[Federal Register Volume 75, Number 246 (Thursday, December 23, 2010)]
[Proposed Rules]
[Pages 81004-81029]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-32143]



[[Page 81003]]

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Part V





Department of Health and Human Services





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45 CFR Part 154



Rate Increase Disclosure and Review; Proposed Rule

  Federal Register / Vol. 75 , No. 246 / Thursday, December 23, 2010 / 
Proposed Rules  

[[Page 81004]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

45 CFR Part 154

[OCIIO-9999-P; Docket No. HHS-OS-2010-0029]
RIN 0950-AA03


Rate Increase Disclosure and Review

AGENCY: Office of Consumer Information and Insurance Oversight (OCIIO), 
Department of Health and Human Services (HHS).

ACTION: Notice of proposed rulemaking (NPRM).

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SUMMARY: This document contains proposed regulations implementing the 
rules for health insurance issuers regarding the disclosure and review 
of unreasonable premium increases under section 2794 of the Public 
Health Service Act. The proposed rule would establish a rate review 
program to ensure that all rate increases that meet or exceed an 
established threshold are reviewed by a State or HHS to determine 
whether the rate increases are unreasonable.

DATES: Send your comments on or before February 22, 2011.

ADDRESSES: 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-9999-P. Because of 
staff and resource limitations, we cannot accept comments by facsimile 
(FAX) transmission.
    You may submit comments using any of the following methods (please 
choose only one of the ways listed):
     Electronically. You may submit electronic comments on this 
regulation to http://www.regulations.gov. Follow the instructions under 
the ``More Search Options'' tab.
     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-9999-P, 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.
     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-9999-P, 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 address 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 information on viewing public comments, see the beginning of 
the ``ADDITIONAL INFORMATION'' section.

FOR FURTHER INFORMATION CONTACT:
    For questions concerning this proposed rule, contact Sally McCarty, 
Office of Consumer Information and Insurance Oversight, Department of 
Health and Human Services, by phone at (301) 492-4489 OR by e-mail at 
[email protected].

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

Table of Contents

I. Background
II. Provisions of the Proposed Rule
    A. Introduction and Overview
    B. Definitions (Sec.  154.102)
    C. Applicability (Sec.  154.103)
    D. Rate Increases Subject to Review (Sec.  154.200)
    E. Review of Rate Increases Subject to Review by HHS or by a 
State (Sec.  154.210)
    F. Effective Rate Review Program (Sec.  154.301)
    G. Unreasonable Rate Increases
    H. Issuer Disclosure Required Under Part 154
III. Collection of Information Requirements
IV. Response to Comments
V. Regulatory Impact Analysis

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. Most of the 
previous regulations were issued jointly with the Departments of Labor 
and the Treasury. A request for comments 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 comments). A request for comments relating to the premium review 
provisions of PHS Act section 2794 was also published by HHS in the 
Federal Register on April 14, 2010 (75 FR 19335) (notice, or request 
for comments). 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

[[Page 81005]]

(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)); (5) section 
2719 (regarding internal claims and appeals and external review 
processes) (75 FR 43330 (July 23, 2010)). HHS published interim final 
regulations implementing PHS Act section 2718 (regarding medical loss 
ratio (75 FR 74864 (December 1, 2010)). HHS, Department of Labor, and 
Department of the Treasury also 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.
    These proposed regulations are being published to implement section 
2794 of the PHS Act, relating to the disclosure and review of 
unreasonable premium increases.\1\
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    \1\ There are two sections numbered 2794 in the Public Health 
Service Act. The Section 2794 that is the basis for this rule is 
entitled ``Ensuring That Consumers Get Value For Their Dollars.''
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II. Provisions of the Proposed Rule

A. Introduction and Overview

    Section 1003 of the Affordable Care Act adds a new PHS Act section 
2794 which directs the Secretary, in conjunction with the States, to 
establish a process for the annual review of ``unreasonable increases 
in premiums for health insurance coverage.'' The statute provides that 
this process shall require health insurance issuers to submit to the 
Secretary and the applicable State a justification for an unreasonable 
premium increase prior to the implementation of the increase.
    The review process required under section 2794 does not preempt or 
supplant any existing State laws or processes governing the review of 
insurance premiums, including any State authority to prevent the 
implementation of unreasonable rates. Many States' laws already provide 
that rates may not be approved, or may not remain in effect, if they 
are excessive or unreasonable in relation to the benefits provided or 
fail to satisfy other statutory standards. Specifically, our review of 
State law indicates that 43 of the 50 States currently have some rate 
review process, in either the individual or small group markets, or 
both.
    This proposed regulation recognizes the traditional role of the 
States in regulating insurance rates and builds on existing State-based 
rate review processes. In circumstances where HHS is reviewing rates 
rather than a State, which we believe will be a minority of States that 
have not yet established effective rate review programs as discussed 
below, a determination by HHS that a rate increase is ``unreasonable'' 
under section 2794 would not prevent any health insurance issuer from 
implementing a rate increase permitted by State law. In this regard, 
this proposed regulation preserves the opportunity for insurers to 
implement a proposed rate that is consistent with State law. Moreover, 
the process established by this proposed regulation would not result in 
any delay in an issuer's ability to implement a proposed rate increase. 
In other words, the requirements of Section 2794 only supplement and 
complement, rather than supplant, and do not interfere with, existing 
State laws and processes for rate review.
    Section 2794 of the PHS Act directs the Secretary, in conjunction 
with the States, to establish a process for the annual review of 
unreasonable increases in ``premiums.'' ''Premium'' is the final amount 
charged to a specific insured. For those States that currently review 
proposed increases in ``premiums,'' it is the underlying rates and 
methods that are the subject of the actuarial review conducted by these 
States.
    To determine rates for a specific insurance product, the issuer 
must estimate future claims costs in connection with that product and 
then the revenue needed to pay anticipated claims and non-claims 
expenses, such as administrative expenses including profits. The costs 
that will be incurred and the revenue that will be received are not 
known at the time the rate is established (indeed, the number of people 
that will be covered by the product is not known), so the rates must be 
based on an actuarial estimate of these costs and of the non-claims 
expenses. It is these estimates, along with the methodology used to 
determine them, that are the subject of the actuarial review conducted 
by States that have authority to review premium or rate increases.
    Once the overall amount of revenue needed is established, the 
premium that will be charged to specific insureds is determined. 
Generally, the premium charged will vary depending on characteristics 
such as age, geography, and in the individual market in many States, 
health status. It will also vary based on choices made by the insured, 
such as the amount of deductibles and co-pays. The criteria that may be 
used and the differences in premium that may be charged are determined 
by State law.
    This proposed regulation, therefore, provides a process for the 
review of unreasonable rate increases, based upon the practice in 
States that conduct effective reviews of the cost of health insurance 
coverage.
    Section 2794 of the PHS Act does not define what makes a rate 
increase ``unreasonable,'' nor does it specify the process that should 
be used for determining whether a particular rate increase is 
unreasonable (requiring that a review be conducted and a justification 
submitted). Therefore, this proposed regulation provides a definition 
of an ``unreasonable'' rate increase, and outlines a process that would 
be used by HHS when reviewing rate increases to determine which rates 
are subject to review and among them which are ``unreasonable.''
    We considered two types of processes that arguably could satisfy 
the requirement in 2794 that unreasonable rates be reviewed. One would 
establish, by regulation, a standard of unreasonableness, based on some 
criteria other than an actuarial standard or actual review. For 
example, any rate increase exceeding the average increase for similar 
products during the previous year, or any rate increase exceeding a 
rate of inflation of medical costs by a specific amount, could be 
deemed to be unreasonable. Under this approach, any rate increase over 
a pre-determined percentage would be considered ``unreasonable'' and 
therefore subject to review. However, while consumers may view any 
large increase in the cost of their health insurance coverage to be 
``unreasonable,'' it is not possible to know whether an increase is 
``unreasonable'' from an actuarial standpoint until the proposed 
increase, and the underlying assumptions, have been the subject of 
actuarial analysis. Moreover, while such an approach may be relatively 
easy to administer, for the reasons stated above it almost certainly 
would label as ``unreasonable'' rate increases that are not 
unreasonable from an actuarial standpoint. This point was made in 
numerous comments received in response to the Request for Comments 
published on April 14, 2010 in the Federal Register (75 FR 19335). 
Those comments suggest that HHS should not establish a definition of an 
unreasonable rate increase by, for example, providing that all rate 
increases greater than a specified

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percentage would be deemed to be unreasonable.
    In addition, this ``literal'' reading under which rates are deemed 
``unreasonable'' at the outset, in the absence of review, would make 
any ``review'' process meaningless, as the outcome of any review (that 
is, whether the rate was ``unreasonable'') would have been pre-
determined.
    This proposed regulation instead proposes an alternative approach 
that is consistent with the language of section 2794; is more narrowly 
focused on what we interpret to be the purpose of that section; and 
would not involve the anomaly of ``pre-determining'' the reasonableness 
of a rate before it has been reviewed. Under this approach, if a 
proposed rate increase equals or exceeds a defined threshold, it would 
be considered ``subject to review.'' The review process would then 
determine if the increase is, in fact, unreasonable. This approach 
interprets the statutory ``process'' for reviewing unreasonable rate 
increases as a process under which rates that may ultimately be 
determined to be unreasonable are reviewed. Under this interpretation, 
identifying potentially unreasonable rates for review is reasonably an 
element of a broader process for the review of proposed rate increases.
    Rates above the threshold would not be deemed or otherwise 
determined to be unreasonable in advance of this review. As discussed 
below, for rate increases filed in a State on or after July 1, 2011, or 
effective on or after July 1, 2011 in a State that does not require a 
rate increase to be filed, the threshold for whether rates are subject 
to review would be whether the average weighted increase in the rate 
filing, alone or in combination with prior increases in the preceding 
12 month period, is 10 percent or more.
    In establishing the 10 percent threshold for determining which 
rates are subject to review, HHS has balanced the wide range of 
available data on rate and medical trend increases. HHS reviewed 
available data and literature on insurance rate increases in States and 
general trends in health care costs. HHS reviewed each State's 
applicable Web site, and determined that the information related to 
rate trends posted on these Web sites is limited. Our review of the 
limited data available suggests that the majority of increases in the 
individual market exceeded 10 percent each year for the past 3 years.
    These yearly increases significantly exceed some national measures 
of medical cost inflation, such as the medical component of the 
Consumer Price Index, whose inflation has typically ranged from 3.7 
percent to 4.4 percent. The Centers for Medicare and Medicaid Services' 
National Health Expenditures (NHE) data is another measure of health 
care cost trends based on overall national health care spending. The 
five most recent years of available NHE data suggest that overall 
health care expenditures have increased at an annual rate between 4.4 
percent to 6.9 percent. Some commenters suggested using these indices 
as thresholds for a review of rate increases. Another national index, 
the Standard & Poor's Healthcare Economic Commercial Index, also 
measures insurance rate trends. The S & P Index measures trends in 
provider claims costs, which encompasses both unit cost and utilization 
changes; the trend in that index from September 2009 to September 2010 
was 8.5 percent.
    The 10 percent threshold established in this regulation exceeds 
these major indices and in doing so balances industry concerns that any 
threshold would be over-inclusive with the competing concern that it 
would subject to review too few rates that may be unreasonable. As we 
discuss below, when better and more specific data on trends in 
insurance rates in individual States can be collected, State-specific 
thresholds would be established.
    This approach does not provide for the review of every proposed 
rate increase, no matter how small, to determine whether it is 
unreasonable. We recognize that the choice of any threshold makes it 
inevitable that unreasonable rate increases below the threshold will 
not be reviewed, and that a proposed increase of less than 10 percent 
would be unreasonable if the actuarial assumptions underlying the 
increase were invalid or unreasonable. In proposing this approach, HHS 
also has taken into consideration the fact that many States, as 
discussed below, conduct a rate review process for all rate increases 
without regard to the magnitude of the increase. We expect the number 
of States conducting such reviews to increase in light of additional 
resources provided under the rate review grants and passage of State 
legislation. Therefore, as a practical matter, in a growing number of 
States, there is even less likelihood that an unreasonable increase 
below the threshold would be implemented.
    In this regulation, HHS proposes an approach that balances the 
regulatory burdens that would be imposed on both the agency and the 
industry if every rate increase, no matter how small, were to be 
reviewed for unreasonableness against the potential harm to consumers 
should a small, but unreasonable, increase not be reviewed and the 
issuer not be required to provide a final justification for the 
increase. We invite comments on whether 10 percent is a reasonable 
threshold to apply in determining which rate increases will be subject 
to review.
    In establishing an initial 10 percent threshold for whether a rate 
increase is subject to review, as discussed below, HHS recognizes that 
rates, underlying costs, and health care trends vary from State to 
State. Many factors influence the magnitude and frequency of increases 
in the States, and a single, national filing threshold does not reflect 
all of the local variations. As a consequence, HHS would propose, for 
future calendar years, to establish State-specific thresholds for each 
future calendar year by September 15th of the prior year. In 
determining each State-specific threshold, HHS would consider the 
State-specific data submitted for each rate increase subject to review, 
and also the State-specific data received by HHS from those States that 
have received ``premium review grants'' under section 2794(c) of the 
PHS Act. To the extent that a State insurance regulator has other data 
that could serve as the basis for a State-specific threshold, that 
would be considered as well.
    As discussed below, the State-specific threshold would be based on 
the same analysis used to develop the initial 10 percent threshold, but 
would be based on data from the specific State, rather than the 
national data we analyzed in selecting the proposed 10 percent figure.
    In response to the Request for Comments, many commenters also 
suggested that the rate review process should not apply to rate 
increases in the large group market. Currently, our review of State law 
indicates that only 18 States have authority to review rates for all or 
part of the large group market. Applying this regulation to the large 
group market would result in a process that is not closely aligned with 
most State processes upon which the regulation is modeled. In addition, 
many issuers are not accustomed to submitting proposed rate increases 
for review in this market. Finally, purchasers in the large group 
market have greater leverage than those in the individual and small 
group markets, and therefore may be better able to avoid imposition of 
unreasonable rate increases. For these reasons, under this proposed 
regulation, rates in the large group market would not be subject to the 
rate review process we are proposing. HHS solicits specific comments on 
whether, in the future, if rate increases in the large group market 
were subject to a review process under

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section 2794, if that process should differ from the process provided 
for in this proposed regulation for the individual and small group 
markets.
    In recognition of the primary role States have in reviewing rates 
today, HHS would defer to the definitions used under applicable State 
rate filing laws when determining whether a rate filing relates to 
health insurance coverage offered in the individual market, small group 
market, or large group market, where such laws differ from the 
definitions of these terms in the PHS Act. HHS believes that deferring 
to the definitions employed in State rate filing laws ensures that the 
rate review process under this proposed regulation would not disrupt 
current State rate filing and review practices; however, we are 
soliciting public comment on alternative approaches. We note that this 
is solely for rate filing purposes. Federal law distinctions in the 
Affordable Care Act regarding group size apply for all other purposes 
unless otherwise specified. As discussed below, where State rate 
filings laws do not contain definitions of small and large group 
markets, we propose to employ the definitions in the Public Health 
Service Act, with the caveat that the number used for a cut-off between 
small and large groups would remain at 50 employees, as is currently 
the case in all States, even though States have the option of using 100 
employees prior to 2016, and a 100 employee cut-off would be used after 
that date.
    Rate increases for health insurance coverage for ``excepted 
benefits,'' as described in paragraph (1) of subsection (c) of section 
2791 of the PHS Act, or in paragraphs (2), (3) or (4) of such 
subsection, if the benefits are provided under a separate policy, 
certificate of contract of insurance, would also be exempted from 
review under this proposed regulation. Excepted benefits, such as 
dental and vision, do not appear to be a principal focus of the 
Affordable Care Act, and the regulatory burden that would be imposed on 
the industry and HHS would not justify reviewing rate increases for 
these benefits.
    All rate increases that meet or exceed the 10 percent threshold 
would be reviewed, by the relevant State, or by HHS in the smaller 
number of cases where States do not yet have an effective process in 
place. The proposed regulation would use the definition of States set 
forth in section 2791(d)(14) of the PHS Act, which defines States to 
include each of the several States, the District of Columbia, Puerto 
Rico, the Virgin Islands, Guam, American Samoa, and the Northern 
Mariana Islands. Consistent with the statutory requirement in section 
2794 that the rate review process be established ``in conjunction with 
the States,'' the proposed regulation provides that HHS would adopt a 
State's determination of whether a rate increase is unreasonable if the 
State has an effective rate review program for rates filed in a 
particular market. This element of the proposed regulation preserves 
the primary role States have today in reviewing rates. So long as a 
State can conduct an effective review of proposed rate increases that 
meet or exceed the applicable threshold, State determinations will be 
adopted by HHS.
    HHS expects that a significant majority of States would currently 
meet the standards for having an effective review process in one or 
both of the individual or small group markets, and we anticipate the 
remainder would likely establish an effective rate review process as 
they obtain needed statutory authority or implement new or enhanced 
review procedures. More than 10 States indicated in their applications 
for rate review grants they would be seeking additional legislative 
authority to enhance their existing processes.
    HHS would evaluate whether a State has an effective rate review 
program based on four main factors, all of which currently represent 
the best practices among the many States which conduct review today. 
The first factor is whether the State receives from health insurance 
issuers' data and documentation sufficient to determine whether a rate 
increase is unreasonable. As noted above, many States have these 
provisions today. The second factor is whether the State effectively 
reviews the data and documentation submitted by health insurance 
issuers in support of a rate increase. The third factor is whether the 
State review examines the reasonableness of the assumptions used by the 
issuer in developing its rate proposal and the historic data underlying 
those assumptions. The proposed regulation also describes the areas of 
analysis that a State's review would be required to include in order 
for it to be deemed effective. The fourth factor is whether the State 
applies a standard set forth in statute or regulation when making the 
determination of whether a rate increase is unreasonable. This proposed 
regulation does not establish a standard for unreasonableness that a 
State must use or apply; nor does it require a numerical standard to be 
applied under State law to determine whether a rate increase is 
unreasonable. Rather, a State regulator would apply the applicable 
standards that exist under State law. Finally, we are soliciting public 
comment on whether the public's ability to comment on unreasonable rate 
increases during the review process should be considered as one 
criterion for an effective rate review program.
    As noted above, section 2794 does not provide a definition of 
``unreasonable'' rate increases. The proposed regulation provides that 
States would apply the standards set forth in State law or regulation 
when determining whether a rate increase is unreasonable. As mentioned 
above, many States' laws provide that rates may not be approved, or may 
not remain in effect, if they are excessive or unreasonable in relation 
to the benefits provided or fail to satisfy other statutory standards. 
Specifically, our review of States' laws indicates that 43 of the 50 
States currently have some rate review process in either the individual 
or small group markets, or both. 16 States and the District of Columbia 
explicitly prohibit insurance rates from being excessive, inadequate, 
or unfairly discriminatory. In addition, 13 States prohibit rates from 
being both unreasonable in relation to the benefits provided and 
excessive, inadequate, or unfairly discriminatory. Finally, an 
additional 14 States prohibit rates from being unreasonable in relation 
to the benefits provided. For the remaining 8 States, we did not 
identify any explicit statutory standards that address the 
unreasonableness of rates; however, these States may use other legal 
tools available to regulate unreasonable rates. In addition, based on 
the rate review grant applications, some Territories either have a rate 
review process in place today, or expect to implement a process in the 
future.
    When a State with an effective rate review program determines 
whether a rate increase violates the standards set forth in State law 
and therefore whether the increase is unreasonable, HHS would adopt 
that determination and would not conduct an independent review of the 
State's determination. Given this proposed regulation, and the rate 
review grants made available to States under Section 2794 of the PHS 
Act, it is likely that, as States gain rate review authority and 
improve their rate review programs, the number of States in which HHS 
would be conducting reviews would diminish over time.
    For rate increases filed in markets for which a State does not have 
an effective rate review process, HHS would conduct a review of the 
proposed rate increases to determine whether they are unreasonable 
until such time as the State implements an effective review process in 
that market. This proposed regulation provides that where HHS conducts 
rate reviews, the standard for

[[Page 81008]]

unreasonable would be whether the rate increase is ``excessive,'' 
``unjustified,'' or ``unfairly discriminatory.'' The proposed 
regulation lists the factors that HHS would consider when determining 
if a rate increase is excessive, unjustified or unfairly 
discriminatory, and therefore, unreasonable.
    Consistent with the statutory requirement that a ``justification'' 
be filed before an unreasonable rate may be implemented, the regulation 
also proposes to require that for rate increases that are subject to 
review (because they meet or exceed the 10 percent review threshold), a 
preliminary justification would have to be submitted to the applicable 
State in which the increase is proposed to be implemented, as long as a 
State accepts such submissions, and to HHS. The regulation sets out the 
proposed contents of the preliminary justification. The preliminary 
justification would be divided into three parts, each part having a 
different purpose. The proposed regulation would require health 
insurance issuers to complete parts one and two of the preliminary 
justification, regardless of whether a State or HHS is reviewing the 
rate increase. The information that would be contained in parts one and 
two of the preliminary justification is intended to provide consumers 
with a description of the rate increase and the factors contributing to 
the increase, including both a descriptive and a quantitative analysis.
    The information required to be provided in the preliminary 
justification supplements, and does not conflict with, State laws 
specifying what issuers must file with the State when they propose to 
increase rates. Those laws continue to govern what the issuer must file 
with the State, and would be unaffected by this proposed regulation and 
the requirement that the preliminary justification must be filed with 
HHS.
    When HHS is reviewing a rate increase, issuers would be required to 
submit the additional data required under part three of the preliminary 
justification in order to allow HHS to conduct a comprehensive 
actuarial review of the increase. The specific data reporting 
requirements in part three of the preliminary justification are modeled 
on the actuarial memorandum guidelines included in NAIC Model 
Regulation 134-1. In the event the level of detail provided by a health 
insurance issuer does not provide a sufficient basis for HHS to review 
a rate increase, HHS would request from the health insurance issuer the 
additional information necessary to complete its review.
    Parts one and two of the preliminary justification would promptly 
be posted to the HHS Web site so that insurance consumers are on notice 
of proposed increases and have basic information about the factors the 
issuer asserts are causing the increase. HHS will also post on its Web 
site before any information contained in part three of the preliminary 
justification that has not been designated as ``confidential'' as 
defined in HHS's Freedom of Information Act regulations, 45 CFR Sec.  
5.65. HHS will make a determination as to whether to post information 
designated as ``confidential'' under the standards and procedure set 
forth in those regulations, and will post that information only after 
making a determination that it is subject to disclosure as provided by 
those regulations.
    If HHS reviews a rate increase and determines it to be 
unreasonable, HHS would provide its final determination to the health 
insurance issuer. If the issuer chooses not to implement the 
unreasonable rate increase, or to implement a lower increase than it 
had proposed and such lower increase is below the applicable subject to 
review threshold, the issuer would be required to provide a final 
notification to this effect to HHS. If the issuer chooses to implement 
a lower increase but the lower increase is above the applicable subject 
to review threshold, the lower increase would be subject to review and 
the issuer would be required to submit a new preliminary justification. 
If the issuer implements an unreasonable rate increase, it would have 
to provide to HHS a final justification in response to HHS's 
determination of unreasonableness. HHS would post its final 
determination and the issuer's final notification or final 
justification on its Web site. If the issuer chooses to implement the 
rate increase, it would be required to post its preliminary 
justification, HHS's determination and its final justification on its 
Web site.
    One of the elements of an effective rate review program, discussed 
more fully below, is that the State's review would include an analysis 
of certain specific factors set forth in this proposed regulation and 
which are based on the common practices that States employ today. In 
addition, the State would provide to the issuer and to HHS its 
determination of whether a rate increase is unreasonable, along with an 
explanation of how its analysis of the factors set forth in the 
proposed regulation caused it to arrive at that determination. HHS 
would adopt determinations made by States with effective rate review 
programs. When HHS has adopted a State's determination as to whether a 
rate increase is unreasonable, HHS would post the State's final 
determination on its Web site, together with the issuer's final 
justification in the event that the issuer chose to implement a rate 
increase that was determined to be unreasonable by the State.

B. Definitions (Sec.  154.102)

    The proposed regulation provides the following key definitions that 
would apply to the rate review process used by HHS, and to its 
determination regarding whether a rate increase is unreasonable. The 
definitions are discussed here because they are unique to this 
regulation or may be of particular interest to enrollees, health 
insurance issuers, consumers, regulators, and others. Defined terms 
that conform to definitions commonly used in the health insurance 
industry, such as ``insurance,'' or that have already been defined in 
Federal law, are not discussed here.
1. Individual Market and Small Group Market
    As discussed above, in order to ensure that the rate review process 
outlined in the proposed regulation is consistent with the process used 
by States in performing rate reviews, and in order to avoid any 
disruption to the current State rate filing and review practices, the 
definitions of ``individual market'' and ``small group market'' would 
be defined as they are under the applicable State's rate filing laws, 
if such laws include such definitions. For example, several States 
define a small group to include 2 to 25 employees for rating purposes, 
and the small group rating requirements in these States do not apply to 
groups with 26 or more employees. Further, certain States consider 
association plans to be large employers for rating purposes. In such 
circumstances, and only for this purpose, HHS would defer to applicable 
State law when determining whether a rate increase in that State 
relates to the small group market. For all other purposes the 
definitions set forth in the PHS Act govern as applicable.
    In addition, for purposes of rate review under this regulation 
only, if the State rate filing law does not include a definition of 
small or large group, the definition under the PHS Act would be used, 
except that a small group would be defined to include 1 to 50 
employees. Currently, under the Affordable Care Act definitions, States 
have the option until 2016 of using 50 or 100 as the cutoff for a small 
group, with 100 applying after that date, and all States have elected 
the 50 option. Thus, if

[[Page 81009]]

there are no definitions of small and large group in a State's rate 
filing law, this proposed regulation would define ``small group'' to 
include 1 to 50 employees.
2. Unreasonable Rate Increase
    The proposed regulation defines a rate increase as ``unreasonable'' 
if it is ``unjustified,'' ``excessive,'' or ``unfairly 
discriminatory,'' as these terms are more fully described in Sec.  
154.205, but this proposed definition would apply only to rate 
increases that are reviewed by HHS, and would not create a Federal 
standard for States to use when determining whether a rate increase is 
unreasonable. These terms are described consistently with the standards 
that are most commonly used by States to identify rate increases that 
are not in compliance with State law.
    Since HHS would be adopting the determinations of States with an 
effective rate review program, the proposed regulation includes in the 
definition of ``unreasonable rate increase,'' those rate increases that 
have been determined by a State to be excessive, unjustified, unfairly 
discriminatory or otherwise unreasonable under applicable State law. 
Accordingly, a State with an effective review program would be 
permitted to use any applicable standards set forth in statute or 
regulation for determining whether a rate increase that is subject to 
review is unreasonable. This serves to preserve and recognize existing 
State laws relating to unreasonable rates. HHS recognizes that factors 
other than those addressed in the proposed regulation may be viewed as 
potentially impacting the reasonableness of a rate, including the 
structure and competitiveness of the market, and we are therefore 
soliciting public comment to identify these factors and whether they 
should be considered in determining whether a rate increase is 
unreasonable.

C. Applicability (Sec.  154.103)

    The requirements of this proposed regulation would generally be 
applicable to all health insurance issuers offering small group or 
individual health insurance coverage in a State.
    Section 2794 of the PHS Act does not apply to grandfathered health 
plan coverage (See 45 CFR 147.140 (75 FR 34538, June 17, 2010, as 
amended by 75 FR 70114, November 17, 2010)), so these proposed 
regulations similarly would not apply to such coverage.
    In addition, insurance coverage that meets the ``excepted 
benefits'' definition set forth in section 2791(c) of the PHS Act and 
45 CFR 144.103 would not be subject to these proposed regulations. 
While ``excepted benefits'' are not explicitly exempt from section 2794 
of the PHS Act, they are exempt from other provisions of the PHS Act, 
as added by the Affordable Care Act. ``Excepted benefits'' do not 
appear to be the focus of the rate review provisions of the Affordable 
Care Act. Therefore, the proposed regulation would exempt ``excepted 
benefits,'' to allow for the consistent administration of the PHS Act 
with respect to these defined benefits.
    While HHS recognizes that the rate review provisions of section 
2794 of the PHS Act do not specify to which particular segments of the 
insurance market the rate review provisions apply, and contain no 
specific exclusion for the large group market, HHS proposes that these 
provisions should only apply to the small group and individual market 
at this time. The significant majority of States focus their efforts on 
review of rates within the small group and individual markets. 
Purchasers in the large group market are viewed as more sophisticated 
purchasers, who may have greater leverage and therefore better ability 
to avoid the imposition of unreasonable rate increases, also mitigating 
the need for more active regulation. Many States have limited authority 
over the large group market, so under the framework set out in this 
regulation, few States could satisfy the standards for an effective 
review process in the large group market. Taking these factors into 
consideration, as noted above, these proposed regulations would not 
apply to the large group market. HHS may, however, revise these 
regulations at a future date to cover such plans, and solicits specific 
comments on whether, in the future, if rate increases in the large 
group market were subject to a review process under Section 2794, that 
process should be different than the one provided for in this 
regulation for the small and individual group markets.
    Although section 2794 of the PHS Act directs that implementation of 
the annual rate review process begin with the 2010 plan year, the rate 
review process established in the proposed regulation would begin 
implementation with rate increases filed in a State on or after July 1, 
2011, or effective on or after July 1, 2011 in a State that does not 
require rate increases to be filed, due to several factors. At the time 
that the Affordable Care Act amendments to the PHS Act first became 
effective, on March 23, 2010, many health insurance issuers had already 
implemented rate increases for the 2010 plan or policy year, and many 
more had taken necessary steps to implement increases in the immediate 
months that followed. Since that time, in fulfilling the statute's 
directive that an effective rate review program be developed in 
conjunction with the States, the National Association of Insurance 
Commissioners (NAIC) has been working to develop appropriate reporting 
and disclosure mechanisms, and HHS has provided input into this 
development process. HHS also deemed it appropriate to solicit public 
comments prior to the promulgation of this proposed regulation, through 
the Request for Comments published on April 14, 2010. Finally, this 
regulation is being issued in proposed form, with opportunity for 
further comments which specifically address this proposed regulation. 
Therefore, as noted, the rate review process outlined in this proposed 
regulation would begin with rate increases filed in a State on or after 
July 1, 2011 or effective on or after July 1, 2011 in a State that does 
not require rate increases to be filed.

D. Rate Increases Subject To Review (Sec.  154.200)

1. Applicable Threshold for Rate Increases Subject To Review
    As explained previously, while section 2794 of the PHS Act directs 
the Secretary to establish a process for the annual review of 
unreasonable increases in ``premiums,'' HHS has interpreted this as 
referring to the underlying ``rates'' that are used to develop the 
premiums. This is consistent with how these terms are most commonly 
used by State regulators and the insurance industry. Often, the rate 
review process performed by States is one that reviews changes to the 
rating structure for a plan or policy, as opposed to premium increases 
within the plan or policy that are derived from the underlying rating 
structure. Therefore a ``rate increase'' alters the underlying rate 
structure of a policy form, while a ``premium increase'' can occur even 
without any increase (or change) to the underlying rate structure. For 
example, for policies that are age-rated, as the duration of the policy 
advances, premium changes that correlate with age bands are not ``rate 
increases,'' since they do not change the underlying rate structure. 
For these reasons, the term ``rate'' is used instead of the statutory 
term ``premium'' throughout the text of the proposed regulation.
    Since it is not possible under the provisions of this proposed 
regulation to know before conducting a review of a proposed rate 
increase whether it is ``unreasonable,'' the process that would

[[Page 81010]]

be established must provide for the review of a range of proposed rate 
increases, some of which ultimately would be determined to be 
unreasonable, while others would not. This proposed regulation 
therefore provides that for health insurance coverage offered in the 
individual or small group market all proposed rate increases above the 
defined threshold would be ``subject to review.'' In establishing a 
threshold for rate increases subject to review, the Secretary has 
balanced the need to set a standard that would effectively capture 
unreasonable increases, while avoiding unnecessary filing burdens for 
health insurance issuers with regard to increases that are likely to be 
reasonable.
    The review of a rate increase subject to review, and the 
determination of whether the rate increase is unreasonable, must take 
into account the unique experience of a health insurance product and 
cannot be subject to a simple, fixed value. Therefore, under the 
proposed rule, a rate increase that is subject to review would not be 
per se unreasonable. For 2011, the threshold for whether a rate 
increase is subject to review is a rate increase of 10 percent or more. 
This applies not only to a single rate increase, but also to multiple 
rate increases of less than 10 percent that, when added to one or more 
previous increases within the preceding 12 month period, total 10 
percent or more.
    In establishing the 10 percent threshold, as noted earlier, HHS 
reviewed available data and literature on insurance rate increases in 
States and general trends in health care costs. HHS reviewed each 
State's applicable Web site, and determined that the information 
related to rate trends posted on these Web sites is limited. A small 
number of States make available data on rate increases in different 
insurance market segments in that State. Our review of this data 
suggests that the majority of increases in the individual market 
exceeded 10 percent each year for the past 3 years. Trends are slightly 
lower in the small group market, but over 40 percent of increases still 
exceeded 10 percent. In fact, in the States examined, rate increases in 
the individual market and small group market typically exceeded 15 
percent. These yearly increases significantly exceed some national 
measures of medical cost inflation, such as the medical component of 
the Consumer Price Index, whose inflation has typically ranged from 3.7 
percent to 4.4 percent. The Centers for Medicare and Medicaid Services' 
National Health Expenditures (NHE) data is another measure of health 
care cost trends based on overall national health care spending. The 
five most recent years of available NHE data suggest that overall 
health care expenditures have increased at an annual rate between 4.4 
percent to 6.9 percent. Commenters point out that the factors which 
account for the NHE or the medical component of the CPI are different 
than the various components that account for increases in insurance 
rates. For example, the medical component of CPI does not take into 
account utilization of health care services, or the risk profiles of 
specific populations but is instead based on prices for certain 
services provided to the general population. Health insurance rates are 
affected, not only by the prices charged by the providers of health 
care services, but also by changes in the rate at which those services 
are accessed and the characteristics of the group covered by the 
insurance. Another national index, the Standard & Poor's Healthcare 
Economic Commercial Index, also measures insurance rate trends. The S & 
P Index measures trends in provider claims costs, which encompasses 
both unit cost and utilization changes; the trend in that index from 
September 2009 to September 2010 was 8.5 percent.
    In establishing a 10 percent threshold for determining which rates 
are subject to review, HHS has balanced the wide range of available 
data on rate and medical trend increases. If, for example, the NHE or 
medical component of the CPI represented an accurate measure of 
insurance rate trends, then a threshold for review could be established 
consistent with those indices under the theory that rate increases in 
line with those trends were reasonable because they tracked medical 
cost trends generally, and increases that exceed those measures are 
more likely to be unreasonable. However, since neither of those 
particular measures captures the many factors that affect insurance 
rates, using those measures as a threshold for reviewing rates under 
section 2794 would be over-inclusive. Under that approach, rather than 
capturing potentially unreasonable or excessive rate increases, almost 
all rate increases would be subject to review. Such a result would not 
be consistent with the intent of section 2794. For these reasons, a 10 
percent threshold is a reasonable accommodation between the observed, 
but limited data available regarding trends in rate increases in the 
States, and the available but not precisely comparable data on general 
trends in health care costs and spending, and recognizes that other 
factors may justify a larger rate increase.
    As noted earlier, the Secretary would seek to establish a State-
specific threshold for each future calendar year no later than 
September 15th of the preceding calendar year, beginning in 2011, 
provided applicable State-specific trend data is available. If a State-
specific threshold is not established by the Secretary for an 
applicable calendar year, the 10 percent threshold would continue to 
apply.
    A State-specific threshold, to the extent it can be developed, 
would be based on the same kind of analysis used in establishing the 
proposed 10 percent threshold, but would account for State-specific 
variations in rate increases based on the cost of health care, 
utilization patterns, and other factors affecting health insurance 
rates in a State. HHS would use trend data and other information made 
available to HHS from States receiving premium review grants and 
through the reporting and notification requirements of this proposed 
regulation to develop State-specific thresholds, when possible.
    In developing the 10 percent threshold, the Secretary considered 
the level of aggregation that should apply when determining whether a 
rate increase meets or exceeds the threshold, and the Secretary 
received numerous comments on this issue. Comments received from 
issuers, the American Academy of Actuaries, and industry groups 
proposed the use of a higher level of aggregation of multiple policy 
forms to improve statistical credibility. Typically, this aggregation 
occurs within a market segment. Consumer groups, on the other hand, 
generally favored lower levels of aggregation. Finally, various State 
regulators sent comments describing how individual State rate review 
laws affect the level of aggregation used in performing rate reviews.
    In considering the broad range of perspectives represented by the 
comments on aggregation, the proposed regulation requires the 
consideration of rate increases at the ``product'' level when 
determining whether the increase is subject to review. Product would be 
defined under this proposed regulation as a package of health insurance 
coverage benefits with a discrete set of rating and pricing 
methodologies that a health insurance issuer offers in a State. Most 
States require issuers to submit each ``product'' as a separate form 
filing prior to marketing the ``product'' in the State. While each 
filed ``product'' may include variable options (such as different cost-
sharing or deductible requirements), this definition,

[[Page 81011]]

consistent with State law, does not consider each variable option as a 
separate ``product.'' Any rate increase for a product that meets or 
exceeds the applicable threshold is subject to review. However, if an 
issuer has rate increases that meet or exceed the applicable threshold 
for multiple products, the issuer may submit a single, combined 
preliminary justification for those products combined, provided (i) the 
experience of all combined products has been aggregated to calculate 
the rate increases, and (ii) the rate increase is the same across all 
combined products.
2. Determining Whether a Rate Increase Meets or Exceeds the Threshold
    A rate increase would meet or exceed the applicable threshold if 
the weighted average increase for all enrollees subject to the rate 
increase meets or exceeds the applicable threshold. In this case, the 
weighted average takes into account the number of enrollees affected by 
each particular rate increase and represents the given increase 
proportionately. Specifically, we assume that different subcategories 
of enrollees will experience varying rate increases. The weighted 
average is calculated as follows: For each subcategory of enrollees 
subject to the same rate increase, we multiply the number of enrollees 
by the respective rate increase. The products are then summed over all 
subcategories. The sum is then divided by the total number of enrollees 
to arrive at the weighted average rate increase.
    A rate increase meets or exceeds the threshold either by itself, or 
when considered cumulatively with any previous rate increases 
implemented with respect to the product during the preceding 12-month 
period. Therefore, a single rate increase which by itself falls below 
the applicable threshold must be aggregated with rate increases 
implemented during the 12 month period preceding its effective date in 
order to determine whether it is subject to review. If a rate increase 
meets or exceeds the threshold when combined with a previous increase 
or increases during the 12-month period preceding the date on which the 
rate increase would become effective, the rate increase is subject to 
review, and such review shall include a review of the aggregate rate 
increases during the applicable 12-month period.

E. Review of Rate Increases Subject To Review by a State or by HHS 
(Sec.  154.210)

    As noted above, under this proposed regulation, States would 
continue to have primary responsibility for the review of rate 
increases. HHS would only review rates when a State has not yet 
established a process, including adequate legal authority, to do so. 
While not every State is currently equipped to conduct an effective 
review of insurance rates, the significant majority of States have a 
review process for some or all of the individual or small group 
markets, and many are planning to expand their authority to review 
rates using the grants provided in the Affordable Care Act detailed 
below. We fully expect that the vast majority of States will be able to 
conduct effective reviews in the future, should they choose to.
    A Kaiser Family Foundation survey designed to explore what rate 
review authority States have and how they exercise it, identifies 
various reasons that explain why there is wide variation in the review 
of rate increases by States.\2\ Some States have no legislative 
authority to approve or disapprove rates, while others have the 
authority to approve rates prior to implementation, or disapprove rates 
before or after implementation. Among States with robust legislative 
authority, a thorough rate review is contingent on State resources, 
staffing, and statutory timelines. The effectiveness of a State rate 
review program depends on State law as well as insurance department 
resources and practices, and will be determined, for purposes of this 
regulation, based on the State's ability to meet the criteria set forth 
in Sec.  154.301.
---------------------------------------------------------------------------

    \2\ Kaiser Family Foundation, ``Rate Review: Spotlight on State 
Efforts to Make Health Insurance More Affordable,'' December 2010, 
available at http://www.kff.org/healthreform/upload/8122.pdf.
---------------------------------------------------------------------------

    Section 2794(c) of the PHS Act established a program to award 
``premium review grants.'' Section 2794(c) makes available a total of 
$250 million through 2014 for the provision of grants to States to 
support their efforts to enhance review of premium increases. These 
grants are available to States with the goal of improving existing rate 
review programs, developing rate review programs in States where none 
exist, and improving the transparency of the rate review process for 
the public. On August 16, 2010 HHS announced the first cycle of grant 
awards totaling the amount of $46 million to build upon States' current 
processes for reviewing, and to the extent permitted by State law, 
approving health insurance premium increases. Forty-five States and the 
District of Columbia applied for grants, and each was awarded $1 
million in grant funds.
    In applying for the first phase of these grants in 2010, some 
States indicated a need for additional resources to make the State's 
rate review program more effective. Many States indicated they lacked 
funding to hire actuaries and to secure other resources essential to a 
meaningful rate review program. Therefore, the rate review process 
under this proposed regulation, in conjunction with the rate review 
grant program, would enhance the quality and quantity of review of rate 
increases that States are able to conduct, building on their existing 
efforts and processes.
    By requiring the Secretary to develop a rate review process in 
conjunction with the States, Congress also recognized that many States 
have significant experience reviewing rate increases and understand the 
local market forces driving health insurance rate increases. Therefore, 
HHS is proposing a rate review process that leverages State experience 
and expertise.
    Section 154.210 of the proposed regulation sets forth the factors 
that would determine whether HHS would review rate increases that are 
subject to review or whether HHS would adopt the determination made by 
a State regarding whether a rate increase is an unreasonable rate 
increase. To the extent that a State has an effective rate review 
program in a given market, as evaluated by HHS using the criteria set 
forth more fully below, HHS would adopt that State's determinations 
regarding rate increases subject to the State's review in a given 
market. Accordingly, upon receipt of the State's final determination 
and explanation for its determination, HHS would adopt the 
determination of a State that has an effective rate review program 
regarding whether a rate increase is unreasonable under applicable 
State law. If a State does not have an effective rate review program in 
place for the individual or small group markets within the State, only 
then would HHS review rate increases and make its own determinations of 
whether the rate increases are unreasonable.

F. Effective Rate Review Program (Sec.  154.301)

1. General Criteria for an Effective Rate Review Program
    This regulation sets out specific criteria, set forth in Sec.  
154.301(a), for evaluating whether a State has an effective rate review 
program in the individual and small group markets. Specifically 
defining these criteria provides transparency to the rate review 
process as these criteria are readily available to the States, health 
insurance issuers, and consumers. These criteria

[[Page 81012]]

were developed solely for the purpose of establishing the standards 
that HHS would use to evaluate, in consultation with the States, 
whether a State's rate review process is effective, or whether HHS 
would conduct rate reviews and make a determination as to whether a 
rate increase is unreasonable. Since a State may be in the process of 
improving its rate review program, and may be using grant funds and 
other resources for this purpose, HHS would make its determination 
based on the State's existing rate review program, including any recent 
changes made that would satisfy the criteria for an effective rate 
review program set forth in Sec.  154.301(a).
    Under proposed Sec.  154.301(a)(1), we set forth four criteria for 
an effective rate review program. These criteria are drawn from common 
practices that States use today for effective reviews. Underlying these 
proposed criteria is the principle that the purpose of an effective 
rate review program is to affirmatively determine, based on substantial 
evidence on the record as a whole, whether a rate increase is an 
unreasonable rate increase. The proposed regulation specifies that in 
order for a State's rate review program to be considered effective, the 
State needs to have the legal authority to obtain data and 
documentation that is sufficient to conduct an effective examination. 
The State would also be required to effectively review data and 
documentation submitted in support of rate increases. An effective rate 
review program would have to include an examination of both (i) the 
reasonableness of the assumptions used by the health insurance issuer 
in developing the rate proposal and the validity of historical data 
underlying such assumptions; and (ii) the issuer's data related to past 
projections and actuarial experience. As is the case for those States 
conducting effective review today, this examination of assumptions and 
past projections would be required to include analyses of at least the 
following twelve areas that typically impact rates:
     Medical trend changes by major service categories;
     Utilization changes by major service categories;
     Cost-sharing changes by major service categories;
     Benefit changes;
     Changes in enrollee risk profile;
     Impact of over- or under-estimate of medical trend in 
previous years on the current rate;
     Reserve needs;
     Administrative costs related to programs that improve 
health care quality;
     Other administrative costs;
     Applicable taxes, licensing or regulatory fees;
     Medical loss ratio; and
     The health insurance issuer's risk-based capital status 
relative to national standards.
    Finally, the State's determination of whether a rate increase is 
unreasonable would be made under a standard that is set forth in State 
statute or regulation. As noted above, 43 States have some standard 
under State law that would apply to the review of unreasonable rates. 
This proposed regulation does not establish a standard that States must 
apply.
2. HHS's Determination Whether a State Has an Effective Rate Review 
Program
    We fully expect that the vast majority of States will be able to 
conduct effective reviews in the future. HHS expects that the majority 
of States would currently meet the standards for having an effective 
review process, and many more would become effective review States as 
they obtain needed statutory authority or implement new or enhanced 
rate review processes. So long as a State can conduct an effective 
review of proposed rate increases that meet or exceed the applicable 
threshold, States will not be ``second-guessed'' by HHS. Working with 
the States, HHS would evaluate whether a State's rate review program 
meets the requirements of an effective rate review program set forth in 
Sec.  154.301(a) based on documentation and information received from 
the State through the grant process, through review of applicable State 
law, and through any other information otherwise available to HHS. 
Unless a State were no longer conducting reviews in accordance with the 
criteria set forth in proposed Sec.  154.301(a), HHS would not conduct 
reviews for rate filings in that State. If after an initial 
determination has been made by HHS that a State's rate review program 
is not effective, HHS would subsequently be able to determine that 
later improvements made by the State to its rate review program have 
made it an effective rate review program. HHS would post on its Web 
site a list of those States having effective rate review programs, and 
would update this list from time to time, as appropriate.

G. Unreasonable Rate Increases (Sec.  154.205)

    Under the proposed regulation, when HHS reviews a rate increase, 
HHS would determine that the rate increase is an unreasonable rate 
increase if the increase is an excessive rate increase, an unjustified 
rate increase, or an unfairly discriminatory rate increase. The factors 
that make a rate increase excessive, unjustified or unfairly 
discriminatory are described in 154.205. HHS would consider all of 
these factors in determining whether a rate increase is unreasonable. 
The factors used to determine whether a rate increase is unreasonable 
would only apply to rate increases that are reviewed by HHS. Each State 
would apply its own State standards when reviewing a rate increase to 
determine whether it is unreasonable.
    HHS recognizes that factors other than those addressed in the 
proposed regulation may be viewed as potentially impacting the 
reasonableness of a rate, including the structure and competitiveness 
of the market, and we are therefore soliciting public comment to 
identify these factors and whether they should be considered in 
determining whether a rate increase is unreasonable.
1. Excessive Rate Increase
    An excessive rate increase is a rate increase that is subject to 
review and that causes the premium charged for the health insurance 
coverage to be unreasonably high in relation to the benefits provided. 
HHS recognizes that identifying objective measures that would be 
considered in determining whether a rate increase is excessive would be 
helpful to both issuers and the public. The proposed regulation 
therefore would describe several objective measures that HHS would 
consider in determining whether a rate increase causes the premiums 
charged to be unreasonably high in relation to the benefits provided.
    First, HHS would consider whether the rate increase results in a 
projected future loss ratio below the Federal medical loss ratio (MLR) 
standard determined under section 2718 of the PHS Act for the 
applicable market to which the rate increase applies. HHS recognizes 
that under the regulations implementing the MLR standards, 75 FR 74864 
(December 1, 2010), generally issuers must meet the relevant MLR 
standard in each State by aggregating all of their business in a 
particular market segment. The consequence of this approach is that an 
issuer may meet the MLR standard in the aggregate even if a particular 
insurance product does not meet the relevant standard so long as the 
combination of all products in the market by the issuer meets the 
Federal standard. Therefore, while the MLR is not a determinative 
factor, MLR

[[Page 81013]]

standards serve as a benchmark against which the reasonableness of 
rates are measured in the industry and the approach that would be 
adopted under this proposed rule is consistent with the approach taken 
in States that have had MLR standards under State law. Under this 
proposed approach, if an issuer proposed an increase of 10 percent or 
more (an increase that would be subject to review) for one or more 
individual market products, and the projected MLR for the product or 
products was below 80 percent, the increase nonetheless would not 
necessarily be considered excessive if the issuer could demonstrate 
that the aggregate MLR for all products in the individual market in 
that State would be at or above 80 percent.
    Notably, the Federal MLR standard under the Public Health Service 
Act also takes into account certain adjustments such as credibility 
adjustments to account for newer and smaller plans and other special 
cases. HHS would consider the issuer's adjusted Federal medical loss 
ratio in the applicable market to which the rate increase applies when 
determining whether an increase is excessive.
    Second, in determining whether a rate increase is excessive, HHS 
would consider whether one or more of the assumptions on which the rate 
increase is based are not supported by substantial evidence. Finally, 
HHS would consider whether the choice of assumptions or combination of 
assumptions on which the rate increase is based is unreasonable.
2. Unjustified Rate Increase
    Included in this proposed regulation are provisions that would 
require health insurance issuers to provide a defined set of data and 
documentation to HHS, to permit HHS to determine whether a rate 
increase is ``unjustified.'' A proposed rate increase that is subject 
to review would be ``unjustified'' if the health insurance issuer 
provides data or documentation to HHS in connection with the increase 
that is incomplete, inadequate or otherwise does not provide a basis 
upon which the reasonableness of an increase may be determined. 
Therefore, issuers would be required to provide data and documentation 
that is sufficient for HHS to conduct a meaningful review of a rate 
increase.
3. Unfairly Discriminatory Rate Increase
    Under the proposed regulation, an unfairly discriminatory rate 
increase is one that results in premium differences for a particular 
product between insureds within similar risk categories that are not 
permissible under applicable State law or, if no State law applies, do 
not reasonably correspond to differences in expected costs. In this 
context, a risk category is a classification of a group of insureds who 
share a common set of descriptive characteristics, such as age or 
geographic location, and are covered under a single product. Health 
insurance issuers charge different premiums to insureds that fall 
within different risk categories.
    More than 25 States prohibit health insurance rates from being 
unfairly discriminatory. Therefore, the proposed regulation would 
define an unreasonable rate increase to include an unfairly 
discriminatory rate increase. In order to develop the factors that 
would make a rate increase an unfairly discriminatory rate increase, 
HHS reviewed factors applied by States to determine whether a rate 
increase is unfairly discriminatory.
    In our review, we concluded that States determine whether a rate 
increase is unfairly discriminatory based on the specific rating 
requirements under applicable State law. For example, if a State's 
rating law prohibits price discrimination within a rating cell (a 
subcategory of enrollees with particular characteristics in common, 
such as age, geographical location or tobacco status), a rate increase 
in that State would be unfairly discriminatory if the increase varied 
between individuals with the same characteristics within a given rating 
cell. If a State's rating law requires community rating (the practice 
of charging a common, unadjusted premium to all members of a diverse 
pool who may have widely varied health spending for the year) or 
prohibits the use of a specific rating factor such as geographical 
location, age or tobacco status, a rate increase in that State would be 
unfairly discriminatory if the increase was calculated based on a 
prohibited rating factor or does not account for pooled experience 
under the State's community rating requirements.
    Therefore, under the proposed regulation, an unfairly 
discriminatory rate increase would be one that results in premium 
differences not permissible under applicable State law between insureds 
within similar risk categories or, if no State law applies, do not 
reasonably correspond to differences in expected costs. This approach 
would give deference to applicable State rating laws, and give HHS the 
ability to determine that a rate increase is unfairly discriminatory in 
the absence of applicable State law.

H. Issuer Disclosure Required Under Part 154

1. Preliminary Justification
    The proposed regulation would require health insurance issuers to 
submit a preliminary justification for all rate increases subject to 
review, regardless of whether a State or HHS is reviewing the rate 
increase. The format of the preliminary justification would be provided 
in guidance. In order to minimize the burden on health insurance 
issuers to complete the preliminary justification, HHS is developing a 
web-based program that would allow health insurance issuers to complete 
and submit the preliminary justification electronically. The 
information contained in parts one and two of the preliminary 
justification would be intended to provide consumers with a thorough 
description of the rate increase, including both a narrative 
descriptive and a quantitative analysis. Further, parts one and two 
would provide consumers with the context necessary to interpret a 
State's or HHS's determination as to whether a rate increase is 
unreasonable. HHS is sensitive to placing an increased reporting burden 
on health insurance issuers, but believes that the majority of issuers 
would have the information required in parts one and two of the 
preliminary justification readily available, since this is the type of 
information generally used by issuers to calculate their rates.
    In developing the requirements for parts one and two of the 
proposed preliminary justification, HHS has reviewed and incorporated 
elements from a comparable form developed by the NAIC over a period of 
several months. For example, State regulators expressed the view that 
consumers need more than just quantitative information, such as cost 
and utilization trend factors, to interpret a rate increase. Regulators 
recommended that issuers be required to provide a narrative explanation 
of applicable rate increases that supports and explains the key 
quantitative information associated with the increase. The narrative 
also should describe, in a straightforward fashion, the rationale for 
the rate increase. The preliminary justification therefore would 
require issuers to provide high level quantitative data associated with 
a rate increase along with a written narrative explaining the increase.
    If HHS is responsible for reviewing a rate increase, HHS would 
conduct a comprehensive actuarial review of the increase. In this case, 
issuers would be required to submit additional information in part 
three of the

[[Page 81014]]

preliminary justification. As noted above, the specific proposed data 
reporting requirements in part three of the preliminary justification 
are modeled on the actuarial memorandum guidelines included in NAIC 
Model Regulation 134-1. These guidelines set forth reasonable standards 
for reporting and justifying rate increases, and this type of data 
comprises a typical rate filing in those States that require rates to 
be filed. Therefore, HHS anticipates that these data would be readily 
available to most issuers. Shortly following the release of this 
proposed rule, HHS will release via the Federal Register a draft 
version of the preliminary justification for public comment. The draft 
preliminary justification will provide the formatting and reporting 
instructions for each of the reporting categories listed in the 
regulation.
    Part one of the preliminary justification, titled ``rate increase 
summary,'' would require issuers to submit the following data 
underlying the rate increase:
    (1) Historical and projected claims experience;
    (2) Trend projections related to utilization, and service or unit 
cost;
    (3) Any claims assumptions related to benefit changes;
    (4) Allocation of the overall rate increase to claims and non-
claims costs;
    (5) Per enrollee per month allocation of current and projected 
premium;
    (6) Current loss ratio and projected loss ratio;
    (7) Three year history of rate increases for the product associated 
with the rate increase; and
    (8) Employee and executive compensation data from the health 
insurance issuer's annual financial statements.
    Under part two of the preliminary justification, titled ``written 
description justifying the rate increase,'' a health insurance issuer 
would be required to provide a written description of the rate 
increase, including: (1) An explanation of the rating methodology (that 
is, the method used to apply various rating factors, such as cost 
trends or benefit design, to the development of an insurance rate, as 
well as the formulae employed to apply those factors); (2) an 
explanation of the most significant factors causing the rate increase, 
including a brief description of the relevant claims and non-claims 
expense increases reported in the rate increase summary; and (3) a 
brief description of the overall experience of the policy, including 
historical and projected expenses and loss ratios.
    Again, a health insurance issuer would be required to complete and 
submit sections one and two of the preliminary justification for all 
rate increases subject to review, regardless of whether HHS or a State 
is reviewing the rate increase. Issuers would be required to complete 
part three titled, ``rate filing documentation,'' only in the event HHS 
is reviewing the rate increase. The rate filing documentation supports 
parts one and two of the preliminary justification, and the proposed 
regulation lists the following broad reporting data categories that 
would be required under part three, consistent with NAIC model 
requirements:
    (1) Description of the type of policy, benefits, renewability, 
general marketing method and issue age limits;
    (2) Scope and reason for the rate increase;
    (3) Average annual premium per policy, before and after the rate 
increase;
    (4) Past experience, and any other alternative or additional data 
used;
    (5) A description of how the rate increase was determined, 
including the general description and source of each assumption used;
    (6) The cumulative loss ratio and a description of how it was 
calculated;
    (7) The projected future loss ratio and a description of how it was 
calculated;
    (8) The projected lifetime loss ratio that combines cumulative and 
future experience, and a description of how it was calculated;
    (9) The Federal medical loss ratio standard in the applicable 
market to which the rate increase applies, accounting for any 
adjustments allowable under Federal law; and
    (10) If the result under paragraph (e)(7) is less than the standard 
under paragraph (e)(9), a justification for this outcome.
    When health insurance issuers provide rate filing documentation for 
each category in part three of the preliminary justification, they 
would have to be sufficient to permit HHS to conduct a thorough 
actuarial review of the rate increase. However, HHS would accept a 
State rate filing in lieu of the information required under part three, 
provided the rate filing includes the information required under such 
part. In the event a health insurance issuer does not provide 
sufficiently detailed information for HHS to review a rate increase and 
determine whether it is unreasonable, HHS would request from the health 
insurance issuer the information necessary to complete its review. HHS 
proposes to provide further details on the format by which the specific 
data elements would be required to be submitted by this proposed 
regulation.
2. Submission of Final Justification or Final Notification
    When a State with an effective rate review program receives notice 
of a rate increase subject to review, it would determine whether the 
increase is an unreasonable rate increase. The State would provide its 
findings and conclusions to HHS. In the situations when HHS reviews a 
rate increase, HHS would prepare a final determination and brief 
explanation of its analysis. If HHS determines that a rate increase is 
not unreasonable, or adopts a determination by a State that a rate 
increase is not unreasonable, the health insurance issuer would not be 
obligated to submit any additional information to HHS. If HHS 
determines that a rate increase is unreasonable, HHS would provide the 
final determination and explanation to the health insurance issuer. If 
HHS adopts a determination by a State that a rate increase is 
unreasonable, and the health insurance issuer is legally permitted to 
implement the unreasonable rate increase under applicable State law, 
HHS would provide the State's final determination and explanation to 
the issuer.
    If the health insurance issuer intends to implement an unreasonable 
rate increase, the issuer would be required to submit a final 
justification to HHS. The justification would be a brief response to 
HHS's or the applicable State's final determination. If the issuer 
chooses not to implement the unreasonable rate increase, or chooses to 
implement a lower rate increase, it would be required to notify HHS to 
that effect. If the issuer implements a lower rate increase that does 
not meet or exceed the applicable threshold, the lower increase would 
not be subject to the proposed regulation. However if the lower rate 
increase does meet or exceed the applicable threshold, the increase 
would be subject to the proposed regulation and the issuer would be 
required to submit to HHS a new preliminary justification for the 
increase. The issuer would submit the final justification or final 
notification by the later of 10 days after (i) the implementation of 
such increase or (ii) the health insurance issuer's receipt of HHS's 
final determination that a rate increase is an unreasonable rate 
increase.
    The purpose of the final justification would be to provide the 
health insurance issuer with an opportunity to respond to HHS's or the 
State's determination that its rate increase is unreasonable and to 
make the issuer's final justification available to health

[[Page 81015]]

insurance consumers. Since HHS would rely directly on information 
provided by the health insurance issuer when making the determination 
whether a rate increase is unreasonable, the health insurance issuer's 
final justification would have to be consistent with and based upon the 
information provided under the preliminary justification, and could not 
include new or different information that was not provided to HHS. 
Health insurance issuers would be required to provide their final 
justifications electronically to HHS through the web-based program 
developed by HHS.
    As noted above, HHS's determination that a rate increase is 
unreasonable would not have any effect on the issuer's right to 
implement the rate increase, which is entirely a matter of State law. 
Similarly, HHS's review of rate increases would not delay the 
implementation of those increases; the timing of implementation is also 
a matter of State law.
3. Posting of Information on the HHS Web site
    HHS proposes to promptly post on its Web site the information 
contained in parts one and two of the preliminary justification. 
Section 2794 requires the Secretary to ensure the public disclosure of 
information, including the justifications. The statute does not specify 
when this information must be posted, but HHS believes that Congress 
intended that the rate review process be transparent, and that this 
objective is served by giving consumers immediate access to basic 
information regarding the proposed increase that is under consideration 
by HHS or States and prior to the implementation of the rates that are 
subject to review. To avoid a misperception that these postings 
represent justifications for rate increases that are determined to be 
unreasonable, HHS will prominently place a disclaimer near the postings 
that: ``The preliminary justification is the initial summary 
information regarding the rate increase subject to review and does not 
represent a determination that the rate increase subject to review is 
an unreasonable rate increase.'' We solicit public comment on the 
specific language HHS should use in its disclaimer. HHS considered 
disclosing this information later in the review process, such as when 
the review of the rate increase was completed, but determined that 
posting in this manner would reduce transparency and provide 
insufficient opportunity for consumer review of information related to 
these rate increases prior to implementation.
    HHS does not consider the information contained in the preliminary 
justification to be confidential and believes that consumers would 
benefit from this information because it provides a basic description 
of the rationale underlying a rate increase. HHS also believes that the 
information under part three should be made public, but understands 
that issuers may consider certain of this information to be 
confidential. HHS would promptly post on its Web site any information 
provided in part three of the preliminary justification, as long as it 
has not been designated as ``confidential'' as defined in HHS's Freedom 
of Information Act regulations, 45 CFR 5.65. HHS will also make a 
determination as to whether to post information designated as 
``confidential'' under the standards and procedure set forth in those 
regulations, and will post that information only after making a 
determination that it is subject to disclosure as provided by those 
regulations.
    HHS would also post on its Web site the final determinations of 
both States and HHS that a rate increase is either unreasonable or not, 
as well as explanations for those determinations. In the event that 
either a State or HHS determines that a rate increase is an 
unreasonable rate increase and the health insurance issuer chooses to 
implement the rate increase, HHS would also post on its Web site the 
health insurance issuer's final justification.
4. Posting of Information on the Health Insurance Issuer's Web site
    PHS Act section 2794 requires health insurance issuers to 
prominently post on their Web sites their justification for an 
unreasonable premium increase. Therefore, if HHS determines that a rate 
increase is unreasonable or adopts a determination by a State that a 
rate increase is unreasonable, and the health insurance issuer 
implements the rate increase, the issuer would be required to post on 
its Web site the information contained in the preliminary 
justification; HHS's final determination and explanation; and the 
issuer's final justification. In an attempt to minimize this posting 
burden, health insurance issuers would be able to download from HHS an 
electronic file containing the information required to be posted. 
Further, the health insurance issuer would have no obligation to post 
on its Web site any information regarding rate increases that are not 
determined to be unreasonable or that are not implemented. HHS proposes 
to issue further guidance regarding the format of posting.
5. Timing of Submission of Preliminary Justification, Final 
Justification, Final Notice, and Issuer Posting
    PHS Act section 2794 requires health insurance issuers to provide 
justifications for unreasonable rate increases prior to the 
implementation of such increases. As noted above, consistent with this 
requirement, HHS is proposing necessary timeframes for the completion 
of the preliminary justification by health insurance issuers. 
Specifically, if a State requires a health insurance issuer to file a 
proposed rate increase with the State prior to implementation of the 
rate, the issuer would be required to submit a completed preliminary 
justification when it submits the proposed rate increase to the State. 
This approach would allow HHS to receive the preliminary justification 
prior to implementation of a rate increase without creating an 
additional burden on health insurance issuers to include an extensive 
justification in their initial submission to the State.
    If a State does not require a health insurance issuer to file a 
rate increase with the State, HHS anticipates that such State would not 
be found to have an effective rate review program. Therefore, HHS 
anticipates that it would be responsible for reviewing rate increases 
in those States. PHS Act section 2794 does not require issuers to 
submit rate filing data prior to implementation of a rate increase, and 
accordingly neither would this proposed regulation. Therefore, absent 
any State law to the contrary, issuers would have the option of 
completing the preliminary justification at the time of implementation 
or prior to that time. If HHS requires information in addition to the 
preliminary justification to complete its review, then the issuer would 
be required to provide this information within five business days 
following its receipt of the request.
    In the event the issuer implements an unreasonable rate increase, 
the issuer would be required to submit a final justification to HHS and 
post the required information on its Web site within the later of 10 
days after the implementation of the increase or 10 days after the 
issuer's receipt of the final determination by HHS that the rate is 
unreasonable. If an issuer determines that it will decline to implement 
or has withdrawn an increase determined by HHS to be unreasonable, or 
that it will implement a lower increase, it would be required to notify 
HHS of this decision within 10 days of its determination.

[[Page 81016]]

III. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, we are required to 
provide 60 days 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. This 
proposed rule contains information collection requirements (ICRs) that 
are subject to review by OMB. A description of these provisions is 
given in the following paragraphs with an estimate of the annual 
burden, and summarized in table A. Included in the estimate is the time 
for reviewing instructions, searching existing data sources, gathering 
and maintaining the data needed, and completing and reviewing each 
collection of information. 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.
     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 proposed rule that contain information 
collection requirements (ICRs):

A. Background

    Section 2794 requires the Secretary to develop, in conjunction with 
the States, a process for the annual review of unreasonable rate 
increases. The proposed regulation would establish a rate review 
program to ensure that all rate increases that meet or exceed an 
established threshold are reviewed by a State or HHS to determine 
whether the rate increases are unreasonable. Under the proposed 
regulation, if HHS determines that a State has an effective rate review 
program in a given market, using the criteria set forth in the proposed 
rule, HHS would adopt that State's determinations regarding whether 
rate increases in that market are unreasonable, provided that the State 
reports its final determinations to HHS, and explains the bases of its 
determinations. For all other States, HHS would conduct its own review 
of rates that meet or exceed the applicable threshold to determine 
whether they are unreasonable.
    Section 2794 directs the Secretary to ensure the public disclosure 
of information on unreasonable rate increases and justification for 
those increases. The proposed regulation would therefore develop a 
process to ensure the public disclosure of information on unreasonable 
rate increases and justifications for those increases. Section 2794 
also requires that health insurance issuers submit a justification for 
an unreasonable rate increase to HHS and the relevant State prior to 
its implementation. The proposed regulation would therefore establish 
various reporting requirements for health insurance issuers, including 
a preliminary justification for a proposed rate increase, a final 
justification for any rate increase determined by a State or HHS to be 
unreasonable, and a notification requirement for unreasonable rate 
increases which the carrier will not implement.

B. ICRs Regarding the Rate Review Preliminary Justification Form (Sec.  
154.215 and Sec.  154.220)

    This proposed rule describes the preliminary justification that 
each health insurance issuer would be required to submit to both HHS 
and States, if it is seeking to implement a rate increase that meets or 
exceeds the threshold described in Sec.  154.200. The preliminary 
justification would include data supporting the potential rate increase 
as well as a written explanation of the rate increase. For those rates 
HHS would be reviewing, issuers' submissions would also include 
supplemental data and information that HHS would need to make a valid 
actuarial determination regarding whether a rate increase is 
unreasonable.
    Each health insurance issuer seeking to implement a rate increase 
that meets or exceeds the established threshold would be required to 
complete a preliminary justification. The preliminary justification 
consists of three parts. Part one consists of a document (Excel 
spreadsheet) to be completed by issuers for all proposed rate increases 
that meet or exceed the threshold. Part two of the preliminary 
justification is a three- to five-page written narrative explaining the 
methodology used to derive the rate increase. Issuers would be required 
to submit to both HHS and the applicable State parts one and two prior 
to implementation of a rate increase, regardless of whether HHS is 
reviewing the rate increase or adopting the State's review. Issuers 
typically calculate these figures in order to develop a premium and 
submit a rate filing to State regulators. The data elements and 
methodologies are commonly calculated by issuers and are often required 
by States that review rates.
    Issuers would be required to complete part three of the preliminary 
justification only when HHS is reviewing a rate increase to determine 
whether it is unreasonable or not, and submit part three to HHS only 
(and not to the applicable State). Part three of the preliminary 
justification defines an additional set of information that issuers 
must submit only when HHS is reviewing a rate increase. The information 
provided under part three would allow HHS to make a valid actuarial 
determination as to whether the rate increase is unreasonable or not. 
If an issuer completes and submits part three of the preliminary 
justification, but does not provide sufficient information for HHS to 
conduct its review, HHS would request the additional information 
necessary to make its determination. Issuers would have five business 
days to respond to any request for outstanding information from HHS.
    Using 2010 data, HHS estimates the number of rate filings in 2010 
that would have been subject to the proposed rule had it been in force 
to be between 3,635 and 4,015 in the individual and small group markets 
nationwide. HHS estimates that the total number of rate filings is 
expected to increase slightly in 2011, due in part to an increased 
number of issuers required to file based on those factors discussed in 
the impact analysis section. Therefore, HHS estimates that, in 2011, 
there would be 5,343 rate filings subject to the proposed rule. As 
discussed in the impact analysis section, HHS estimates that 
approximately 773 of these rate filings would require review under the 
proposed rule because they meet or exceed the established threshold.
    At this time, HHS has not completed development of the draft forms 
for parts one, two, and three of the preliminary justification that 
issuers would have to submit should their rate increase be subject to 
review because it would meet or exceed the threshold. While these are 
new forms, we believe issuers are already collecting the data necessary 
to complete any form we develop. Because the forms are still under 
development, we cannot assign a complete burden estimate at this time. 
Once the forms are available, we will publish a notice in the Federal 
Register to solicit public comments on the forms and provide our burden 
estimates associated with this requirement.

[[Page 81017]]

C. ICRs Regarding State Determinations (Sec.  154.210 and Sec.  
154.225)

    Under the proposed rule, if HHS determines that a State has 
satisfied specific criteria for an effective rate review program under 
Sec.  154.301, HHS would adopt the State's determinations regarding 
whether a rate increase that meets or exceeds the established threshold 
is unreasonable, providing the State reports its final determinations 
to the Department and explains the bases of its determination as 
required under Sec.  154.210(b)(2). As discussed in the impact analysis 
section, since many States are already performing these functions, the 
cost burden to States would be small and would largely be offset by 
rate review grants provided by the Department to help States improve 
their rate review processes. In those cases where a State does not have 
an effective rate review program, HHS would make its own determinations 
regarding whether a rate increase that meets or exceeds the established 
threshold is unreasonable.
    HHS would post on its Web site the information contained in each 
preliminary justification for each rate increase subject to review 
under Sec.  154.200. For consumer clarity, HHS would also post on its 
Web site the final disposition of each rate increase reviewed by either 
HHS or a State. Therefore, either a State or HHS would make a final 
disposition for all rate increases reviewed under the proposed rule, 
similar to current rate filing practices under the NAIC System for 
Electronic Rate and Form Filing (SERFF) or similar State-based filing 
systems.
    As explained in the impact analysis section, HHS estimates that 773 
rates would be reviewed under the proposed rule because they meet or 
exceed the established threshold and that 25 to 35 States, in whole or 
in part based on market segment, would be reporting to HHS and posting 
dispositions on approximately two-thirds of these rates (or 515 
filings) for at least one market. The RIA also estimates that reporting 
information from the State to Department will require approximately 20 
minutes per filing. Thus the annual burden for this requirement is 
approximately 172 hours. HHS estimates that the additional burden of 
posting to the States would be negligible, since States currently post 
information about the disposition of rates. However, we welcome 
comments regarding the burden associated with the State posting burden 
requirements described in Sec.  154.225.

D. ICRs Regarding the Final Justification and Final Notification (Sec.  
154.230)

    The proposed rule would require health insurance issuers to submit 
to HHS and the relevant State a final justification for any 
unreasonable rate increase that would be implemented and to display 
this information on their Internet Web sites. If an issuer is legally 
permitted to implement an unreasonable rate increase and declines to 
implement the increase, the issuer would provide notice to HHS that it 
will not implement the increase. As discussed in the impact analysis 
section, HHS estimates that 417 issuers will submit an estimated 371 to 
1,396 rates for review and that it will take between 6 to 16 hours to 
complete the entire justification process. HHS estimates that 773 rates 
will meet or exceed the threshold and further assumes carriers will 
implement 100 percent of rates found unreasonable. We welcome comments 
regarding the burden associated with the State posting burden 
requirements described in Sec.  154.230.

E. ICRs Regarding HHS's Determinations of Effective Rate Review 
Programs (Sec.  154.301)

    As discussed earlier in the preamble, HHS would determine whether a 
State's rate review program meets the requirements of an effective rate 
review program set forth in Sec.  154.301(a) based on documentation and 
information received from the State through the grant process, through 
review of applicable State law, and through any other information 
otherwise available to HHS. The information collection for the ``Grants 
to States for Health Insurance Premium Review'' is approved under OMB 
Control number 0938-1092. Since HHS does not believe additional data 
from States are necessary to make these determinations, we assume the 
additional burden from this provision is zero.

                                                            Table A--Estimated Annual Burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                      Number of     Total annual
           45 CFR Section              Type of collection         Respondent         respondents      responses      Hours per response     Total hours
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sec.   154.210.....................  Reporting............  States...............           25-35             515  0.33.................             172
Sec.   154.215 and Sec.   154.220..  Reporting............  Issuers..............             417             773  TBD..................             TBD
Sec.   154.225.....................  Disclosure...........  States...............           25-35             515  Negligible...........               0
Sec.   154.230.....................  Reporting............  Issuers..............             417             773  .5...................             386
Sec.   154.230.....................  Disclosure...........  Issuers..............             417             773  .5...................             386
--------------------------------------------------------------------------------------------------------------------------------------------------------

    In compliance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)), the agency has submitted the information collection 
provisions of this proposed rule to OMB for review.
    If you comment on these 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: OCIIO Desk 
Officer, OCIIO-9999-P, Fax: (202) 395-7245; or E-mail: [email protected].

IV. 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.

V. Regulatory Impact Analysis

    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

A. Summary

    As stated earlier in the preamble, this notice of proposed 
rulemaking (NPRM) implements Section 2794 of the Public Health Service 
(PHS) Act (as added by Section 1003 of the Affordable Care Act), which 
requires the Secretary, in conjunction with the States, to establish a 
process for the annual review of unreasonable increases in health

[[Page 81018]]

insurance premiums (referred to in the NPRM as ``rates''). This notice 
of proposed rulemaking outlines the methodology by which HHS would 
review proposed rate increases. HHS has proposed this regulation to 
implement statutory provisions designed to help make private health 
insurance more affordable, and to increase the transparency of the 
process by which health insurance issuers calculate premiums. HHS has 
quantified costs where possible and provided a qualitative discussion 
of the benefits and of the transfers and costs that may stem from this 
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 proposed 
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. OMB has 
determined that this proposed rule is a ``significant rule'' under 
Executive Order 12866. Accordingly, OMB has reviewed this proposed rule 
under 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, HHS has 
concluded that this proposed rule would likely not have economic 
impacts of $100 million or more in any one year, nor would it adversely 
or materially affect a sector of the economy, productivity, 
competition, jobs, the environment, public health or safety, or State, 
local or tribal governments or communities. This assessment is based 
primarily on the administrative costs to issuers of completing the 
preliminary justification form they are required to submit when 
proposing rate increases of 10 percent or greater, and on the costs to 
States and the Federal government of reviewing these justifications. As 
discussed below, HHS is not able to quantify the effect of this 
proposed rule on rates charged by issuers, and it is possible that the 
effect on rates will be large enough to cause the proposed rule to be 
considered a major rule. HHS invites comments on this issue.
    Nevertheless, HHS opted to provide an assessment of the potential 
costs, benefits, and transfers associated with this proposed 
regulation.
1. Need for Regulatory Action
    Consistent with the provisions in Section 2794 of the PHS Act, this 
NPRM when finalized would require health insurance issuers offering 
non-grandfathered coverage in the individual and small group markets to 
report information concerning rate increases to HHS and the applicable 
State if the proposed increase is 10 percent or higher. Section 2794(a) 
of the PHS Act (captioned ``initial premium review process'') requires 
the Secretary to ``establish a process for the annual review of 
unreasonable increases in premiums for health insurance coverage.'' The 
section further provides that issuers ``submit to the Secretary and the 
relevant State a justification for an unreasonable premium increase 
prior to the implementation of the increase.''
    Many States currently review rate filings in all or some portion of 
the insurance market, therefore, the burden of implementing this 
proposed rule on States will be small. In the States that do not 
currently conduct effective rate review, HHS will initially review 
those rate filings that meet or exceed the 10 percent threshold. HHS 
anticipates that those States will use the rate review grants described 
in the preamble to enhance their capacity for review. Moreover, HHS 
anticipates gradually transitioning rate review responsibilities to 
these States as they build their capacity and as a result, reducing 
Federal costs over time.
    In addition, this proposed rule requires issuers proposing rate 
increases 10 percent and above to provide a preliminary justification 
for the proposed increase. That preliminary justification will use data 
typically assembled by the issuers in computing their rate request. 
Because the preliminary justification requires the restating of 
existing data rather than the generation of new information, HHS 
expects the burden on issuers in filing the justification will be 
relatively small.
2. Summary of Impacts
    In accordance with OMB Circular A-4, Table 1 below depicts an 
accounting statement summarizing HHS' assessment of the benefits, 
costs, and transfers associated with this regulatory action. HHS 
limited the period covered by the regulatory impact analysis (RIA) to 
2011-2013. Estimates are not provided for subsequent years because 
there will be significant changes in the marketplace in 2014 related to 
the offering of new individual and small group plans through the health 
insurance Exchanges, and the wide ranging scope of these changes makes 
it difficult to project results for 2014 and beyond.
    As described in this RIA, HHS estimates that this regulatory action 
would result in better information for consumers about their health 
insurance premiums and is likely to lower premiums. The proposed rule 
also imposes costs on insurers associated with preparing and filing 
proposed rate increases, and imposes costs on State and Federal 
governments associated with reviewing proposed rate increases. In 
accordance with Executive Order 12866, HHS believes that the benefits 
of this regulatory action justify the costs.

                                            Table 1--Accounting Table
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Benefits:
----------------------------------------------------------------------------------------------------------------
Qualitative:
   * Increased transparency in health insurance markets, promoting competition.
   * To the extent that unreasonable rate increases are prevented as a result of this rule, reduction in the
    deadweight loss to the economy from the exercise of monopolistic power by issuers.
----------------------------------------------------------------------------------------------------------------

[[Page 81019]]

 
Costs:                                  Low       Mid-range       High     Year dollar    Discount      Period
                                      estimate     estimate     estimate                    rate       covered
                                                                                          percent
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($millions/              7           12           19         2010  ...........    2011-2013
 year)
                                   -----------------------------------------------------------------------------
                                              6           11           18         2010  ...........    2011-2013
----------------------------------------------------------------------------------------------------------------
One-time costs to create systems to report data, and annual costs related to reporting data to the Secretary,
 providing rate increase justifications, and costs to the States and Federal government of reviewing the
 justifications.
----------------------------------------------------------------------------------------------------------------
Transfers:
----------------------------------------------------------------------------------------------------------------
Qualitative:
    * To the extent that rate increases are reduced as a result of this rule, money will be transferred from
     issuers/shareholders to consumers..........................................................................
----------------------------------------------------------------------------------------------------------------

3. Qualitative Discussion of Anticipated Benefits, Costs and Transfers
a. Benefits
    Reliable information on prices is a prerequisite for well-
functioning competitive markets. Consumers in the individual and small-
group health insurance markets, which are highly concentrated, may have 
difficulty knowing whether an increase in their premium is actuarially 
justifiable--for example, because it is due to a change in the scope of 
covered services--or whether it is the result of insurers exercising 
market power to set rates above the level that is actuarially 
justifiable.
    The proposed rule subjects proposed rate increases of ten percent 
or more to additional scrutiny in order to safeguard against this 
exercise of market power by insurers. The proposed rule's reporting 
requirements should result in better information for consumers about 
prices, promoting competition and potentially increasing the volume of 
trade, thereby yielding a net benefit to society.
b. Costs
    HHS has identified the primary sources of costs that would be 
associated with this proposed rule as the costs to issuers associated 
with reporting, recordkeeping, notifications, and the costs to State 
and Federal governments of conducting reviews of the justifications 
filed by issuers.
    HHS estimates that issuers would incur approximately $10 million to 
$15 million in one-time administrative costs, and $0.4 million to $4.5 
million in annual ongoing administrative costs related to complying 
with the requirements of this proposed rule from 2011 through 2013. In 
addition, States would incur very small additional costs for reporting 
the results of their reviews to the Federal government, and the Federal 
government would incur approximately $0.6 million to $4.8 million in 
annual costs to conduct reviews of justifications filed by issuers in 
States that do not perform effective reviews. Additional details 
relating to these costs are discussed later in this regulatory impact 
analysis.

C. Estimated Number of Affected Entities and Number of Rate Filings 
Meeting or Exceeding the Threshold and Subject To Review

    Section 2794 of the Public Health Service Act specifies that the 
rate review provisions apply to health insurance issuers offering 
individual or group health insurance coverage, not including 
grandfathered health plans. As discussed earlier in the 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 in the 
preamble, the rate review provisions in this proposed rule apply to 
issuers that offer individual and small group coverage, and these 
issuers would be required to submit a preliminary justification for 
rate increases meeting or exceeding the rate review threshold of 10 
percent, to file with the Secretary and the applicable State a final 
justification for those rate increases found unreasonable, and disclose 
information about the proposed increase, if implemented, on their Web 
sites. The following sections summarize HHS' estimates of the number of 
entities and rate filings that would be affected by the requirements 
being proposed in this rule.

D. Estimated Number of Affected Entities

    The rate review provisions will apply to all health insurance 
issuers offering coverage in the individual and small group markets 
except for grandfathered plans. The number of issuers is 311 in the 
individual market and 342 in the small group market, for a total of 417 
(unduplicated) issuers, as determined for the interim final rule for 
implementing the medical loss ratio requirements under the Affordable 
Care Act (Federal Register December 1, 2010).
    Table 2 shows the estimated distribution of the 417 issuers 
offering coverage in the individual and small group markets for the 
analytic sample used in this RIA.\3\ Approximately 75 percent (311) of 
these issuers offer coverage in the individual market and 82 percent 
(342) offer coverage in the small group market. Additionally, HHS 
estimates that there are 34.8 million enrollees in coverage that would 
be subject to the requirements being proposed in this rule, including 
approximately 10.6 million enrollees in individual market coverage and 
24.2 million enrollees in small group coverage (estimated based on 
``life years'' for 2009 NAIC Health and Life Blank filers, which 
excludes data for companies that are not required to file annual 
statements with NAIC).\4\
---------------------------------------------------------------------------

    \3\ The analytic sample excludes companies that are regulated by 
HHS 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. The excluded companies are 
estimated to account for approximately 9 percent of the 
comprehensive major medical fully insured market. In addition, among 
the 579 companies that filed with the NAIC, 137 were excluded 
because of data anomalies. These 137 excluded companies are 
estimated to account for approximately 5 percent of the individual 
market and less than one percent of the group market.
    \4\ As noted above, issuers that are regulated by HHS of Managed 
Health Care in California are not required to file annual statements 
with the NAIC, and are not included in the estimates provided here.

[[Page 81020]]



             Table 2--Estimated Number of Issuers Subject to the Rate Review Requirements by Market
----------------------------------------------------------------------------------------------------------------
                                                    Issuers                        Enrollees 2
                                                  (companies)                   ----------------
                                                   offering
                  Description                    coverage 1 3      % of total      Number  (in      % of total
                                               ----------------                    thousands)
                                                    Number
----------------------------------------------------------------------------------------------------------------
Total (Unduplicated)..........................             417            100.0          34,792            100.0
Number Offering Coverage In:                    ..............  ...............  ..............  ...............
    Individual Market.........................             311             74.6          10,603             30.5
    Small Group Market 4......................             342             82.0          24,189             69.5
----------------------------------------------------------------------------------------------------------------
Notes:
1 Issuers represents companies (e.g., NAIC company codes).
2 Enrollment represents ``life years'' (total member months divided by 12).
3 Total issuers represents 2009 NAIC Health and Life Blank filers with valid data, which excludes approximately
  8 percent of comprehensive major medical premium among NAIC filers. Also excludes data for companies that are
  regulated by the California Department of Managed Health Care.
4 Small group is defined based on the current definition (e.g., 2 to 50 employees).

E. Estimated Number of Rate Filings

    This section of the regulatory impact assessment provides estimates 
of the number of filings that would be subject to review under this 
proposed rule.
1. Estimation Methods and Sources of Uncertainty
    HHS estimates the total number of rate filings using data on the 
number of filings in 2010 made through the NAIC System for Electronic 
Rate and Form Filing (SERFF). However, not all issuers are required to 
file through SERFF, and HHS is required to make assumptions about the 
total number of filings in 2010, as well as the expected change in the 
number of filings between 2010 and 2011.
    HHS conducted research to compile information regarding the 
regulatory structure in place by State and market. HHS analyzed 
information provided by States in their applications for rate review 
grants, analyzed State Department of Insurance Web sites, and surveyed 
State Insurance Department staff via telephone to obtain information 
regarding the number of licensed carriers and filings in the individual 
and small group markets. In its original estimate for the number of 
filings, HHS used ten representative States with relatively complete 
data to estimate the average number of filings that could be expected 
per State and by market. Those average values were used for all States 
to estimate the total number of filings in the individual and small 
group markets.
    HHS also gathered information from State Insurance Departments to 
obtain data for 2008 through 2010 on the estimated number of filings 
processed, by market, and approval/rejection rate, stratified by the 
magnitude of the increase. Separately HHS received from the NAIC an 
extract showing the final disposition for all comprehensive major 
medical filings in SERFF for the first three quarters of calendar year 
2010, by market type. This information was used to estimate the total 
number of filings in 2010 received and processed by the 49 States and 
the District of Columbia which use SERFF.
    Another SERFF extract provided the number of comprehensive major 
medical filings filed for 2009 by 31 States. All 19 States that did not 
use the field ``market type'' were excluded from the extract. Using the 
data pertaining to the 31 States included in the 2009 data, HHS 
estimated the proportion of filings submitted by quarter, and used that 
distribution, along with the 2010 data, to project the number of 
filings for all States using SERFF for the 4th quarter of 2010. The 
increase in the number of number of filings from 2009 to 2010, by State 
and market, was added to the 2010 estimates to trend the number of 
filings forward to 2011. HHS has determined that there is insufficient 
data to estimate the number of rate filings beyond 2011.
    Although there is some uncertainty concerning the number of filings 
in 2011, a much larger source of uncertainty is uncertainty about the 
number of filings that will have proposed rate increases greater than 
or equal to 10 percent. Data on rate requests made by issuers are 
available from a handful of States, and HHS has used these data to 
estimate the proportion of rate filings with requested rate increases 
of 10 percent or greater. However, given the small number of States for 
which data are available, there is substantial uncertainty about the 
number of filings in 2010 with proposed rate increases that are greater 
than or equal to 10 percent. Further, even if HHS had precise data on 
the distribution of rate increase requests in 2010, it is unclear to 
what extent that distribution might change in 2011 as a result of this 
proposed rule. Given the combination of data imperfections and 
limitations and behavioral uncertainties, HHS has chosen to provide a 
range of estimates, based on a range of assumptions.
2. Estimated Number of Rate Filings Meeting or Exceeding the Threshold 
and Subject To Review
    Twenty-five States require issuers to use the NAIC System for 
Electronic Rate and Form Filing (SERFF) and many issuers also use SERFF 
for filings in States that have no SERFF requirement. Based on the 
number of SERFF filings from 31 States for the first three quarters of 
2010, HHS estimates a range of rate filings from 3,635 to 4,015 in the 
individual and small group markets for all States for all of 2010.
    The total number of filings in 2011 is expected to be larger than 
the number of filings in 2010 in part due to an increased number of 
issuers required to file and additional filings to meet the 
justification requirements.\5\ Based on actuarial estimates using data 
from 2009 and 2010, HHS estimates that the number of 2011 rate filings 
will be in the range of from 4,858 to 5,828 (see Table 3).
---------------------------------------------------------------------------

    \5\ According the Kaiser Family Foundation, a number of States 
have already enhanced their rate review and filing process under 
their current authority and several other States will seek 
additional authority to review rates from their legislature. See 
Rate Review: Spotlight on State Efforts to Make Health Insurance 
More Affordable, Kaiser Family Foundation, December 2010.
---------------------------------------------------------------------------

    Issuers are not required to submit preliminary justification for 
their grandfathered enrollees. The percentage of individuals covered 
under policies that will lose grandfathered status in the individual 
market is estimated to be 40 to 67 percent, according to Grandfathered 
Health Plan Regulation (Federal Register June 17, 2010). The percentage 
of small group plans relinquishing their grandfathered status in the 
small group market is estimated

[[Page 81021]]

to be 20 to 42 percent in 2011. HHS uses 40 percent, 54 percent, and 67 
percent for the low, mid, and high estimates of the percentage of non-
grandfathered rate filings in the individual market and 20 percent, 30 
percent and 42 percent in the small group market.
    An issuer would be required to submit a preliminary justification 
report to the Secretary and the applicable State if the rate increase 
is 10 percent or higher. The estimates in this regulatory impact 
analysis are based on this provision of the proposed rule.
    Data from a small group of States for their individual market show 
the percentage of rate requests at or above 10 percent ranged from 50 
percent to 72 percent during the time period 2008 to 2010.\6\ The 
fraction of enrollees in plans requesting an increase of 10 percent or 
greater ranged from 34 percent to 77 percent. HHS uses 50 percent, 60 
percent, and 70 percent as the low, mid, and high estimates for the 
percentage of rate requests at or above the rate review threshold of 10 
percent in the individual market, and 35 percent, 50 percent, and 75 
percent for the percentage of enrollees affected.
---------------------------------------------------------------------------

    \6\ The sources for the rate increases in the individual market 
are: Iowa list of proposed rate increases as of October 25, 2010 
http://www.iid.state.ia.us/docs/0_Multi-year%20A&H%20Rate%20Increase_PPACA%20Types.pdf; Illinois list of 
proposed rate increases as of September 2010 http://www.insurance.illinois.gov/Reports/special_reports/IMMHPRFR.pdf; 
North Carolina rate filings http://infoportal.ncdoi.net/filelookup.jsp?divtype=3; Oregon list of proposed rate increases as 
of November 30 2010 http://www.oregoninsurance.org/insurer/rates_forms/health_rate_filings/health-rate-filing-search.html; 
Pennsylvania announcement of each proposed rate increases http://www.pabulletin.com/secure/search.html, Washington list of proposed 
rate increases from the State.
---------------------------------------------------------------------------

    Data on rate requests in the small group market are available from 
three States (Colorado and Oregon, data for 2009 and 2010, and 
Minnesota, 2007 through 2010).\7\ On average, approximately 35 percent 
of rate requests were for 10 percent or greater, and with, one 
exception, in each State and year combination, between 20 percent and 
40 percent of rate requests were above that threshold. HHS uses 20 
percent, 30 percent, and 40 percent for the low, medium, and high-range 
estimates of the percentage of rate requests at or above the rate 
review threshold of 10 percent in the small group market. For the 
percentage of enrollees affected in the small group market, HHS 
estimates 15 percent, 30 percent, and 50 percent.\8\
---------------------------------------------------------------------------

    \7\ The sources for the rate increases in the small group market 
are: Colorado list of rate increases http://www.dora.state.co.us/pls/real/Ins_RAF_Report.main; Minnesota list of final rate 
increases from the State; and Oregon list of proposed rate increases 
http://www.oregoninsurance.org/insurer/rates_forms/health_rate_filings/health-rate-filing-search.html.
    \8\ Rate filings in which each of the products covered in the 
filing are grandfathered plans will not be subject to the provisions 
of this proposed rule. However, in the small group market, HHS 
believes that most filings are made for products which are still 
being actively marketed. To the extent that there are filings in the 
individual market that include no products which are being actively 
marketed, the estimates provided here of the number of filings that 
will be subject to review are overestimates of the true burden that 
will be imposed by this proposed rule.
---------------------------------------------------------------------------

    The following table (Table 3) shows the low, mid and high range 
estimates (371, 773, and 1,396) of the number of filings that will be 
subject to review and require the submission of a justification report 
because the proposed rate increase is 10 percent or greater.

                             Table 3--Estimated Number of Filings Subject To Review
----------------------------------------------------------------------------------------------------------------
                                                                    Individual      Small group        Total
----------------------------------------------------------------------------------------------------------------
Estimated number of filings for 2011:
    Low Range...................................................            1107            3751            4858
    Mid Range...................................................            1247            4097            5343
    High Range..................................................            1386            4442            5828
Percent of filings subject to review (non-grandfathered):
    Low Range...................................................             40%             20%  ..............
    Mid Range...................................................             54%             30%
    High Range..................................................             67%             42%  ..............
Number of filings subject to review:
    Low Range...................................................             443             750            1193
    Mid Range...................................................             673            1229            1902
    High Range..................................................             929            1866            2794
Estimated percentage of filings meeting or exceeding threshold:
    Low Range...................................................             50%             20%  ..............
    Mid Range...................................................             60%             30%  ..............
    High Range..................................................             70%             40%  ..............
Estimated number of filings meeting or exceeding threshold:
    Low Range...................................................             221             150             371
    Mid Range...................................................             404             369             773
    High Range..................................................             650             746            1396
----------------------------------------------------------------------------------------------------------------

F. Estimated Administrative Costs Related To Rate Review Provisions

    As stated earlier in this preamble, this proposed rule would 
implement the reporting requirements of section 2794, describing the 
type of information that would be included in the preliminary 
justification to the Secretary and the applicable State and the 
disclosure that would be made available to consumers on the issuer's 
Web site if the rate increase is found to be unreasonable. HHS has 
quantified the primary sources of start-up costs that issuers in the 
individual and small group market would incur to bring themselves into 
compliance with this proposed rule, as well as the ongoing annual costs 
that they would incur related to these requirements. These costs and 
the methodology used to estimate them are discussed below.
    In order to assess the potential administrative burden relating to 
the requirements in this proposed rule, HHS consulted with the NAIC and 
industry experts to gain insight into the tasks and level of effort 
required. Based on these discussions, HHS estimates that issuers would 
incur one-time start-up costs associated with developing teams to 
review the requirements in this proposed rule, and developing processes 
for capturing the necessary data (e.g., automating systems). HHS 
estimates that issuers would also incur ongoing annual costs relating 
to data collection, completing the justification

[[Page 81022]]

reports, conducting a final internal review, submitting the reports to 
the Secretary and applicable State, record retention, and Web site 
notifications.
1. One-Time Start-up Costs
    Based on discussions with NAIC and industry experts, start-up costs 
are estimated at $25,000 to $35,000 per issuer, calculated from 
assumptions of 125 to 175 hours at $200 per hour (senior actuary fee) 
to review the requirements for this proposed rule and developing 
processes for data collection.
2. Ongoing Costs Related To Rate Review Reporting
    For each rate review reporting year, issuers offering coverage in 
the individual and small group markets would be required to submit a 
preliminary justification to the Secretary and applicable State prior 
to the implementation of a rate increase for each proposed rate 
increase of 10 percent or greater.
    Ongoing annual costs are estimated at 6 to 16 hours per 
justification report at $200 per hour or $1,200 to $3,200 per report. 
Most of the hours are for populating the justification reports with an 
additional hour for record retention and Web site notification.
    HHS estimates that the one-time costs relating to the rate review 
reporting requirements in this proposed rule would range from $10 
million to $15 million, and that annual costs would be between $0.4 
million and $4.5 million per year (Table 4).

                           Table 4--Estimated Costs for Reporting, Record Retention, and Website Notification (Actual Dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                          Estimated                Estimated   Estimated
                                                                        Total       Total     Estimated    average    Estimated     average     average
                            Description                               number of   number of     total     cost per    total cost   cost per    cost per
                                                                       issuers     reports    hours (1)   hour (2)                  issuer      report
--------------------------------------------------------------------------------------------------------------------------------------------------------
 LOW RANGE ASSUMPTIONS:
     One-Time Costs................................................         417         371      52,125        $200  $10,425,000     $25,000     $28,100
    Ongoing Costs..................................................         417         371       2,226         200       445200       1,068       1,200
                                                                    ------------------------------------------------------------------------------------
     Total Year One Costs..........................................         417         371      54,351         200   10,870,200      26,068      29,300
MID RANGE ASSUMPTIONS:
    One-Time Costs.................................................         417         773      62,550         200   12,510,000      30,000      16,184
     Ongoing Costs.................................................         417         773       8,503         200    1,700,600       4,078       2,200
                                                                    ------------------------------------------------------------------------------------
    Total Year One Costs...........................................         417         773      71,053         200   14,210,600      34,078      18,384
HIGH RANGE ASSUMPTIONS:
    One-Time Costs.................................................         417       1,396      72,975         200   14,595,000      35,000      10,455
    Ongoing Costs..................................................         417       1,396      22,336         200    4,467,200      10,713       3,200
                                                                    ------------------------------------------------------------------------------------
    Total Year One Costs...........................................         417       1,396      95,311         200   19,062,200      45.713      13,655
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes: Estimated costs are stated in 2010 dollars.
(1) Estimated number of one-time start up hours and annual ongoing hours.
(2) Actuary salary/fee.

3. Estimated Costs to the States and Federal Government Related To Rate 
Review Provisions
    Section 2794 directs the Secretary to, in conjunction with the 
States establish a process for the annual review of unreasonable 
increases in premiums for health insurance coverage. In doing so, both 
the Federal Government and States will incur certain administrative 
costs. However, HHS estimates that the additional costs to the States 
will be negligible given that the majority already conduct some level 
of rate review, and the costs to the Federal Government and States will 
be extremely small.
4. Estimated Costs to the Federal Government
    States currently have primary responsibility for the review of rate 
increases and will continue to under this proposed regulation. If a 
State does not have an effective rate review program in place for all 
or some markets within the State, HHS would review rate increases that 
meet or exceed the 10 percent threshold and make its own determinations 
of whether the rate increases were excessive, unjustified, or unfairly 
discriminatory, or otherwise unreasonable, within those markets. This 
activity could be conducted with in-house resources and/or with the use 
of contracted services. Given the fact that, as noted above, some 
States do not have review authority in either the small group or 
individual markets, and assuming filings are evenly distributed across 
markets, HHS estimates a range between 28 percent and 36 percent of the 
rate filings requiring review in 2011 would fall under HHS's review 
responsibility. Based on these filing estimates and the necessary 
actuarial expertise, this rate review process would range in cost from 
$0.6 million to $4.8 million.
    Table 5 describes the assumptions used in the estimates for the 
administrative costs to the Federal Government associated with its rate 
review activities.

                                       Table 5--Estimated Actuarial Rates
----------------------------------------------------------------------------------------------------------------
                    Estimated actuarial rates                           Low             Mid            High
----------------------------------------------------------------------------------------------------------------
Principal Actuaries.............................................         $340.00         $350.00         $360.00
Support Actuaries...............................................          200.00          234.00          275.00
Actuarial Analyst...............................................          120.00          150.00          180.00
Administrative Support..........................................           80.00          100.00          120.00
----------------------------------------------------------------------------------------------------------------

[[Page 81023]]

 
            Estimated Time to Complete Average Review                          Average Time Required
----------------------------------------------------------------------------------------------------------------
Principal Actuaries.............................................            4.25            5.50            6.75
Support Actuaries...............................................            8.50            9.50           11.00
Actuarial Analyst...............................................           12.00           14.00           15.00
Administrative Support..........................................            9.00            9.50           12.00
Actuarial Staff Hours...........................................           24.75           29.00           32.75
                                                                 -----------------------------------------------
    Total Staff Hours...........................................           33.75            38.5           44.75
----------------------------------------------------------------------------------------------------------------
                                                                             Low             Mid            High
----------------------------------------------------------------------------------------------------------------
Estimated Cost per Review.......................................          $5,305          $7,198          $9,595
Number of Rate Reviews..........................................             104             255             503
----------------------------------------------------------------------------------------------------------------
    Total Expected Contracting Cost.............................         551,720       1,835,490       4,826,285
----------------------------------------------------------------------------------------------------------------

    In addition to the costs to the Federal government of conducting 
rate reviews in States that do not conduct effective reviews, there 
will be a small, largely one-time cost to the Federal government to 
determine whether States are conducting effective reviews.
5. Estimated Costs to States
    HHS recognizes that States have significant experience reviewing 
rate increases. As discussed earlier in this preamble, most States have 
existing effective rate review programs that would meet the 
requirements of this regulation in substituting for HHS' review of rate 
filings that meet or exceed the threshold. Rate review grants provided 
by HHS are expected to increase the effectiveness of State rate review 
processes, but are not a direct measure of the cost of this regulation.
    HHS estimates that the cost burden on States would be small because 
most States currently conduct rate review. For these States the 
incremental costs and requirements of this regulation would be minimal. 
Some States do not already have a rate review process or have a process 
that applies to only a portion of the individual and small group 
markets that this regulation addresses. In these States, the 
implementation costs to develop effective rate review processes at the 
State level will be offset by the rate review grants provided by HHS. 
However, from a Federal budget perspective, these Federal costs from 
grants will be largely balanced by a decrease in the Federal cost of 
performing reviews directly. For States not currently conducting 
effective rate review, there are likely a variety of factors affecting 
the decision to institute an effective rate review process, including 
the need for resources, as well as potential legislative hurdles. The 
rate review grants are expected to help States overcome some of these 
hurdles.
    States with effective rate review programs would be required to 
report on their rate review activities to the Secretary. HHS believes 
that this reporting requirement will involve minimal cost. HHS 
estimates that reporting information from the State to Department will 
require approximately 20 minutes per filing. Based on resource use from 
the NAIC's 2009 Resource Report which shows the average Department of 
Insurance actuary earns approximately $45 an hour, HHS estimates an 
average cost per filing of $15. The estimated cost of reporting the 
two-thirds of filings meeting or exceeding the 10 percent threshold, 
which are reviewed by States, ranges from $4,011 to $13,404.

G. Transfers

    The proposed rule will likely result in lower premiums, although 
the magnitude of this effect is difficult to predict. To the extent 
that premiums are lower as a result of the proposed rule, this 
represents a transfer from insurers/shareholders to consumers. The 
experience of States that engage in rate review, summarized in Table 6, 
suggests that the review process may result in premium increases that 
are lower than they would otherwise be.\9\
---------------------------------------------------------------------------

    \9\ Data provided by States on recent rate review actions from 
informal discussions between HHS and State Department of Insurance 
actuaries

                                       Table 6--State Rate Review Actions
                                        [State filings from 2005 to 2010]
----------------------------------------------------------------------------------------------------------------
                                      Number of                               Range of actual     Number of rate
     State            Market           filings     Range of rate requests        increases          reductions
----------------------------------------------------------------------------------------------------------------
A.............  Individual.......              96  7%-40%................  0%-21%...............              15
                Small Group......              21  14%-26%...............  9%-22%...............               5
B.............  Individual.......              31  4%-30%................  1%-25%...............              14
                Small Group......              37  1%-17%................  1%-17%...............               5
C.............  Combined.........              34  1%-32%................  1%-32%...............               8
----------------------------------------------------------------------------------------------------------------

    It is difficult, however, to draw strong conclusions from this 
information about the effects of additional rate review on rates 
because we are uncertain about insurers' behavioral response. Further, 
a substantial number of States currently operate effective rate review 
processes, and it is likely that any potential effect

[[Page 81024]]

in these States will be less than in States currently without strong 
rate review.
    Although HHS did not estimate the impact of this proposed 
regulation on the reduction in premium rate increases, HHS estimates 
that comprehensive major medical premiums are $28 billion in the 
individual market and $95 billion in the small group market, for a 
total of $123 billion in 2011 (Medical Loss Ratio Regulation Technical 
Appendix, December 1, 2010 and National Health Expenditure projection 
factors). The percentage of individuals covered under policies that 
will lose grandfathered status in the individual market is estimated to 
be 40 to 67 percent (Grandfathered Health Plan Regulation, June 17, 
2010). The percentage of small group plans relinquishing their 
grandfathered status in the small group market is estimated to be 20 to 
42 percent in 2011 (Grandfathered Health Plan Regulation, June 17, 
2010). Thus, HHS estimates that approximately $30 to $59 billion of 
premiums will be written by issuers in the individual and small group 
markets to non-grandfathered subscribers. Given the magnitude of the 
premiums that may be affected, HHS invites comments on how to calculate 
premium savings so as to determine whether the $100 million threshold 
is met.

H. Regulatory Alternatives

    Under the Executive Order, HHS is required to consider alternatives 
to issuing regulations and alternative regulatory approaches. HHS 
considers a variety of regulatory alternatives below.
1. Establish a Lower or Higher Threshold for Rate Increase Review
    Section 2794(a) requires the Secretary, in conjunction with the 
States to conduct an annual review of unreasonable increases in 
premiums. In establishing a threshold for rate increases that would be 
subject to review, HHS (1) examined national trends in rate increases 
and health care costs; and (2) weighed the administrative burden on 
issuers and States against the level of protection for consumers.
    If HHS established a threshold lower than 10 percent, this would 
impose a larger burden on issuers, States, and HHS, and HHS judged that 
it would not yield a substantial benefit for consumers. However, as 
discussed earlier in the preamble, HHS proposes an approach that 
balances the regulatory burdens on both the agency and the industry 
where every rate increase, no matter how small, is reviewed for 
unreasonableness against the potential harm to consumers should a small 
but unreasonable increase be implemented.
    In addition, HHS has also taken into consideration the fact that 
many States, as discussed below, conduct a rate review process for all 
rate increases without regard to the magnitude of the increase, and we 
expect the number of States conducting such reviews to increase. 
Therefore, as a practical matter, in a growing number of States, the 
prospect that an unreasonable increase that is also below the 10 
percent threshold would be implemented without review is mitigated by 
the State review processes.
    HHS recognizes that there may be rate increases that fall below the 
10 percent threshold that are unjustified. However, given the practice 
of many States to review all increases, HHS considered the cost benefit 
of the additional Federal resources to potentially catch unjustified/
unreasonable rates vs. fairness to consumers and the additional 
administrative burden for insurers. HHS could spend additional 
resources and potentially catch only a small number of unreasonable 
rates below the threshold.
    HHS also examined establishing a threshold higher than 10 percent 
for rate increases that would be subject to review. However, in 
attempting to strike the balance discussed above, HHS decided on the 10 
percentage point threshold. Specifically, with a threshold higher than 
10 percent, consumers would face greater exposure to rate increases 
that were either unjustified or excessive with no assurance that those 
rates were given a careful review.
2. Establish a State-Specific Threshold
    HHS recognizes that underlying costs and health care trends vary 
from State to State. Many factors influence the magnitude and frequency 
of increases in the States, and a single, national filing threshold 
does not reflect all of the local variations. Therefore, in this 
proposed rule, HHS proposes to use a State-specific threshold as 
determined by the Secretary for future calendar years.
    HHS did not immediately adopt the State-specific threshold for rate 
increases in calendar year 2011 because of the lack of State-specific 
data. For future calendar years, the Secretary would consider the 
State-specific data submitted for each rate increase subject to review, 
and also the State-specific rate trend data and information received by 
the Secretary from those States that have received ``premium review 
grants'' under section 2794(c) of the PHS Act. Using these data, the 
Secretary may set a State-specific threshold. In the event the 
Secretary does not have sufficient data to calculate a State-specific 
threshold, the threshold will remain at 10 percent.
3. Establish a Threshold Based on the Market Share of the Insurer
    An alternative approach would have established a lower threshold 
for insurers with larger market share, with the justification that such 
insurers were more likely to be able to exert market power. However, 
analysis of data from a limited number of States suggested showed no 
evidence that larger insurers received higher rates of increase. 
Further, to the extent that market power exists in the individual 
market because subscribers with health problems are unable to switch to 
a competing insurer, this power exists equally for small companies as 
for large ones. As a result, HHS decided to propose a uniform threshold 
for all insurers, regardless of their size.
4. Apply Rate Review Standards to the Large Group Market
    As discussed in the preamble, HHS discussed applying this proposed 
rule to the large group market as well as the individual and small 
group markets. However, because of the current rate-setting practices 
of the large group market and States' limited authority over this 
segment of the market, HHS concluded that this regulation should only 
apply to the individual and small group markets.
    We welcome comments on the likely costs and benefits of this 
proposed rule as presented, on alternatives that would improve consumer 
benefits and minimize industry burden, and on our quantitative 
estimates of burden.

I. 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 proposed 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 RFA requires agencies to analyze options for regulatory relief 
of small businesses, if a proposed rule has a significant impact on a 
substantial

[[Page 81025]]

number of small entities. For purposes of the RFA, small entities 
include small businesses, nonprofit organizations, and small government 
jurisdictions. Small businesses are those with sizes below thresholds 
established by the Small Business Administration (SBA). We 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 we 
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.
    Further, the one-time costs of this proposed rule are approximately 
$25 thousand per covered entity (regardless of size or non-profit 
status) and approximately $4 thousand annually in ongoing costs. 
Numbers of this magnitude do not remotely approach the amounts 
necessary to be considered a ``significant economic impact'' on firms 
with revenues of tens of millions of dollars (usually hundreds of 
millions or billions of dollars annually). Accordingly, we have 
determined, and certify, that this proposed rule will not have a 
significant economic impact on a substantial number of small entities 
and that a regulatory flexibility analysis is not required.
    In addition, section 1102(b) of the Social Security Act requires us 
to prepare a regulatory impact analysis if a proposed 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 notice of proposed rulemaking would not 
affect small rural hospitals. Therefore, the Secretary has determined 
that this proposed rule would not have a significant impact on the 
operations of a substantial number of small rural hospitals.

J. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits before issuing any 
proposed 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 proposed 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 proposed rule includes no mandates on State, local, or tribal 
governments. Under the proposed rule, issuers would be required to 
submit rate justification reports for rate increases of 10 percent or 
greater directly to HHS. A State may voluntarily choose to use its 
existing rate review process, if deemed an ``effective rate review 
program,'' to make a determination as to whether a rate increase is 
unreasonable. If a State chooses to review the rate increase, the State 
would be required to submit to HHS the final determination and an 
explanation of its analysis. However, if a State chooses not to do so, 
HHS would review a rate increase subject to review to determine whether 
it is unreasonable. Thus, the law and this regulation do not impose an 
unfunded mandate on States. However, consistent with policy embodied in 
UMRA, this notice for proposed rulemaking 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.

K. 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 HHS' view, while the requirements proposed in this 
notice for proposed rulemaking would not impose substantial direct 
costs on State and local governments, this notice for proposed 
rulemaking has federalism implications due to direct effects on the 
distribution of power and responsibilities among the State and Federal 
governments relating to determining the reasonableness of rate 
increases for coverage that State-licensed health insurance issuers 
offer in the individual and small group markets.
    HHS recognizes that there are federalism implications with regard 
to HHS' evaluation of effective rate review programs and its subsequent 
review of rate increases. Under Subpart C of this proposed rule, HHS 
outlines those criteria that States would have to meet in order to be 
deemed to have an effective rate review program. If HHS determines that 
a State does not meet those criteria, then HHS would review a rate 
increase subject to review to determine whether it is unreasonable. If 
a State does meet the criteria, then HHS would adopt that State's 
determination of whether a rate increase is unreasonable.
    States would continue to apply State law requirements regarding 
rate and policy filings. State rate review processes that are more 
stringent than the Federal requirements would likely be deemed 
effective and satisfy the requirements under this proposed rule. 
Accordingly, States have significant latitude to impose requirements 
with respect to health 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, HHS 
has engaged in efforts to consult with and work cooperatively with 
affected States, including participating in conference calls with and 
attending conferences of the National Association of Insurance 
Commissioners, and consulting with State insurance officials on an 
individual basis.
    Throughout the process of developing this notice of proposed 
rulemaking, HHS has attempted to balance the States' interests in 
regulating health insurance issuers, and Congress' intent to provide 
uniform protections to consumers in every State. By doing so, it is 
HHS' view that it has complied with the requirements of Executive Order 
13132. Under the requirements set forth in section 8(a) of Executive 
Order 13132, and by the signatures affixed to this regulation, HHS 
certifies that the Office of Consumer Information and Insurance 
Oversight has complied with the requirements of Executive Order 13132 
for the attached notice for proposed rulemaking in a meaningful and 
timely manner.

List of Subjects in 45 CFR Part 154

    Administrative practice and procedure, Claims, Health care, Health 
insurance, Health plans, Penalties, Reporting and recordkeeping 
requirements.

    For the reasons set forth in the preamble, the Department of Health 
and Human Services proposes to amend 45 CFR subtitle A, subchapter B, 
by adding a new part 154 to read as follows:

[[Page 81026]]

PART 154--HEALTH INSURANCE ISSUER RATE INCREASES: DISCLOSURE AND 
REVIEW REQUIREMENTS

Subpart A--General Provisions
Sec.
154.101 Basis and scope.
154.102 Definitions.
154.103 Applicability.
Subpart B--Disclosure and Review Provisions
154.200 Rate increases subject to review.
154.205 Unreasonable rate increases.
154.210 Review of rate increases subject to review by HHS or by a 
State.
154.215 Submission of disclosure to HHS for rate increases subject 
to review.
154.220 Timing of preliminary justification.
154.225 Determination by HHS or a State of an unreasonable rate 
increase.
154.230 Submission and posting of final justifications for 
unreasonable rate increases.
Subpart C--Effective Rate Review Programs
154.301 HHS's determinations of effective rate review programs.

    Authority: Section 2794 of the Public Health Service Act (42 
U.S.C. 300gg-94).

Subpart A--General Provisions


Sec.  154.101  Basis and scope.

    (a) Basis. This part implements section 2794 of the Public Health 
Service (PHS) Act.
    (b) Scope. This part establishes the requirements for health 
insurance issuers offering small group or individual health insurance 
coverage to report information concerning unreasonable rate increases 
to the Department of Health and Human Services (HHS). This part further 
establishes the process by which it will be determined whether the rate 
increases are unreasonable rate increases as defined in this part.


Sec.  154.102  Definitions.

    As used in this part:
    Effective rate review program means a State program that HHS has 
determined meets the requirements set forth in Sec.  154.301(a) for the 
relevant market segment in the State.
    Federal medical loss ratio standard means the applicable medical 
loss ratio standard for the State and market segment involved, 
determined under subpart B of 45 CFR part 158.
    Health insurance coverage has the meaning given the term in section 
2791(b)(1) of the PHS Act.
    Health insurance issuer has the meaning given the term in section 
2791(b)(2) of the PHS Act.
    HHS means the Department of Health and Human Services.
    Individual market has the meaning given the term under the 
applicable State's rate filing laws, except that where State law does 
not define the term, it has the meaning given in section 2791(e)(1)(A) 
of the PHS Act.
    Product means a package of health insurance coverage benefits with 
a discrete set of rating and pricing methodologies that a health 
insurance issuer offers in a State.
    Rate increase means an increase of the rates for a specific product 
offered in the individual or small group market.
    Rate increase subject to review means a rate increase that meets 
the criteria set forth in Sec.  154.200.
    Secretary means the Secretary of the Department of Health and Human 
Services.
    Small group market has the meaning given under the applicable 
State's rate filing laws, except that where State law does not define 
the term, it has the meaning given in section 2791(e)(5) of the PHS 
Act; provided, however, that for the purpose of this definition, ``50'' 
employees is substituted for ``100'' employees in the definition of 
``small employer'' under section 2791(e)(4).
    State has the meaning given the term in section 2791(d)(14) of the 
PHS Act.
    Unreasonable rate increase means:
    (1) When HHS is conducting the review required by this part, a rate 
increase that HHS determines is:
    (i) An excessive rate increase;
    (ii) An unjustified rate increase; or
    (iii) An unfairly discriminatory rate increase; as described in 
Sec.  154.205.
    (2) When HHS adopts the determination of a State that has an 
effective rate review program, a rate increase that the State 
determines is excessive, unjustified, unfairly discriminatory, or 
otherwise unreasonable as provided under applicable State law.


Sec.  154.103  Applicability.

    (a) In general. The requirements of this part apply to health 
insurance issuers offering health insurance coverage in the individual 
market and small group market.
    (b) Exceptions. The requirements of this part do not apply to 
grandfathered health plan coverage as defined in 45 CFR Sec.  147.140, 
or to excepted benefits as described in paragraph (1) of subsection (c) 
of section 2791 of the Public Health Service Act, or as described in 
paragraph (2), (3) or (4) of such subsection if the benefits are 
provided under a separate policy, certificate or contract of insurance.

Subpart B--Disclosure and Review Provisions


Sec.  154.200  Rate increases subject to review.

    (a) Rate increases that meet or exceed the following threshold are 
subject to review to determine whether they are unreasonable rate 
increases:
    (1) For rate increases filed in a State on or after July 1, 2011, 
or effective on or after July 1, 2011 in a State that does not require 
rate increases to be filed, a rate increase that is 10 percent or more, 
as calculated under paragraph (b) of this section.
    (2) For rate increases filed in a State during calendar year 2012 
and thereafter, or effective during calendar year 2012 and thereafter 
in a State that does not require rate increases to be filed, any rate 
increase, as calculated under paragraph (b) of this section that meets 
or exceeds:
    (i) State-specific thresholds as determined by the Secretary for 
the applicable calendar year based on the cost of health care and 
health insurance coverage in a State; or
    (ii) 10 percent if an applicable State-specific threshold is not 
established by the Secretary under paragraph (a)(2)(i) of this section. 
The thresholds set forth in paragraph (a)(2)(i) will be published in 
the Federal Register no later than September 15th of the year preceding 
the calendar year in which the threshold applies, beginning in 2012.
    (b) A rate increase meets or exceeds the applicable threshold set 
forth in paragraph (a) of this section if the weighted average increase 
for all enrollees subject to the rate increase meets or exceeds the 
applicable threshold.
    (c) If a rate increase that does not otherwise meet or exceed the 
threshold under paragraph (b) of this section meets or exceeds the 
threshold if combined with a previous increase or increases during the 
12 month period preceding the date on which the rate increase would 
become effective, then the rate increase must be considered to meet or 
exceed the threshold and is subject to review under Sec.  154.210, and 
such review shall include a review of the aggregate rate increases 
during the applicable 12 month period.


Sec.  154.205  Unreasonable rate increases.

    (a) When HHS reviews a rate increase subject to review under Sec.  
154.210(a), HHS will determine that the rate increase is an 
unreasonable rate increase if the increase is an excessive rate 
increase, an unjustified rate increase, or an unfairly discriminatory 
rate increase.

[[Page 81027]]

    (b) The rate increase is an excessive rate increase if the increase 
causes the premium charged for the health insurance coverage to be 
unreasonably high in relation to the benefits provided under the 
coverage. In determining whether the rate increase causes the premium 
charged to be unreasonably high in relationship to the benefits 
provided, HHS will consider:
    (1) Whether the rate increase results in a projected medical loss 
ratio below the Federal medical loss ratio standard in the applicable 
market to which the rate increase applies, after accounting for any 
adjustments allowable under Federal law;
    (2) Whether one or more of the assumptions on which the rate 
increase is based is not supported by substantial evidence; and
    (3) Whether the choice of assumptions or combination of assumptions 
on which the rate increase is based is unreasonable.
    (c) The rate increase is an unjustified rate increase if the health 
insurance issuer provides data or documentation to HHS in connection 
with the increase that is incomplete, inadequate or otherwise does not 
provide a basis upon which the reasonableness of an increase may be 
determined.
    (d) The rate increase is an unfairly discriminatory rate increase 
if the increase results in premium differences between insureds within 
similar risk categories that:
    (1) Are not permissible under applicable State law; or
    (2) In the absence of an applicable State law, do not reasonably 
correspond to differences in expected costs.


Sec.  154.210  Review of rate increases subject to review by HHS or by 
a State.

    (a) Except as provided in paragraph (b) of this section, HHS will 
review a rate increase subject to review to determine whether it is 
unreasonable, as required by this part.
    (b) HHS will adopt a State's determination of whether a rate 
increase is an unreasonable rate increase, if the State:
    (1) Has an effective rate review program as described in Sec.  
154.301; and
    (2) The State provides to HHS, on a form and in a manner prescribed 
by the Secretary, its final determination of whether a rate increase is 
unreasonable, which must include an explanation of how its analysis of 
the relevant factors set forth in Sec.  154.301(a)(3) caused it to 
arrive at that determination, within five business days following the 
State's final determination.
    (c) HHS will post and maintain on its Web site a list of the States 
that meet the requirements of paragraph (b) of this section.


Sec.  154.215  Submission of disclosure to HHS for rate increases 
subject to review.

    (a) For each rate increase subject to review, a health insurance 
issuer must submit a preliminary justification for each product 
affected by the increase on a form and in the manner prescribed by the 
Secretary.
    (b) The preliminary justification must consist of the following 
parts:
    (1) Rate increase summary;
    (2) Written description justifying the rate increase; and
    (3) When HHS is reviewing the rate increase under Sec.  154.210(a), 
rate filing documentation.
    (c) A health insurance issuer must complete and submit parts one 
and two of the preliminary justification described in paragraph (b)(1) 
and (2) of this section to HHS and, as long as the applicable State 
accepts such submissions, to the applicable State, for any rate 
increase subject to review. If a rate increase subject to review is for 
a product offered in the individual market or small group market and 
HHS is reviewing the rate increase under Sec.  154.210(a), then the 
health insurance issuer must also complete and submit part three of the 
preliminary justification described in paragraph (b)(3) of this section 
to HHS only.
    (d) The health insurance issuer may submit a single, combined 
preliminary justification for rate increases subject to review 
affecting multiple products, if the claims experience of all products 
has been aggregated to calculate the rate increases and the rate 
increases are the same across all products.
    (e) Content of rate increase summary. The rate increase summary 
must include the following:
    (1) Historical and projected claims experience;
    (2) Trend projections related to utilization, and service or unit 
cost;
    (3) Any claims assumptions related to benefit changes;
    (4) Allocation of the overall rate increase to claims and non-
claims costs;
    (5) Per enrollee per month allocation of current and projected 
premium;
    (6) Current loss ratio and projected loss ratio;
    (7) Three year history of rate increases for the product associated 
with the rate increase; and
    (8) Employee and executive compensation data from the health 
insurance issuer's annual financial statements.
    (f) Content of written description justifying the rate increase. 
The written description of the rate increase must include a simple and 
brief narrative describing the data and assumptions that were used to 
develop the rate increase and include the following:
    (1) Explanation of the rating methodology;
    (2) Explanation of the most significant factors causing the rate 
increase, including a brief description of the relevant claims and non-
claims expense increases reported in the rate increase summary; and
    (3) Brief description of the overall experience of the policy, 
including historical and projected expenses, and loss ratios.
    (g) Content of rate filing documentation. (1) The rate filing 
documentation supports the information required under paragraphs (d) 
and (e) of this section. This documentation must be sufficient to 
permit HHS to conduct a review to determine whether the rate increase 
is an unreasonable rate increase and must include the following:
    (i) Description of the type of policy, benefits, renewability, 
general marketing method and issue age limits;
    (ii) Scope and reason for the rate increase;
    (iii) Average annual premium per policy, before and after the rate 
increase;
    (iv) Past experience, and any other alternative or additional data 
used;
    (v) A description of how the rate increase was determined, 
including the general description and source of each assumption used;
    (vi) The cumulative loss ratio and a description of how it was 
calculated;
    (vii) The projected future loss ratio and a description of how it 
was calculated;
    (viii) The projected lifetime loss ratio that combines cumulative 
and future experience, and a description of how it was calculated;
    (ix) Federal medical loss ratio standard in the applicable market 
to which the rate increase applies, accounting for any adjustments 
allowable under Federal law; and
    (x) If the result under paragraph (g)(1)(vii) of this section is 
less than the standard under paragraph (g)(1)(ix) of this section, a 
justification for this outcome.
    (2) If the health insurance issuer is also required to submit a 
rate filing to a State in connection with the rate increase under State 
law, HHS will accept a copy of the filing provided that the filing 
includes all of the information described in paragraph (g)(1)(i) 
through paragraph (g)(1)(x) of this section.
    (h) In the event the level of detail provided by the issuer for the 
information under paragraph (g) of this section does not provide 
sufficient basis

[[Page 81028]]

for HHS to determine whether the rate increase is an unreasonable rate 
increase, HHS will request the additional information necessary to make 
its determination. The health insurance issuer must provide the 
requested information to HHS within five business days following its 
receipt of the request.
    (i) Posting of the disclosure on the HHS Web site.
    (1) HHS will promptly make available to the public on its Web site 
the information contained in parts one and two of each preliminary 
justification.
    (2) HHS will make available to the public on its Web site the 
information contained in part three of each preliminary justification 
after its receipt thereof.
    (i) HHS will post any information contained in part three of the 
preliminary justification that is not designated as ``confidential'' as 
defined in HHS's Freedom of Information Act regulations, 45 CFR 5.65.
    (ii) HHS will make a determination as to whether to post 
information designated as ``confidential'' under the standards and 
procedure set forth in 45 CFR 5.65, and will post that information only 
after making a determination that it is subject to disclosure as 
provided by 45 CFR 5.65.
    (3) HHS will include the following disclaimer on its Web site with 
information made available to the public under this paragraph (i):

    ``The preliminary justification is the initial summary 
information regarding the rate increase subject to review and does 
not represent a determination that the rate increase subject to 
review is an unreasonable rate increase.''


Sec.  154.220  Timing of preliminary justification.

    A health insurance issuer must submit a preliminary justification 
for all rate increases subject to review that are filed in a State on 
or after July 1, 2011, or effective on or after July 1, 2011 in a State 
that does not require the rate increase subject to review to be filed, 
as follows:
    (a) If a State requires that a proposed rate increase be filed with 
the State prior to the implementation of the rate, the health insurance 
issuer must submit to HHS and the applicable State the preliminary 
justification on the date on which the health insurance issuer submits 
the proposed rate increase to the State.
    (b) For all other States, the health insurance issuer must submit 
to HHS and the State the preliminary justification prior to the 
implementation of the rate increase.


Sec.  154.225  Determination by HHS or a State of an unreasonable rate 
increase.

    (a) When HHS receives a preliminary justification for a rate 
increase subject to review and HHS reviews the rate increase under 
Sec.  154.210(a), HHS will determine whether the rate increase is an 
unreasonable rate increase.
    (1) HHS will post on its Web site its final determination and a 
brief explanation of its analysis within five business days following 
its final determination.
    (2) If HHS determines that the rate increase is an unreasonable 
rate increase, HHS will also provide its final determination and brief 
explanation to the health insurance issuer within five business days 
following its final determination.
    (b) If a State conducts a review under Sec.  154.210(b), HHS will 
adopt the State's determination of whether a rate increase is 
unreasonable and post on the HHS Web site the State's final 
determination described in Sec.  154.210(b)(2).
    (c) If a State determines that the rate increase is an unreasonable 
rate increase and the health insurance issuer is legally permitted to 
implement the unreasonable rate increase under applicable State law, 
HHS will provide the State's final determination and brief explanation 
to the health insurance issuer within five business days following 
HHS's receipt thereof.


Sec.  154.230  Submission and posting of final justifications for 
unreasonable rate increases.

    (a) If a health insurance issuer receives from HHS a final 
determination by HHS or a State that a rate increase is an unreasonable 
rate increase, and the health insurance issuer declines to implement 
the rate increase or chooses to implement a lower increase, the health 
insurance issuer must submit to HHS timely notice that it will not 
implement the rate increase or that it will implement a lower increase 
on a form and in the manner prescribed by the Secretary.
    (b) If a health insurance issuer implements a lower increase as 
described in paragraph (a) of this section and the lower increase does 
not meet or exceed the applicable threshold under Sec.  154.200, such 
lower increase is not subject to this part. If the lower increase meets 
or exceeds the applicable threshold, the health insurance issuer must 
submit a new preliminary justification under this part.
    (c) If a health insurance issuer implements a rate increase 
determined by HHS or a State to be unreasonable, the health insurance 
issuer must, within the later of 10 days after the implementation of 
such increase or the health insurance issuer's receipt of HHS's final 
determination that a rate increase is an unreasonable rate increase:
    (1) Submit to HHS a final justification in response to HHS's or the 
State's final determination, as applicable. The information in the 
final justification must be consistent with the information submitted 
in the preliminary justification supporting the rate increase; and
    (2) Prominently post on its Web site the following information on a 
form and in the manner prescribed by the Secretary:
    (i) The information made available to the public by HHS and 
described in Sec.  154.215(i);
    (ii) HHS's or the State's final determination and brief explanation 
described in Sec.  154.225(a) and Sec.  154.210(b)(2), as applicable; 
and
    (iii) The health insurance issuer's final justification for 
implementing an increase that has been determined to be unreasonable by 
HHS or the State, as applicable.
    (3) The health insurance issuer must continue to make this 
information available to the public on its Web site for at least three 
years.
    (d) HHS will post all final justifications on the HHS Web site. 
This information will remain available to the public on the HHS Web 
site for three years.

Subpart C-Effective Rate Review Programs


Sec.  154.301  HHS's determinations of effective rate review programs.

    (a) Effective rate review program. The purpose of an effective rate 
review program as set forth in this section is to determine whether a 
rate increase is an unreasonable rate increase. In evaluating whether a 
State has an effective rate review program, HHS will apply the 
following criteria for the review of rates for the small group market 
and the individual market, and also, as applicable depending on State 
law, the review of rates for different types of products within those 
markets:
    (1) The State receives from issuers data and documentation in 
connection with rate increases that are sufficient to conduct the 
examination described in paragraph (a)(3) of this section.
    (2) The State conducts an effective and timely review of the data 
and documentation submitted by a health insurance issuer in support of 
a proposed rate increase.
    (3) The State's rate review process includes an examination of:

[[Page 81029]]

    (i) The reasonableness of the assumptions used by the health 
insurance issuer to develop the proposed rate increase and the validity 
of the historical data underlying the assumptions; and
    (ii) The health insurance issuer's data related to past projections 
and actual experience.
    (4) The examination must include an analysis of:
    (i) The impact of medical trend changes by major service 
categories;
    (ii) The impact of utilization changes by major service categories;
    (iii) The impact of cost-sharing changes by major service 
categories;
    (iv) The impact of benefit changes;
    (v) The impact of changes in enrollee risk profile;
    (vi) The impact of any overestimate or underestimate of medical 
trend for prior year periods related to the rate increase;
    (vii) The impact of changes in reserve needs;
    (viii) The impact of changes in administrative costs related to 
programs that improve health care quality;
    (ix) The impact of changes in other administrative costs;
    (x) The impact of changes in applicable taxes, licensing or 
regulatory fees;
    (xi) Medical loss ratio; and
    (xii) The health insurance issuer's risk-based capital status 
relative to national standards.
    (5) The State's determination of whether a rate increase is 
unreasonable is made under a standard that is set forth in State 
statute or regulation.
    (b) HHS will determine whether a State has an effective rate review 
program for each market based on documentation and information received 
from the State or any other information otherwise available to HHS that 
its rate review program meets the criteria described in paragraph (a) 
of this section.
    (c) HHS reserves the right to determine that a State no longer has 
an effective rate review program if HHS determines that the State no 
longer satisfies the criteria set forth in paragraph (a) of this 
section.

    Dated: December 16, 2010.
Jay Angoff,
Director, Office of Consumer Information and Insurance Oversight.
    Approved: December 16, 2010.
Kathleen Sebelius,
Secretary.
[FR Doc. 2010-32143 Filed 12-21-10; 8:45 am]
BILLING CODE 4150-03-P