[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
[[Page 81006]]
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
[[Page 81007]]
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