official submits for each year for which the
State is requesting an adjustment.
Section 158.320 also provides some flexibility in the event certain
data are unavailable or collection of certain data is unduly
burdensome. In such situations, a State may provide notice of this to
the Secretary and the Secretary may request alternative supporting data
or move forward with her determination on the State's request without
the data the State is unable to provide.
5. Assessment Criteria (Sec. 158.330)
Section 158.330 sets forth the criteria the Secretary will use in
determining the risk of destabilization. It does not set forth a single
test for determining that risk, but rather states that the Secretary
may consider five main criteria in assessing such risk.
The first criterion the Secretary will consider, as set forth in
Sec. 158.330(a), is the number of issuers reasonably likely to exit
the individual market or cease offering specific products in a State
absent an adjustment to the 80 percent MLR and the resulting impact on
competition in the State. In making this determination, the Secretary
may consider (1) each issuer's MLR relative to an 80 percent MLR, (2)
each issuer's profitability and risk-based capital level, (3) the
requirements and limitations within the State with respect to market
withdrawals, and (4) the number of
[[Page 74888]]
issuers that may not be required to pay rebates pursuant to Sec.
158.240.
Second, the Secretary may consider the number of individual market
enrollees covered by issuers that are reasonably likely to exit the
State absent the adjustment. All other things being equal, the greater
the number of policyholders in a market who are enrollees of issuers
reasonably likely to exit the market, the greater the likelihood of
market destabilization.
Third, the Secretary will consider whether, absent an adjustment to
the MLR standard, consumers may be unable to access insurance agents or
brokers. Access could be restricted if, in order to comply with MLR
standards, issuers reduced compensation to agents or brokers to the
point where agents or brokers were not available to assist consumers in
finding coverage and other options for consumers were limited. In its
October 13th letter, the NAIC noted the important role that agents and
brokers will play in the next four years as markets transition to
Exchanges, and encouraged HHS to ``recognize the essential role served
by producers and accommodate producer compensation arrangements in any
MLR regulation promulgated.'' This criterion recognizes that role.
Fourth, the Secretary will consider the alternate coverage options
available within the State for enrollees of issuers that are reasonably
likely to exit the market--or as the NAIC puts it in its October 13
letter, she will consider ``the ability of consumers to find easily
affordable products in the State should their carrier leave the State
market.'' Section 158.330(d) provides that, in assessing alternative
coverage options, the Secretary will take into account (1) any
requirement that issuers who exit the State's individual market must
have their block(s) of business assumed by another issuer, (2) which
issuers may remain in the State if the adjustment request were denied,
and the breadth and price of the products offered by such issuers, (3)
the capacity of incumbent issuers to write additional business, (4) the
mechanisms, such as guaranteed-issue products, an issuer of last
resort, or a State high risk pool, available to the State to provide
coverage to consumers to the extent, if any, that issuers withdraw from
the market, and (5) any authority the insurance commissioner might have
that would help stabilize the State's individual insurance market.
Fifth, the Secretary will consider the impact on premiums charged,
the benefits offered, and the cost-sharing provided to consumers by
issuers remaining in the market in the event one or more issuers were
to withdraw from the market. For example, premiums may rise if the loss
of one or more issuers reduced competition to an extent that allowed
remaining issuers to increase premiums beyond what competitive
conditions would have allowed.
Section 158.330 also states that the Secretary will consider any
other relevant information submitted by the State's insurance
commissioner, superintendent, or comparable official in the State's
request.
6. Process (Sec. Sec. 158.340 Through 158.350)
Section 158.340 provides that the request for adjustment must be
submitted in electronic format, and Sec. 158.340(a) provides that all
the information that Subpart C requires in support of a request must be
submitted electronically. HHS has determined that these requirements
are necessary if, as the PHS Act envisions and the public interest
demands, State requests for MLR adjustments are to be handled as
expeditiously as possible. Section 158.340(b) permits a State, solely
at its option and only if it wishes, also to submit to the Secretary a
copy of its request by regular or express mail.
Section 158.341 provides that the State's request will be promptly
posted on the Secretary's healthcare.gov website. In addition, Sec.
158.342 states that the Secretary will invite public comment upon the
request when it is posted, and will, when assessing the request,
consider any comments filed by the public within 10 days of that
posting. Section 158.343 provides that any State that submits a request
may, at its option, hold a public hearing and create an evidentiary
record with respect to its request. If the State does so, the Secretary
will consider the evidentiary record of the hearing in making her
determination as to the State's request for an adjustment. Section
158.344 provides that the Secretary may also hold a public hearing with
respect to a State's request, at the Secretary's discretion. HHS
believes that a transparent yet expeditious process will allow all
interested parties to provide input while satisfying the need to come
to a prompt determination.
Once the Secretary determines that the request has sufficiently
satisfied the information required by the interim final regulation and
the public comment period has expired, the Secretary will make a
determination within 30 days as to whether to grant a State's request
for an adjustment to the MLR standard. Section 158.345 also allows the
Secretary to extend that 30-day period up to an additional 30 days at
her discretion. The Secretary believes that it is in the interests of
both issuers and consumers in a State to have certainty about the
applicable MLR for the individual market in the State at the earliest
practicable date.
Section 158.350 provides that a State submitting a subsequent
request for an adjustment shall ``submit information as to what steps
the State has taken since its initial and other prior requests, if any,
to increase the likelihood that enrollees who have health coverage
through issuers that are considered likely to exit the State's
individual market will receive coverage at a comparable price and with
comparable benefits if the issuer does exit the market.''
A State that disagrees with the Secretary's initial decision
regarding its request for an adjustment to the statutory 80 percent MLR
standard may request reconsideration of a denial if it does so in
writing within 10 days of the initial decision. Section 158.345(b)
provides that the Secretary will issue her determination on the request
for reconsideration within 20 days of receiving the request. Section
158.345(a) makes clear that a State may include any additional
information it wishes in support of its reconsideration request.
The process established in Subpart C seeks to give States and
interested parties full opportunity to present all information
necessary and helpful to a determination of requests for adjustments to
the statutory 80 percent MLR standard while ensuring that States and
issuers will know as early as possible the standard that issuers in the
State will be required to meet.
7. Public Comments
In creating this framework for considering a State's request for an
adjustment of the MLR for the individual market, HHS reviewed and took
into consideration the public comments submitted in response to its
Notice. Only a relatively few of the comments received mentioned the
authority granted to the Secretary regarding potential destabilization
in a State's individual market and offered suggestions with respect to
the process and criteria for determining destabilization.
Commenters specifically suggested that markets may become
destabilized if issuers choose to withdraw from the market or terminate
or materially change existing policies. Commenters also suggested that
markets may become destabilized if customers losing coverage have
insufficient product choice or are unable to find new
[[Page 74889]]
coverage that covers pre-existing conditions. The determination whether
to adjust the MLR standard should, commenters suggested, take into
account guaranteed issue options, issuers of last resort, requirements
that issuers offer individual coverage, and eligibility flexibility
under State high risk pools. HHS agrees that these are important
considerations, and has incorporated into this Subpart consideration of
both the potential causes of destabilization and the systems in place
that mitigate destabilization risks.
Other commenters suggested potential warning signals of market
destabilization. These included volatility in premium rates, decreases
in issuers' reported capital levels, increases in assumption
reinsurance, changes in marketing, increases in complaints from brokers
or consumers, declines in insurance coverage, increases in applications
to State high risk pools, and significant changes in benefit design.
State insurance commissioners may wish to further comment on these
factors and other local trends in their requests for an adjustment.
One insurance issuer's comment letter suggested that whether at
least 10 percent of enrollees are impacted by exiting issuers or at
least 10 percent of products are withdrawn from the marketplace may be
valid criteria for determining market destabilization. While HHS agrees
that market destabilization could not occur absent a significant impact
on consumer welfare, HHS believes it is difficult to generalize and
create a single numeric test given the different characteristics of
State insurance markets, different State laws, and different types of
issuers.
As the NAIC Consumer Representatives noted in their letter, the
NAIC addressed market destabilization in an ``issue resolution
document.'' That document suggested the Secretary consider existing
State laws and historic MLRs in each State. The Secretary seeks
information regarding existing State laws and issuers' MLRs in order to
consider them in connection with a State's request for an adjustment of
the MLR standard in the individual market. HHS notes that although
State MLR standards are, in general, lower than the 80 percent MLR
standard, many issuers are currently above both the 80 percent MLR
standard and the applicable State regulatory standard. HHS also
received comments suggesting that the MLR standard in all States be
adjusted to historic MLR levels and increased to 80 percent over a
three year period until 2014. The NAIC did not recommend a national
transition. Instead, while noting in its October 13th letter that
``some states seek national relief from the 2011 MLR, all states
recognize that transitional relief may be appropriate for some State
insurance markets.'' (Emphasis added.)
Finally, an NAIC advisory subgroup suggested that the Secretary may
consider State laws and regulations regarding cancellation and non-
renewal of health insurance and the cost to issuers of withdrawing from
the individual health insurance market. HHS agrees that in making a
determination regarding market destabilization, alternatives available
to a State and to an issuer should be considered, and has provided that
these are factors to be considered in assessing whether to grant an
adjustment to the 80 percent MLR for a State's individual market.
F. Subparts D-F--HHS Enforcement, Additional Requirements on Issuers,
and Federal Civil Penalties
Section 2718 of the PHS Act created two requirements for health
insurance issuers. Under section 2718(a) of the PHS Act, all health
insurance issuers in the group and individual markets are required to
report to the Secretary certain data concerning the amount of premium
revenue as well as the amounts spent on clinical care, quality
improvement activities, and adjusted non-claims expenses. Section
2718(b) requires the calculation of MLR and payments of rebates to
enrollees if the MLR standard is not met.
The data that must be reported to the Secretary under section
2718(a) of the PHS Act are addressed in Subpart A of this interim final
regulation. The calculation of rebates is addressed in Subpart B.
Subparts D through F of this interim final regulation implement
enforcement authority in section 2718(b)(3) and provide for enforcement
of the reporting obligations set forth in section 2718(a) and rebate
requirements in section 2718(b).
Section 2718(b)(3) of the PHS Act [as added by the Affordable Care
Act] specifically requires the Secretary to promulgate regulations to
enforce the provisions of section 2718. It makes HHS responsible for
direct enforcement of the reporting and rebate provisions of section
2718. This interim final regulation implements this statutory mandate.
Section 2718(a) requires issuers to report the data specified
directly to the Secretary, rather than to the States. HHS is thus best
situated, consistent with the mandate in section 2718(b)(3), to
directly enforce the requirement that data be reported to it. This does
not mean, however, that the States should play no role in enforcement
of these provisions.
States are currently responsible for solvency and, in many States,
rate oversight as well. In performing these functions, many states
collect and review data and conduct audits of issuer information
related to MLRs. In addition, some twenty-nine States already have
experience in regulating MLRs either prospectively through rate filing
or retrospectively through rebate requirements. States already receive
detailed financial reporting from issuers for solvency purposes.
Finally, section 2718 of the PHS Act gives States the discretion to
impose a higher MLR standard than that prescribed in section 2718.
Taking all of these factors into consideration, together with the
historical role that States have had in regulating insurance, it is
appropriate for the States to have an oversight role with respect to
the reporting provisions of section 2718(a), even though the statute
gives HHS direct enforcement authority.
Under the regulation, while HHS is responsible for enforcing the
reporting provisions and for conducting audits to test the validity and
accuracy of the data reported (Sec. 158.401), HHS may also, in its
discretion, accept the findings of audits conducted by State
regulators, so long as certain specified conditions are met (Sec.
158.403). In particular, HHS may accept the findings of audits from a
State which report on:
(1) The validity of data on expenses and premiums reported to the
Secretary, including the appropriateness of the allocations of
expenses, taxes, and revenues used in such reporting;
(2) Whether the activities associated with the issuer's reported
expenditures for quality improving activities meet the definition of
such activities; and
(3) The accuracy of rebate calculations and the timeliness and
accuracy of rebate payments.
In addition, in order to accept the findings of audits from a
State, the State's laws must permit the public release of the audit
findings of health insurance issuers and the State must submit its
audit findings to HHS within 30 days of finalization and submit all
preliminary or draft reports within six months of the completion of
audit field work unless the audit findings have already been finalized
and reported to HHS.
While this interim final regulation provides that HHS may accept
audit findings from a State, it makes clear that pursuant to the
statutory requirement in section 2718(b)(3), HHS is responsible
[[Page 74890]]
for direct enforcement of the MLR reporting and rebate provisions, and
retains the discretion to conduct its own audits of issuers, including
in States that have acceptable audit programs as defined in the
regulation. This approach recognizes that although States have
traditionally conducted financial examinations for the purpose of
determining solvency, the type of audit needed to assess whether the
data reported pursuant to section 2718 is accurate and valid is quite
different. As HHS and the States develop greater experience and
expertise in conducting these audits, it is likely that the States'
role will increase.
This interim final regulation sets forth the procedure to be
followed by HHS when it conducts an audit of an issuer to determine
whether the reports it has submitted pursuant to this regulation are
accurate and valid. The procedure set forth is comparable to the
procedures used by HHS when conducting audits of Medicare Advantage
plans pursuant to 42 CFR Part 422.
This interim final regulation contains provisions requiring issuers
to retain documentation relating to the data reported, and requiring
issuers to provide access to that data to HHS or its outside auditors.
These provisions are intended to make it possible for HHS or the
relevant State to have access to the information needed to determine
whether the reports submitted are accurate and valid.
Finally, this interim final regulation provides for the imposition
of civil monetary penalties in the event an issuer fails to comply with
the reporting and rebate requirements set forth in the regulation. It
provides criteria and a process for determining whether and in what
amount such penalties should be imposed. While HHS's intent is not to
be punitive to issuers, given the importance of receiving timely and
accurate reporting and making appropriate rebates, and given the desire
to bring down the cost of health care for consumers as soon as
practicable following the effective date of the Affordable Care Act,
this regulation strikes a balance between penalties that are severe
enough so as to encourage compliance with the requirements of the
regulations but not so severe as to be punitive. The civil monetary
penalties provided for are identical to those for violations of title
XXVII that are set forth in the current regulations on enforcement, 45
CFR 150.301 et seq. They provide for a penalty for each violation of
$100 per entity, per day, per individual affected by the violation. HHS
is interested in public comments as to the proper amount or range of
penalties for violations of various provisions of this interim final
rule. This interim final regulation also adopts the provisions in the
existing enforcement regulation regarding factors in aggravation and
mitigation that HHS will take into account in determining whether to
impose civil monetary penalties and if so, in what amount.
The interim final regulation also provides that if a State has
assessed a penalty against an issuer, then HHS will take that into
account in considering whether it should assess any penalty for
violation of the requirements of this Part.
III. 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.
IV. Waiver of Proposed Rulemaking and Delay of Effective Date
Section 2792 of the PHS Act authorizes the Secretary to promulgate
any interim final rules determined to be appropriate to carry out the
provisions of Part A of title XXVII of the PHS Act. The provisions of
these interim final regulation requirements in section 2718, and the
foregoing interim final rule authority applies to this interim final
regulation.
In addition, under section 553(b) of the Administrative Procedure
Act (APA) (5 U.S.C. 551 et seq.) a general notice of proposed
rulemaking is not required when an agency, for good cause, finds that
notice and public comment thereon are impracticable, unnecessary, or
contrary to the public interest. Although the provisions of the APA
that ordinarily require a notice of proposed rulemaking do not apply
here because of the specific authority granted by section 2792 of the
PHS Act, even if the APA were applicable, the Secretary has determined
that it would be impracticable and contrary to the public interest to
delay putting the provisions of this interim final regulation in place
until a public notice and comment process was completed.
Prior notice and comment in this situation is impracticable because
section 2718 of the PHS Act directs the NAIC, not later than December
31, 2010, and subject to certification by the Secretary, to establish
uniform definitions of the activities reported as reimbursement for
clinical services, activities that improve health care quality, and
non-claims costs. However, the reporting required by section 2718 of
the PHS Act applies to plan years beginning not later than January 1,
2011. The NAIC transmitted its recommendations to the Secretary on
October 27, 2010, in the form of a model regulation. The regulation
implementing the reporting requirements must be in effect on or before
January 1, 2011, so that issuers, regulators, and consumers know what
information must be reported and how to aggregate it prior to the time
period which they must report. There are fewer than 60 days between
when HHS would be able to review the NAIC's recommendations, certify
them, and issue an implementing regulation.
Therefore, we find good cause to waive the notice of proposed
rulemaking and to issue this final rule on an interim basis. We are
providing a 60-day public comment period.
In addition, the Congressional Review Act, at 5 U.S.C. 801(a)(3),
ordinarily requires that the effective date of a ``major rule'' such as
this interim final rule be at least 60 days after publication. However,
under 5 U.S.C. 808(2), this delay of effective date may be modified
when an agency ``for good cause finds (and incorporates the finding and
a brief statement of reasons therefore in the rule issued) that notice
and public procedure thereon are impracticable, unnecessary, or
contrary to the public interest.'' Specifically, where ``good cause''
is found to waive prior notice and comment, the rule may ``take effect
at such time as the Federal agency promulgating the rule determines.''
5 U.S.C. 808. Given the exigencies discussed above, and the fact that
the provisions of this rule apply, by statute, on January 1, 2011, we
find good cause under section 808 to make this interim final rule
effective on that date.
V. 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 collection of information requirement is submitted to
the Office of Management and Budget (OMB) for review and approval. In
order 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.
[[Page 74891]]
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.
We are soliciting public comment on each of these issues for the
following sections of this document that contain information collection
requirements (ICRs):
A. ICRs Regarding MLR and Rebate Reporting Requirement (Sec. 158.101
Through Sec. 158.170)
This interim final regulation describes the information that will
be reported by health insurance issuers on an annual basis to the
Secretary starting in 2012, and quarterly in 2011 only for certain
plans. Issuers' submissions will include information regarding
reimbursement for clinical services, expenditures for activities that
improve health care quality, other non-claim costs, earned premiums,
and Federal and State taxes and regulatory fees, among other data
elements. Issuers will be required to calculate MLRs and rebates as
part of their submission to the Secretary.
Generally, the data and methodologies that the regulation instructs
issuers to use follow the NAIC 2010 blank, approved August 17, 2010 and
the NAIC MLR model regulation, which was finalized on October 27, 2010.
Most issuers file information with the NAIC on a regular basis, in
accordance with State laws; it is expected that issuers who typically
file information with the NAIC will file the supplemental exhibit and
the rebate reporting documents that the NAIC created in fulfilling its
mandate in section 2718. We expect the NAIC to collect MLR and rebate
information beginning for plan year 2010 and to continue collecting
such data for the foreseeable future.
HHS's data collection requirements described in this interim final
regulation are very similar to the NAIC's. One exception is that we are
requiring health insurance issuers who sell expatriate plans or mini-
med plans to disaggregate that business from the rest of their business
in that market segment and report the MLR data separately. As discussed
above in the impact analysis section, HHS estimates that approximately
442 entities will submit reports for each of the States and markets in
which they operate; further, we estimate that approximately 25 health
insurance issuers will report data for expatriate plans and 50 health
insurance issuers will report data for mini-med plans.
At this time, HHS has not developed the MLR and rebate forms that
health insurance issuers will have to complete on an annual basis
beginning for plan years starting January 1, 2011. In addition, as
described above, we are requiring issuers who opt to separately report
the experience for expatriate plans and mini-med plans to submit
quarterly reports in 2011, so that we can better understand these
products. We will revisit the special filing circumstances for
expatriate plans and mini-med plans after reviewing the quarterly
filings. We plan to publish the instructions and forms that issuers
must file for all plans in future guidance. At that time we will
solicit public comments on both the forms the estimated burden imposed
on health insurance issuers for complying with the provisions of this
interim final regulation. The information collection requirements
associated with Sec. Sec. 158.101-158.170 will become effective upon
OMB approval. HHS will publish a notice in the Federal Register
notifying the public of OMB approval at the appropriate time.
B. ICRs Regarding Notice of Rebates to Enrollees (Sec. 158.250)
Within Subpart B of this interim final regulation, we describe the
obligation of health insurance issuers to calculate and pay rebates to
consumers in years when the issuer's MLR does not meet the applicable
minimum MLR threshold. In addition, the interim final regulation
requires issuers to provide information to consumers about the rebate
they are receiving. At this time, HHS has not developed the model
disclosure language for the rebate notice to enrollees that issuers
will be required to send beginning August 1, 2012, based upon plan
years starting January 1, 2011. In the near future, HHS will publish
the model disclosure language and will solicit public comment. At that
time, and per the requirements outlined in the Paperwork Reduction Act,
we will estimate the burden on health insurance issuers of complying
with this provision of this interim final regulation. The information
collection requirements associated with Sec. 158.250 will become
effective upon OMB approval. HHS will publish a notice in the Federal
Register notifying the public of OMB approval at the appropriate time.
C. ICRs Regarding Retention of Records (Sec. Sec. 158.501-158.502)
Subpart E of the interim final regulations establishes the
Secretary's enforcement authority regarding the reporting requirements
under section 2718. Issuers must maintain all documents and other
evidence necessary to enable HHS to verify that the data required to be
submitted comply with the definitions and criteria set forth in this
interim final regulation, and that the MLR is calculated and any
rebates owing are calculated and provided in accordance with this
interim final regulation. The interim final regulation requires issuers
to maintain all of the documents and other evidence for the current
year and six prior years, unless a longer period is required under
Sec. 158.501.
We expect all issuers will have to retain data relating to the
calculation of MLRs; we expect only some issuers will have to retain
information regarding the payment of rebates and the notice to
enrollees. We believe that the burdens associated with our record
retention requirements do not exceed standard record retention
practices in that issuers are already required to retain the records
and information required by this interim final regulation in order to
comply with the legal requirements of their States' departments of
insurance. For that reason, we are assigning a minimal burden to these
requirements. We estimate that 442 issuers must comply with the
aforementioned requirements. We further estimate that it will take each
issuer a total of one hour to file and maintain both the data for MLR
calculations and the information regarding payment of rebates and
notices to enrollees. The total estimated annual burden associated with
the requirements in Sec. Sec. 158.501 through 158.502 is 442 hours at
a cost of $10,045.
However, we welcome comments regarding the burden associated with
maintaining the information described in subpart E of this interim
final regulation.
D. ICRs Regarding State Request for MLR Adjustment (Sec. Sec. 158.301-
158.350)
Subpart C of this interim final regulation implements the
provisions of section 2718(b)(1)(A)(ii). The interim final regulation
describes the data and narratives which States must submit that are
seeking an adjustment to the applicable MLR in the individual market
for their State. There is no standardized application form associated
with a State's request. As discussed in Sec. Sec. 158.321, 158.322,
and158.323, the data elements that a requesting State must provide
include:
The applicable State minimum required MLR, if any;
State individual market withdrawal requirements, if any;
[[Page 74892]]
Any mechanisms to provide options to consumers in case of
issuer withdrawal;
Information on issuers in the State's individual market;
The State's proposed adjustment to the minimum MLR for the
State's individual market; and
The contact information for the State representative.
In addition, a State whose request for adjustment to the MLR
standard has been denied by the Secretary may request reconsideration
of that determination. A request for reconsideration must be submitted
in writing to the Secretary within 10 days of her decision to deny the
State's request for an adjustment, and may include any additional
information in support of its request.
Based on preliminary data analysis and indications by a few States
that they may apply for an adjustment, the Department estimates that
approximately 20 States will submit applications and that it will take
approximately ten working days for a State to complete the application.
An exact time burden estimate is uncertain because some States may have
better access to the required application information elements than
others; some States may have to seek some of the required information
from health insurance issuers in their States, which could increase
their burden. Some States may, if providing the requested information
is an undue burden, have the Secretary consider their application
without some of the information elements.
The Department estimates that it will take a State 94 hours to
complete an application including gathering data, developing data
analyses, synthesizing information, and developing the adjusted MLR
threshold. For the purposes of this estimate, the Department assumes
that this application will take various professional staff
approximately 75 hours (at an average rate of $125 an hour), an
associate general counsel 10 hours (at $175 an hour), a senior general
counsel 5 hours (at $350 an hour), and the Commissioner 4 hours (at
$450 an hour) to assemble and review the various components of the
application.\1\ The Department estimates that the total cost burden
associated with the submission of a MLR adjustment application to be
approximately $14,675 per response for a total estimated burden of
$293,500.
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\1\ Estimates were developed by interviewing two former
insurance commissioners, a former insurance department actuary, and
a former health plan employee familiar with the burden of submitting
financial data to health insurance departments.
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The Department is soliciting public comments for 60 days concerning
the process described in subpart C of the preamble whereby a State may
request an adjustment of the minimum MLR applicable in the individual
market. The Department has submitted a copy of these interim final
regulations to OMB in accordance with 44 U.S.C. 3507(d) for review of
the information collections. If you comment on this information
collection and recordkeeping requirements, please do either of the
following:
1. Submit your comments electronically as specified in the
ADDRESSES section of this proposed rule; or
2. Submit your comments to the Office of Information and Regulatory
Affairs, Office of Management and Budget, Attention: CMS Desk Office,
9998-IFC. Fax: (202) 395-6974; or E-mail: [email protected].
VI. Regulatory Impact Analysis
A. Summary
As stated earlier in this preamble, this interim final regulation
implements sections 2718(a) through (c) of the PHS Act, which set forth
requirements for reporting of certain medical loss ratio (MLR)-related
data to the Secretary on an annual basis by issuers offering coverage
in the individual and group markets, and calculating and providing
rebates to policyholders in the event that an issuer's MLR fails to
meet the minimum statutory requirements. This interim final rule also
establishes uniform definitions and standardized methodologies for
calculating MLR-related data; provides a process and criteria for the
Secretary to determine whether application of the 80 percent minimum
MLR threshold may destabilize the individual market in a given State;
and addresses enforcement of the reporting and rebate requirements.
These provisions are generally effective for plan years beginning
January 1, 2011.
The Department is publishing this interim final regulation to
implement the protections intended by Congress in the most economically
efficient manner possible. We have examined the effects of this rule as
required by Executive Order 12866 (58 FR 51735, September 1993,
Regulatory Planning and Review), the Regulatory Flexibility Act (RFA)
(September 19, 1980, Pub. L. 96-354), section 1102(b) of the Social
Security Act, the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4),
Executive Order 13132 on Federalism, and the Congressional Review Act
(5 U.S.C. 804(2). In accordance with OMB Circular A-4, the Department
has quantified the benefits, costs and transfers where possible, and
has also provided a qualitative discussion of some of the benefits,
costs and transfers that may stem from this interim final regulation.
B. Executive Order 12866
Executive Order 12866 (58 FR 51735) directs 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).
Section 3(f) of the Executive Order defines a ``significant
regulatory action'' as an action that is likely to result in a rule (1)
having an annual effect on the economy of $100 million or more in any
one year, or adversely and materially affecting a sector of the
economy, productivity, competition, jobs, the environment, public
health or safety, or State, local or tribal governments or communities
(also referred to as ``economically significant''); (2) creating a
serious inconsistency or otherwise interfering with an action taken or
planned by another agency; (3) materially altering the budgetary
impacts of entitlement grants, user fees, or loan programs or the
rights and obligations of recipients thereof; or (4) raising novel
legal or policy issues arising out of legal mandates, the President's
priorities, or the principles set forth in the Executive Order.
A regulatory impact analysis (RIA) must be prepared for major rules
with economically significant effects ($100 million or more in any 1
year); and a ``significant'' regulatory action is subject to review by
the Office of Management and Budget (OMB). As discussed below, we have
concluded that this rule is likely to have economic impacts of $100
million or more in any one year, and therefore meets the definition of
``significant rule'' under Executive Order 12866. Therefore, the
Department has provided an assessment of the potential costs, benefits,
and transfers associated with this interim final regulation.
Accordingly, OMB has reviewed this interim final regulation pursuant to
the Executive Order.
1. Need for Regulatory Action
Consistent with the provisions in Section 2718 of the PHS Act, this
interim final rule requires health insurance issuers offering coverage
in
[[Page 74893]]
the individual and group markets to provide a rebate to consumers if
they do not spend a specified portion of premium income on
reimbursement for clinical services (i.e., incurred claims) and
activities that improve quality. Section 2718(a) of the PHS Act
(captioned ``clear accounting of costs'') requires health insurance
issuers to ``submit to the Secretary a report concerning the ratio of
the incurred loss (or incurred claims) plus the loss adjustment expense
(or change in contract reserves) to earned premiums.'' Section 2718(b)
of the PHS Act (captioned ``ensuring that consumers receive value for
their premium payments'') requires issuers to provide an annual rebate
to each enrollee if the ratio of the amount of premium revenue expended
on reimbursement for clinical services and activities that improve
quality is less than the applicable minimum standards, specifies how
the rebate is to be calculated, and allows the Secretary to adjust the
80 percent minimum MLR threshold if the Secretary determines that
applying this standard may destabilize the individual market in a given
State. Section 2718(c) of the PHS Act directs the NAIC to establish
uniform definitions and calculation methodologies subject to
certification by the Secretary. As discussed elsewhere in this
preamble, after considering the NAIC's recommendations, HHS in this
interim final regulation certifies and adopts them in full. Consistent
with Section 2718(b)(3) of the PHS Act, which requires the Secretary to
promulgate regulations, this interim final regulation sets forth the
provisions in Sections 2718(a) through (c) and is needed for their
implementation to provide rules that issuers can use to implement
effective processes for reporting the required data and calculating and
paying applicable rebates.
2. Summary of Impacts
In accordance with OMB Circular A-4, Table VI.1 below depicts an
accounting statement summarizing the Department's assessment of the
benefits, costs, and transfers associated with this regulatory action.
The Department limited the period covered by the regulatory impact
analysis (RIA) to 2011-2013 Estimates are not provided for subsequent
years both because there will be significant changes in the marketplace
in 2014 related to the offering of new individual and small group plans
through the exchanges, and because there will be statutorily required
adjustments to the MLR formula to account for payments or receipts for
risk adjustment, risk corridors, and reinsurance under sections 1341,
1342, and 1343 of the Affordable Care Act that are not effective until
2014. Those provisions require additional regulations that have not yet
been promulgated.
The Department anticipates that the transparency and
standardization of MLR reporting in this interim final regulation will
help consumers to ensure that they receive good value for their premium
dollars. Additionally, the inclusion of activities that improve quality
in calculating the MLR could help to increase the level of investment
in and implementation of effective quality improving activities, which
could result in improved quality outcomes and lead to a healthier
population. The Department estimates that issuers' total one-time
administrative costs related to the MLR reporting, record retention,
and rebate payment and notification requirements represent less than
0.02 percent of their total premiums for accident and health coverage,
and their total annual ongoing administrative costs related to these
requirements represent less than 0.01 percent of their total premiums
for accident and health coverage. Executive Order 12866 also requires
consideration of the ``distributive impacts'' and ``equity'' of a
regulation. As described in this RIA, this regulatory action will help
ensure that issuers spend at least a specified portion of premium
income on reimbursement for clinical services and quality improving
activities and will result in a decrease in the proportion of health
insurance premiums spent on administration and profit. It will require
issuers to pay rebates to consumers if this standard is not met. As the
table shows, although we are unable to quantify benefits, the transfers
(rebates from issuers to consumers) could be substantial--estimated
monetized rebates of $0.6 billion to $1.4 billion annually. As noted,
Executive Order 12866 requires consideration of ``distributive
impacts'' and ``equity.'' The rebates will help insure that issuers
spend at least a specified portion of premium income on reimbursement
for clinical services and quality improvement, resulting in less
disparate MLRs and value to consumers across issuers and States. In
accordance with Executive Order 12866, the Department believes that the
benefits of this regulatory action justify the costs.
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3. Qualitative Discussion of Anticipated Benefits, Costs and Transfers
The medical loss ratio (MLR) is an accounting statistic that,
stated simply, measures the percentage of total premiums that insurance
companies spend on health care and quality initiatives, versus what
they spend on administration, marketing and profit. In the following
sections, we discuss some of the anticipated benefits, costs and
transfers associated with the Affordable Care Act MLR requirements.
a. Benefits
In developing this interim final regulation, the Department
carefully considered its potential effects including both costs and
benefits. Because of data limitations, the Department did not attempt
to quantify the benefits of this regulation. Nonetheless, the
Department was able to identify several potential benefits which are
discussed below.
Health insurance markets in the United States are often not highly
competitive. The share of the US population living in areas where
markets are least competitive has been increasing.\2\ Even in markets
with multiple competing plans, lack of transparency in pricing may
prevent adequate competition based on the value of product, since it is
difficult to ascertain if a low premium is due to high efficiency, low
coverage of medical claims, or a healthy underlying population of
enrollees. As a result, insurers can provide an inefficient, low-value
product without consumers being fully aware of what they are
purchasing. A potential benefit to this regulation is greater market
transparency and improved ability of consumers to make informed
insurance choices. The uniform reporting required under this
regulation, along with other programs required by Affordable Care Act
such as http://www.HealthCare.gov, a Web site with plan-level
information, will mean that consumers will have better data to inform
their choices, enabling the market to operate more efficiently.
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\2\ Dafny, Leemore S.. 2010. ``Are Health Insurance Markets
Competitive?'' American Economic Review, 100(4): 1399-1431.
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In addition, issuers that would not otherwise meet the MLR minimum
defined by this regulation may increase spending on quality-promoting
activities. These programs, which include case management, care
coordination, chronic disease management and medication compliance,
have the potential to create a societal benefit by improving outcomes
and population health.
Issuers that would not otherwise meet the MLR minimum may also
expand covered benefits or reduce cost sharing. To the extent that
these changes result in increased consumption of effective health
services, the regulation could result in improved health outcomes,
thereby creating a societal benefit.
b. Costs
The Department has identified the primary sources of costs
associated with this regulation as the costs associated with reporting,
recordkeeping, rebate notifications and payments, and other costs.
The Department estimates that issuers will incur approximately $33
million to $67 million in one-time administrative costs, and $11
million to $29 million in annual ongoing administrative costs related
to complying with the requirements of this interim final regulation
from 2011 through 2013. Additional details relating to these costs are
discussed later in this regulatory impact analysis.
Other Costs--There are two other potential types of costs
associated with this regulation: Costs of potential increases in
medical care use, the cost of additional quality-improving activities,
and costs to consumers if some issuers decide to limit offered products
as a result of this interim final regulation.
As discussed under benefits, there may be increases in quality-
improving activities or in consumption of medical care due to this
regulation. Both of these very likely have some benefit to enrollees
but they also represent an additional cost to issuers and society.
It is also possible that some issuers in particular areas or
markets will not be able to operate profitably when required to comply
with the requirements of this regulation. They may respond by changing
or reducing the number of products they offer. The Department
anticipates that issuers' decisions regarding whether to limit offered
products will not be governed solely by short-term profitability.
Issuers are likely to consider whether they expect to be successful
competitors in Exchanges in 2014 and beyond.\3\ Some low MLR plans may
decide to leave a given market entirely or be acquired by a larger
company, while other low MLR plans (particularly those that are
subsidiaries of larger organizations) may find ways to achieve higher
MLRs through increased efficiencies.
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\3\ Bernstein, Jill, ``Recognizing Destabilization in the
Individual Health Insurance Market,'' Changes in Health Care
Financing and Organization (HCFO) Issue Brief, July 2010, accessed
at http://www.hcfo.org/files/hcfo/HCFO%20Policy%20Brief%20July%202010.pdf.
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To the extent that issuers do decide to limit product offerings,
group purchasers or individual enrollees in these plans may bear some
costs associated with searching for and enrolling in a new insurance
plan. For employers, particularly small employers, these costs may
include increased administrative expenses. For consumers, this may lead
to reduced choice, the inability to purchase similar coverage, and
higher search costs related to finding affordable insurance coverage.
States may apply for an adjustment of the MLR threshold in the
individual market if the Secretary concurs that the adjustment is
necessary to prevent market destabilization. This could mitigate the
potential costs.
c. Transfers
To the extent that insurers' MLR experience falls short of the
minimum thresholds, they must provide rebates to enrollees. These
rebates would reflect transfers of income from the insurers or their
shareholders to the policy holders. Based on the methods described
above, we have estimated ranges for the rebates that may occur during
2011-2013. These estimates are discussed later in this regulatory
impact analysis (see Tables VI.7, VI.8, and VI.9).
4. Overview of Data Sources, Methods, and Limitations
The most complete source of data on the number of licensed entities
offering fully insured, private comprehensive major medical coverage in
the individual and group markets is the National Association of
Insurance Commissioners (NAIC) Annual Financial Statements and Policy
Experience Exhibits database. These data contain multiple years of
information on issuers' revenues, expenses, and enrollment collected on
various NAIC financial exhibits called ``Blanks'' that issuers submit
to the NAIC through State insurance regulators. The NAIC has four
different Blanks for different types of insurers: Health, Life,
Property & Casualty, and Fraternal issuers.\4\ A Technical Appendix for
this analysis, available at http://www.hhs.gov/ociio/regulations/index.html, provides more detail on the
[[Page 74896]]
precise NAIC data sources used for this analysis.
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\4\ If a company's premiums and reserve ratios for its health
insurance products equals 95 percent or more of their total business
for both the current and prior reporting years, a company files its
annual statement using the Health Blank. Otherwise, a company files
the annual statement associated with the type of license held in its
domiciliary State, i.e. it files either the Life, Property&
Casualty, or Fraternal Blank.
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A total of 618 insurers offering comprehensive major medical
coverage filed annual financial statements in 2009, with the Health and
Life Blank filers accounting for approximately 99 percent of all
comprehensive major medical premiums earned. It is for this reason that
we have restricted our analysis to Health and Life Blank companies.
Comprehensive major medical coverage \5\--including both coverage
offered in the individual and group markets that is subject to this
interim final regulation--accounted for approximately 47.8 percent of
all Accident and Health (A&H) premiums in 2009.
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\5\ Comprehensive major medical coverage sold to associations
and trusts has been included in individual comprehensive major
medical coverage for purposes of the RIA. The Department's estimates
exclude Medigap, which is reported separately in the NAIC data from
comprehensive major medical coverage offered in the individual and
group markets. The NAIC data do not allow us to identify mini-med
plans or expatriate plans.
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Although the NAIC data represent the best available data source
with which to estimate impacts of the MLR regulation, the data contain
certain limitations that should be noted. For example, the NAIC data do
not include issuers regulated by California's Department of Managed
Health Care (DMHC) as well as small, single-State insurers that are not
required by State regulators to submit NAIC annual financial
statements. When we compare the NAIC enrollment data to InterStudy
data, we estimate that these limitations cause the NAIC data to exclude
approximately 9 percent of the total fully insured, private
comprehensive major medical market.\6\ Additionally, the NAIC data do
not break out small and large group coverage at the State level, and
administrative expenses such as taxes are reported at the national
level for all A&H lines of business. We developed imputation methods to
account for these limitations. Finally, we made several edits to the
data that led us to exclude from the analysis 176 of the companies that
the NAIC data identify as reporting comprehensive major medical
coverage.\7\ However, these excluded companies represent a small
portion of the overall comprehensive major medical market (3 percent of
life years and 2 percent of earned premiums). The Technical Appendix
(available at http://www.hhs.gov/ociio/regulations/index.html)
contains a detailed description of the limitations of the NAIC data,
and the data edits that were made by the Department. We use the
remaining 442 companies to estimate the regulatory impacts discussed
below.
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\6\ This estimate is based on a comparison of 2008 NAIC and
InterStudy data. Interstudy data report 79.7 million enrollees for
comprehensive major medical coverage in 2008 whereas NAIC data
report approximately 72.9 million enrollees. The NAIC enrollment
number represents 91 percent of the Interstudy total enrollment
figure.
\7\ These exclusions reflect the restriction to Health and Life
Blank companies, which drops 22 Fraternal and Property and Casualty
companies from the analysis.
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5. Estimated Number of Affected Entities Subject to the MLR Provisions
Section 2718(a) of the PHS Act specifies that the MLR provisions
apply to health insurance issuers offering group or individual health
insurance coverage, including grandfathered health plans. As discussed
earlier in this preamble, in this context, the term ``issuer'' has the
same meaning provided in 45 CFR 144.103, which states that an issuer is
``an insurance company, insurance service, or insurance organization
(including an HMO) that is required to be licensed to engage in the
business of insurance in a State and that is subject to State law that
regulates insurance (within the meaning of section 514(b)(2) of
ERISA).'' As discussed elsewhere in this preamble, and consistent with
the NAIC recommendations, the MLR provisions in this interim final rule
apply to issuers that offer comprehensive major medical coverage, and
these issuers will be required to report these data and determine if
rebates are owed at the company, State, and market level (e.g.,
individual, small group, and large group).\8\ The following sections
summarize the Department's estimates of the number of entities that
will be affected by the requirements of this interim final regulation.
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\8\ This includes some issuers that offer mini-med plans which,
as discussed elsewhere in the preamble, often cover the same types
of medical services as comprehensive medical plans, but have low
annual benefit limits and typically have lower premiums than plans
providing higher ceilings on benefits. Data for mini-med plans are
not broken out separately from other data that issuers reported to
NAIC in 2009. Therefore, the regulatory impact analysis does not
include separate estimates relating to mini-med plans.
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a. Estimated Number of Affected Entities
The MLR provisions will apply to all health insurance issuers
offering comprehensive major medical coverage in the individual and
group markets. For purposes of the regulatory impact analysis, we have
estimated the total number of issuers that will be affected by the
requirements of this interim final regulation at the company level
because this is the level at which issuers currently submit their
annual financial reports to the NAIC (including both company- and
State-level exhibits where appropriate). However, because issuers will
be required to report MLRs and calculate any rebates that are owed at
the company/State level for each market in which they offer coverage
(for example, individual, small group, large group), we have estimated
rebates by ``licensed entity'' (company/State combination) for each
market.
Table VI.2 shows the estimated distribution of issuers offering
coverage in the individual, small group and large group markets for the
analytic sample used in this RIA.\9\ Approximately 70 percent (311) of
these issuers offer coverage in the individual market, 77 percent (342)
offer coverage in the small group market, and 77 percent (338) offer
coverage in the large group market. Approximately half (224) of these
issuers offer coverage in all three markets that are subject to the MLR
requirements, while the other half offer coverage in one or two of the
markets that are subject to the requirements (118 and 100,
respectively).
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\9\ As noted above, the analytic sample excludes companies that
are regulated by the Department of Managed Health Care in
California, as well as small, single-State insurers that are not
required by State regulators to submit NAIC annual financial
statements.
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Additionally, the Department estimates that there are 74.8 million
enrollees in the analytic sample in coverage that is subject to the
requirements in this interim final rule, including approximately 10.6
million enrollees in individual market coverage (estimated based on
``life years'' for 2009 NAIC Health and Life Blank filers, which as
discussed earlier excludes data for companies that are not required to
file annual statements with the NAIC), 24.2 million enrollees in small
group coverage, and 40.0 million enrollees in large group coverage
(excluding enrollees in companies that did not file annual financial
statements on the NAIC's Health or Life Blanks in 2009).\10\
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\10\ The estimate provided here of the size of the individual
market differs from estimates provided in previous rulemaking for a
number of reasons. First, as discussed in this regulatory impact
assessment, issuers that are regulated by the Department of Managed
Health Care in California do not file with the NAIC. Second, and
more importantly, the estimate provided here is of enrollment at an
average point in time, while previous estimates included people who
were enrolled at some point during the year. Third, the Current
Population Survey, which was the source of previous estimates, is
thought by some analysts to overestimate the number of people
purchasing individual coverage.
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b. Characteristics of the Affected Entities
Table VI.3 provides additional information about the
characteristics of the issuers that are subject to the MLR
requirements. Most (80 percent) of these companies are subsidiaries of
larger carriers, and more than two thirds (315) only offer coverage in
a single State. A third (143) of the issuers that are subject to the
MLR requirements collected less than $50 million in earned premiums for
individual and group comprehensive major medical coverage in 2009, 21
percent (92) collected $50 to $149 million, 31 percent (138) collected
$150 to $999 million, and 16 percent (69) collected $1 billion or more
in earned premiums that year. Meanwhile, 80 percent of the affected
issuers also offer other types of accident and health coverage that is
not subject to the requirements of this interim final regulation.
[[Page 74898]]
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BILLING CODE 4150-03-C
[[Page 74899]]
While all 442 of these issuers will be subject to the requirements
of this interim final regulation, the Department estimates only a
subset of these companies will be required to pay MLR-related rebates
to policyholders during any given year. The following section contains
estimates of the number of entities whose coverage will not meet the
applicable minimum MLR thresholds, the estimated MLR rebate payments,
and the estimated number of enrollees that would receive the MLR
rebates.
6. Estimated MLR Rebate Payments
To date, there have been few published studies that document MLRs
for comprehensive major medical coverage offered in the individual,
small group and large group markets at the State and company levels
nationwide.\11\ Additionally, as discussed earlier, there are a number
of challenges related to using the 2009 NAIC data. Despite these
limitations, the Department believes that the 2009 NAIC data provide a
reasonable basis for developing a model to be used for estimating the
universe of entities that are likely to be affected by the MLR
requirements, and estimating a potential range of other impacts
including rebate amounts.\12\ Specifically, the Department believes
that a reasonable range of assumptions can be applied to the 2009 NAIC
data making it the best available source for estimating the potential
impacts of this interim final regulation. Therefore, using data from
NAIC annual financial statements, the Department summarized data on
traditional or unadjusted MLR values prior to the enactment of
Affordable Care Act and estimated the impact of the Affordable Care
Act's MLR provisions on the market.
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\11\ For example, the Senate Commerce Committee used NAIC data
to report on nationwide MLRs for selected companies, but did not
analyze MLRs at the State level (see ``Implementing Health Insurance
Reform: New Medical Loss Ratio Information for Policymakers and
Consumers: Staff Report For Chairman Rockefeller,'' U. S. Senate,
Committee on Commerce, Science and Transportation, April 15, 2010,
accessed at http://commerce.senate.gov/public/index.cfm?p=Reports).
It is also important to note that MLRs calculated for other purposes
may not provide an accurate picture of MLRs under the Affordable
Care Act, which includes adjustments for administrative expenses
related to quality improving activities and small plans.
\12\ The NAIC has developed a ``Supplemental Blank'' that will
be used to collect 2010 comprehensive major medical data by company,
State and market that are consistent with the uniform definitions
and standardized calculation methodologies that NAIC was required to
develop under Section 2718(c) of the PHS Act (subject to
certification by the Secretary). However, this information will not
be available until the Spring of 2011.
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In considering how to model the MLR impacts, the Department
examined State experience with various types of related policies. Some
States have traditionally used MLR standards for reviewing rate
filings, others have set minimum standards, a few States require
rebates to be made if minimum standards are not met, and many States
have no requirements. The Department estimates that prior to the
enactment of the Affordable Care Act, approximately 32 States
(including the District of Columbia) had enacted requirements relating
to minimum MLR standards or administrative expense limits for coverage
in at least some segments of the individual and group markets,\13\
primarily in the context of submitting historical and anticipated loss
ratios as part of their rate filings; approximately 19 States did not
have any minimum MLR requirements for individual or group coverage
prior to the enactment of the Affordable Care Act. State-level MLR
requirements, where they existed, often varied by the type of coverage
being offered, were sometimes optional, and lacked standardization in
the way that the MLRs were to be calculated. In addition, States'
minimum MLR requirements were often quite low--approximately 10 States
had loss ratio requirements that were as low as 55 percent for at least
some segments of the market, and another 13 States had minimum MLR
thresholds between 60 and 75 percent for at least some segments of the
market. The Department estimates that nine States have enacted minimum
MLR thresholds or administrative expense limits requiring that at least
80 percent of premiums be spent on clinical services in at least some
segments of the individual and group markets.
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\13\ This is consistent with America's Health Insurance Plans
(AHIP) data, which suggest that there are 32 States that have
established MLR guidelines or imposed limitations on administrative
expenses for comprehensive major medical insurance (excluding States
that require filing of loss ratios, but have not established minimum
standards), see ``State Mandatory Medical Loss Ratio (MLR)
Requirements for Comprehensive, Major Medical Coverage: Summary of
State Laws and Regulations, as of April 15, 2010'', AHIP, accessed
at http://www.naic.org/documents/committees_lhatf_ahwg_100426_AHIP_MLR_Chart.pdf.
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For several reasons, the State experience with MLR requirements was
not useful for modeling the effects of imposing an 80 percent MLR
requirement nationwide for the individual and small group markets, and
an 85 percent MLR requirement nationwide for the large group market.
First, as described above, the States varied considerably in terms of
MLR definitions and policy implementation. The experience of the nine
States that have enacted 80 percent or higher MLR thresholds for at
least a portion of the affected market may have been relevant, but
there was not sufficient data available to estimate the impact of their
policies and generalize to the national level. For example, in five of
these States, the 80 percent or higher thresholds only apply to a
portion of the market.\14\ Additionally, there is limited data
available for several of these States; for example, there is limited
availability of California HMO data because they do not file with the
NAIC; New Jersey first imposed its 80 percent requirement for the
individual and small group markets in 2009 (prior to that, the State
had a 75 percent minimum MLR standard for individual and small group
coverage); \15\ and New Mexico's 80 percent and 85 percent standards
for the small group and large group markets, respectively, were just
enacted on March 3, 2010 (prior to that, the State had a 55 percent
minimum MLR standard for small group coverage, and no minimum MLR
standard for the large group market). Additionally, in New York and New
Jersey, the market for individual unsubsidized insurance is extremely
small, largely as a result of rating rules. Finally, Ohio's provision
limiting the administrative expenses that an insurer can spend to no
more than 20 percent applies to the insurance company as a whole (e.g.,
the State does not have separate requirements for coverage offered in
the individual, small group and large group markets, as required by the
Affordable Care Act).\16\ The State's regulators estimate that carriers
will be close to the Affordable Care Act's minimum MLR thresholds for
small group and large group coverage, but that some carriers will have
to ``raise the bar'' in order to meet the standards for the individual
market.\17\
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\14\ The 80 percent or higher minimum MLR requirements apply
only to HMOs in California, only to HMO point of service plans in
Arkansas, only to small group special health care plans in
Connecticut, only to small group plans assessed 3 percent or more of
the total annual amount assessed by the State's high risk pool in
Minnesota, and only for nonprofit medical and dental indemnity or
health and hospital service corporation individual direct payment
contracts in New York.
\15\ Carriers in New Jersey are required to pay rebates if they
have a loss ratio below the minimum standard. In 2008, total
standard and non-standard market refunds paid by carriers in the
State were approximately $850,000. New Jersey Department of Banking
and Insurance, ``SEH Loss Ratio and Refund Reports for 2008,'' April
19, 2010, accessed at http://www.pdcbank.state.nj.us/dobi/division_insurance/ihcseh/sehrpts/seh08lossratiorpt.pdf.
\16\ Ohio Revised Code Sec. 3923.022, accessed at http://codes.ohio.gov/orc/3923.
\17\ Adamczak, Rick, ``New Regs Unlikely to Have Much Impact on
Ohio Insurers,'' Dayton Legal News, November 1, 2010, accessed at
https://www.dailycourt.com/articles/index/id/7284.
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[[Page 74900]]
It is difficult to draw general lessons from the experience in
these nine States about the likely results of imposing an 80 percent
MLR requirement for the individual and small group market nationwide--
relevant data are not available in many of the States, the level of
aggregation is not consistent in one of the States, and rating rules in
two of the States are so different than in most of the rest of the
country that results are not likely to be generalizable. Most
importantly, in all nine States data were not available over a
sufficient time period to establish causality between State policies
and observed MLRs.
a. Data Limitations and Modeling Assumptions
As discussed earlier in section VI.B.4 of this regulatory impact
analysis, and in a Technical Appendix that is available at http://www.hhs.gov/ociio/regulations/index.html, the available data are less
than perfect for the task at hand. Among the larger imperfections: The
data do not measure quality improving activities as defined by this
interim final regulation; the data for some issuers and States are
clearly in error; and the data capture administrative expenses at the
national level, but do not allocate them to States or to markets
(individual, small group, and large group).
The Department expects that as a result of this interim final
regulation that issuer behavior may well change, and even if the data
could precisely measure MLRs in 2009, MLRs in 2011 may well be
different as a result of issuer behavioral change. However, for
purposes of this analysis we do not explicitly model these behavioral
changes in our estimates. Potential behavioral changes as a result of
this regulation and impact on our estimates are discussed below,
including:
Insurer Pricing Policy--Companies will likely consider a
number of responses in pricing 2011 policies (e.g., reducing premium
increases or increase health care expenditures) that would minimize or
avoid rebates. As a result of these anticipated responses, estimates
based on the 2009 data would result in upwardly biased estimates of
potential rebates;
Allocation of Expenses Across States and Markets and
Affiliates--Issuers were not previously required to allocate company-
level expenses by State and by line of business in their annual
financial report submissions to the NAIC. However, companies are likely
to focus more attention on the methodologies that they use for
allocating administrative expenses now that this information will be
used in determining if they owe rebates for a given company/State/
market. The choices issuers make in determining allocation methods
could have a material impact on MLR rebates;
Activities That Improve Quality--Issuers may increase
their quality-improving activities given the financial incentive to do
so, or newly describe existing activities as such, and spending on
these activities may vary significantly by State or company;
Other Changes in Categorization--Companies are expected to
carefully scrutinize all of their expenditures to determine whether
some could legitimately be categorized as expenditures for clinical
services or quality improvement based on the definitions implemented by
this regulation;
Other Behavioral Changes--It is unclear to what extent
companies may make other behavioral changes that could affect MLR
rebates (e.g., expanding coverage to increase medical claims, limiting
premium increases, consolidation, etc.); and
Potential Impact of Destabilization Policy--It is unknown
to what extent State Commissioners of Insurance will request
adjustments of the 80 percent individual market minimum MLR threshold
under the destabilization policy, and unknown whether the
justifications provided with these requests will be sufficient to allow
the Secretary to grant the adjustments. Thus, it is unknown how these
potential adjustments will affect the size of MLR rebates.
b. Methods for Estimating MLR Rebates
The analysis includes estimates that are based on both unadjusted
and adjusted MLRs. Information on unadjusted MLRs, which are simply
incurred claims divided by earned premiums, is included to assess the
impact of the adjustments allowed by the regulation on companies'
State-level MLRs.\18\
---------------------------------------------------------------------------
\18\ As discussed earlier, data for mini-med plans are not
broken out separately from other data that issuers reported to NAIC
in 2009. Therefore, this regulatory impact analysis does not include
separate estimates relating to mini-med plans.
---------------------------------------------------------------------------
The adjusted MLRs include three sets of adjustments for: (1) Taxes
and fees; (2) credibility adjustments; and (3) quality improvements.
First, the adjustments include deductions for Federal and State taxes
and licensing and regulatory fees from premiums. These adjustments
follow the policy described in the regulation.
Second, they apply estimates of the credibility adjustments for
licensed entities that have partially credible experience, that is,
issuers with life years that are greater than or equal to 1,000 life
years but less than 75,000 life years, based on the 2009 NAIC data.\19\
Section D of the preamble describes the rationale and method for
calculating credibility adjustments. As stated in this section, there
are two components to the credibility adjustment: A base factor that
depends on the number of life years a company has in a particular
market and State and a factor that depends on average per person
deductible for the experience reported in the MLR for a particular
market and State. The total credibility adjustment to the MLR equals
the base factor times the deductible factor. We used linear
interpolation to calculate the base credibility adjustment factor for
life years that fall between the values in Table 1 of the preamble.
---------------------------------------------------------------------------
\19\ For purposes of this analysis, the Department has not made
any assumptions relating to the potential for annual fluctuations in
the estimated number of issuers with non-credible and partially
credible experience.
---------------------------------------------------------------------------
Third, the adjusted MLRs reported in this analysis also incorporate
assumptions about the size of expenses for quality improvement
activities, as well as assumptions about other actions that insurers
might take to increase their reported MLR. Because the definitions of
quality improving activities are new to this rule, the NAIC data
collected in 2009 cannot be used to directly estimate how much insurers
spent on quality improving activities in 2009 or how much they are
expected to spend on these activities in 2011. The closest category in
the NAIC data is ``cost containment expenses'', which averaged
approximately 1 percent of premiums in 2009, but the definition of
quality improving activities includes many activities that were not
included in cost containment expenses. Discussions with industry
experts suggest that quality improving activities are likely to account
for an average of approximately 3 percent of premium, but there is
substantial uncertainty concerning this estimate. Few observers think
that quality improving activities will be greater than 5 percent of
premium, and few expect that they will be less than 1 percent of
premium. In the mid-range estimate, the Department assumes that quality
improving activities will account for 3 percent of premium, and uses
the 1 percent and 5 percent estimates as the range in a sensitivity
analysis.
In addition to uncertainty about the magnitude of quality improving
activities, as discussed above, there are many other sources of
uncertainty about how insurers will respond to this
[[Page 74901]]
interim final regulation, and the effects of these responses on MLRs
and rebate amounts.
Given the combination of data imperfections and behavioral
uncertainties, the Department has chosen to provide a range of
estimates, based on a range of assumptions. A reasonable range of
assumptions is that, in the mid-range estimate, MLRs will increase by 1
percentage point relative to the data reported in 2009, with a
reasonable bound for this assumption being on one end, no change from
the 2009 data, and, on the other end, an assumption that MLRs will
increase by 2 percentage points relative to the 2009 data.
Combined with the low-rebate assumption that quality improving
activities will increase MLRs by 5 percentage points, the assumption
that other behavioral changes may increase MLRs by an additional 2
percentage points will result in estimated MLRs in the low-rebate
scenario being 7 percentage points higher than they would be with no
allowance for either quality improving activities or other behavioral
changes. Consultation with industry experts suggests that this is a
reasonable upper bound for the low-rebate assumption as an average for
the industry. It is possible that some issuers may invest greater than
5 percent of premium in quality improving activities, or change their
behavior in ways that result in a greater than 2 percentage point
increase in MLR, but the Department thinks it is unlikely that the
changes across the industry for quality improving activities and
behavioral changes will be greater than 7 percentage points.
The Department further assumes that issuers with an MLR that is
already above the minimum threshold (80 percent in the individual and
small group markets, 85 percent in the large group market) will have
less incentive to change their behavior in an attempt to increase their
MLR than will issuers with lower MLRs that would require them to pay
rebates. In the mid-range and low-rebate scenarios, the Department
assumes that issuers whose adjusted MLR is above the minimum threshold
after an assumed 3 percent increase for quality improving activities
will not further increase the MLR with additional quality improving
activities or other behavioral changes.
Table VI.4 summarizes the values that are added to the base MLR to
adjust for quality improving expenses and other behavioral
uncertainties.
[GRAPHIC] [TIFF OMITTED] TR01DE10.067
These three sets of adjustments are combined to produce the
following formula for estimating companies' adjusted MLRs for the
individual, small group, and large group markets by State, rounded to
the nearest thousandth decimal place as dictated in the regulation:
\20\
---------------------------------------------------------------------------
\20\ The text states that in the mid-range assumption, quality
improving activities will account for 3 percent of premium. In the
formula above, quality improving (and other behavioral change
assumptions) are expressed as percentage point increases in the MLR
amount. That is, in the mid-range assumption, we assume that quality
improvement expenses will add 3 percentage points to the MLR. As a
practical matter, because Federal and State taxes and licensing and
regulatory fees are quite small, there is virtually no difference
between assuming that quality improvement expenses account for 3
percent of premium or assuming that they will add 3 percentage
points to the MLR.
---------------------------------------------------------------------------
Adjusted MLR = (c)/(p-t-f) + (b * d) + u,
where c = incurred claimsp = earned premiums
t = Federal and State taxes
f = licensing and regulatory fees
b = base credibility adjustment factor
d = deductible credibility adjustment factor
u = low, medium, or high assumptions to account for quality
improving activities, unknown behavioral changes and data
measurement error
We then calculate rebates for a company whose adjusted MLR value in a
State falls below the minimum MLR standard in a given market using the
following formulas:
Rebates = [(m-a) * (p-t-f)]
where m = minimum MLR standard for a particular market
a = adjusted State MLR for that market
Finally, to estimate impacts for each year covered by the
regulation, we assume that the number of issuers, enrollment, and
experience are stable over time. This interim final regulation requires
that experience be combined across multiple years for issuers that are
not fully credible based on a single year of data. Given the assumption
that enrollment is stable over time, the Department estimates that
issuers which are not fully credible in 2011 will have twice as much
enrollment in the combined experience for 2011 and 2012, and three
times as much enrollment in the combined 2011 through 2013 data. As a
result, the magnitude of the credibility adjustment in 2012 will be
smaller than in 2011, and smaller again in 2013. The Department is
unable to model the impact of losing the MLR
[[Page 74902]]
credibility adjustment beginning in 2013 if licensed entities report
partially credible experience for the current year and the two previous
years and have MLRs below the minimum standard in all three years.
Rebates are estimated in 2011 through 2013 by applying the projected
growth rate in private health insurance premiums from the National
Health Expenditures Accounts to the 2009 NAIC adjusted premiums.
However, the analysis does simulate the impact of doubling life years
in 2012 or tripling life years in 2013 for licensed entities that have
non-credible or partially credible experience using a single year of
data to estimate how this affects the portion of insurers that are
deemed to have credible experience as well as their associated MLR
values in those years. Additionally, rebates are estimated in 2011
through 2013 by applying the projected growth rate in private health
insurance premiums from the National Health Expenditures Accounts (per
privately insured) to the 2009 NAIC adjusted premiums.
c. Estimated Number of Issuers and Individuals Affected By the MLR
Rebate Requirements
As shown in Table VI.5, the Department estimates that 68 percent of
the licensed entities (State/company combinations) nationwide selling
comprehensive major medical insurance in the individual market in 2011
will have fewer than 1,000 enrollees in at least one State, and will be
designated as ``non-credible'' according to the standards of this
interim final regulation, 30 percent of licensed entities will be
partially credible, and 2 percent will be fully credible.\21\ As
discussed elsewhere in this preamble, issuers with non-credible
experience in a given State, for a given market, during a given MLR
reporting year are not required to provide any rebate to enrollees in
that State/market because the issuer does not insure a sufficiently
large number of lives to yield a statistically valid MLR.
---------------------------------------------------------------------------
\21\ As described above, insurers with non-credible experience
are those with less than 1,000 life years in a particular State
market and they are not subject to the rebate requirements. Insurers
with partially credible experience are those with 1,000 or more life
years but fewer than 75,000 life years. These insurers receive a
credibility adjustment to their adjusted MLRs to account for
statistical variability that is inherent in smaller blocks of
business. Finally, insurers with fully credible experience are those
with 75,000 life years or more. Reported MLR values for fully
credible insurers are used without a credibility adjustment in a
given reporting year to determine their rebate obligation.
---------------------------------------------------------------------------
Although the Department estimates that more than two-thirds of
licensed entities (State-company combinations) have non-credible 2011
experience for the individual market, and will not be required to
provide rebates to their enrollees, there are relatively few enrollees
in licensed entities that are non-credible--the non-credible licensed
entities account for 68 percent of all entities, but only 1 percent of
enrollees and 2 percent of earned premiums in the individual market.
Fully credible licensed entities, accounting for only 2 percent of
licensed entities, account for 50 percent of enrollees and 49 percent
of premiums.
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[[Page 74903]]
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[[Page 74904]]
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Non-credible entities account for a smaller share of total
entities, and a smaller share of enrollees and premiums in the small
group market than in the individual market, and an even smaller share
in the large group market than in the small group market. Conversely,
fully credible entities are a larger share of the market in both the
small group and large group markets than in the individual market.
As described above, the Department assumes that MLRs and enrollment
are constant in 2012 and 2013. As a result of this assumption, the
number of non-credible entities declines somewhat in 2012 and again in
2013, because experience is combined across multiple years.
d. Impact of Adjustments on MLRs
As shown in Table VI.6, the estimated average unadjusted MLR among
all fully or partially credible entities in the individual market in
2011 is expected to be 79.5 percent--very close, on average, to the 80
percent minimum threshold required under the Affordable Care Act. When
adjustments are made for taxes, licensing and regulatory fees, quality
improving activities, and assumed behavioral changes, the Department's
mid-range estimate is that the average MLR in the individual market in
2011 will be 86.5 percent, with a low-range estimate (where low-range
refers to low-range for the rebate estimate) of 87.2 percent, and a
high-range rebate estimate of 84.2 percent. The mid-range estimate is
approximately 7 percentage points above the unadjusted estimate. Of
this difference, 3.5 percentage points results from the assumption made
about quality improving and other behavior assumptions (3 percentage
points for quality improving activities and 0.5 percentage points for
other behavioral assumptions), and 3.6 of the percentage point
difference comes from the other adjustments, primarily the exclusion of
Federal and State taxes and licensing and regulatory fees from the
denominator, as well as the credibility adjustment.
The average adjusted MLR in the small group market in 2011 is
estimated to be 90.8 percent for the mid-range estimate, and is
estimated at 94.2 percent for the mid-range estimate in the large group
market.
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[[Page 74905]]
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[[Page 74906]]
e. Estimated Range of MLR Rebates
As shown in Table VI.7, in the mid-range estimate in the individual
market, rebates in 2011 are estimated to be $521 million. The $521
million accounts for approximately 7 percent of premium revenue at
companies required to pay a rebate--that is, the average rebate at
companies required to pay a rebate in the individual market is
estimated to be 7 percent of premium. The $521 million accounts for
approximately 2 percent of all premiums written in the individual
market. Approximately 3.2 million people, accounting for approximately
30 percent of enrollees in the individual market are estimated to
receive a rebate, and the average rebate per person receiving a rebate
is estimated as $164.
Over the 2011-2013 period, the Department's mid-range estimate is
that rebates will total $1.8 billion in the individual market, $770
million in the small group market, and $440 million in the large group
market. Additionally, the Department estimates that 9.9 million
enrollees in the individual market, 2.3 million enrollees in the small
group market, and 2.7 million enrollees in the large group market will
receive rebates over the 2011-2013 period under the mid-range estimate.
Summing across all three markets, the mid-range estimate is a total of
$3.0 billion in rebates over the 2011-2013 period. The low rebate
estimate across all three markets for 2011-2013 is $2.0 billion, and
the high rebate estimate is $4.9 billion.
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[[Page 74907]]
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[[Page 74908]]
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[[Page 74909]]
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[[Page 74910]]
In the low-rebate estimate, total rebates in the individual market
are estimated at $337 million, with 21 percent of enrollees in the
individual market estimated to receive a rebate, and in the high-rebate
scenario, $839 million, with 50 percent of enrollees.\22\
---------------------------------------------------------------------------
\22\ The average rebate per person receiving a rebate is
slightly lower in the high rebate scenario than in the mid-range
scenario because in the high rebate scenario there are a larger
number of issuers and enrollees with MLRs that are close to the 80
percent threshold, and average rebates for these enrollees are
relatively low.
---------------------------------------------------------------------------
Estimated rebates in the small group market range from $166 million
to $359 million, with a mid-range estimate of $226 million (Table
VI.8), and from $84 million to $258 million in the large group market,
with a mid-range estimate of $121 million. In both the small group and
large group (Table VI.9) markets a small fraction of enrollees are
estimated to receive rebates--in the mid-range scenario, 3 percent in
the small group market and 2 percent in large group.
f. Potential Impact of State Destabilization Adjustment Requests on MLR
Rebates
Section 2718(b)(1)(A)(ii) provides that the Secretary may adjust
the 80 percent level with respect to the individual market of a State
``if the Secretary determines that the application of such 80 percent
may destabilize the individual market in such State.'' Subpart C of
this interim final regulation implements this provision by setting
forth who may apply, how to apply, the criteria used in assessing an
application, and how the adjustment would be made. It proposes that
States apply for a specific adjustment to the individual market
threshold that would be approved only if, according to information
provided to the Secretary and assessed by the proposed criteria, there
is a reasonable likelihood that market destabilization would occur in
the absence of such an adjustment.
Prior to the publication of this interim final regulation, several
States have indicated their interest in an adjustment to the MLR
threshold for their individual markets. However, this interest was
expressed before the NAIC recommendations and proposed rules that may
lessen the need for such an adjustment. For example, the credibility
adjustments, newer plan adjustments, and treatment of Federal taxes may
lessen what they had projected would be the impact of the MLR rules. In
addition, as described earlier, the behavioral response of issuers to
the proposed rules is uncertain. As such, the Department has not
produced quantitative estimates of the potential impact of this
authority.
However, if this authority is exercised, by definition, there would
be fewer issuers and enrollees to whom rebates in the individual market
apply. There would also be fewer benefits as well as costs than
previously described. While the benefit of transparency would persist
regardless of whether a rebate is made, issuers may have less of an
incentive to improve quality or benefits if the MLR threshold were
lower than 80 percent. At the same time, the goal of the adjustment is
prevent disruption, so individuals in States whose MLR threshold has
been adjusted would have more health insurance options than they
otherwise would.
7. Estimated Administrative Costs Related to MLR Provisions
As stated earlier in this preamble, this interim final regulation
implements the reporting requirements of section 2718(a), describing
the type of information that is to be included in the report to the
Secretary and made available to consumers, as well as the rebate
calculation, payment and enforcement provisions of section 2718(b). The
Department has quantified the primary sources of start-up costs that
issuers in the individual and group markets will incur to bring
themselves into compliance with this interim final regulation, as well
as the ongoing annual costs that they will incur related to these
requirements. These costs and the methodology used to estimate them are
discussed below and in the Technical Appendix available at http://www.hhs.gov/ociio/regulations/index.html. Additional detail on these
estimates can be found in the Paperwork Reduction Act section of this
preamble and we welcome comment on them.
a. Methodology and Assumptions for Estimating Administrative Costs
The Affordable Care Act MLR reporting requirements will affect
health insurance issuers offering coverage in the individual and group
markets, including both the small group and large group markets. As
discussed earlier, most of the affected issuers currently report
similar data to the NAIC as part of their annual financial statements.
However, this interim final regulation includes requirements related to
calculating some additional data elements, and allocating data by
company, State and market.
As discussed earlier in this impact analysis, in order to assess
the potential administrative burden relating to the requirements in
this interim final regulation, the Department consulted with the NAIC
and an industry expert to gain insight into the tasks and level of
effort required. Based on these discussions, the Department estimates
that issuers will incur one-time start-up costs associated with
developing teams to review the requirements in this interim final
regulation, and developing processes for capturing the necessary data
(e.g., automating systems; writing new policies for tracking expenses
in the general ledger; developing methodologies for allocating expenses
by State, company and market; etc.). The Department estimates that
issuers will also incur ongoing annual costs relating to data
collection, populating the MLR reporting forms, conducting a final
internal review, submitting the reports to the Secretary, internal
audit, record retention, and preparing and mailing rebate
notifications/payments (where appropriate).
The Department anticipates that the level of effort relating to
these activities will vary depending on the scope of an issuer's
operations. Each issuer's estimated reporting burden is likely to be
affected by a variety of factors that will affect the level of
complexity of its filing--including the number of markets in which it
operates (e.g., individual, small group, large group), the number of
States and licensed entities through which it offers coverage, the
degree to which it currently captures relevant data at the State/
company/market level, firm size (e.g., claims, premiums, covered
lives), whether it offers other types of A&H coverage, whether it is a
Health Blank or Life Blank filer, and whether it is a subsidiary of a
larger carrier. The assumptions used by the Department to estimate the
administrative burden of reporting data needed to calculate MLRs, and
information about the uncertainties associated with these assumptions
is provided in the Technical Appendix, available at http://www.hhs.gov/ociio/regulations/index.html.
b. Estimated Costs Related to MLR Reporting
For each MLR reporting year (defined as a calendar year for
purposes of this interim final regulation), issuers offering coverage
in the individual and group markets must submit a report to the
Secretary by June 1 of the following year that complies with the
requirements of this interim final rule on a form and in the manner
prescribed by the Secretary. For purposes of these impact estimates,
the Department assumes that there will be a single MLR data submission
for purposes of both the NAIC annual report and reporting to the
Secretary, and that this report would include data
[[Page 74911]]
relating to both the amounts expended on reimbursement for clinical
services, activities that improve quality and other non-clinical costs,
as well as information relating to rebates.
The estimated total number of MLR data reports that issuers subject
to the MLR reporting requirements will be required to submit to the
Secretary under the provisions of this interim final regulation is
3,317. This is an upper-bound estimate, assuming that all issuers
offering coverage in both the individual and small group markets will
be submitting separate reports to the Secretary for this coverage.
However, as discussed elsewhere in this preamble, the provisions of
this interim final regulation allow issuers offering coverage in States
requiring that the individual and small group markets be combined to
submit consolidated reports for these two markets.
Table VI.10 shows that the Department estimates that issuers will
incur one-time costs relating to the MLR reporting requirements in this
interim final rule of approximately $75,018 to $151,507 per issuer on
average, and annual ongoing costs of about $17,261 to $32,259 per
issuer annually thereafter.
BILLING CODE 4150-03-P
[[Page 74912]]
[GRAPHIC] [TIFF OMITTED] TR01DE10.073
[[Page 74913]]
c. Estimated Costs Related to MLR Record Retention Requirements
Consistent with the assumptions discussed above, MLR record
retention costs are assumed to be relatively negligible, since issuers
already retain similar data for State audits. Table VI.11 shows that
the Department estimates that issuers will incur annual ongoing costs
relating to the MLR reporting requirements in this interim final rule
of approximately $17 to $29 per issuer on average.
[[Page 74914]]
[GRAPHIC] [TIFF OMITTED] TR01DE10.074
[[Page 74915]]
d. Estimated Costs Related to MLR Rebate Notifications and Payments
Consistent with the assumptions discussed above, rebate
notification and payment costs are expected to be relatively negligible
on a per-notification and per-check basis, in particular because
issuers have the option of paying rebates through premium withholds.
However, the estimated total costs relating to rebate notifications and
payments reflect the relatively large numbers of enrollees that could
potentially receive rebates during any given year, and will be
sensitive to annual fluctuations in the number of licensed entities
that owe rebates for a given State and market.
Table VI.12 shows that the Department estimates that in 2011,
approximately 60 to 119 issuers (companies) will pay rebates for at
least one licensed entity/State/market combination, and that annual
ongoing costs relating to the MLR rebate payment and notification
requirements in this interim final rule will be approximately $58,010
to $122,891 per affected issuer during that year on average. This
number will be sensitive to annual fluctuations in the number of
licensed entities that owe rebates for a given State and market.
[[Page 74916]]
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[[Page 74917]]
C. Regulatory Alternatives
Under the Executive Order, the Department is required to consider
alternatives to issuing regulations and alternative regulatory
approaches. The Department considers a variety of regulatory
alternative below.
1. Credibility Adjustment
Section 2718(c) requires the NAIC to develop uniform definitions
and calculation methodologies subject to certification by the
Secretary. This section directs the NAIC to take into account the
special circumstances of smaller plans. In response to this direction,
the NAIC recommended a credibility adjustment for smaller plans. After
considering the NAIC's recommendation on credibility adjustments, HHS
has decided to certify and adopt it in full.
One alternative to the credibility adjustment in this interim final
regulation would be to not make any adjustment for credibility, and to
require smaller plans to make rebate payments on the same terms as
larger plans. If the Department had not adopted a credibility
adjustment, the estimated mid-range rebate in the individual market in
2011 would be approximately $682 million, or approximately $161 million
larger than the estimate shown in Table VI.7 including the credibility
adjustment. The mid-range estimated rebate in the small group market
would be $292 million, $66 million larger than the estimate in Table
VI.8, and the mid-range estimate for the large group market would be
$178 million, $57 million larger than the estimate in Table VI.9. As
described elsewhere in this preamble, the Department has concluded that
the credibility adjustment as proposed will best balance the goals of
providing value to consumers assuring that issuers with relatively few
subscribers will be able to function effectively.
2. Federal Taxes
As described elsewhere in this preamble, after considering the
NAIC's recommendation on treatment of Federal taxes in the denominator
of the MLR calculation, HHS has decided to certify and adopt it in
full. An alternative would have been to adopt a narrower definition of
the Federal taxes to be excluded. If the Department had decided that
payroll and Social Security taxes should be included in the
denominator, rather than excluded from the denominator as provided in
this interim final regulation, the estimated rebate in the mid-range
scenario in the individual market would have been $552 million, or $31
million higher than in the estimate shown in Table VI.7. Similarly, the
effect of this regulatory alternative in the small group and large
group markets would have been to increase the estimated rebate by $9
million in each of these two markets. As described elsewhere in this
preamble, the Department has concluded that excluding payroll taxes and
Social Security taxes from the denominator balances the legitimate
needs of insurers with the needs of consumers.
3. Quality Improving Activities
Section 2718(a)(2) of the PHS Act requires health insurance issuers
to submit an annual report to the Secretary concerning the percent of
total premium revenue that is spent on activities that improve health
care quality, and Section 2718(c) of the PHS Act directs the NAIC,
subject to certification by the Secretary, to establish uniform
definitions of activities that improve health care quality.
As discussed elsewhere in this preamble, the NAIC recommended
definitions of quality improving activities that are consistent with
the categories set forth in Section 2717 of the PHS Act. After
considering the NAIC's recommendation on the definition of quality
improving activities, HHS has decided to certify and adopt it in full.
As discussed elsewhere in this preamble, potential alternatives would
have been to adopt narrower or broader definitions of quality improving
activities. These distinctions can be made based on the criteria for
selecting quality improving activities and/or the specific types of
activities included in the definition.
This interim final regulation defines quality-improving activities
as being grounded in evidence-based medicine, designed to improve the
quality of care received by an enrollee, and capable of being
objectively measured and producing verifiable results and achievements.
A narrower definition might include only evidence-based quality
improving initiatives, while excluding activities that have not been
demonstrated to improve quality. Similarly, a narrower definition would
not allow for inclusion of future innovations before data are available
demonstrating their effectiveness.
Conversely, a broader definition might allow additional types of
administrative expenses to be counted as activities that improve
quality--such as network fees associated with third party provider
networks or costs associated with converting International
Classification of Disease (ICD) code sets from ICD-9 to ICD-10. As
discussed elsewhere in this preamble, while the Department agrees that
certain administrative expenses should not be counted as quality
improving, some traditional administrative activities can qualify as
quality improving if they meet the criteria set forth in this interim
final regulation.
The Department does not have data available to estimate the effects
of alternative definitions of quality improving activities on MLRs,
although it should be clear that if a broader definition of quality
improving activities had been adopted that estimated rebates would be
smaller, and if a narrowed definition had been adopted, estimated
rebates would be larger.
4. Level of Aggregation
As discussed elsewhere in this preamble, the NAIC could have
recommended that MLRs be aggregated to the national level for multi-
State companies, rather than be calculated separately in each State. If
MLRs were calculated at the national level for multi-State companies,
estimated rebates in the individual market in the mid-range scenario
would have been $461 in 2011, or $60 million less than the estimates
provided in Table VI.7. The estimated effects of national-level
aggregation on the small group and large group markets are
proportionally larger: in the small group market, estimated rebates in
the mid-range scenario fall from $226 million to $97 million in 2011,
and in the large group market, from $121 to $42 million.
Requiring issuers to aggregate their individual, small group and
large group experience at the national level, rather than by State
could reduce the administrative burden associated with these
requirements because nearly a third of the issuers that would be
affected by the requirements of this interim final regulation offer
coverage in multiple States. For example, under the Department's mid-
range estimates, the estimated number of MLR reports to the Secretary
would decrease by 29 percent (from 3,317 to 972), and the estimated
one-time and annual ongoing costs associated with MLR reporting would
decrease by approximately 49 percent compared with what is shown in
Table VI.10.
Because insurance is regulated primarily at the State level, and
because it is important for consumers in each State to receive value
for their insurance premium, the Department has concluded that MLRs
should be calculated at the issuer/market/State level, rather than
aggregating results to
[[Page 74918]]
the national level. After considering the NAIC's recommendation on the
level of aggregation for purposes of MLR reporting and rebate
calculation, HHS has decided to certify and adopt it in full.
We welcome comments on the likely costs and benefits of this rule
as presented, on alternatives that would improve the consumer and small
business purchaser information to be provided, and on our quantitative
estimates of burden.
D. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires agencies that issue a
regulation to analyze options for regulatory relief of small businesses
if a rule has a significant 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 nonprofit 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 as its measure of significant
economic impact on a substantial number of small entities a change in
revenues of more than 3 to 5 percent.
The Regulatory Flexibility Act only requires an analysis to be
conducted for those final rules for which a Notice of Proposed Rule
Making was required. Accordingly, we have determined that a regulatory
flexibility analysis is not required for this interim final rule.
However, the Department has considered the likely impact of this
interim final rule on small entities.
As discussed in the Web Portal interim final rule (75 FR 24481),
HHS examined the health insurance industry in depth in the Regulatory
Impact Analysis we prepared for the proposed rule on establishment of
the Medicare Advantage program (69 FR 46866, August 3, 2004). In that
analysis the Department determined that there were few if any insurance
firms underwriting comprehensive health insurance policies (in
contrast, for example, to travel insurance policies or dental discount
policies) that fell below the size thresholds for ``small'' business
established by the SBA (currently $7 million in annual receipts for
health insurers).\23\
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\23\ ``Table of Size Standards Matched To North American
Industry Classification System Codes,'' effective November 5, 2010,
U.S. Small Business Administration, available at http://www.sba.gov.
---------------------------------------------------------------------------
The Department has used the data set created from 2009 NAIC Health
and Life Blank annual financial statement data to develop an updated
estimate of the number of small entities that offer comprehensive major
medical coverage in the individual and small group markets, and are
therefore subject to the MLR reporting requirements. For purposes of
this analysis, the Department is using total Accident and Health (A&H)
earned premiums as a proxy for annual receipts. These estimates may
overstate the actual number of small health insurance issuers that
would be affected, since they do not include receipts from these
companies' other lines of business.
The Department estimates that there are 28 small entities with less
than $7 million in A&H earned premiums that offer individual or group
comprehensive major medical coverage, and would therefore be subject to
the requirements of this interim final regulation. These small entities
account for 6 percent of the estimated 442 total issuers that the
Department estimates will be affected by these requirements. The
Department estimates that 86 percent of these small issuers are
subsidiaries of larger carriers, 75 percent only offer coverage in a
single State, 68 percent only offer individual or group comprehensive
coverage in a single market, 46 percent also offer other types of A&H
coverage, and 29 percent are Life Blank filers.
As discussed elsewhere in this preamble, Section 2718(c) of the PHS
Act directed the NAIC to take the special circumstances of small plans
into account in developing uniform definitions and calculation
methodologies relating to the data being reported to the Secretary in
Section 2718(a). This has been accomplished through the credibility
adjustment, which provides that issuers with non-credible experience in
a given market, based on definitions established by the NAIC, are not
required to provide any rebate to enrollees in that State/market
because the issuer does not insure a sufficiently large number of lives
to yield a statistically valid MLR. Additionally, issuers with
partially credible experience in a given State/market are allowed to
make a credibility adjustment to their MLR during that year.
The Department estimates that the 28 small issuers that are subject
to the requirements of this interim final regulation offer individual
and group coverage through 73 licensed entities (company/State
combinations). For example, the Department estimates that all of the
total 85 company/State/market combinations offered by small entities
will be either non-credible (92 percent) or partially credible (8
percent) in 2011.
The Department estimates that small entities will owe approximately
$435,000 to $656,000 in rebates in 2011, accounting for 0.5 to 0.7
percent of their total A&H premiums during that year. By comparison,
the Department estimates that small entities will owe approximately
$1.8 to $3.0 million in rebates in 2013, accounting for 1.9 to 2.9
percent of their total A&H premiums during that year.
Additionally, the Department estimates that small entities will
spend $44,656 to $62,518 per issuer in one-time costs (accounting for
1.3 to 1.9 percent of their total A&H premiums), and $10,240 to $14,031
per issuer in annual ongoing costs (accounting for 0.3 to 0.4 percent
of their total A&H premiums) related to the MLR reporting, record
retention, and rebate payment and notification requirements.
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As discussed earlier, the Department believes that these estimates
overstate the number of small entities that will be affected by the
requirements in this interim final regulation, as well as the relative
impact of these requirements on these entities because the Department
has based its analysis on issuers' total A&H earned premiums (rather
than their total annual receipts). Therefore, the Secretary certifies
that these interim final regulations will not have significant impact
on a substantial number of small entities. In addition, section 1102(b)
of the Social Security Act requires us to prepare a regulatory impact
analysis if a rule may have a significant economic impact on the
operations of a substantial number of small rural hospitals. This
analysis must conform to the provisions of section 604 of the RFA. This
interim final rule would not affect small rural hospitals. Therefore,
the Secretary has determined that this rule would not have a
significant impact on the operations of a substantial number of small
rural hospitals.
E. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA)
requires that agencies assess anticipated costs and benefits before
issuing any rule that includes a Federal mandate that could result in
expenditure in any one year by State, local or tribal governments, in
the aggregate, or by the private sector, of $100 million in 1995
dollars, updated annually for inflation. In 2010, that threshold level
is approximately $135 million.
UMRA does not address the total cost of a rule. Rather, it focuses
on certain categories of cost, mainly those ``Federal mandate'' costs
resulting from: (1) Imposing enforceable duties on State, local, or
tribal governments, or on the private sector; or (2) increasing the
stringency of conditions in, or decreasing the funding of, State,
local, or tribal governments under entitlement programs.
This interim final regulation is not subject to the Unfunded
Mandates Reform Act, because it is being issued as an interim final
regulation. However, consistent with policy embodied in UMRA, this
interim final regulation has been designed to be the least burdensome
alternative for State, local and tribal governments, and the private
sector while achieving the objectives of the Affordable Care Act.
This interim final regulation contains MLR reporting, data
retention and rebate notification and payment requirements for private
sector firms (for example, health insurance issuers offering coverage
in the individual and group markets), but these will not cost more than
the approximately $32 million to $68 million in one-time administrative
costs, and $11 million to $29 million in annual ongoing administrative
costs related to complying with the requirements of this interim final
regulation that we have estimated. This interim final rule also
contains requirements related to rebates paid by issuers to enrollees
for coverage offered in the individual, small group, and large group
markets that does not meet the minimum MLR standards. The Department's
estimates that approximately 2.8 million to 9.6 million enrollees could
receive $0.6 to $1.8 billion in rebates during any individual year
between 2011 and 2013. It includes no mandates on State, local, or
tribal governments. Under Section 2718 of the Affordable Care Act,
issuers are required to submit MLR data reports directly to the
Secretary. States may voluntarily choose to review the MLR data that
issuers submit through the NAIC supplemental blank; develop or modify
their regulations relating to MLR definitions and calculation
methodologies, reporting and rebates; request adjustments of the 80
percent individual market minimum MLR threshold under the
destabilization policy; or modify their audit methodologies to include
a more comprehensive review of MLR data reported under Section 2718.
However, if they choose not to do so, the Secretary has direct
enforcement authority relating to this provision. Thus, the law and
this regulation do not impose an unfunded mandate on States.
F. Federalism
Executive Order 13132 establishes certain requirements that an
agency must meet when it promulgates a proposed rule (and subsequent
final rule) that imposes substantial direct requirement costs on State
and local governments, preempts State law, or otherwise has Federalism
implications. In the Department's view, while this interim final rule
does not impose substantial direct requirement costs on State and local
governments, this interim final regulation has Federalism implications
due to direct effects on the distribution of power and responsibilities
among the State and Federal governments relating to determining and
enforcing minimum MLR standards, reporting and rebate requirements
relating to coverage that State-licensed health insurance issuers offer
in the individual and group markets.
However, the Department anticipates that the Federalism
implications (if any) are substantially mitigated because the
Affordable Care Act does not provide any role for the States in terms
of receiving or analyzing the data or enforcing the requirements of
Section 2718 of the PHS Act. The enforcement provisions of this interim
final rule state that the Secretary has enforcement authority and does
not require the States to do anything. The States already require
issuers to report the NAIC Annual Statement (Blanks) and audit those
data. The regulation does contemplate that if a State includes MLR in
its audit of issuers, the Secretary has the discretion to accept that
audit. But, again, the regulation does not require the States to do
anything and, in fact, it is not clear that we even have statutory
authority to require them to do anything with respect to the MLR. It is
HHS' responsibility to do the audits and enforce the statutory
requirements.
States may continue to apply State law requirements except to the
extent that such requirements prevent the application of the Affordable
Care Act requirements that are the subject of this rulemaking. State
insurance laws that are more stringent than the Federal requirements
are unlikely to ``prevent the application of'' the Affordable Care Act,
and be preempted. Additionally, States have an opportunity to request
adjustments of the 80 percent individual market minimum MLR threshold
under the destabilization policy, subject to the Secretary's approval.
Accordingly, States have significant latitude to impose requirements on
health with respect to health insurance issuers, insurance issuers that
are more restrictive than the Federal law.
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, the
Department 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 interim final regulation,
to the extent feasible within the specific preemption provisions of
HIPAA as it applies to the Affordable Care Act, the Department has
attempted to balance the States' interests in regulating health
insurance issuers, and Congress' intent to provide uniform minimum
protections to consumers in every State.
[[Page 74921]]
By doing so, it is the Department's view that we have complied with the
requirements of Executive Order 13132. Pursuant to the requirements set
forth in section 8(a) of Executive Order 13132, and by the signatures
affixed to this regulation, the Department certifies that the Office of
Consumer Information and Insurance Oversight has complied with the
requirements of Executive Order 13132 for the attached interim final
regulation in a meaningful and timely manner.
G. Congressional Review Act
This interim final regulation 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.) and have been transmitted
to Congress and the Comptroller General for review.
In accordance with the provisions of Executive Order 12866, this
interim final rule was reviewed by the Office of Management and Budget.
List of Subjects in 45 CFR Part 158
Administrative practice and procedure, Claims, Health care, Health
insurance, Health plans, Penalties, Reporting and recordkeeping
requirements.
0
For the reasons stated in the preamble, the Department of Health and
Human Services amends 45 CFR subtitle A, subchapter B, by adding a new
part 158 to read as follows:
PART 158--ISSUER USE OF PREMIUM REVENUE: REPORTING AND REBATE
REQUIREMENTS
Sec.
158.101 Basis and scope.
158.102 Applicability.
158.103 Definitions.
Subpart A--Disclosure and Reporting
158.110 Reporting requirements related to premiums and expenditures.
158.120 Aggregate reporting.
158.121 Newer experience.
158.130 Premium revenue.
158.140 Reimbursement for clinical services provided to enrollees.
158.150 Activities that improve health care quality.
158.151 Expenditures related to Health Information Technology and
meaningful use requirements.
158.160 Other non-claims costs.
158.161 Reporting of Federal and State licensing and regulatory
fees.
158.162 Reporting of Federal and State taxes.
158.170 Allocation of expenses.
Subpart B--Calculating and Providing the Rebate
158.210 Minimum medical loss ratio.
158.211 Requirement in States with a higher medical loss ratio.
158.220 Aggregation of data in calculating an issuer's medical loss
ratio.
158.221 Formula for calculating an issuer's medical loss ratio.
158.230 Credibility adjustment.
158.231 Life-years used to determine credible experience.
158.232 Calculating the credibility adjustment.
158.240 Rebating premium if the applicable medical loss ratio
standard is not met.
158.241 Form of rebate.
158.242 Recipients of rebates.
158.243 De minimis rebates.
158.244 Unclaimed rebates.
158.250 Notice of rebates.
158.260 Reporting of rebates.
158.270 Effect of rebate payments on solvency.
Subpart C--Potential Adjustment to the MLR for a State's Individual
Market
158.301 Standard for adjustment to the medical loss ratio.
158.310 Who may request adjustment to the medical loss ratio.
158.311 Duration of adjustment to the medical loss ratio.
158.320 Information supporting a request for adjustment to the
medical loss ratio.
158.321 Information regarding the State's individual health
insurance market.
158.322 Proposal for adjusted medical loss ratio.
158.323 State contact information.
158.330 Criteria for assessing request for adjustment to the medical
loss ratio.
158.340 Process for submitting request for adjustment to the medical
loss ratio.
158.341 Treatment as a public document.
158.342 Invitation for public comments.
158.343 Optional State hearing.
158.344 Secretary's discretion to hold a hearing.
158.345 Determination on a State's request for adjustment to the
medical loss ratio.
158.346 Request for reconsideration.
158.350 Subsequent requests for adjustment to the medical loss
ratio.
Subpart D--HHS Enforcement
158.401 HHS enforcement.
158.402 Audits.
158.403 Circumstances in which a State is conducting audits of
issuers.
Subpart E--Additional Requirements on Issuers
158.501 Access to facilities and records.
158.502 Maintenance of records.
Subpart F--Federal Civil Penalties
158.601 General rule regarding the imposition of civil penalties.
158.602 Basis for imposing civil penalties.
158.603 Notice to responsible entities.
158.604 Request for extension.
158.605 Responses to allegations of noncompliance.
158.606 Amount of penalty--general.
158.607 Factors HHS uses to determine the amount of penalty.
158.608 Determining the amount of the penalty--mitigating
circumstances.
158.609 Determining the amount of the penalty--aggravating
circumstances.
158.610 Determining the amount of the penalty--other matters as
justice may require.
158.611 Settlement authority.
158.612 Limitations on penalties.
158.613 Notice of proposed penalty.
158.614 Appeal of proposed penalty.
158.615 Failure to request a hearing.
Authority: Section 2718 of the Public Health Service Act (42
U.S.C. 300gg-18, as amended.)
Sec. 158.101 Basis and scope.
(a) Basis. This Part implements section 2718 of the Public Health
Service Act (PHS Act).
(b) Scope. Subpart A of this Part establishes the requirements for
health insurance issuers (``issuers'') offering group or individual
health insurance coverage to report information concerning premium
revenues and the use of such premium revenues for clinical services
provided to enrollees, activities that improve health care quality, and
all other non-claims costs. Subpart B describes how this information
will be used to determine, with respect to each medical loss ratio
(MLR) reporting year, whether the ratio of the amount of adjusted
premium revenue expended by the issuer on permitted costs to the total
amount of adjusted premium revenue (MLR) meets or exceeds the
percentages established by section 2718(b)(1) of the PHS Act. Subpart B
also addresses requirements for calculating any rebate amounts that may
be due in the event an issuer does not meet the applicable MLR
standard. Subpart C implements the provision of section 2718(b)(A)(ii)
of the PHS Act allowing the Secretary to adjust the MLR standard for
the individual market in a State if requiring issuers to meet that
standard may destabilize the individual market. Subparts D through F
provide for enforcement of this part, including requirements for
issuers to maintain records and civil monetary penalties that may be
assessed against issuers who violate the requirements of this Part.
Sec. 158.102 Applicability.
General requirements. The requirements of this Part apply to
issuers offering group or individual health insurance coverage,
including a grandfathered health plan as defined in Sec. 147.140 of
this subpart.
Sec. 158.103 Definitions.
For the purposes of this Part, the following definitions apply
unless specified otherwise.
Contract reserves means reserves that are established by an issuer
which, due
[[Page 74922]]
to the gross premium pricing structure at issue, account for the value
of the future benefits that at any time exceeds the value of any
appropriate future valuation of net premiums at that time. Contract
reserves must not include premium deficiency reserves. Contract
reserves must not include reserves for expected MLR rebates.
Direct paid claims means claim payments before ceded reinsurance
and excluding assumed reinsurance except as otherwise provided in this
Part.
Enrollee means an individual who is enrolled, within the meaning of
Sec. 144.103 of this title, in group health insurance coverage, or an
individual who is covered by individual insurance coverage, at any time
during an MLR reporting year.
Experience rating refund means the return of a portion of premiums
pursuant to a retrospectively rated funding arrangement when the sum of
incurred losses, retention and margin are less than earned premium.
Group conversion charges means the portion of earned premium
allocated to providing the privilege for a certificate holder
terminated from a group health plan to purchase individual health
insurance without providing evidence of insurability.
Health Plan means health insurance coverage offered through either
individual coverage or a group health plan.
Individual market has the meaning given the term in section
2791(e)(1) of the PHS Act and section 1304(a)(2) of the Affordable Care
Act.
Large Employer has the meaning given the term in section 2791(e)(2)
of the PHS Act and section 1304(b)(1) of the Affordable Care Act,
except that as provided by section 1304(b)(3) of the Affordable Care
Act, until 2016 a State may substitute ``51'' employees for ``101''
employees in the definition.
Large group market has the meaning given the term in section
2791(e)(3) of the PHS Act and section 1304(a)(3) of the Affordable Care
Act.
MLR reporting year means a calendar year during which group or
individual health insurance coverage is provided by an issuer.
Multi-State blended rate means a single rate charged for health
insurance coverage provided to a single employer through two or more of
an issuer's affiliated companies for employees in two or more States.
Policyholder means any entity that has entered into a contract with
an issuer to receive health insurance coverage as defined in section
2791(b) of the PHS Act.
Situs of the contract means the jurisdiction in which the contract
is issued or delivered as stated in the contract.
Small Employer has the meaning given the term in section 2791(e)(4)
of the PHS Act and section 1304(b)(2) of the Affordable Care Act,
except that as provided by section 1304(b)(3) of the Affordable Care
Act, until 2016 a State may substitute ``50'' employees for ``100''
employees in the definition.
Small group market has the meaning in section 2791(e)(5) of the PHS
Act and section 1304(a)(3) of the Affordable Care Act.
Subscriber refers to both the group market and the individual
market. In the group market, subscriber means the individual, generally
the employee, whose eligibility is the basis for the enrollment in the
group health plan and who is responsible for the payment of premiums.
In the individual market, subscriber means the individual who purchases
an individual policy and who is responsible for the payment of
premiums.
Unearned premium means that portion of the premium paid in the MLR
reporting year that is intended to provide coverage during a period
which extends beyond the MLR reporting year.
Unpaid Claim Reserves means reserves and liabilities established to
account for claims that were incurred during the MLR reporting year but
had not been paid within 3 months of the end of the MLR reporting year.
Subpart A--Disclosure and Reporting
Sec. 158.110 Reporting requirements related to premiums and
expenditures.
(a) General requirements. For each MLR reporting year, an issuer
must submit to the Secretary a report which complies with the
requirements of this Part, concerning premium revenue and expenses
related to the group and individual health insurance coverage that it
issued.
(b) Timing and form of report. (1) Except as provided in paragraph
(b)(2) of this section, the report for each MLR reporting year 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.
(2) An issuer that reports its experience separately under Sec.
158.120(d)(3) or (4) of this subpart must submit a report for each
quarter of the 2011 MLR reporting year, on the same form and in the
same manner as described in paragraph (b)(1) of this section, as
follows:
(i) By May 1 for the quarter ending March 31;
(ii) By August 1 for the quarter ending June 30; and
(ii) By November 1 for the quarter ending September 30.
(c) Transfer of Business. Issuers that purchase a line or block of
business from another issuer during an MLR reporting year are
responsible for submitting the information and reports required by this
Part for the assumed business, including for that part of the MLR
reporting year that was prior to the purchase.
Sec. 158.120 Aggregate reporting.
(a) General requirements. For purposes of submitting the report
required in Sec. 158.110 of this subpart, the issuer must submit a
report for each State in which it is licensed to issue health insurance
coverage that includes the experience of all policies issued in the
State during the MLR reporting year covered by the report. The report
must aggregate data for each entity licensed within a State, aggregated
separately for the large group market, the small group market and the
individual market. Experience with respect to each policy must be
included on the report submitted with respect to the State where the
contract was issued, except as specified in Sec. 158.120(d) of this
subpart.
(b) Group Health Insurance Coverage in Multiple States. Group
coverage issued by a single issuer that covers employees in multiple
States must be attributed to the applicable State based on the situs of
the contract. Group coverage issued by multiple affiliated issuers that
covers employees in multiple States must be attributed by each issuer
to each State based on the situs of the contract.
(c) Group Health Insurance Coverage With Dual Contracts. Where a
group health plan involves health insurance coverage obtained from two
affiliated issuers, one providing in-network coverage only and the
second providing out-of-network coverage only, solely for the purpose
of providing a group health plan that offers both in-network and out-
of-network benefits, experience may be treated as if it were all
related to the contract provided by the in-network issuer. However, if
the issuer chooses this method of aggregation, it must apply it for a
minimum of 3 MLR reporting years.
(d) Exceptions. (1) For individual market business sold through an
association, the experience of the issuer must be included in the State
report for the State that has jurisdiction over the certificate of
coverage.
(2) For employer business issued through a group trust or multiple
employer welfare association, the
[[Page 74923]]
experience of the issuer must be included in the State report for the
State where the employer or the association has its principal place of
business.
(3) For the 2011 MLR reporting year, an issuer with policies that
have a total annual limit of $250,000 or less must report the
experience from such policies separately from other policies.
(4) For the 2011 MLR reporting year, an issuer with group policies
that provide coverage for employees working outside their country of
citizenship, employees working outside of their country of citizenship
and outside the employer's country of domicile, and citizens working in
their home country, must aggregate the experience from these policies
but report the experience from such policies separately from other
policies.
Sec. 158.121 Newer experience.
If, for any aggregation as defined in Sec. 158.120, 50 percent or
more of the total earned premium for an MLR reporting year is
attributable to policies newly issued and with less than 12 months of
experience in that MLR reporting year, then the experience of these
policies may be excluded from the report required under Sec. 158.110
of this subpart for that same MLR reporting year. If an issuer chooses
to defer reporting of newer business as provided in this section, then
the excluded experience must be added to the experience reported in the
following MLR reporting year.
Sec. 158.130 Premium revenue.
(a) General requirements. An issuer must report to the Secretary
earned premium for each MLR reporting year. Earned premium means all
monies paid by a policyholder or subscriber as a condition of receiving
coverage from the issuer, including any fees or other contributions
associated with the health plan.
(1) Earned premium is to be reported on a direct basis except as
provided in paragraph (b) of this section.
(2) All earned premium for policies issued by one issuer and later
assumed by another issuer must be reported by the assuming issuer for
the entire MLR reporting year during which the policies were assumed
and no earned premium for that MLR reporting year must be reported by
the ceding issuer.
(3) Reinsured earned premium for a block of business that was
subject to indemnity reinsurance and administrative agreements
effective prior to March 23, 2010, for which the assuming entity is
responsible for 100 percent of the ceding entity's financial risk and
takes on all of the administration of the block, must be reported by
the assuming issuer and must not be reported by the ceding issuer.
(b) Adjustments. Earned premium must include adjustments to:
(1) Account for assessments paid to or subsidies received from
Federal and State high risk pools.
(2) Account for portions of premiums associated with group
conversion charges.
(3) Account for any experience rating refunds paid or received,
excluding any rebate paid based upon an issuer's MLR.
(4) Account for unearned premium.
Sec. 158.140 Reimbursement for clinical services provided to
enrollees.
(a) General requirements. The report required in Sec. 158.110 of
this subpart must include direct claims paid to or received by
providers, including under capitation contracts with physicians, whose
services are covered by the policy for clinical services or supplies
covered by the policy. In addition, the report must include claim
reserves associated with claims incurred during the MLR reporting year,
the change in contract reserves, reserves for contingent benefits and
the claim portion of lawsuits, and any experience rating refunds paid
or received. Reimbursement for clinical services as defined in this
section are referred to as ``incurred claims.''
(1) If there are any group conversion charges for a health plan,
the conversion charges must be subtracted from the incurred claims for
the aggregation that includes the conversion policies and this same
amount must be added to the incurred claims for the aggregation that
provides coverage that is intended to be replaced by the conversion
policies.
(2) Incurred claims must include changes in unpaid claims between
the prior year's and the current year's unpaid claims reserves,
including claims reported in the process of adjustment, percentage
withholds from payments made to contracted providers, claims that are
recoverable for anticipated coordination of benefits (COB), and claim
recoveries received as a result of subrogation.
(3) Incurred claims must include the change in claims incurred but
not reported from the prior year to the current year. Except where
inapplicable, the reserve should be based on past experience, and
modified to reflect current conditions such as changes in exposure,
claim frequency or severity.
(4) Incurred claims must include changes in other claims-related
reserves.
(5) Incurred claims must include experience rating refunds and
exclude rebates paid as required by Sec. 158.240 based upon prior MLR
reporting year experience.
(b) Adjustments to incurred claims. (1) Adjustments that must be
deducted from incurred claims:
(i) Prescription drug rebates received by the issuer.
(ii) Overpayment recoveries received from providers.
(2) Adjustments that may be included in incurred claims:
(i) Market stabilization payments or receipts by issuers that are
directly tied to claims incurred and other claims based or census based
assessments.
(ii) State subsidies based on a stop-loss payment methodology.
(iii) The amount of incentive and bonus payments made to providers.
(3) Adjustments that must not be included in incurred claims:
(i) Amounts paid to third party vendors for secondary network
savings.
(ii) Amounts paid to third party vendors for network development,
administrative fees, claims processing, and utilization management. For
example, if an issuer contracts with a behavioral health, chiropractic
network, or high technology radiology vendor, or a pharmacy benefit
manager, and the vendor reimburses the provider at one amount but bills
the issuer a higher amount to cover its network development,
utilization management costs, and profits, then the amount that exceeds
the reimbursement to the provider must not be included in incurred
claims.
(iii) Amounts paid, including amounts paid to a provider, for
professional or administrative services that do not represent
compensation or reimbursement for covered services provided to an
enrollee. For example, medical record copying costs, attorneys' fees,
subrogation vendor fees, compensation to paraprofessionals, janitors,
quality assurance analysts, administrative supervisors, secretaries to
medical personnel and medical record clerks must not be included in
incurred claims.
(4) Adjustments that can be either included in or deducted from
incurred claims:
(i) Payment to and from unsubsidized State programs designed to
address distribution of health risks across issuers via charges to low
risk issuers that are distributed to high risk issuers must be included
in or deducted from incurred claims, as applicable.
(ii) [Reserved]
(5) Other adjustments to incurred claims:
(i) Affiliated issuers that offer group coverage at a blended rate
may choose
[[Page 74924]]
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 will be defined prior to January 1, 2011, 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.
(ii) [Reserved]
Sec. 158.150 Activities that improve health care quality.
(a) General requirements. The report required in Sec. 158.110 of
this subpart must include expenditures for activities that improve
health care quality, as described in this section.
(b) Activity requirements. Activities conducted by an issuer to
improve quality must meet the following requirements:
(1) The activity must be designed to:
(i) Improve health quality.
(ii) Increase the likelihood of desired health outcomes in ways
that are capable of being objectively measured and of producing
verifiable results and achievements.
(iii) Be directed toward individual enrollees or incurred for the
benefit of specified segments of enrollees or provide health
improvements to the population beyond those enrolled in coverage as
long as no additional costs are incurred due to the non-enrollees.
(iv) Be grounded in evidence-based medicine, widely accepted best
clinical practice, or criteria issued by recognized professional
medical associations, accreditation bodies, government agencies or
other nationally recognized health care quality organizations.
(2) The activity must be primarily designed to:
(i) Improve health outcomes including increasing the likelihood of
desired outcomes compared to a baseline and reduce health disparities
among specified populations.
(A) Examples include the direct interaction of the issuer
(including those services delegated by contract for which the issuer
retains ultimate responsibility under the insurance policy), providers
and the enrollee or the enrollee's representative (for example, face-
to-face, telephonic, web-based interactions or other means of
communication) to improve health outcomes, including activities such
as:
(1) Effective case management, care coordination, chronic disease
management, and medication and care compliance initiatives including
through the use of the medical homes model as defined in section 3606
of the Affordable Care Act.
(2) Identifying and addressing ethnic, cultural or racial
disparities in effectiveness of identified best clinical practices and
evidence based medicine.
(3) Quality reporting and documentation of care in non-electronic
format.
(4) Health information technology to support these activities.
(5) Accreditation fees directly related to quality of care
activities.
(B) [Reserved]
(ii) Prevent hospital readmissions through a comprehensive program
for hospital discharge. Examples include:
(A) Comprehensive discharge planning (for example, arranging and
managing transitions from one setting to another, such as hospital
discharge to home or to a rehabilitation center) in order to help
assure appropriate care that will, in all likelihood, avoid readmission
to the hospital;
(B) Patient-centered education and counseling.
(C) Personalized post-discharge reinforcement and counseling by an
appropriate health care professional.
(D) Any quality reporting and related documentation in non-
electronic form for activities to prevent hospital readmission.
(E) Health information technology to support these activities.
(iii) Improve patient safety, reduce medical errors, and lower
infection and mortality rates.
(A) Examples of activities primarily designed to improve patient
safety, reduce medical errors, and lower infection and mortality rates
include:
(1) The appropriate identification and use of best clinical
practices to avoid harm.
(2) Activities to identify and encourage evidence-based medicine in
addressing independently identified and documented clinical errors or
safety concerns.
(3) Activities to lower the risk of facility-acquired infections.
(4) Prospective prescription drug Utilization Review aimed at
identifying potential adverse drug interactions.
(5) Any quality reporting and related documentation in non-
electronic form for activities that improve patient safety and reduce
medical errors.
(6) Health information technology to support these activities.
(B) [Reserved]
(iv) Implement, promote, and increase wellness and health
activities:
(A) Examples of activities primarily designed to implement,
promote, and increase wellness and health activities, include--
(1) Wellness assessments;
(2) Wellness/lifestyle coaching programs designed to achieve
specific and measurable improvements;
(3) Coaching programs designed to educate individuals on clinically
effective methods for dealing with a specific chronic disease or
condition;
(4) Public health education campaigns that are performed in
conjunction with State or local health departments;
(5) Actual rewards, incentives, bonuses, reductions in copayments
(excluding administration of such programs), that are not already
reflected in premiums or claims should be allowed as a quality
improvement activity for the group market to the extent permitted by
section 2705 of the PHS Act;
(6) Any quality reporting and related documentation in non-
electronic form for wellness and health promotion activities;
(7) Coaching or education programs and health promotion activities
designed to change member behavior and conditions (for example, smoking
or obesity); and
(8) Health information technology to support these activities.
(B) [Reserved]
(v) Enhance the use of health care data to improve quality,
transparency, and outcomes and support meaningful use of health
information technology consistent with Sec. 158.151 of this subpart.
(c) Exclusions. Expenditures and activities that must not be
included in quality improving activities are:
(1) Those that are designed primarily to control or contain costs;
(2) The pro rata share of expenses that are for lines of business
or products other than those being reported, including but not limited
to, those that are for or benefit self-funded plans;
(3) Those which otherwise meet the definitions for quality
improvement activities but which were paid for with grant money or
other funding separate from premium revenue;
(4) Those activities that can be billed or allocated by a provider
for care delivery and which are, therefore, reimbursed as clinical
services;
(5) Establishing or maintaining a claims adjudication system,
including costs directly related to upgrades in health information
technology that are designed primarily or solely to improve claims
payment capabilities or to meet regulatory requirements for processing
claims (for example, costs of implementing new administrative
simplification standards and code sets
[[Page 74925]]
adopted pursuant to the Health Insurance Portability and Accountability
Act (HIPAA), 42 U.S.C. 1320d-2, as amended, including the new ICD-10
requirements);
(6) That portion of the activities of health care professional
hotlines that does not meet the definition of activities that improve
health quality;
(7) All retrospective and concurrent utilization review;
(8) Fraud prevention activities, other than fraud detection/
recovery expenses up to the amount recovered that reduces incurred
claims;
(9) The cost of developing and executing provider contracts and
fees associated with establishing or managing a provider network,
including fees paid to a vendor for the same reason;
(10) Provider credentialing;
(11) Marketing expenses;
(12) Costs associated with calculating and administering individual
enrollee or employee incentives;
(13) That portion of prospective utilization that does not meet the
definition of activities that improve health quality; and
(14) Any function or activity not expressly included in paragraph
(c) of this section, unless otherwise approved by and within the
discretion of the Secretary, upon adequate showing by the issuer that
the activity's costs support the definitions and purposes in this Part
or otherwise support monitoring, measuring or reporting health care
quality improvement.
Sec. 158.151 Expenditures related to Health Information Technology
and meaningful use requirements.
(a) General requirements. An issuer may include as activities that
improve health care quality such Health Information Technology (HIT)
expenses as are required to accomplish the activities allowed in Sec.
158.150 of this subpart and that are designed for use by health plans,
health care providers, or enrollees for the electronic creation,
maintenance, access, or exchange of health information, as well as
those consistent with Medicare and/or Medicaid meaningful use
requirements, and which may in whole or in part improve quality of
care, or provide the technological infrastructure to enhance current
quality improvement or make new quality improvement initiatives
possible by doing one or more of the following:
(1) Making incentive payments to health care providers for the
adoption of certified electronic health record technologies and their
``meaningful use'' as defined by HHS to the extent such payments are
not included in reimbursement for clinical services as defined in Sec.
158.140 of this subpart;
(2) Implementing systems to track and verify the adoption and
meaningful use of certified electronic health records technologies by
health care providers, including those not eligible for Medicare and
Medicaid incentive payments;
(3) Providing technical assistance to support adoption and
meaningful use of certified electronic health records technologies;
(4) Monitoring, measuring, or reporting clinical effectiveness
including reporting and analysis of costs related to maintaining
accreditation by nationally recognized accrediting organizations such
as NCQA or URAC, or costs for public reporting of quality of care,
including costs specifically required to make accurate determinations
of defined measures (for example, CAHPS surveys or chart review of
HEDIS measures and costs for public reporting mandated or encouraged by
law.
(5) Tracking whether a specific class of medical interventions or a
bundle of related services leads to better patient outcomes.
(6) Advancing the ability of enrollees, providers, issuers or other
systems to communicate patient centered clinical or medical information
rapidly, accurately and efficiently to determine patient status, avoid
harmful drug interactions or direct appropriate care, which may include
electronic Health Records accessible by enrollees and appropriate
providers to monitor and document an individual patient's medical
history and to support care management.
(7) Reformatting, transmitting or reporting data to national or
international government-based health organizations for the purposes of
identifying or treating specific conditions or controlling the spread
of disease.
(8) Provision of electronic health records, patient portals, and
tools to facilitate patient self-management.
(b) [Reserved]
Sec. 158.160 Other non-claims costs.
(a) General requirements. The report required in Sec. 158.110 of
this subpart must include non-claims costs described in paragraph (b)
of this section and must provide an explanation of how premium revenue
is used, other than to provide reimbursement for clinical services
covered by the benefit plan, expenditures for activities that improve
health care quality, and Federal and State taxes and licensing or
regulatory fees as specified in this part.
(b) Non-claims costs other than taxes and regulatory fees. (1) The
report required in Sec. 158.110 of this subpart must include any
expenses for administrative services that do not constitute adjustments
to premium revenue as provided in Sec. 158.130 of this subpart,
reimbursement for clinical services to enrollees as defined in Sec.
158.140 of this subpart, or expenditures on quality improvement
activities as defined in Sec. Sec. 158.150 and 158.151 of this
subpart.
(2) Expenses for administrative services include the following:
(i) Cost-containment expenses not included as an expenditure
related to an activity at Sec. 158.150 of this subpart.
(ii) Loss adjustment expenses not classified as a cost containment
expense.
(iii) Direct sales salaries, workforce salaries and benefits.
(iv) Agents and brokers fees and commissions.
(v) General and administrative expenses.
(vi) Community benefit expenditures.
Sec. 158.161 Reporting of Federal and State licensing and regulatory
fees.
(a) Federal taxes. The report required in Sec. 158.110 of this
subpart must separately report:
(1) Federal taxes excluded from premium under subpart B which
include all Federal taxes and assessments allocated to health insurance
coverage reported under section 2718 of the PHS Act.
(2) Federal taxes not excluded from premium under subpart B which
include Federal income taxes on investment income and capital gains as
other non-claims costs.
(b) State taxes and assessments. The report required in Sec.
158.110 of this subpart must separately report:
(1) State taxes and assessments excluded from premium under subpart
B which include:
(i) Any industry-wide (or subset) assessments (other than
surcharges on specific claims) paid to the State directly, or premium
subsidies that are designed to cover the costs of providing indigent
care or other access to health care throughout the State.
(ii) Guaranty fund assessments.
(iii) Assessments of State industrial boards or other boards for
operating expenses or for benefits to sick employed persons in
connection with disability benefit laws or similar taxes levied by
States.
(iv) Advertising required by law, regulation or ruling, except
advertising associated with investments.
[[Page 74926]]
(v) State income, excise, and business taxes other than premium
taxes.
(vi) State premium taxes plus State taxes based on policy reserves,
if in lieu of premium taxes.
(vii) One of the following types of payments:
(A) Payments to a State, by not-for-profit health plans, of premium
tax exemption values in lieu of State premium taxes limited to the
State premium tax rate applicable to for-profit entities subject to
premium tax multiplied by the allocated premiums earned for individual,
small group and large group;
(B) Payment by not-for-profit health plans for community benefit
expenditures as described in paragraph (c) of this section limited to
the State premium tax rate applicable to for-profit entities subject to
premium tax multiplied by the allocated premiums earned for individual,
small group and large group. These payments must be State based
requirement to qualify for inclusion in this line item; or
(C) Payments made by (Federal income) tax exempt health plans for
community benefit expenditures as defined in paragraph (c) of this
section limited to the State premium tax rate applicable to for-profit
entities subject to premium tax multiplied by the allocated premiums
earned for individual, small group, and large group.
(2) State taxes and assessments not excluded from premium under
subpart B which include:
(i) State sales taxes if the issuer does not exercise options of
including such taxes with the cost of goods and services purchased.
(ii) Any portion of commissions or allowances on reinsurance
assumed that represent specific reimbursement of premium taxes.
(iii) Any portion of commissions or allowances on reinsurance ceded
that represents specific reimbursement of premium taxes.
(c) Community benefit expenditures. (1) A not-for-profit issuer
exempt from Federal or State taxes and assessments, but required to
make community benefit expenditures in lieu of taxes, must report to
the Secretary such community benefit expenditures, multiplied by the
allocated premiums earned for individual, small group and large group,
but not to exceed the amount of the taxes they would otherwise be
required to pay. Each expenditure must not be reported more than once,
but may be split between Federal and State taxes as applicable.
(2) Community benefit expenditures means expenditures for
activities or programs that seek to achieve the objectives of improving
access to health services, enhancing public health and relief of
government burden. This includes any of the following activities that:
(i) Are available broadly to the public and serve low-income
consumers;
(ii) Reduce geographic, financial, or cultural barriers to
accessing health services, and if ceased to exist would result in
access problems (for example, longer wait times or increased travel
distances);
(iii) Address Federal, State or local public health priorities such
as advancing health care knowledge through education or research that
benefits the public;
(iv) Leverage or enhance public health department activities such
as childhood immunization efforts; and
(v) Otherwise would become the responsibility of government or
another tax-exempt organization.
Sec. 158.170 Allocation of expenses.
(a) General requirements. Each expense must be reported under only
one type of expense, unless a portion of the expense fits under the
definition of or criteria for one type of expense and the remainder
fits into a different type of expense, in which case the expense must
be pro-rated between types of expenses. Expenditures that benefit lines
of business or products other than those being reported, including but
not limited to those that are for or benefit self-funded plans, must be
reported on a pro rata share.
(b) Description of the methods used to allocate expenses. The
report required in Sec. 158.110 of this subpart must include a
detailed description of the methods used to allocate expenses,
including incurred claims, quality improvement expenses, Federal and
State taxes and licensing or regulatory fees, and other non-claims
costs, to each health insurance market in each State. A detailed
description of each expense element must be provided, including how
each specific expense meets the criteria for the type of expense in
which it is categorized, as well as the method by which it was
aggregated.
(1) Allocation to each category should be based on a generally
accepted accounting method that is expected to yield the most accurate
results. Specific identification of an expense with an activity that is
represented by one of the categories above will generally be the most
accurate method. If a specific identification is not feasible, the
issuer should provide an explanation of why it believes the more
accurate result will be gained from allocation of expenses based upon
pertinent factors or ratios such as studies of employee activities,
salary ratios or similar analyses.
(2) Many entities operate within a group where personnel and
facilities are shared. Shared expenses, including expenses under the
terms of a management contract, must be apportioned pro rata to the
entities incurring the expense.
(3) Any basis adopted to apportion expenses must be that which is
expected to yield the most accurate results and may result from special
studies of employee activities, salary ratios, premium ratios or
similar analyses. Expenses that relate solely to the operations of a
reporting entity, such as personnel costs associated with the adjusting
and paying of claims, must be borne solely by the reporting entity and
are not to be apportioned to other entities within a group.
(c) Disclosure of allocation methods. The issuer must identify in
the report required in Sec. 158.110 of this subpart the specific basis
used to allocate expenses reported under this Part to States and,
within States, to lines of business including the individual market,
small group market, large group market, supplemental health insurance
coverage, health insurance coverage offered to beneficiaries of public
programs (such as Medicare and Medicaid), and group health plans as
defined in Sec. 145.103 of this chapter and administered by the
issuer.
(d) Maintenance of records. The issuer must maintain and make
available to the Secretary upon request the data used to allocate
expenses reported under this Part together with all supporting
information required to determine that the methods identified and
reported as required under paragraph (b) of this section were
accurately implemented in preparing the report required in Sec.
158.110 of this subpart.
Subpart B--Calculating and Providing the Rebate
Sec. 158.210 Minimum medical loss ratio.
Subject to the provisions of Sec. 158.211 of this subpart:
(a) Large group market. For all policies issued in the large group
market in a State during the MLR reporting year, an issuer must provide
a rebate to enrollees if the issuer has an MLR of less than 85 percent,
as determined in accordance with this part.
(b) Small group market. For all policies issued in the small group
market in a State during the MLR reporting year, an issuer must provide
a rebate to enrollees if the issuer has an
[[Page 74927]]
MLR of less than 80 percent, as determined in accordance with this
part.
(c) Individual market. For all policies issued in the individual
market in a State during the MLR reporting year, an issuer must provide
a rebate to enrollees if the issuer has an MLR of less than 80 percent,
as determined in accordance with this Part.
(d) Adjustment by the Secretary. If the Secretary has adjusted the
percentage that issuers in the individual market in a specific State
must meet, then the adjusted percentage determined by the Secretary in
accordance with Sec. 158.301 of this part et seq. must be substituted
for 80 percent in paragraph (c) of this section.
Sec. 158.211 Requirement in States with a higher medical loss ratio.
(a) State option to set higher minimum loss ratio. For coverage
offered in a State whose law provides that issuers in the State must
meet a higher MLR than that set forth in Sec. 158.210, the State's
higher percentage must be substituted for the percentage stated in
Sec. 158.210 of this subpart.
(b) Considerations in setting a higher minimum loss ratio. In
adopting a higher minimum loss ratio than that set forth in Sec.
158.210, a State must seek to ensure adequate participation by health
insurance issuers, competition in the health insurance market in the
State, and value for consumers so that premiums are used for clinical
services and quality improvements.
Sec. 158.220 Aggregation of data in calculating an issuer's medical
loss ratio.
(a) Aggregation by State and by market. In general, an issuer's MLR
must be calculated separately for the large group market, small group
market and individual market within each State. However, if, pursuant
to section 1312(c)(3) of the Affordable Care Act, a State requires the
small group market and individual market to be merged, then the data
reported separately under subpart A for the small group and individual
market in that State may be merged for purposes of calculating an
issuer's MLR and any rebates owing.
(b) Years of data to include in calculating MLR. Subject to
paragraph (c) of this section, an issuer's MLR for an MLR reporting
year is calculated according to the formula in Sec. 158.221 of this
subpart and aggregating the data reported under this Part for the
following 3-year period:
(1) The data for the MLR reporting year whose MLR is being
calculated; and
(2) The data for the two prior MLR reporting years.
(c) Requirements for MLR reporting years 2011 and 2012. (1) For the
2011 MLR reporting year, an issuer's MLR is calculated using the data
reported under this Part for the 2011 MLR reporting year only.
(2) For the 2012 MLR reporting year--
(i) If an issuer's experience for the 2012 MLR reporting year is
fully credible, as defined in Sec. 158.230 of this subpart, an
issuer's MLR is calculated using the data reported under this Part for
the 2012 MLR reporting year.
(ii) If an issuer's experience for the 2012 MLR reporting year is
partially credible or non-credible, as defined in Sec. 158.230 of this
subpart, an issuer's MLR is calculated using the data reported under
this part for the 2011 MLR reporting year and the 2012 MLR reporting
year.
Sec. 158.221 Formula for calculating an issuer's medical loss ratio.
(a) Medical loss ratio. (1) An issuer's MLR is the ratio of the
numerator, as defined in paragraph (b) of this section, to the
denominator, as defined in paragraph (c) of this section, subject to
the applicable credibility adjustment, if any, as provided in Sec.
158.232 of this subpart.
(2) An issuer's MLR shall be rounded to three decimal places. For
example, if an MLR is 0.7988, it shall be rounded to 0.799 or 79.9
percent. If an MLR is 0.8253 or 82.53 percent, it shall be rounded to
0.825 or 82.5 percent.
(b) Numerator. The numerator of an issuer's MLR for an MLR
reporting year must be the issuer's incurred claims, as defined in
Sec. 158.140 of this part, plus the issuer's expenditures for
activities that improve health care quality, as defined in Sec.
158.150 and Sec. 158.151 of this part, that are reported for the years
specified in Sec. 158.220 of this subpart.
(1) The numerator of the MLR for the 2012 MLR reporting year may
include any rebate paid under Sec. 158.240 of this subpart for the
2011 MLR reporting year if the 2012 MLR reporting year experience is
not fully credible as defined in Sec. 158.230 of this subpart.
(2) The numerator of the MLR for the 2013 MLR reporting year may
include any rebate paid under Sec. 158.240 for the 2011 MLR reporting
year or the 2012 MLR reporting year.
(3) The numerator of the MLR for policies that are reported
separately under Sec. 158.120(d)(3) of this part must be the amount
specified in paragraph (b) of this section, except that for the 2011
MLR reporting year the total of the incurred claims and expenditures
for activities that improve health care quality are then multiplied by
a factor of two.
(4) The numerator of the MLR for policies that are reported
separately under Sec. 158.120(d)(4) of this part must be the amount
specified in paragraph (b) of this section, except that for the 2011
MLR reporting year the total of the incurred claims and expenditures
for activities that improve health care quality are then multiplied by
a factor of two.
(c) Denominator. The denominator of an issuer's MLR must equal the
issuer's premium revenue, as defined in Sec. 158.130, minus 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) of this
part.
Sec. 158.230 Credibility adjustment.
(a) General rule. An issuer may add to the MLR calculated under
Sec. 158.221(a) of this subpart the credibility adjustment specified
by Sec. 158.232 of this section, if such MLR is based on partially
credible experience as defined in paragraph (c)(2) of this section. An
issuer may not apply the credibility adjustment if the issuer's
experience is fully credible, as defined in paragraph (c)(1) of this
section, or non-credible, as defined in paragraph (c)(3) of this
section.
(b) Life-years. The credibility of an issuer's experience is based
upon the number of life-years covered by the issuer. Life-years means
the total number of months of coverage for enrollees whose premiums and
claims experience is included in the report to the Secretary required
by Sec. 158.110 of this part, divided by 12.
(c) Credible experience. (1) An MLR calculated under Sec.
158.221(a) through (c) of this subpart is fully credible if it is based
on the experience of 75,000 or more life-years.
(2) An MLR calculated under Sec. 158.221(a) through (c) of this
subpart is partially credible if it is based on the experience of at
least 1,000 life-years and fewer than 75,000 life-years.
(3) An MLR calculated under Sec. 158.221(a) through (c) of this
subpart is non-credible if it is based on the experience of less than
1,000 life-years.
(d) If an issuer's MLR is non-credible, it is presumed to meet or
exceed the minimum percentage required by Sec. 158.210 or Sec.
158.211 of this subpart.
Sec. 158.231 Life-years used to determine credible experience.
(a) The life-years used to determine the credibility of an issuer's
experience are the life-years for the MLR reporting year plus the life-
years for the two prior MLR reporting years.
(b) For the 2011 MLR reporting year, the life-years used to
determine
[[Page 74928]]
credibility are the life-years for the 2011 MLR reporting year only.
(c) For the 2012 MLR reporting year-
(1) If an issuer's experience for the 2012 MLR reporting year is
fully credible, the life-years used to determine credibility are the
life-years for the 2012 MLR reporting year only;
(2) If an issuer's experience for the 2012 MLR reporting year only
is partially credible, the life-years used to determine credibility are
the life-years for the 2011 MLR reporting year plus the life-years for
the 2012 MLR reporting year.
Sec. 158.232 Calculating the credibility adjustment.
(a) Formula. An issuer's credibility adjustment, if any, is the
product of the base credibility factor, as determined under paragraph
(b) of this section, multiplied by the deductible factor, as determined
under paragraph (c) of this section.
(b) Base credibility factor. (1) The base credibility factor for
fully credible experience or for non-credible experience is zero.
(2) The base credibility factor for partially credible experience
is determined based on the number of life-years included in the
aggregation, as determined under Sec. 158.231 of this subpart, and the
factors shown in Table 1. When the number of life-years used to
determine credibility exactly matches a life-year category listed in
Table 1, the value associated with that number of life-years is the
base credibility factor. The base credibility factor for a number of
life-years between the values shown in Table 1 is determined by linear
interpolation.
Table 1 to Sec. 158.232: Base Credibility Factors
------------------------------------------------------------------------
Life-years Base credibility factor
------------------------------------------------------------------------
< 1,000............................... No Credibility.
1,000................................. 8.3%.
2,500................................. 5.2%.
5,000................................. 3.7%.
10,000................................ 2.6%.
25,000................................ 1.6%.
50,000................................ 1.2%.
>= 75,000............................. 0.0% (Full Credibility).
------------------------------------------------------------------------
(c) Deductible factor. (1) The deductible factor is based on the
average per person deductible of policies whose experience is included
in the aggregation, as determined under Sec. 158.231 of this subpart.
When the weighted average deductible, as determined in accordance with
this section, exactly matches a deductible category listed in Table 2,
the value associated with that deductible is the deductible factor. The
deductible factor for an average weighted deductible between the values
shown in Table 2 is determined by linear interpolation.
(i) The per person deductible for a policy that covers a subscriber
and the subscriber's dependents shall be calculated as follows: The
lesser of the sum of the individual family members' deductibles or the
overall family deductible for the subscriber and subscriber's family,
shall be divided by the total number of individuals covered through the
subscriber (including the subscriber).
(ii) The average deductible for an aggregation is calculated
weighted by the life-years of experience for each deductible level of
policies included in the aggregation.
(2) An issuer may choose to use a deductible factor of 1.0 in lieu
of calculating a deductible factor based on the average of policies
included in the aggregation.
Table 2 to Sec. 158.232: Deductible Factor
------------------------------------------------------------------------
Deductible
Health plan deductible factor
------------------------------------------------------------------------
$2,500.................................................. 1.000
$2,500.................................................. 1.164
$5,000.................................................. 1.402
>= $10,000.............................................. 1.736
------------------------------------------------------------------------
(d) No credibility adjustment. For the 2013 MLR reporting year,
the credibility adjustment for an MLR based on partially credible
experience is zero if both of the following conditions are met:
(1) The current MLR reporting year and each of the two previous MLR
reporting years included experience of at least 1,000 life-years; and
(2) Without applying any credibility adjustment, the issuer's MLR
for the current MLR reporting year and each of the two previous MLR
reporting years were below the applicable MLR standard for each year as
established under Sec. 158.210 in this subpart.
Sec. 158.240 Rebating premium if the applicable medical loss ratio
standard is not met.
(a) General requirement. For each MLR reporting year, an issuer
must provide a rebate to each enrollee if the issuer's MLR does not
meet or exceed the minimum percentage required by Sec. Sec. 158.210
and 158.211 of this subpart.
(b) Definition of enrollee for purposes of rebate. For the sole
purpose of determining whom is entitled to receive a rebate pursuant to
this part, the term ``enrollee'' means the subscriber, policyholder,
and/or government entity that paid the premium for health care coverage
received by an individual during the respective MLR reporting year.
(c) Amount of rebate to each enrollee. (1) For each MLR reporting
year, an issuer must rebate to the enrollee the total amount of premium
revenue received by the issuer from the enrollee after subtracting
Federal and State taxes and licensing and regulatory fees as provided
in Sec. 158.161(a), Sec. 158.162(a)(1) and Sec. 158.162(b)(1) of
this part, multiplied by the difference between the MLR required by
Sec. 158.210 or Sec. 158.211 of this subpart, and the issuer's MLR as
calculated under Sec. 158.221 of this subpart.
(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 small
group 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 small group 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 premium and subtracting taxes and fees
as provided in paragraph (c) of this section. In this example, an
enrollee may have paid $2,000 in premiums for the MLR reporting year.
If the Federal and State taxes and licensing and regulatory fees that
may be excluded from premium revenue as described in Sec. 158.161(a),
Sec. 158.161(a)(1) and Sec. 158.162(b)(1) of this subpart are $150
for a premium of $2,000, then the issuer would subtract $150 from
premium revenue, 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. An issuer must provide any rebate owing to an
enrollee no later than August 1 following the end of the MLR reporting
year.
(e) Late payment interest. An issuer that fails to pay any rebate
owing to an enrollee or subscriber in accordance with paragraph (d) of
this section or to take other required action within the time periods
set forth in this Part must, in addition to providing the required
rebate to the enrollee, pay the enrollee interest at the current
Federal Reserve Board lending rate or ten percent annually, whichever
is higher, on the total amount of the rebate, accruing from the date
payment was due under paragraph (d) of this section.
Sec. 158.241 Form of rebate.
(a) Current enrollees. (1) An issuer may choose to provide any
rebates owing to current enrollees in the form
[[Page 74929]]
of a premium credit, lump-sum check, or, if an enrollee paid the
premium using a credit card or direct debit, by lump-sum reimbursement
to the account used to pay the premium.
(2) 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.
(b) Former enrollees. Rebates owing to former enrollees must be
paid in the form of lump-sum check or lump-sum reimbursement using the
same method that was used for payment, such as credit card or direct
debit.
Sec. 158.242 Recipients of rebates.
(a) Individual market. An issuer must meet its obligation to
provide any rebate due to an enrollee in the individual market by
providing it to the enrollee. For individual policies that cover more
than one person, one lump-sum rebate may be provided to the subscriber
on behalf of all enrollees covered by the policy.
(b) Large group and small group markets. An issuer must meet its
obligation to provide any rebate to persons covered under a group
health plan by providing it to the enrollee, in amounts proportionate
to the amount of premium the policyholder and each subscriber paid.
(1) Arrangement with policyholder to distribute rebates. An issuer
may meet its obligation to provide any rebate owing to a large group or
small group enrollee by entering into an agreement with the group
policyholder to distribute the rebate on behalf of the issuer, subject
to all of the following conditions:
(i) The issuer must remain liable for complying with all of its
obligations under this part.
(ii) The issuer must obtain and retain records and documentation
evidencing accurate distribution of any rebate owing, sufficient to
demonstrate compliance with its obligations under this subpart, subpart
D, and subpart E. Such records and documentation include:
(A) The amount of the premium paid by each subscriber;
(B) The amount of the premium paid by the group policyholder;
(C) The amount of the rebate provided to each subscriber;
(D) The amount of the rebate retained by the group policyholder;
and
(E) The amount of any unclaimed rebate and how and when it was
distributed.
(2) [Reserved]
Sec. 158.243 De minimis rebates.
(a) Minimum threshold. An issuer is not required to provide a
rebate to an enrollee based upon the premium that enrollee paid, under
the following circumstances:
(1) For a group policy, if the total rebate owed to the
policyholder and the subscribers is less than $5 per subscriber covered
by the policy for a given MLR reporting year.
(2) In the individual market, if the total rebated owed to the
subscriber is less than $5.
(b) Distribution. (1) An issuer must aggregate and distribute any
rebates not provided because they did not meet the minimum threshold
set forth in paragraph (a) of this section by aggregating the unpaid
rebates by individual market, small group market and large group market
in a State and use them to increase the rebates provided to enrollees
who receive rebates based upon the same MLR reporting year as the
aggregated unpaid rebates. An issuer must distribute such aggregated
rebates by providing additional premium credit or payment divided
evenly among enrollees who are being provided a rebate.
(2) For example, an issuer in the individual market has aggregated
unpaid rebates totaling $2,000, and the issuer has 10,000 enrollees who
are entitled to be provided a rebate above the minimum threshold for
the applicable MLR reporting year. The $2,000 must be redistributed to
the 10,000 and added on to their existing rebate amounts. The $2,000 is
divided evenly among the 10,000 enrollees, so the issuer increases each
enrollee's rebate by $0.20.
Sec. 158.244 Unclaimed rebates.
An issuer must make a good faith effort to locate and deliver to an
enrollee any rebate required under this Part. If, after making a good
faith effort, an issuer is unable to locate a former enrollee, the
issuer must comply with any applicable State law.
Sec. 158.250 Notice of rebates.
For each MLR reporting year, at the time any rebate of premium is
provided in accordance with this Part, an issuer must provide each
enrollee who receives a rebate the following information in a form
prescribed by the Secretary:
(a) A general description of the concept of an MLR;
(b) The purpose of setting a MLR standard;
(c) The applicable MLR standard;
(d) The issuer's MLR, adjusted in accordance with the provisions of
this subpart;
(e) The issuer's aggregate premium revenue as reported in
accordance with Sec. 158.130, minus any Federal and State taxes and
licensing and regulatory fees that may be excluded from premium revenue
as described in Sec. Sec. 158.161(a) and 158.162(a)(1) and (b)(1); and
(f) The rebate percentage and amount owed to enrollees based upon
the difference between the issuer's MLR and the applicable MLR
standard.
Sec. 158.260 Reporting of rebates.
(a) General requirement. For each MLR reporting year, an issuer
must submit to the Secretary a report concerning the rebates provided
to and on behalf of enrollees pursuant to this subpart.
(b) Aggregation of information in the report. The information in
the report must be aggregated in the same manner as required by Sec.
158.120.
(c) Information to report. The report required by this section must
include the total:
(1) Number and percentage of enrollees who received a rebate;
(2) Number and amount of rebates provided:
(i) As premium credit; and
(ii) As lump sum check or lump-sum reimbursement to a subscriber's
credit card or direct payment to a subscriber's bank account;
(3) Amount of rebates that were provided to enrollees, including a
breakdown of the amounts provided based upon the portion of premiums
paid by group policyholders and amounts provided based upon the portion
of premium paid by subscribers;
(4) Amount of rebates that were de minimis, as provided in Sec.
158.243, and a detailed description of how these rebates were
disbursed; and
(5) Amount of unclaimed rebates, a description of the methods used
to locate the applicable enrollees, and a detailed description of how
the unclaimed rebates were disbursed.
(d) Timing and form of report. The data required by paragraphs
(c)(1) through (4) of this section must be submitted with the report
under Sec. 158.110, on a form and in the manner prescribed by the
Secretary. The data required by paragraph (c)(5) of this section must
be submitted with the report under Sec. 158.110 for the subsequent MLR
reporting year.
[[Page 74930]]
Sec. 158.270 Effect of rebate payments on solvency.
(a) If a State's insurance commissioner, superintendent, or other
responsible official determines that the payment of rebates by a
domestic issuer in that State will cause the issuer's risk based
capital (RBC) level to fall below the Company Action Level RBC, as
defined in the NAIC's Risk Based Capital (RBC) for Insurers Model Act,
the commissioner, superintendent, or other responsible official must
notify the Secretary. In such a circumstance, the commissioner,
superintendent, or other responsible official may request that the
Secretary defer all or a portion of the rebate payments owed by the
issuer.
(b) In the event an insurance commissioner, superintendent, or
other responsible official makes the request set forth in paragraph (a)
of this section, the following should be provided to the Secretary
along with the notification:
(1) The domestic issuer's RBC reports for the current calendar year
and the 2 preceding calendar years; and
(2) A calculation of the amount of rebates that would be owed by
the domestic issuer pursuant to this Part.
(c) Upon receipt of the notification under paragraph (a), the
Secretary will examine the information provided by the insurance
commissioner, superintendent, or other responsible official along with
any other information the Secretary may request from the issuer, and
determine whether the payment of rebates by the issuer will cause its
RBC level to fall below the Company Action Level RBC.
(d) When the Secretary determines that the payment of rebates by an
issuer will cause its RBC level to fall below the Company Action Level
RBC, the Secretary may permit a deferral of all or a portion of the
rebates owed, but only for a period determined by the Secretary in
consultation with the State. The Secretary will require that the issuer
must pay these rebates with interest in a future year in which payment
of the rebates would not cause the issuer's RBC level to fall below the
Company Action Level RBC.
Subpart C--Potential Adjustment to the MLR for a State's Individual
Market
Sec. 158.301 Standard for adjustment to the medical loss ratio.
The Secretary may adjust the MLR standard that must be met by
issuers offering coverage in the individual market in a State, as
defined in section 2791 of the PHS Act, for a given MLR reporting year
if, in her discretion, she determines that application of the 80
percent MLR standard of section 2718(b)(1)(A)(ii) of the Public Health
Service Act may destabilize the individual market in that State.
Application of the 80 percent MLR standard may destabilize the
individual market in a State only if there is a reasonable likelihood
that application of the requirement will do so.
Sec. 158.310 Who may request adjustment to the medical loss ratio.
A request for an adjustment to the MLR standard for a State must be
submitted by the State's insurance commissioner, superintendent, or
comparable official of that State in order to be considered by the
Secretary.
Sec. 158.311 Duration of adjustment to the medical loss ratio.
A State may request that an adjustment to the MLR standard be for
up to three MLR reporting years.
Sec. 158.320 Information supporting a request for adjustment to the
medical loss ratio.
A State must submit in electronic format the information required
by Sec. Sec. 158.321 through 158.323 of this subpart in order for the
request for adjustment to the MLR standard for the State to be
considered by the Secretary. A State may submit to the Secretary any
additional information it determines would support its request. In the
event that certain data are unavailable or that the collection of
certain data is unduly burdensome, a State may provide written notice
to the Secretary and the Secretary may, at her discretion, request
alternative supporting data or move forward with her determination.
Sec. 158.321 Information regarding the State's individual health
insurance market.
(a) State MLR standard. The State must describe its current MLR
standard for the individual market, if any, and the formula used to
assess compliance with such standard.
(b) State market withdrawal requirements. The State must describe
any requirements it has with respect to withdrawals from the State's
individual health insurance market. Such requirements include, but are
not limited to, any notice that must be provided and any authority the
State regulator may have to approve a withdrawal plan or ensure that
enrollees of the exiting issuer have continuing coverage, as well as
any penalties or sanctions that may be levied upon exit or limitations
on re-entry.
(c) Mechanisms to provide options to consumers. The State must
describe the mechanisms available to the State to provide consumers
with options in the event an issuer withdraws from the individual
market. Such mechanisms include, but are not limited to, a guaranteed
issue requirement, limits on health status rating, an issuer of last
resort, or a State-operated high risk pool. A description of each
mechanism should include detail on the issuers participating in and
products available under such mechanism, as well as any limitations
with respect to eligibility, enrollment period, total enrollment, and
coverage for pre-existing conditions.
(d) Issuers in the State's individual market. Subject to Sec.
158.320 of this subpart, the State must provide:
(1) For each issuer who offers coverage in the individual market in
the State its number of individual enrollees by product, available
individual premium data by product, and individual health insurance
market share within the State; and
(2) For each issuer who offers coverage in the individual market in
the State to more than 1,000 enrollees, the following additional
information:
(i) Total earned premium on individual market health insurance
products in the State;
(ii) Reported MLR pursuant to State law for the individual market
business in the State;
(iii) Estimated MLR for the individual market business in the
State, as determined in accordance with Sec. 158.221 of this part;
(iv) Total agents' and brokers' commission expenses on individual
health insurance products;
(v) Estimated rebate for the individual market business in the
State, as determined in accordance with Sec. 158.221 and Sec. 158.240
of this part;
(vi) Net underwriting profit for the individual market business and
consolidated business in the State;
(vii) After-tax profit and profit margin for the individual market
business and consolidated business in the State;
(viii) Risk-based capital level; and
(ix) Whether the issuer has provided notice of exit to the State's
insurance commissioner, superintendent, or comparable State authority.
Sec. 158.322 Proposal for adjusted medical loss ratio.
A State must provide its own proposal as to the adjustment it seeks
to the MLR standard. This proposal must include:
(a) An explanation and justification of how the proposed adjustment
to the MLR was determined;
(b) An explanation of how an adjustment to the MLR standard for the
State's individual market will permit issuers to adjust current
business models and practices in order to meet
[[Page 74931]]
an 80 percent MLR as soon as is practicable;
(c) An estimate of the rebates that would be paid if the issuers
offering coverage in the individual market in the State must meet an 80
percent MLR for the applicable MLR reporting years; and
(d) An estimate of the rebates that would be paid if the issuers
offering coverage in the individual market in the State must meet the
adjusted MLR proposed by the State for the applicable MLR reporting
years.
Sec. 158.323 State contact information.
A State must provide the name, telephone number, e-mail address,
and mailing address of the person the Secretary may contact regarding
the request for an adjustment to the MLR standard.
Sec. 158.330 Criteria for assessing request for adjustment to the
medical loss ratio.
The Secretary may consider the following criteria in assessing
whether application of an 80 percent MLR, as calculated in accordance
with this subpart, may destabilize the individual market in a State
that has requested an adjustment to the 80 percent MLR:
(a) The number of issuers reasonably likely to exit the State or to
cease offering coverage in the State absent an adjustment to the 80
percent MLR and the resulting impact on competition in the State. In
making this determination the Secretary may consider as to each issuer
that is reasonably likely to exit the State:
(1) Each issuer's MLR relative to an 80 percent MLR;
(2) Each issuer's solvency and profitability, as measured by
factors such as surplus level, risked-based capital ratio, net income,
and operating or underwriting gain;
(3) The requirements and limitations within the State with respect
to market withdrawals; and
(4) Whether each issuer covers less than 1,000 life-years in the
State's individual insurance market.
(b) The number of individual market enrollees covered by issuers
that are reasonably likely to exit the State absent an adjustment to
the 80 percent MLR.
(c) Whether absent an adjustment to the 80 percent MLR standard
consumers may be unable to access agents and brokers.
(d) The alternate coverage options within the State available to
individual market enrollees in the event an issuer exits the market,
including:
(1) Any requirement that issuers who exit the State's individual
market must have their block(s) of business assumed by another issuer;
(2) The issuers that may remain in the State subsequent to the
implementation of the 80 percent MLR, as calculated in accordance with
this Part, and the nature, terms, and price of the products offered by
such issuers;
(3) The capacity of remaining issuers to write additional business,
as measured by their risk based capital ratios;
(4) The mechanisms, such as guaranteed issue products, an issuer of
last resort, or a State high risk pool, available to the State to
provide coverage to consumers in the event of an issuer withdrawing
from the market, and the affordability of these options compared to the
coverage provided by exiting or potentially exiting issuers; and
(5) Any authority the State's insurance commissioner,
superintendent, or comparable official may exercise with respect to
stabilization of the individual insurance market.
(e) The impact on premiums charged, and on benefits and cost-
sharing provided, to consumers by issuers remaining in the market in
the event one or more issuers were to withdraw from the market.
(f) Any other relevant information submitted by the State's
insurance commissioner, superintendent, or comparable official in the
State's request.
Sec. 158.340 Process for submitting request for adjustment to the
medical loss ratio.
(a) Electronic submission. A State must submit electronically, to
an address and in a format prescribed by the Secretary, all of the
information required by this subpart in order for its request for an
adjustment to the MLR standard for its individual market to be
considered by the Secretary.
(b) Submission by mail. A State may also submit by overnight
delivery service or by U.S mail, return receipt requested, to an
address and in a format prescribed by the Secretary, its request for an
adjustment to the MLR standard for its individual market.
Sec. 158.341 Treatment as a public document.
A State's request for an adjustment to the MLR standard, and all
information submitted as part of its request, will be treated as a
public document and will be posted promptly on the Secretary's Internet
Web site devoted to health care coverage.
Sec. 158.342 Invitation for public comments.
The Secretary will invite public comment regarding a State's
request for an adjustment to the MLR standard. All public comments must
be submitted in writing within 10 days of the posting of the request,
and must be submitted in the manner prescribed by the Secretary. The
Secretary will consider timely public comments in assessing a State's
request for an adjustment to the MLR standard.
Sec. 158.343 Optional State hearing.
Any State that submits a request for adjustment to the MLR standard
may, at its option, hold a public hearing and create an evidentiary
record with respect to its application. If a State does so, the
Secretary will take the evidentiary record of the hearing into
consideration in making her determination.
Sec. 158.344 Secretary's discretion to hold a hearing.
The Secretary may, at her discretion, conduct a public hearing with
respect to a State's request for an adjustment to the MLR standard. All
testimony and materials received in connection with any public hearing
will be made part of the public record, and shall be considered by the
Secretary in assessing a State's request for an adjustment to the MLR
standard.
Sec. 158.345 Determination on a State's request for adjustment to the
medical loss ratio.
(a) General time frame. The Secretary will make a determination as
to whether to grant a State's request for an adjustment to the MLR
standard within 30 days after determining that the information required
by this subpart has been received.
(b) Extension at the discretion of the Secretary. The Secretary
may, in her discretion, extend the 30 day time period in paragraph (a)
of this section for as long a time as necessary not to exceed 30 days.
Sec. 158.346 Request for reconsideration.
(a) Requesting reconsideration. A State whose request for
adjustment to the MLR standard has been denied by the Secretary may
request reconsideration of that determination. A request for
reconsideration must be submitted in writing to the Secretary within 10
days of her decision to deny the State's request for an adjustment, and
may include any additional information in support of its request.
(b) Reconsideration determination. The Secretary will issue her
determination on a State's request for reconsideration within 20 days
of receiving the reconsideration request.
[[Page 74932]]
Sec. 158.350 Subsequent requests for adjustment to the medical loss
ratio.
A State that has made a previous request for an adjustment to the
MLR standard must, in addition to the other information required by
this subpart, submit information as to what steps the State has taken
since its initial and other prior requests, if any, to increase the
likelihood that enrollees who have health coverage through issuers that
are considered likely to exit the State's individual market will
receive coverage at a comparable price and with comparable benefits if
the issuer does exit the market.
Subpart D--HHS Enforcement
Sec. 158.401 HHS enforcement.
HHS enforces the reporting and rebate requirements described in
subparts A and B, including but not limited to:
(a) The requirement that such reports be submitted timely.
(b) The requirement that the data reported complies with the
definitions and criteria set forth in this part.
(c) The requirement that rebates be paid timely and accurately.
Sec. 158.402 Audits.
(a) Notice of Audit. HHS will provide 30 days advance notice of its
intent to conduct an audit of an issuer.
(b) Conferences. All audits will include an entrance conference at
which the scope of the audit will be presented and an exit conference
at which the initial audit findings will be discussed.
(c) Preliminary Audit Findings. HHS will share its preliminary
audit findings with the issuer, which will then have 30 days to respond
to such findings. HHS may extend, for good cause, the time for an
issuer to submit such a response.
(d) Final Audit Findings. If the issuer does not dispute the
preliminary findings, the audit findings will become final.
Alternatively, if the issuer responds to the preliminary findings, HHS
will review and consider such response and finalize the audit findings.
(e) Corrective actions. HHS will send a copy of the final audit
findings to the issuer as well as any corrective actions that issuer
must undertake as a result of the audit findings.
(f) Order to pay rebates. If HHS determines as the result of an
audit that an issuer has failed to pay rebates it is obligated to pay
pursuant to this part, it may order the issuer to pay those rebates,
together with interest from the date the rebates were due, in
accordance with Sec. 158.240(d) of this part.
Sec. 158.403 Circumstances in which a State is conducting audits of
issuers.
(a) If a State conducts an audit of an issuer's MLR reporting and
rebate obligations, HHS may, in the exercise of its discretion, accept
the findings of that audit if HHS determines the following:
(1) The laws of the State permit public release of the findings of
audits of issuers;
(2) The State's audit reports on the validity of the data regarding
expenses and premiums that the issuer reported to the Secretary,
including the appropriateness of the allocations of expenses used in
such reporting and whether the activities associated with the issuer's
reported expenditures for quality improving activities meet the
definition of such activities;
(3) The State's audit reports on the accuracy of rebate
calculations and the timeliness and accuracy of rebate payments;
(4) The State submits final audit reports to HHS within 30 days of
finalization; and
(5) The State submits preliminary or draft audit reports to HHS
within 6 months of the completion of audit field work unless they have
already been finalized and reported under paragraph (a)(4) of this
section.
(b) If HHS accepts an audit conducted by a State, and if the issuer
makes additional rebate payments as a result of the audit, then HHS
shall accept those payments as satisfying the issuer's obligation to
pay rebates pursuant to this part.
Subpart E--Additional Requirements on Issuers
Sec. 158.501 Access to facilities and records.
(a) Each issuer subject to the reporting requirement of this part
must allow access and entry to its premises, facilities and records,
including computer and other electronic systems, to HHS, the
Comptroller General, or their designees to evaluate, through
inspection, audit, or other means, compliance with the requirements for
reporting and calculation of data submitted to HHS, and the timeliness
and accuracy of rebate payments made under this part.
(b) Each issuer must also allow access and entry to the facilities
and records, including computer and other electronic systems, of its
parent organization, subsidiaries, related entities, contractors,
subcontractors, agents, or a transferee that pertain to any aspect of
the data reported to HHS or to rebate payments calculated and made
under this part. To the extent that the issuer does not control access
to the facilities and records of its parent organization, related
entities, or third parties, it will be the responsibility of the issuer
to contractually obligate any such parent organization, related
entities, or third parties to grant said access.
(c) The Comptroller General, HHS, or their designees may inspect,
evaluate, and audit through 6 years from the date of the filing of a
report required by this part or through 3 years after the completion of
the audit and for such longer period set forth below provided that any
of the following occur:
(1) HHS determines there is a special need to retain a particular
record or group of records for a longer period and notifies the issuer
at least 30 days before the disposition date.
(2) There has been a dispute, or allegation of fraud or similar
fault by the issuer, in which case the retention may be extended to 6
years from the date of any resulting final resolution of the dispute,
fraud, or similar fault.
(3) HHS determines that there is a reasonable possibility of fraud
or similar fault, in which case HHS may inspect, evaluate, and audit
the issuer at any time.
Sec. 158.502 Maintenance of records.
(a) Basic rule. Each issuer subject to the requirements of this
part must maintain all documents and other evidence necessary to enable
HHS to verify that the data required to be submitted in accordance with
this part comply with the definitions and criteria set forth in this
part, and that the MLR is calculated and any rebates owing are
calculated and provided in accordance with this part. This includes but
is not limited to all administrative and financial books and records
used in compiling data reported and rebates provided under this part
and in determining what data to report and rebates to provide under
this part, electronically stored information, and evidence of
accounting procedures and practices. This also includes all
administrative and financial books and records used by others in
assisting an issuer with its obligations under this part.
(b) Length of time information must be maintained. All of the
documents and other evidence required by this part must be maintained
for the current year and six prior years, unless a longer time is
required under Sec. 158.501 of this subpart.
Subpart F--Federal Civil Penalties
Sec. 158.601 General rule regarding the imposition of civil
penalties.
If any issuer fails to comply with the requirements of this part,
civil penalties,
[[Page 74933]]
as described in this subpart, may be imposed.
Sec. 158.602 Basis for imposing civil penalties.
Civil penalties. For the violations listed in this paragraph, HHS
may impose civil penalties in the amounts specified in Sec. 158.606 of
this subpart on any issuer who fails to do the following:
(a) Submit to HHS a report concerning the data required under this
part by the deadline established by HHS.
(b) Submit to HHS a substantially complete or accurate report
concerning the data required under this part.
(c) Timely and accurately pay rebates owing pursuant to this part.
(d) Respond to HHS inquiries as part of an investigation of issuer
non-compliance.
(e) Maintain records as required under this part for the periodic
auditing of books and records used in compiling data reported to HHS
and in calculating and paying rebates pursuant to this Part.
(f) Allow access and entry to premises, facilities and records that
pertain to any aspect of the data reported to HHS or to rebates
calculated and paid pursuant to this part.
(g) Comply with corrective actions resulting from audit findings.
(h) Accurately and truthfully represent data, reports or other
information that it furnishes to a State or HHS.
Sec. 158.603 Notice to responsible entities.
If HHS learns of a potential violation described in Sec. 158.602
of this subpart or if a State informs HHS of a potential violation
prior to imposing any civil monetary penalty HHS must provide written
notice to the issuer, to include the following:
(a) Describe the potential violation.
(b) Provide 30 days from the date of the notice for the responsible
entity to respond and to provide additional information to refute an
alleged violation.
(c) State that a civil monetary penalty may be assessed if the
allegations are not, as determined by HHS, refuted.
Sec. 158.604 Request for extension.
In circumstances in which an entity cannot prepare a response to
HHS within the 30 days provided in the notice, the entity may make a
written request for an extension from HHS detailing the reason for the
extension request and showing good cause. If HHS grants the extension,
the responsible entity must respond to the notice within the time frame
specified in HHS's letter granting the extension of time. Failure to
respond within 30 days, or within the extended time frame, may result
in HHS's imposition of a civil monetary penalty based upon its
determination of a potential violation described in Sec. 158.602 of
this subpart.
Sec. 158.605 Responses to allegations of noncompliance.
In determining whether to impose a civil monetary penalty, HHS may
review and consider documentation provided in any complaint or other
information, as well as any additional information provided by the
responsible entity to demonstrate that it has complied with Affordable
Care Act requirements. The following are examples of documentation that
a potential responsible entity may submit for HHS's consideration in
determining whether a civil monetary penalty should be assessed and the
amount of any civil monetary penalty:
(a) Any evidence that refutes an alleged noncompliance.
(b) Evidence that the entity did not know, and exercising due
diligence could not have known, of the violation.
(c) Evidence documenting the development and implementation of
internal policies and procedures by an issuer to ensure compliance with
the Affordable Care Act requirements regarding MLR. Those policies and
procedures may include or consist of a voluntary compliance program.
Any such program should do the following:
(1) Effectively articulate and demonstrate the fundamental mission
of compliance and the issuer's commitment to the compliance process.
(2) Include the name of the individual in the organization
responsible for compliance.
(3) Include an effective monitoring system to identify practices
that do not comply with Affordable Care Act requirements regarding MLRs
and to provide reasonable assurance that fraud, abuse, and systemic
errors are detected in a timely manner.
(4) Address procedures to improve internal policies when
noncompliant practices are identified.
(d) Evidence documenting the entity's record of previous compliance
with Affordable Care Act requirements regarding MLRs.
Sec. 158.606 Amount of penalty--general.
A civil monetary penalty for each violation of Sec. 158.602 of
this subpart may not exceed $100 for each day, for each responsible
entity, for each individual affected by the violation. Penalties
imposed under this Part are in addition to any other penalties
prescribed or allowed by law.
Sec. 158.607 Factors HHS uses to determine the amount of penalty.
In determining the amount of any penalty, HHS may take into account
the following:
(a) The entity's previous record of compliance. This may include
any of the following:
(1) Any history of prior violations by the responsible entity,
including whether, at any time before determination of the current
violation(s), HHS or any State found the responsible entity liable for
civil or administrative sanctions in connection with a violation of
Affordable Care Act requirements regarding minimum loss ratios.
(2) Evidence that the responsible entity has never had a complaint
for noncompliance with Affordable Care Act requirements regarding MLRs
filed with a State or HHS.
(3) Such other factors as justice may require.
(b) The gravity of the violation. This may include any of the
following:
(1) The frequency of the violation, taking into consideration
whether any violation is an isolated occurrence, represents a pattern,
or is widespread.
(2) The level of financial and other impacts on affected
individuals.
(3) Other factors as justice may require.
Sec. 158.608 Determining the amount of the penalty--mitigating
circumstances.
For every violation subject to a civil monetary penalty, if there
are substantial or several mitigating circumstances, the aggregate
amount of the penalty is set at an amount sufficiently below the
maximum permitted by Sec. 158.606 of this subpart to reflect that
fact. As guidelines for taking into account the factors listed in Sec.
158.607 of this subpart, HHS considers the following:
(a) Record of prior compliance. It should be considered a
mitigating circumstance if the responsible entity has done any of the
following:
(1) Before receipt of the notice issued under Sec. 158.603 of this
subpart, implemented and followed a compliance plan as described in
Sec. 158.605(c) of this subpart.
(2) Had no previous complaints against it for noncompliance.
(b) Gravity of the violation(s). It should be considered a
mitigating circumstance if the responsible entity has done any of the
following:
(1) Made adjustments to its business practices to come into
compliance with the requirements of this Part so that the following
occur:
(i) Each enrollee adversely affected by the violation has been paid
any amount
[[Page 74934]]
of rebate owed so that, to the extent practicable, that enrollee is in
the same position that he, she, or it would have been in had the
violation not occurred.
(ii) The rebate payments are completed in a timely manner.
(2) Discovered areas of noncompliance without notice from HHS and
voluntarily reported that noncompliance, provided that the responsible
entity submits the following:
(i) Documentation verifying that the rights and protections of all
individuals adversely affected by the noncompliance have been restored;
and
(ii) A plan of correction to prevent future similar violations.
(3) Demonstrated that the violation is an isolated occurrence.
(4) Demonstrated that the financial and other impacts on affected
individuals is negligible or nonexistent.
(5) Demonstrated that the noncompliance is correctable and that a
high percentage of the violations were corrected.
Sec. 158.609 Determining the amount of penalty--aggravating
circumstances.
For every violation subject to a civil monetary penalty, if there
are substantial or several aggravating circumstances, HHS may set the
aggregate amount of the penalty at an amount sufficiently close to or
at the maximum permitted by Sec. 158.606 of this subpart to reflect
that fact. HHS considers the following circumstances to be aggravating
circumstances:
(a) The frequency of violation indicates a pattern of widespread
occurrence.
(b) The violation(s) resulted in significant financial and other
impacts on the average affected individual.
(c) The entity does not provide documentation showing that
substantially all of the violations were corrected.
Sec. 158.610 Determining the amount of penalty--other matters as
justice may require.
HHS may take into account other circumstances of an aggravating or
mitigating nature if, in the interests of justice, they require either
a reduction or an increase of the penalty in order to assure the
achievement of the purposes of this Part, and if those circumstances
relate to the entity's previous record of compliance or the gravity of
the violation.
Sec. 158.611 Settlement authority.
Nothing in Sec. 158.606 through Sec. 158.610 of this subpart
limits the authority of HHS to settle any issue or case described in
the notice furnished in accordance with Sec. 158.603 of this subpart
or to compromise on any penalty provided for in Sec. Sec. 158.606
through 158.610 of this subpart.
Sec. 158.612 Limitations on penalties.
(a) Circumstances under which a civil monetary penalty is not
imposed. HHS does not impose any civil monetary penalty on any failure
for the period of time during which none of the responsible entities
knew, or exercising reasonable diligence would have known, of the
failure. HHS also may not impose a civil monetary penalty for the
period of time after any of the responsible entities knew, or
exercising reasonable diligence would have known of the failure, if the
failure was due to reasonable cause and not due to willful neglect and
the failure was corrected within 30 days of the first day that any of
the entities against whom the penalty would be imposed knew, or
exercising reasonable diligence would have known, that the failure
existed.
(b) Burden of establishing knowledge. The burden is on the
responsible entity or entities to establish to HHS's satisfaction that
no responsible entity knew, or exercising reasonable diligence would
have known, that the failure existed.
Sec. 158.613 Notice of proposed penalty.
(a) Contents of notice. If HHS proposes to assess a penalty in
accordance with this Part, it must provide the issuer written notice of
its intent to assess a penalty, which includes the following:
(1) A description of the requirements under this Part that HHS has
determined the issuer violated.
(2) A description of the information upon which HHS based its
determination, including the basis for determining the number of
affected individuals and the number of days or weeks for which the
violations occurred.
(3) The amount of the proposed penalty as of the date of the
notice.
(4) Any considerations described in Sec. 158.607 through Sec.
158.610 of this subpart that were taken into account in determining the
amount of the proposed penalty.
(5) A specific statement of the issuer's right to a hearing.
(6) A statement that failure to request a hearing within 30 days
after the date of the notice permits the assessment of the proposed
penalty without right of appeal in accordance with Sec. 158.615 of
this subpart.
(b) Delivery of Notice. This notice must be either hand delivered,
sent by certified mail, return receipt requested, or sent by overnight
delivery service with signature upon delivery required.
Sec. 158.614 Appeal of proposed penalty.
Any issuer against which HHS has assessed a penalty under this Part
may appeal that penalty in accordance with Sec. 150.400 et seq.
Sec. 158.615 Failure to request a hearing.
If the issuer does not request a hearing within 30 days of the
issuance of the notice described in Sec. 158.613 of this subpart, HHS
may assess the proposed civil monetary penalty indicated in such notice
and may impose additional penalties as described in Sec. 158.606 of
this subpart. HHS must notify the issuer in writing of any penalty that
has been assessed and of the means by which the issuer may satisfy the
penalty. The issuer has no right to appeal a penalty with respect to
which it has not requested a hearing in accordance with Sec. 150.405
of this subchapter, unless the responsible entity can show good cause,
as determined at Sec. 150.405(b) of this subchapter, for failing to
timely exercise its right to a hearing.
Dated: November 18, 2010.
Jay Angoff,
Director, Office of Consumer Information and Insurance Oversight.
Dated: November 18, 2010.
Kathleen Sebelius,
Secretary.
[FR Doc. 2010-29596 Filed 11-22-10; 8:45 am]
BILLING CODE 4150-03-P