[Federal Register Volume 76, Number 136 (Friday, July 15, 2011)]
[Proposed Rules]
[Pages 41930-41956]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-17609]



[[Page 41929]]

Vol. 76

Friday,

No. 136

July 15, 2011

Part III





Department of Health and Human Services





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45 CFR Part 153





Patient Protection and Affordable Care Act; Standards Related to 
Reinsurance, Risk Corridors and Risk Adjustment; Proposed Rule

  Federal Register / Vol. 76 , No. 136 / Friday, July 15, 2011 / 
Proposed Rules  

[[Page 41930]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

45 CFR Part 153

[CMS-9975-P]
RIN 0938-AR07


Patient Protection and Affordable Care Act; Standards Related to 
Reinsurance, Risk Corridors and Risk Adjustment

AGENCY: Department of Health and Human Services.

ACTION: Proposed rule.

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SUMMARY: This proposed rule would implement standards for States 
related to reinsurance and risk adjustment, and for health insurance 
issuers related to reinsurance, risk corridors, and risk adjustment 
consistent with title I of the Patient Protection and Affordable Care 
Act as amended by the Health Care and Education Reconciliation Act of 
2010, referred to collectively as the Affordable Care Act. These 
programs will mitigate the impact of potential adverse selection and 
stabilize premiums in the individual and small group markets as 
insurance reforms and the Affordable Insurance Exchanges 
(``Exchanges'') are implemented, starting in 2014. The transitional 
State-based reinsurance program serves to reduce the uncertainty of 
insurance risk in the individual market by making payments for high-
cost cases. The temporary Federally-administered risk corridor program 
serves to protect against uncertainty in the Exchange by limiting the 
extent of issuer losses (and gains). On an ongoing basis, the State-
based risk adjustment program is intended to provide adequate payments 
to health insurance issuers that attract high-risk populations (such as 
individuals with chronic conditions).

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. Eastern Standard 
Time (E.S.T.) on September 28, 2011.

ADDRESSES: In commenting, please refer to file code CMS-9975-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (Fax) transmission.
    You may submit comments in one of four ways (please choose only one 
of the ways listed):
    1. Electronically. You may submit electronic comments on this 
regulation to http://www.regulations.gov. Follow the instructions under 
the ``More Search Options'' tab.
    2. By regular mail. You may mail written comments to the following 
address only: Centers for Medicare & Medicaid Services, Department of 
Health and Human Services, Attention: CMS-9975-P, P.O. Box 8010, 
Baltimore, MD 21244-8010.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments to 
the following address only: Centers for Medicare & Medicaid Services, 
Department of Health and Human Services, Attention: CMS-9975-P, Mail 
Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments before the close of the comment period 
to either of the following addresses:
    a. For delivery in Washington, DC: Centers for Medicare & Medicaid 
Services, Department of Health and Human Services, Room 445-G, Hubert 
H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC 
20201.
    (Because access to the interior of the Hubert H. Humphrey Building 
is not readily available to persons without Federal government 
identification; commenters are encouraged to leave their comments in 
the CMS drop slots located in the main lobby of the building. A stamp-
in clock is available for persons wishing to retain a proof of filing 
by stamping in and retaining an extra copy of the comments being 
filed.)
    b. For delivery in Baltimore, MD: Centers for Medicare & Medicaid 
Services, Department of Health and Human Services, 7500 Security 
Boulevard, Baltimore, MD 21244-1850.
    If you intend to deliver your comments to the Baltimore address, 
please call telephone number (410) 786-9994 in advance to schedule your 
arrival with one of our staff members.
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    Submission of comments on paperwork requirements. You may submit 
comments on this document's paperwork requirements by following the 
instructions at the end of the ``Collection of Information 
Requirements'' section in this document.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: 
Sharon Arnold at (301) 492-4415 for general information.
Wakina Scott at (301) 492-4393 for matters related to reinsurance and 
risk corridors.
Kelly O'Brien at (301) 492-4399 for matters related to risk adjustment.
Grace Arnold at (301) 492-4272 for matters related to the collection of 
information requirements.
Brigid Russell at (301) 492-4421 for matters related to the summary of 
preliminary regulatory impact analysis.

Abbreviations:

Affordable Care Act--The collective term for the Patient Protection 
and Affordable Care Act (Pub. L. 111-148) and the Health Care and 
Education Reconciliation Act of 2010 (Pub. L. 111-152)
CMS Centers for Medicare & Medicaid Services
HHS U.S. Department of Health and Human Services
HIPAA Health Insurance Portability and Accountability Act of 1996 
(Pub. L. 104-191)
MLR Medical Loss Ratio
PHS Act Public Health Service Act (42 U.S.C. 201 et seq.)
QHP Qualified Health Plan

SUPPLEMENTARY INFORMATION: 
    Submitting Comments: We welcome comments from the public on all 
issues set forth in this proposed rule to assist us in fully 
considering issues and developing policies. Comments will be most 
useful if they are organized by the section of the proposed rule to 
which they apply. You can assist us by referencing the file code [CMS-
9975-P] and the specific ``issue identifier'' that precedes the section 
on which you choose to comment.
    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 electronic 
comments received before the close of the comment period on the 
following public Web site as soon as possible after they have been 
received: http://www.regulations.gov. Follow the search instructions on 
that Web site to view public comments. Comments received timely will be 
available for public inspection as they are received, generally 
beginning approximately 3 weeks after publication of a document, at 
Room 445-G, Department of Health and Human Services, Hubert H. Humphrey 
Building, 200 Independence Avenue, SW., Washington, DC 20201, Monday 
through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an 
appointment to view public comments, call 1-800-743-3951.

[[Page 41931]]

Table of Contents

I. Background
    A. Legislative Overview
    B. Introduction
II. Provisions of the Proposed Regulation
    A. Subpart A--General Provisions
    B. Subpart B--State Notice of Insurance Benefits and Payment 
Parameters
    C. Subpart C--State Standards for the Transitional Reinsurance 
Program for the Individual Market
    D. Subpart D--State Standards for the Risk Adjustment Program
    E. Subpart E--Health Insurance Issuer Standards Related to the 
Transitional Reinsurance Program
    F. Subpart F--Health Insurance Issuer Standards Related to the 
Temporary Risk Corridor Program
    G. Subpart G--Health Insurance Issuer Standards Related to the 
Risk Adjustment Program
III. Collection of Information Requirements
IV. Summary of Preliminary Regulatory Impact Analysis
V. Regulatory Flexibility Act
VI. Unfunded Mandates
VII. Federalism
VIII. Regulations Text

I. Background

A. Legislative Overview

    Starting in 2014, individuals and small businesses will be able to 
purchase private health insurance through State-based competitive 
marketplaces called Affordable Insurance Exchanges, or ``Exchanges.'' 
Exchanges will offer Americans competition, choice, and clout. 
Insurance companies will compete for business on a level playing field, 
driving down costs. Consumers will have a choice of health plans to fit 
their needs. And Exchanges will give individuals and small businesses 
the same purchasing clout as big businesses. The Departments of Health 
and Human Services, Labor, and the Treasury (the Departments) are 
working in close coordination to release guidance related to Exchanges 
in several phases. The first in this series was a Request for Comment 
relating to Exchanges, published in the Federal Register on August 3, 
2010. Second, Initial Guidance to States on Exchanges was issued on 
November 18, 2010. Third, a proposed rule for the application, review, 
and reporting process for waivers for State innovation was published in 
the Federal Register on March 14, 2011. Fourth, two proposed 
regulations, including this one, are published in this issue of the 
Federal Register to implement components of the Exchange and health 
insurance premium stabilization policies in the Affordable Care Act.
    Section 1341 of the Affordable Care Act provides that each State 
must establish a transitional reinsurance program to help stabilize 
premiums for coverage in the individual market during the first three 
years of Exchange operation (2014-2016). Section 1342 provides that the 
Secretary must establish a transitional risk corridor program that will 
apply to the qualified health plans in the individual and small group 
markets for the first three years of Exchange operation (2014-2016). 
Section 1343 provides that each State may establish a program of risk 
adjustment for all non-grandfathered plans in the individual and small 
group market both inside and outside of the Exchange. These risk-
spreading mechanisms, which will be implemented by the Secretary and 
the States, are designed to mitigate the potential impact of adverse 
selection and provide stability for health insurance issuers in the 
individual and small group markets.
    Section 1321(a) also provides broad authority for the Secretary to 
establish standards and regulations to implement the statutory 
requirements related to Exchanges, reinsurance, risk adjustment, and 
other components of title I of the Affordable Care Act. Section 
1321(a)(2) requires, in issuing such regulations, the Secretary to 
engage in stakeholder consultation in a way that ensures balanced 
representation among interested parties. We describe the consultation 
activities the Secretary has undertaken later in this introduction. 
Section 1321(c)(1) authorizes the Secretary to establish Exchanges and 
implement reinsurance, risk adjustment and other components of title I 
of the Affordable Care Act in States that have not done so.

B. Introduction

    Underpinning the goals of high-quality, affordable health insurance 
coverage is the need to minimize the possible negative effects of 
adverse selection. Adverse selection occurs when each new health 
insurance purchaser understands his or her own potential health risk 
better than health insurance insurers do, and health insurance issuers 
are therefore less able to accurately price their products.
    To avoid adverse selection, issuers may set premiums higher than 
necessary in order to offset the potential expense of high-cost 
enrollees. This uncertainty could also result in an issuer being more 
cautious about offering certain plan designs in the Exchange. This risk 
will be greatest in the first years of the Exchange, and become less as 
the new market matures and issuers learn more about new enrollees.
    As experience in States has shown, offsetting the adverse selection 
from insurance reforms may be best accomplished by broadening the risk 
pool: making coverage affordable through lower premiums and targeted 
financial assistance and making coverage a responsibility so that 
people pay premiums in sickness and in health. In addition, to minimize 
the negative effects of adverse selection and foster a stable 
marketplace from year one, the Affordable Care Act establishes 
transitional reinsurance and temporary risk corridor programs, and a 
permanent risk adjustment program to provide payments to health 
insurance issuers that cover higher-risk populations and to more evenly 
spread the financial risk borne by issuers.
    The transitional reinsurance program and temporary risk corridor 
program, which begin in 2014, are designed to provide issuers with 
greater payment stability as insurance market reforms are implemented. 
The reinsurance program, which is a State-based program, will reduce 
the uncertainty of insurance risk in the individual market by making 
payments for high-cost cases. This program will attenuate individual 
market rate increases that might otherwise occur because of the 
immediate enrollment of individuals with unknown health status, 
potentially including, at the State's discretion, those currently in 
State high risk pools. The risk corridor program, which is a Federally-
administered program, will protect against uncertainty in setting rates 
in the Exchange by limiting the extent of issuer losses (and gains). 
Under the risk corridor program, an issuer of a qualified health plan 
(QHP) plan whose gains are greater than three percent of the issuer's 
projections must remit charges to HHS, while HHS must make payments to 
an issuer of a QHP plan that experiences losses greater than three 
percent of the issuer's projections. On an ongoing basis, the risk 
adjustment program is intended to provide adequate payments to health 
insurance issuers that attract high-risk populations (such as those 
with chronic conditions). Under this program, generally, funds are 
transferred from issuers with lower risk enrollees to issuers with 
higher risk enrollees. Section 1343 indicates that the Secretary may 
utilize criteria and methods similar to the criteria and methods 
utilized under part C or D of title XVIII of the Social Security Act. 
Proposed standards for these critical programs are addressed in this 
proposed rule. The chart below summarizes theses programs:

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               Program                       Reinsurance             Risk corridors          Risk adjustment
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What.................................  Provides funding to      Limit issuer loss (and   Transfers funds from
                                        plans that enroll        gains).                  lowest risk plans to
                                        highest cost                                      highest risk plans.
                                        individuals.
Program Oversight....................  State or State Option    HHS....................  State Option in a State-
                                        if no State-Run                                   Run Exchange.
                                        Exchange.
Who Participates.....................  All issuers and TPAs     Qualified Health Plans   Non-grandfathered
                                        contribute funding;      (QHPs).                  individual and small
                                        non-grandfathered                                 group market plans,
                                        individual market                                 inside and outside the
                                        plans (inside and                                 Exchange.
                                        outside the Exchange)
                                        are eligible for
                                        payments.
When.................................  Throughout the year      After reinsurance and    After end of benefit
                                        2014-2016.               risk adjustment 2014-    year 2014 and
                                                                 2016.                    subsequent years.
Why..................................  Offsets high cost        Protect against          Protects against
                                        outliers.                inaccurate rate-         adverse selection.
                                                                 setting.
Time Frame...........................  3 years (2014-2016)....  3 years (2014-2016)....  Permanent.
----------------------------------------------------------------------------------------------------------------

    On August 3, 2010, HHS published a Request for Comment (RFC) 
inviting the public to provide input regarding the rules that will 
govern the Exchanges and related functions such as reinsurance and risk 
adjustment. In particular, HHS asked States, tribal representatives, 
consumer advocates, employers, issuers, and other interested 
stakeholders to comment on the types of standards Exchanges and related 
functions should be required to meet. The comment period closed on 
October 4, 2010. In this proposed rule, we do not directly respond to 
comments from the RFC; however, we generally describe the comments 
received at the beginning of each subpart and refer to them, where 
applicable, when discussing specific regulatory proposals. We intend to 
respond to comments from the RFC, along with comments received on this 
proposed rule, as part of the final rule. We also plan to disseminate 
parameters that will rely on factors that may change each year, such as 
the national reinsurance contribution rate and the Federally-certified 
risk adjustment model, in an annually updated Federal notice of benefit 
and payment parameters. In addition to the RFC, we have consulted with 
stakeholders through weekly meetings with the National Association of 
Insurance Commissioners, regular contact with States that received 
Exchange planning grants, and meetings with tribal representatives, 
health insurance issuers, trade groups, consumer advocates, employers, 
and other interested parties.

II. Provisions of the Proposed Regulation

A. Subpart A--General Provisions

1. Basis and Scope (Sec.  153.10)
    Section 153.10(a) of subpart A specifies that the general statutory 
authority for the standards proposed in part 153 are based on the 
following sections of title I of the Affordable Care Act: sections 1321 
and 1341-1343. Section 153.10(b) specifies that this part establishes 
standards for the establishment and operation of a transitional 
reinsurance program, temporary risk corridors, and a permanent risk 
adjustment program.
2. Definitions (Sec.  153.20)
    Under Sec.  153.20, we set forth definitions for terms that are 
used throughout part 153. Many of the definitions presented in Sec.  
153.20 are taken directly from the Affordable Care Act, from existing 
regulations, or from Sec.  155.20 of the notice of proposed rulemaking 
entitled ``Patient Protection and Affordable Care Act; Establishment of 
Exchanges and Qualified Health Plans,'' published in this issue of the 
Federal Register. New definitions were created for the purposes of 
carrying out regulations proposed in part 153. When a term is defined 
in part 153 other than in subpart A, the definition of the term is 
applicable only to the relevant subpart or section. The application of 
the terms defined in this section is limited to this proposed rule.
    Specifically, several terms are defined by the Affordable Care Act, 
including ``individual market'' (section 1304(a)(2)), ``qualified 
health plan'' (section 1301(a)(1)), and ``health plan'' (section 
1301(b)(1)). The definition for an ``Exchange'' is drawn from the 
statutory text in section 1311(d)(1) and 1311(d)(2)(A). The term 
``State'' is also taken directly from section 1304(d) of the Affordable 
Care Act to mean the 50 States and the District of Columbia.
    Some definitions were taken from other interim final regulations 
issued pursuant to the Affordable Care Act, including the term 
``grandfathered plan'' from Sec.  147.140. The definitions for the 
terms ``group health plan,'' ``health insurance issuer,'' and ``health 
insurance coverage'' are cross-referenced to the definitions 
established in Sec.  144.103. The definitions for the terms 
``enrollee,'' ``benefit year,'' and ``small group market'' are cross-
referenced to the definitions in the notice of proposed rulemaking 
entitled ``Patient Protection and Affordable Care Act; Establishment of 
Exchanges and Qualified Health Plans,'' published in this issue of the 
Federal Register. Other definitions used throughout this proposed rule 
are established for specific purposes. For example, the terms 
``applicable reinsurance entity,'' ``contributing entity,'' and 
``reinsurance-eligible plan'' relate to reinsurance programs, while the 
term ``risk adjustment covered plan'' relates to the risk adjustment 
program.

B. Subpart B--State Notice of Insurance Benefits and Payment Parameters

    In this subpart, we propose a process by which the States that are 
operating an Exchange or establishing a reinsurance program issue an 
annual notice to disseminate information to issuers and other 
stakeholders about specific requirements to support payment-related 
functions. This notice may also be a mechanism to address updates to 
other Exchange-related provisions proposed elsewhere that impact 
payment and benefit design. This provides a practical way to update 
certain payment and benefit factors that may change annually, such as 
reinsurance contribution rates that are based on annually changing 
thresholds.
1. Establishment of State insurance benefits and payment parameters 
(Sec.  153.100)
    In Sec.  153.100(a), we propose that a State operating an Exchange, 
as well as a State establishing a reinsurance program, issue an annual 
notice to describe the specific parameters that the State will employ 
if that State intends to utilize any reinsurance or risk adjustment 
parameters that differ from those specified in the forthcoming annual 
Federal notice of benefit and payment parameters. We believe the

[[Page 41933]]

information contained in the State notice should be provided one year 
in advance of the benefit year so that issuers may account for any 
updates in their design and review of plan benefits and in establishing 
and reviewing rates. As such, in paragraph (b), we propose specific 
deadlines for the State notice, if it intends on modifying Federally-
proposed parameters, which will be tied to a forthcoming annual Federal 
notice of benefit and payment parameters, upon which the public will 
have an opportunity to comment. Below are charts detailing the 
schedules for the forthcoming annual Federal notice of benefit and 
payment parameters for 2014 and subsequent years, with the first two 
dates occurring in the calendar year two years before the effective 
date.

         Annual Federal Notice of Benefit and Payment Parameters
------------------------------------------------------------------------
 
------------------------------------------------------------------------
HHS publishes advance notice...........  Mid-October.
Comment period ends....................  Mid-November.
HHS publishes final notice.............  Mid-January.
------------------------------------------------------------------------

    We propose that States that plan to modify Federal parameters issue 
their notice by early March in the calendar year before the effective 
date. We understand that States may have their own timelines for public 
notice; this proposed requirement sets an outer bound for the final 
notice to be issued by a State that intends to utilize any reinsurance 
or risk adjustment parameters that differ from those specified in the 
forthcoming annual Federal notice of benefit and payment parameters. We 
seek comment on whether the proposed timing allows issuers sufficient 
time to reflect these State requirements in setting rates. In 
particular, we seek comment as to whether the schedule should be 
adjusted in the initial year to provide issuers additional time for 
setting rates for 2014.
    We also propose in paragraph (c) that if a State operating an 
Exchange or establishing a reinsurance program does not provide public 
notice of its intent to have State-specific parameters for any 
provision within the period specified in paragraph (b) of this section, 
the parameters set forth in the forthcoming annual Federal notice of 
benefits and payment parameters will serve as the State parameters.
2. Standards for the State Notice (Sec.  153.110)
    In paragraph (a)(1), we propose that content related to the 
reinsurance program include the data requirements and data collection 
frequency for health insurance issuers to receive reinsurance payment. 
In paragraph (a)(2), we propose that the State specify the attachment 
point, reinsurance cap, and coinsurance rate if the State plans to use 
different values than those set forth in the forthcoming annual Federal 
notice of benefit and payment parameters. In paragraph (a)(3), we 
propose that if a State plans to use more than one reinsurance entity, 
the State must include in the notice information related to the 
geographic boundaries of each applicable reinsurance entity and 
estimates related to the number of enrollees, payments, and premiums 
available for contributions in each region. We note that the 
forthcoming annual Federal notice of benefit and payment parameters 
will provide States with estimates for these values at the State level.
    In paragraph (b), we propose content related to the risk adjustment 
program if the State intends to modify the risk adjustment parameters 
set forth in the forthcoming annual Federal notice of benefits and 
payment parameters, including a detailed description of and rationale 
for any modification. Specifically, the State description of 
modifications should include: the methodology for determining average 
actuarial risk, including the establishment of risk pools and the 
Federally-certified risk adjustment model; and the risk adjustment data 
validation methodology.

C. Subpart C--State Standards for the Transitional Reinsurance Program 
for the Individual Market

    Section 1341 of the Affordable Care Act provides that a 
transitional reinsurance program is established in each State to help 
stabilize premiums for coverage in the individual market during the 
years 2014 through 2016. Under this provision, all health insurance 
issuers, and third-party administrators on behalf of self-insured group 
health plans, must make contributions to a not-for-profit reinsurance 
entity to support reinsurance payments to individual market issuers 
that cover high-cost individuals, except for high-cost individuals in 
grandfathered individual market health plans. As a basis for 
reinsurance payments, the law directs the Secretary to develop a list 
of 50 to 100 medical conditions to identify high-cost individuals or to 
identify alternative methods for payment in consultation with the 
American Academy of Actuaries (AAA). In this subpart, we codify section 
1341 of the Affordable Care Act as it relates to establishing a 
reinsurance program. Related standards on health insurance issuers with 
respect to reinsurance are proposed in subpart E.
    We identified three critical policy goals of the transitional 
reinsurance program. First, the transitional reinsurance program should 
offer protection to health insurance issuers against medical cost 
overruns for high-cost enrollees in the individual market, particularly 
those that are newly insured or those with previously excluded 
conditions, thereby allowing issuers to set lower premiums.
    Second, a transitional reinsurance program should permit early and 
prompt payment of reinsurance funds during the benefit year to help 
offset the potential high costs of health insurance issuers early in 
the benefit year. This objective is particularly important since the 
two other risk sharing protections against adverse selection--risk 
adjustment and risk corridors--are likely to be calculated after the 
end of the benefit year.
    Third, the transitional reinsurance program should require minimal 
administrative burden since it is a temporary program. Given the short-
term nature of the program, the costs of setting up and administering 
this program must be commensurate with its benefits over the three-year 
window.
    We received a number of comments on the transitional reinsurance 
program in response to the RFC. Multiple respondents emphasized that, 
although underlying conditions are referenced in the Affordable Care 
Act with respect to the reinsurance provisions, reinsurance programs 
typically do not consider the health status of the individual. Health 
insurance issuers seek traditional reinsurance to protect against 
unusually high medical cost of enrollees during a coverage year. 
Generally, reinsurance is not tied to underlying conditions that lead 
to high enrollee medical costs but to high claims costs beyond a 
specific dollar threshold within a coverage period, regardless of 
health condition.
    Several commenters asserted that coverage of specific conditions 
under a reinsurance program could lead to discriminatory practices 
toward certain individuals, with one commenter noting that identifying 
medical conditions as a basis for reinsurance payments requires a level 
of verification beyond that of traditional reinsurance. Another 
commenter contended that traditional reinsurance that makes payments 
based solely on incurred costs does not encourage efficient and 
effective care.
    We considered all of these comments in the development of this 
subpart, along with commenter suggestions on entities that could serve 
as the

[[Page 41934]]

applicable reinsurance entity for a State. As explained more fully 
below, we believe that States should have discretion to make a number 
of decisions within the proposed standards, including the 
appropriateness of any specific entity as an administrator of the 
reinsurance program.
1. Definitions (Sec.  153.200)
    In Sec.  153.200, we propose several definitions that are critical 
to the establishment of a properly functioning transitional reinsurance 
program. We define an ``attachment point'' as the threshold dollar 
amount of costs incurred by a health insurance issuer for payment of 
essential health benefits provided for an enrolled individual, after 
which threshold, the costs for covered essential health benefits are 
eligible for reinsurance payments. The definition of ``essential health 
benefits'' will be proposed in future rulemaking. We define 
``coinsurance rate'' as the rate at which the applicable reinsurance 
entity will reimburse the health insurance issuer for costs incurred to 
cover essential health benefits after the attachment point and before 
the reinsurance cap. We define the ``reinsurance cap'' as the threshold 
dollar amount for costs incurred by a health insurance issuer for 
payment of essential health benefits provided for an enrolled 
individual, after which threshold, the costs for covered essential 
health benefits are no longer eligible for reinsurance payments. In 
order to ensure reinsurance payments are made on a comparable set of 
benefits, we propose that payments be calculated for costs to cover the 
essential health benefits package. We solicit comments on alternatives 
to the use of the essential health benefits package.
    We define ``contribution rate'' as the rate, based on a percent of 
premium, used to determine the dollar amounts each health insurance 
issuer and third party administrator, on behalf of a self-insured group 
health plan, must contribute to a State reinsurance program. We define 
the ``percent of premium'' as the percent of total revenue, based on 
earned premiums as described in Sec.  158.130(a), in all fully-insured 
markets (inside and outside of the Exchange) or the percent of total 
medical expenses in a self-insured market. Part 158 describes standards 
for health insurance issuers implementing the medical loss ratio 
requirements under section 2718 of the PHS Act. Finally, we define 
``third party administrator'' as the claims processing entity for a 
self-insured group health plan. As such, if a self-insured group health 
plan processes its own claims, the self-insured plan will be considered 
a third-party administrator for the purpose of the reinsurance program.
2. State Establishment of a Reinsurance Program (Sec.  153.210)
    In Sec.  153.210, we describe standards for States regarding the 
establishment of a reinsurance program. We propose in paragraph (a) 
that each State that elects to operate an Exchange must also establish 
a reinsurance program as required by the law. In paragraph (a)(1), we 
codify section 1341(a) of the Affordable Care Act, which requires that 
such States must either enter into a contract with an existing 
applicable reinsurance entity or establish an applicable reinsurance 
entity to carry out the provisions for the reinsurance program 
discussed in this subpart. We believe the statute allows State 
flexibility in selecting an applicable reinsurance entity and do not 
propose more specific guidelines.
    The Affordable Care Act also allows States to set up more than one 
reinsurance entity, although this option may increase administrative 
costs. We propose in paragraph (a)(2) that, for any State that chooses 
to have more than one reinsurance entity, the State must publish in a 
State notice, described in Sec.  153.110, information regarding the 
geographic divisions between the applicable entities. We further 
interpret the statute to imply that the geographic divisions of the 
applicable reinsurance entities must be distinct and, together, cover 
the entire individual market in the State and not just certain areas or 
populations. In paragraph (a)(3), we propose to allow the State to 
permit a reinsurance entity to subcontract administrative functions, 
provided that the State reviews and approves these subcontracted 
arrangements as described in paragraph (a)(4). We interpret the statute 
to allow flexibility in the performance of administrative functions, 
with the understanding that the responsible party must be the 
applicable reinsurance entity.
    We propose in paragraph (a)(5) that the establishment of, or 
contract with, the applicable reinsurance entity must extend for a 
sufficient period to ensure that the entity can fulfill all reinsurance 
requirements for all benefit years through 2016 and any activities 
required to be undertaken in subsequent periods. Any State in which 
contributions remain to be disbursed for benefit years beyond 2016 must 
ensure that an applicable reinsurance entity is available for required 
payment activities for additional benefit years. When establishing or 
contracting with an applicable reinsurance entity, States must 
establish sufficient time to pay reinsurance claims after 2016. This 
time cannot extend past December 31, 2018 as described in section 
1341(b)(4) of the Affordable Care Act.
    We clarify in paragraph (b) that there may be situations in which 
an applicable reinsurance entity operates a reinsurance program for 
more than one State. In other words, several States may contract with 
one reinsurance entity, but that entity must maintain separate risk 
pools for each State's reinsurance programs. In such cases, we consider 
each contract to be an individual reinsurance arrangement between a 
specific State and the applicable reinsurance entity.
    We propose in paragraph (c) to allow a State that does not elect to 
establish an Exchange to operate its own reinsurance program. Under 
this circumstance, the State will be required to carry out the 
provisions of this subpart. In paragraph (d), we propose that, if a 
State does not elect to establish an Exchange and does not determine to 
operate its own reinsurance program, HHS will establish the reinsurance 
program to perform all the reinsurance functions for that State. These 
functions would include the collection of all contributions described 
in Sec.  153.220, including funds required to operate and administer 
the applicable reinsurance functions. In paragraph (e), we propose that 
each State that establishes an Exchange or operates a reinsurance 
program must ensure that each applicable reinsurance entity complies 
with all provisions of this subpart and with subpart E.
3. Collection of Reinsurance Contribution Funds (Sec.  153.220)
    In Sec.  153.220, we describe standards for how States must ensure 
that the reinsurance entity collects reinsurance contribution funds. 
Section 1341 provides for the collection of contribution funds to cover 
all reinsurance payments and also permits the collection of funds to 
cover administrative costs incurred by the applicable reinsurance 
entity. These contribution funds must be collected by the reinsurance 
entity from all health insurance issuers and third party administrators 
on behalf of self-insured plans. The aggregate contribution funds for 
purposes of making reinsurance payments are specified as $10 billion in 
2014, $6 billion in 2015, and $4 billion in 2016 as described in 
section 1341(b)(3)(B)(iii). None of these funds can be used for any 
purpose other than paying reinsurance or administering the reinsurance 
programs. The aggregate

[[Page 41935]]

contribution funds would be returned to those issuers that qualify for 
the transitional reinsurance program. In paragraph (a)(1), we codify 
the aggregate contribution amounts.
    The statute also requires that the reinsurance entity collect 
specified additional contribution funds for deposit into the general 
fund of the U.S. Treasury. The additional contribution funds to the 
general fund are set at $2 billion in calendar years 2014 and 2015, and 
$1 billion in 2016 as described in section 1341(b)(3)(B)(iv). The 
Congressional Budget Office considered the additional contributions to 
score as an offset for the costs of administering the Early Retiree 
Reinsurance Program within the 10 year budget window, however, these 
funds will not be used to directly pay for ERRP costs. In paragraph 
(a)(2), we codify these additional contribution amounts.
    Although the transitional reinsurance program is State-based, 
section 1341(b)(3) sets contribution levels for the program on a 
national basis. We considered two approaches by which to collect 
contribution funds: (1) Use of a national uniform contribution rate, 
and (2) use of a State-level allocation, both set by HHS to ensure that 
the sum of all contribution funds equals the national amounts set forth 
in statute. In paragraph (b) we propose the first approach to collect 
contribution funds for amounts listed in paragraph (a)(1) and (a)(2). 
Use of a national contribution rate is a simpler approach. Further, 
since there is significant uncertainty about Exchange enrollment, the 
overall health of the enrolled population, and the cost of care for new 
enrollees, we believe that a national contribution rate would be the 
less ambiguous approach of the two. All contribution funds collected by 
a State establishing a reinsurance program, using the national 
contribution rate, will stay in that State and be used to make 
reinsurance payments on valid claims submitted by reinsurance-eligible 
plans in that State. A State-level allocation would be more complex to 
administer. We solicit comments regarding whether to use a State-level 
allocation or a national rate.
    There are two methods we considered for determining contributions 
using a national rate: (1) A percent of premium amount applied to all 
contributing entities, and (2) a flat per capita amount applied to all 
covered enrollees of contributing entities. In paragraph (b)(1), we 
propose the percent of premium method as the fairest method by which to 
collect these contributions, as it allows States that tend to have 
higher premium and health care costs, and thus reinsurance claims, to 
collect additional funds towards reinsurance. A flat, per capita amount 
could represent an excessively high percent of premium for products 
that are designed and intended to have low premiums targeted toward a 
population such as young adults and children. HHS will establish the 
percentage through a forthcoming annual Federal notice of benefit and 
payment parameters, based on its estimate of total premiums in the 
fully insured market and medical expenses in the self-insured market. 
We invite comments regarding the preferred method for calculating 
health insurance issuer contribution funds using a national rate.
    In paragraph (b)(2), we also propose that all contribution funds 
collected for reinsurance payments must be used for reinsurance, and 
all contribution funds collected for the U.S. Treasury must be paid to 
the U.S. Treasury. In paragraph (b)(3)(i), we propose that a State may 
collect more than its amount collected in the national rate, if the 
State believes that these amounts are not sufficient to cover the 
payments it will make under the payment formula. Nothing in the 
Affordable Care Act precludes a State from supplementing this program. 
In paragraph (b)(3)(ii), we also propose that a State may collect more 
than its amount collected at the national rate to cover the 
administrative costs of the applicable reinsurance entity.
    We have also considered the frequency by which applicable 
reinsurance entities should collect contribution funds from 
contributing entities. For example, applicable reinsurance entities 
could collect contribution funds intended for reinsurance payments and 
payments to the U.S. Treasury on a monthly basis beginning in January 
2014 so that reinsurance payments could begin in February 2014. We 
invite comments on the most appropriate method and frequency to collect 
reinsurance contribution funds.
4. Calculation of Reinsurance Payments (Sec.  153.230)
    As required, in Sec.  153.230 we set the payment policy for the 
reinsurance program based upon consultation with the AAA. The 
reinsurance payment policy addresses two basic issues: (1) How to 
determine the individuals who are covered by reinsurance, and (2) how 
to determine appropriate payment amounts. Given the short-term nature 
of the program, our primary objective is to select an implementation 
approach that is administratively and operationally simple, but 
satisfies the goals of the program. Therefore, we would use reliable 
and readily accessible data sources that would allow health insurance 
issuers to receive prompt payment. We propose in paragraph (a) of this 
section that coverage be based on items and services within the 
essential health benefits for an individual enrollee that exceeds an 
attachment point. We invite comments regarding this proposed provision 
or if we should allow reinsurance payment for more generous coverage 
beyond that provided by essential health benefits.
    In paragraph (b), we propose to announce the reinsurance payment 
formula and State-specific values for the attachment point, reinsurance 
cap, and coinsurance rate in the forthcoming annual Federal notice of 
benefits and payment parameters. We believe that publishing this 
information in a Federal notice is the best approach for announcing the 
attachment point and reinsurance cap as these values may change in 
years 2015 and 2016. The Affordable Care Act does not suggest that the 
three-year reinsurance program should replace commercial reinsurance or 
internal risk mitigation strategies. There will be a continued need for 
ongoing commercial reinsurance. Therefore, we propose establishing a 
reinsurance cap set at the attachment point of traditional reinsurance. 
We seek comment on this approach.
    In paragraph (b)(1), we propose that the reinsurance payment amount 
be a percentage of those costs above an attachment point and below a 
reinsurance cap. However, we believe States may have unique situations 
and recommend allowing a State that runs the reinsurance program to 
establish its own payment formula by varying the attachment point, 
coinsurance rate, and reinsurance cap. The reasoning for the policy 
proposed in paragraph (b)(1) follows below, along with a discussion of 
some operational issues related to the timing of reinsurance payments.
    In our consultation, AAA laid out a number of different ways to 
implement the reinsurance payment provisions. A letter outlining this 
issue can be found on their Web site at https://www.actuary.org/pdf/health/Reinsurance%20Options%209%2022%202010.pdf. With respect to the 
determination of who will be covered, AAA identified four possible 
approaches:
    (1) Identification of individuals with specific conditions based on 
claims data.
    (2) Identification of individuals with specific conditions based on 
survey data.
    (3) Identification of high-risk individuals using risk adjustment 
data

[[Page 41936]]

and a condition-based risk adjustment model.
    (4) Identification of reinsurance-eligible individuals based on 
medical cost to the health insurance issuer for covered benefits.
    The last option, which we propose to adopt, focuses on all high-
cost enrollees without respect to the conditions that caused the 
increased cost. This approach would be most familiar to health 
insurance issuers and administratively less burdensome than the first 
and second options. Data will be immediately available and dependent 
only on health insurance issuers filing proof of payment for claims. 
While the third option might mitigate some of the burden and cost 
concerns, it would not eliminate the timing issues that are critical to 
effective reinsurance implementation. In 2014, we will be able to 
collect reliable condition information only for those conditions that 
are diagnosed during that benefit year. In other words, condition-based 
reinsurance will not be a predictive model until at least 2015 due to 
lack of sufficient and timely data. As a result, we found all of the 
condition-based approaches to eligibility identification to be 
considerably more burdensome in comparison to the medical cost approach 
without significant improvement in outcomes from a determination 
standpoint. We solicit comments for a suitable method for ensuring that 
issuer costs are appropriate and accurate.
    With respect to the decision on how to calculate payments, AAA 
discussed the following two principal approaches:
    (1) Payments for costs incurred above an attachment point.
    (2) Fixed payment schedule for specific conditions.
    The first option, payment for costs incurred above an attachment 
point, aligns compensation with cost by reimbursing health insurance 
issuers that have enrollees in the individual market who actually 
experience higher health costs. We propose this approach, which 
represents a more traditional view of reinsurance. It is also 
consistent with the Early Retiree Reinsurance Program. Health insurance 
issuers are eligible for reinsurance payments only when costs are in 
excess of a certain level. The proposed approach is simpler from an 
operational perspective; the only data required to implement it will be 
cost and claims data for individuals. This approach also works in 
tandem with the medical-cost method of determining eligibility.
    The fixed payment schedule option, which we are not proposing to 
adopt, has the effect of paying the same amount for all individuals who 
present with a specific condition regardless of actual enrollee cost. 
This method assumes that high-cost individuals incurring highest costs 
across plans are of equal care mix and does not make distinctions. This 
method also penalizes issuers that attract more individuals with higher 
disease burden within disease categories, and thus may be less 
effective in mitigating the actual financial impact of adverse 
selection.
    In sum, we propose using medical cost experience only to identify 
eligible enrollees for which health insurance issuers would receive 
reinsurance. Accordingly, we also propose to use the attachment point 
approach for determining payment. As described by AAA, an attachment 
method for calculating reinsurance payments considers costs only for 
high-risk individuals and may reduce incentives for health insurance 
issuers to control costs. However, use of a reinsurance cap, as well as 
the requirement for health insurance issuer coinsurance rate above the 
attachment point and below the cap, may incentivize health insurance 
issuers to control costs. We invite comment regarding the best method 
of determining payments for the reinsurance program, which can relate 
to either our criteria for selecting eligible enrollees for payment or 
the method for calculating the payment amounts.
    We propose in Sec.  153.230(b)(2) that all payments to the general 
fund of the U.S. Treasury be made in a manner specified in the 
forthcoming annual Federal notice of benefits and payment parameters. 
We have also considered the frequency for which payments should be made 
to the U.S. Treasury. For example, the applicable reinsurance entities 
could remit payment on a monthly or quarterly basis commencing February 
28, 2014, continuing through January 31, 2017 or until States have 
remitted the full amount of all payments. We invite comment as to the 
most appropriate frequency and method for applicable reinsurance 
entities to remit payment to the U.S. Treasury.
    We propose in Sec.  153.230(c) to allow some degree of State 
variation from the reinsurance parameters proposed by HHS. The 
Affordable Care Act contemplates the potential of modifications to the 
payment parameters through a statutory reference to ``model 
regulation'' as opposed to strict Federal regulation. Therefore, we 
propose in paragraph (c)(1) that the State may alter the attachment 
point, reinsurance cap, including elimination of the cap, and 
coinsurance rate. We propose in paragraph (c)(2) that States must 
publish any modification to the reinsurance payment formula and 
parameters in a State notice as described in Sec.  153.110 of this 
part. We propose in paragraph (c)(3) that the State must ensure that 
all proposed alterations to the reinsurance formulas proposed by HHS, 
including payments and contributions, result in the applicable 
reinsurance entity having sufficient contributions to meet of all of 
its obligations for payments. Such alterations to reinsurance 
parameters do not require HHS approval.
    We believe that a State may have many reasons to make adjustments 
to the HHS reinsurance payment formula. First, the State may determine 
to increase the reinsurance benefit above the level established by HHS. 
Second, the State may have additional unexpended funds from a prior 
contribution period and may seek to adjust the reinsurance formulas to 
disburse the unexpended funds. Third, the State may elect to pay the 
same amounts recommended by HHS, but may wish to make those payments 
either earlier or later in the medical cost experience. Finally, the 
State may decide to vary the annual amounts without varying the total 
across all three years.
5. Disbursement of Reinsurance Payments (Sec.  153.240)
    In Sec.  153.240, we propose parameters for the timing of 
reinsurance payments. In paragraph (a) of this section, we propose that 
States must ensure that the applicable reinsurance entity collects from 
health insurance issuers of reinsurance-eligible plans data required to 
calculate payments described in Sec.  153.230, according to the data 
requirements and data collection frequency specified by the State in 
the notice described in Sec.  153.110 or in the forthcoming annual 
Federal notice of benefit and payment parameters.
    Since we are proposing that reinsurance eligibility and payments be 
based on the health insurance issuer medical costs, we believe that a 
standard method of collecting the required information should be a 
reasonable goal and easily achievable. Further, a standard method will 
enable multi-State health insurance issuers to submit data promptly 
without causing disruption for any single-State health insurance 
issuer.
    In paragraph (b), we propose that the State must ensure that each 
applicable reinsurance entity makes payments that do not exceed 
contributions and makes payments to health insurance issuers of 
reinsurance-eligible plans according to Sec.  153.230. We also propose 
in paragraph

[[Page 41937]]

(b)(2) to allow States to reduce payments on a pro rata basis to match 
the amount of contributions received by the State in a given 
reinsurance year. Any pro rata reductions made by the State must be 
made in a fair and equitable manner for all health insurance issuers in 
the individual market.
    In paragraph (b)(3), we propose that the State must ensure that an 
applicable reinsurance entity makes payments as specified in Sec.  
153.410(b) to the issuer of a reinsurance-eligible plan after receiving 
a valid claim for payment. We invite comments as to the most 
appropriate timeframe that an applicable reinsurance entity should make 
payments for reinsurance claims submitted, particularly, since 
reinsurance claims may exceed contributions for a given month, but not 
total projected contributions for the entire year.
    We have also considered deadlines by which a health insurance 
issuer could submit a claim for a given reinsurance benefit year. For 
example, Medicare Part D has a requirement for data submission within 6 
months after the end of the coverage year, and we believe this is an 
appropriate standard. We seek comment as to whether the deadline for 
health insurance issuers for submitting reinsurance claims should be 
the same or different.
    A standard deadline would allow for an orderly completion of the 
payment processes that depend upon reinsurance, specifically the risk 
corridors program and the medical loss ratio (MLR) reporting to support 
the rebate calculations in section 2718 of the PHS Act. Health 
insurance issuers must know the value of their reinsurance payments and 
must report that value to HHS under the risk corridor and MLR reporting 
provisions. Failure to establish a standard deadline could result in 
excessive delays in the completion of the rebate calculations under 
section 2718 of the PHS Act. Such delays would in turn delay receipt of 
rebate payments by the affected enrollees. We invite comment on the use 
of a standard deadline and the most appropriate deadline considering 
the interaction of the reinsurance program with risk corridor and the 
MLR process.
    Finally, in paragraph (c), we propose that for each benefit year, 
the State maintains all records related to the reinsurance program for 
10 years, consistent with requirements for record retention under the 
False Claims Act. We solicit comments on this record retention 
requirement.
5. Coordination With High-Risk Pools (Sec.  153.250)
    In Sec.  153.250, we codify the requirement under section 1341(d) 
of the Affordable Care Act that States shall eliminate or modify high 
risk pools to the extent necessary to carry out the reinsurance 
program. As stated in the introduction to this subpart, the reinsurance 
program required under the Affordable Care Act is designed to help 
mitigate adverse selection risks in the first three years of Exchange 
operation. In paragraph (a), we codify the above-referenced section. In 
paragraph (b), we propose to allow a State that continues its high risk 
pool to coordinate its high risk pool with its reinsurance program to 
the extent it conforms to the provisions of this subpart. We seek 
comment regarding whether a high risk pool that continues operation 
after January 1, 2014 should be considered an individual market plan 
eligible for reinsurance under this provision.

D. Subpart D--State Standards Related to the Risk Adjustment Program

    In subpart D, we propose standards for States with respect to the 
risk adjustment program required under section 1343 of the Affordable 
Care Act. Parallel provisions on health plans are proposed in subpart G 
of this subpart. Section 1343 provides for a program of risk adjustment 
for all non-grandfathered plans in the individual and small group 
market both inside and outside of the Exchange. Under this provision, 
the Secretary, in consultation with the States, must establish criteria 
and methods to be used by States in determining the actuarial risk of 
plans within a State. States electing to operate an Exchange, or HHS on 
behalf of States not electing to operate an Exchange, will assess 
charges to plans that experience lower than average actuarial risk and 
use them to make payments to plans that have higher than average 
actuarial risk. Thus, the risk adjustment program is intended to reduce 
or eliminate premium differences between plans based solely on 
expectations of favorable or unfavorable risk selection or choices by 
higher risk enrollees in the individual and small group market. The 
risk adjustment program also serves to level the playing field inside 
and outside of the Exchange, reducing the potential for excessive 
premium growth or instability within the Exchange.
    We received a variety of comments on the risk adjustment process in 
response to the RFC. Many commenters expressed strong opinions about 
the extent of Federal oversight in risk adjustment and the level of 
flexibility afforded States for developing a risk adjustment model and 
how much to rely on current prospective models being used, for example, 
in Medicare Advantage or concurrent risk adjustment models being used.
    We also received comments related to data standards and the role of 
the Federal government. Commenters noted difficulties in obtaining 
certain types of data accurately and expressed concerns about audit 
requirements. Commenters discussed upcoding problems, as well as issues 
of credibility of the underlying systems to support risk adjustment. 
Commenters also raised issues related to the transition both to the 
Exchanges and the risk adjustment program, with the primary issue being 
the timing of claims data availability in the early years of the 
program. Some States indicated that they are developing ``all payer 
claims databases,'' although not all of these databases are expected to 
be complete by 2014. However, even existing ``all payer'' databases 
will not contain any data from the currently uninsured individuals, who 
are expected to comprise a segment of new individual market enrollees.
    Overall, we believe that States have discretion to make a number of 
decisions within the standards we propose herein.
1. Definitions (Sec.  153.300)
    We propose several definitions that are specifically applicable to 
this subpart in Sec.  153.300. First, we distinguish between risk 
adjustment models and risk adjustment methodologies. We define ``risk 
adjustment model'' as an actuarial tool used to predict health plan 
costs based on the relative actuarial risk of enrollees in risk 
adjustment covered plans, which we had previously defined as non-
grandfathered plans in the individual and small group market. We define 
``risk adjustment methodology'' as the specific set of procedures used 
to determine average actuarial risk.
    A ``Federally-certified risk adjustment methodology'' is a risk 
adjustment methodology that has been developed and promulgated by HHS 
or has been certified by HHS. As explained further in Sec.  153.330, 
States may use a modified methodology if it has been certified by HHS 
and deemed a Federally-certified risk adjustment methodology. An 
``alternate risk adjustment methodology'' is a risk adjustment 
methodology proposed by one or more States for use in place of the 
Federally-certified risk adjustment methodology, not yet certified by 
HHS. Additionally, we define ``risk pool'' as the population

[[Page 41938]]

across which risk is distributed in risk adjustment.
2. Risk Adjustment Administration (Sec.  153.310)
    Section 1343(a) of the Affordable Care Act establishes that States 
must assess risk adjustment charges and provide risk adjustment 
payments based on plan actuarial risk as compared to a State average. 
We interpret this provision to mean that risk pools must be aggregated 
at the State level, even if a State decides to utilize regional 
Exchanges. Furthermore, section 1343(c) indicates that risk adjustment 
applies to individual and small group market health insurance issuers 
of non-grandfathered plans within a State, both inside and outside of 
the Exchange. Accordingly, similar to our approach in reinsurance, if 
multiple States contract with a single entity to administer risk 
adjustment, risk may not be combined across State lines, but must be 
pooled at the individual State-level.
    In this section, in paragraph (a)(1), we specify that any State 
electing to establish an Exchange is eligible to establish a risk 
adjustment program. Pursuant to section 1321(a)(1)(D) of the Affordable 
Care Act, we propose in paragraph (a)(2) that for States that do not 
operate an Exchange, HHS will establish a risk adjustment program. We 
also clarify in (a)(3) that HHS will administer all of the risk 
adjustment functions for any State that elects to establish an Exchange 
but does not elect to administer risk adjustment. In paragraph (b), we 
clarify that the State may elect to have an entity other than the 
Exchange perform the risk adjustment functions of this subpart provided 
that the selected entity meets the requirements for eligibility to 
serve as the Exchange proposed in Sec.  155.110 of the notice of 
proposed rulemaking entitled, ``Patient Protection and Affordable Care 
Act; Establishment of Exchanges and Qualified Health Plans.''
    In paragraph (c), we propose timeframes for completion of the risk 
adjustment process. We propose that all payment calculations must 
commence with the 2014 benefit year. The Affordable Care Act does not 
explicitly set forth a timeframe by which risk adjustment programs must 
start. However, we believe risk adjustment must be coordinated with 
reinsurance and risk corridors to help stabilize the individual and 
small group markets and ensure the viability of the Exchanges, which 
begin in 2014. Timely completion of the risk adjustment process is 
important because risk adjustments affect calculations of both risk 
corridors and the rebates specified under section 2718 of the PHS Act. 
By law, HHS will be performing the risk corridors calculations for all 
qualified health plans (QHP) in all States. Therefore, we seek comment 
on the appropriate deadline by which risk adjustment must be completed. 
For example, HHS may require that States complete risk adjustment 
activities by June 30 of the year following the benefit year. This 
timing assumes at least a three-month lag from items and services 
furnished in a benefit year and the end of the data collection period. 
This approach is similar to the Medicare Advantage (Part C) risk 
adjustment data submission, in which the annual deadline for risk 
adjustment data submission is 2-months after the end of the 12-month 
benefit period, but may, at CMS's discretion, include a 6-month lag 
time.
    Since risk adjustment is designed as a budget neutral activity, 
States would likely need to receive remittances from issuers of low 
actuarial risk plans before making payments to issuers of high 
actuarial risk plans. We seek comment on an appropriate timeframe for 
State commencement of payments.
    To ensure the each State's risk adjustment program is functioning 
properly, we believe that States should provide HHS with a summary 
report of risk adjustment activities for each benefit year in the year 
following the calendar year covered in the report. The summary report 
should include the average actuarial risk score for each plan, 
corresponding charges or payments, and any additional information HHS 
deems necessary to support risk adjustment methodology determinations. 
We seek comment on the requirements for such reports, including data 
elements and timing.
3. Federally-Certified Risk Adjustment Methodology (Sec.  153.320)
    Section 1343(b) of the Affordable Care Act requires HHS to 
establish criteria and methods for risk adjustment in coordination with 
the States. We interpret this provision to mean that HHS will establish 
a baseline methodology to be used by a State, or HHS on behalf of the 
State, in determining average actuarial risk. To fulfill the terms of 
that basic requirement, we propose in paragraph (a)(1) a Federally-
certified risk adjustment methodology that will be developed and 
authorized by HHS. Section 1343 indicates that the Secretary may 
utilize criteria and methods similar to the criteria and methods 
utilized under part C or D of title XVIII of the Social Security Act. 
We seek to minimize issuer burden and will leverage existing processes 
of part C and D wherever appropriate while recognizing the differences 
in market demographics in determining methodologies.
    We considered proposing a requirement that all States utilize a 
Federally-certified risk adjustment methodology that was developed and 
promulgated by HHS. However, we recognize that States may have 
alternative methods that can achieve similar results. We also know that 
some States have already implemented risk adjustment models for 
programs such as Medicaid. We believe that the terms ``methods and 
criteria'' in the Affordable Care Act can be interpreted to allow 
certain levels of State variation provided that States meet basic 
Federal standards. Therefore, we propose in paragraph (a)(2) that a 
State-submitted alternative risk adjustment methodology may become a 
Federally-certified risk adjustment methodology through HHS 
certification. States that would like to use other methodologies should 
view the Federally-certified risk adjustment methodology as a 
comparative standard for their alternate risk adjustment methodologies. 
A State's alternate risk adjustment methodology should offer similar or 
better performance in that State than the Federally-certified risk 
adjustment methodology as determined based on the criteria set forth in 
Sec.  153.330(a)(2). After HHS approves a State alternative risk 
adjustment methodology, that methodology is considered a Federally-
certified risk adjustment methodology.
    We propose in paragraph (b) of this section that a State that is 
operating a risk adjustment program must use one of the Federally-
certified risk adjustment methodologies that HHS will publish in a 
forthcoming annual Federal notice of benefit and payment parameters or 
that has been published by the State in that State's annual notice, as 
described in Sec.  153.110(b). These notices will include a full 
description of the risk adjustment model, including but not limited to: 
demographic factors, diagnostic factors, and utilization factors if 
any; the qualifying criteria for establishing that an individual is 
eligible for a specific factor; the weights assigned to each factor; 
the data required to support the model; and information regarding the 
deadlines for data submission and the schedule for risk adjustment 
factor determination. We seek comments on other information that should 
be included in this notice.
    In paragraph (b)(2), we propose that the risk adjustment 
methodology will also describe any adjustments made to

[[Page 41939]]

the risk adjustment model weights when calculating average actuarial 
risk, including premium rating variation. Under section 2701 of the PHS 
Act as amended by the Affordable Care Act, issuers may vary rates 
within defined maximum ranges based on age and tobacco use. Plans may 
also vary rates by geographic rating area and family size. An approach 
is needed to account for this allowed variation in rating so that risk 
adjustment does not adjust for the actuarial risk that issuers have 
been allowed to incorporate into their premium rates.
    We invite comments on possible approaches to achieving the stated 
policy goals. In particular, we request comments on the implications of 
approaches for market efficiency, potential incentives created in how 
issuers set rates, and how approaches address allowed rating variation 
for age, family size, and tobacco use. We request comments on other 
approaches to determining average actuarial risk and whether links 
exist between potential actuarial risk methodology and potential 
payments and charges methodology as described in Sec.  153.345. We also 
request comments on the extent of State flexibility that should be 
allowed in adopting an approach to determine average actuarial risk.
    In paragraph (c), we propose that HHS will specify in a forthcoming 
annual Federal notice of benefit and payment parameters the Federally-
certified risk adjustment methodology that will apply when the Federal 
government operates the risk adjustment program in States that do not 
elect to operate an Exchange, or that elect to operate an Exchange but 
not a risk adjustment program.
    To assist States in assessing a potential alternate risk adjustment 
methodology, HHS will publish the basic standards any alternate risk 
adjustment methodology must meet in the forthcoming annual Federal 
notice of benefit and payment parameters that contains the details of 
one or more Federally-certified risk adjustment methodologies. These 
standards will likely include the minimum number or types of factors 
that must be included and the statistical metrics the models will be 
expected to achieve. Prior to that formal publication of standards, and 
as part of the development of the Federally-certified methodologies and 
associated standards for alternate risk adjustment methodologies, HHS 
will consult with States regarding its development and the minimum 
standards for alternate risk adjustment methodologies. States may use 
information from the consultation process to either develop their own 
methodologies or decide to utilize the Federally-certified risk 
adjustment methodology.
    The statute is not specific with respect to the method by which 
States are expected to determine the precise value of payments and 
charges. We believe the payments and charges methodology should 
mitigate the financial impact of adverse selection on risk adjustment 
covered plans, while limiting overall issuer uncertainty. We have 
identified two methods that may achieve those goals--multiplying plan 
average actuarial risk by the State average normalized premiums and 
multiplying plan average actuarial risk by the specific premiums 
collected for each plan. To determine the precise value of payments and 
charges using State average normalized premiums, plan average premiums 
are first normalized to the actuarial value of their benefits by 
dividing each plan's premiums by the plan's actuarial value. This step 
is necessary because plan premiums reflect differences in the benefits 
and administration, including actuarial value.
    Next, States would use these normalized average premiums as the 
basis for the State normalized average premiums, weighted by enrollee 
months, for all plans in a specific risk pool. The State normalized 
average premium represents the premium that will be used in the charges 
and payments calculation. Next, the amount by which a plan's average 
actuarial risk deviates from the state average actuarial risk is 
calculated. This deviation in actuarial risk is multiplied by the State 
normalized average premium, the plan's enrollee months, and the plan's 
actuarial value.
    The alternative methodology uses plan-specific premiums as the 
basis for calculating the gross plan charges and gross plan payments, 
assuming that health plan premiums reflect State average actuarial risk 
and the expectation that risk adjustment accounts for favorable or 
adverse selection. Under this methodology, the deviation in actuarial 
risk is multiplied by the aggregated plan premiums to determine the 
gross plan charges and total plan payments that should be collected 
from or disbursed to health plans through risk adjustment. We request 
comment on the validity of these assumptions, including the two methods 
described, and any alternative methods that could be used to calculate 
payments and charges that would reduce uncertainty for plans. Finally, 
we request comment on any intentional and unintentional consequences 
from the use of either methodology.
    Due to premium variance, we expect inequalities between payments 
and charges, which could result in aggregate surpluses or deficits if a 
simple collection of gross plan charges and disbursement of gross plan 
payments is implemented. We have identified at least three methods for 
adjusting gross calculations when gross plan payments are greater than 
gross plan charges: decrease plan payments on a prorated basis to equal 
plan charges; increase plan charges on a prorated basis to equal plan 
payments; or split the shortfall between high-risk and low-risk plans 
and pro-rating in both directions. We also identified two methods for 
when gross plan charges are greater than the sum of gross plan 
payments: reducing gross plan charges on a prorated basis such that the 
net plan charges are sufficient to cover total plan payments; and 
putting excess plan charges in a reserve account that would provide a 
margin of error to ensure that all necessary payments can be covered by 
charges.
    We request comment on these methodologies and whether there are 
alternative methodologies that might be used, including their 
strengths, limitations, intentional or unintentional consequences and 
any links that exist between the payments and charges methodology and 
the actuarial risk methodology.
4. State Alternate Risk Adjustment Methodologies (Sec.  153.330)
    We interpret the statutory provision regarding the Secretary's 
establishment of criteria and methods for risk adjustment under section 
1343(b) to require substantive Federal oversight of the risk adjustment 
process. Accordingly, while we propose to allow States to utilize 
alternate risk adjustment methodologies, we also propose in paragraph 
(a) of Sec.  153.330 that States taking advantage of this flexibility 
must submit their proposed alternate risk adjustment methodologies for 
HHS review and certification.
    As outlined in paragraph (a)(1), the State request must include 
certain information about the State's proposed risk adjustment 
methodology. As noted in paragraph (a)(1)(i), any request must identify 
the risk pools to which the methodology will apply. Paragraph 
(a)(1)(ii) also indicates that the proposed risk adjustment methodology 
must include a full description of the risk adjustment model, 
consisting of: factors employed in the model; weights associated with 
each factor; the data collection method; the schedule for data 
collection and risk adjustment factor calculation; and the calibration

[[Page 41940]]

methodology. HHS will also review the relevant statistical performance 
metrics of the model, such as R-squared or predictive ratios, which 
indicates the predictive power of the model. If the State wants to use 
a Federally-certified risk adjustment model but with State-specific 
weights, retaining all other characteristics of that model, the State 
would only need to provide the State-specific weights and a description 
of the calibration methodology, as well as an attestation that all 
other model attributes will be implemented consistently with the 
Federally-certified methodology.
    As with the Federally-certified risk adjustment methodology, the 
schedule for collection and submission of data and calculation of 
factors are critical success elements for any State-proposed alternate 
risk adjustment methodology. If a State proposes to deviate from the 
Federally-certified methodology with respect to these elements, HHS 
expects to evaluate a State proposed alternate risk adjustment 
methodology to ensure that the proposed approach will meet HHS goals 
for the risk adjustment program.
    We propose in paragraph (a)(1)(iii) that States must describe any 
adjustments they propose to make to the risk adjustment model weights 
when determining average actuarial risk. We expect that States will 
also incorporate a rating factor into the proposed risk adjustment 
methodology.
    In paragraph (a)(2), we propose that all requests be evaluated 
against criteria that HHS establishes for risk adjustment 
methodologies. Alternate risk adjustment methodologies should be 
evaluated based on the extent to which the methodology: accurately 
explains cost variation within a given population; chooses risk factors 
that are clinically meaningful to providers; encourages favorable 
behavior and discourages unfavorable behavior; uses data that is 
complete, high in quality and available in a timely fashion; provides 
stable risk scores over time and across plans; and minimizes 
administrative burden. This criteria is based on the principles that 
guided the creation of the hierarchical condition categories (HCC) 
model used in Medicare's risk adjustment program, as well as criteria 
described by AcademyHealth in its 2004 risk assessment paper (see 
http://www.hcfo.org/pdf/riskadjustment.pdf) and criteria described by 
the American Academy of Actuaries in its 2010 risk adjustment paper 
(see http://www.actuary.org/pdf/health/Risk_Adjustment_Issue_Brief_Final_5-26-10.pdf).
    To ensure the stability and predictability of payments, we 
contemplated proposing that requests must be submitted to HHS no later 
than early November in the calendar year two years before the effective 
date. HHS recognizes that health insurance issuers must have detailed 
information about risk adjustment prior to setting rates for any 
benefit year because the risk adjustment methodology will affect both 
the total value of premiums received after accounting for payments and 
charges, as well as health plan administrative costs. Therefore, under 
this scenario, HHS would evaluate the proposed alternate risk 
adjustment methodologies submitted within the required timeframes and 
notify States within 60 days, at the time of the publication of the 
forthcoming annual Federal notice of benefits and payment parameters 
whether such methodologies have been certified. In this scenario, if 
HHS approves an alternate risk adjustment methodology, such a 
methodology would be considered a Federally-certified risk adjustment 
methodology and could be implemented in the State that proposed the 
methodology as well as any other State that elects to implement an 
Exchange.
    We recognize that the above contemplated timeframe requires States 
to submit requests for alternate methodology certification only 30 days 
after the advance annual Federal notice of benefit and payment 
parameters and prior to publication of the final annual Federal notice 
of benefit and payment parameters. However, we believe any advantage in 
allowing States additional time would be offset by a lesser ability to 
leverage State alternative models and inadequate time for issuers to 
reflect methodology decisions in setting rates. We seek comments 
regarding our contemplated timeline and potential alternatives for 
States to request submissions for alternate risk adjustment 
methodology.
    In paragraph (b), we propose that States that operate a risk 
adjustment program must renew HHS certification of alternate risk 
adjustment methodologies whenever changes occur, including at the time 
of recalibration, which the State must identify when initially 
requesting certification for the alternate risk adjustment model. The 
proposed requirements for describing an update to a certified risk 
adjustment model are the same as those for the initial model. The State 
must describe any change to the model between the last certified 
version and the recalibrated version. For example, if the only change 
was to the schedule for data submission, then the State would need to 
provide that update when seeking certification. Additionally, we 
propose that States send a notification if they intend to use the 
certified alternate risk adjustment model with no changes to any of the 
basic parameters. We expect to use this certification process to ensure 
that States make updates to their alternate risk adjustment 
methodologies at reasonable intervals.
5. Data Collection Under Risk Adjustment (Sec.  153.340)
    As described above, a robust risk adjustment process requires data 
to support the determination of an individual's risk score and the 
corresponding plan and State averages. In paragraph (a) we propose that 
a State, or HHS on behalf of the State, is responsible for collecting 
the data for use in determining individual risk scores.
    HHS considered three possibilities for data collection: (1) A 
centralized approach in which issuers submit raw claims data sets to 
HHS; (2) an intermediate State-level approach in which issuers submit 
raw claims data sets to the State government, or the entity responsible 
for administering the risk adjustment process at the State level; and 
(3) a distributed approach in which each issuer must reformat its own 
data to map correctly to the risk assessment database and then pass on 
self-determined individual risk scores and plan averages to the entity 
responsible for assessing risk adjustment charges and payments.
    A fully distributed approach would leverage existing 
infrastructures established to support Exchanges. A distributed 
approach also keeps individual-level data with the issuers, eliminating 
privacy risks related to transmission. However, there is reason to be 
concerned that some issuers would make errors in calculating individual 
risk scores and plan averages. Furthermore, we believe that the 
complicated nature of a distributed risk adjustment model may prove 
challenging for some issuers, especially smaller issuers and would thus 
require significant involvement by the State, or HHS on behalf of the 
State. In addition, this approach would require issuers to be able to 
respond to multiple queries to support other functions, such as data to 
recalibrate the Federally-certified risk adjustment model, reconciling 
cost-sharing reductions payments, verifying risk corridor submissions, 
or auditing cost-sharing reductions or reinsurance payments. We seek 
comment on use of this data for auditing purposes. We believe the 
proposed intermediate approach would result in the most

[[Page 41941]]

complete, actuarially sound risk adjustment methodology and provides 
support for other functions that also require encounter level data, 
while maintaining State flexibility. We recognize this approach may 
raise concerns related to consumer privacy and standard submission 
formats. Accordingly, we propose national standards to address each of 
these issues. We seek comment on the proposed approach, as well as 
comments on the potential advantages and disadvantages of the 
alternative approaches.
    We propose in paragraph (b) that States, or HHS on behalf of the 
State, use standard HIPAA transaction standards for data collection. We 
note that HIPAA provides measures to achieve cost savings through 
administrative simplification. As described in Health Insurance Reform: 
Standards for Electronic Transactions, ``The purpose of this part is to 
improve the efficiency and effectiveness of the health care system, by 
encouraging the development of a health information system through the 
establishment of standards and requirements to enable the electronic 
exchange of certain health information.'' (65 FR 50312) ``We estimated 
that the impact of the proposed rules would result in net savings to 
health plans and health care providers of $1.5 billion during the first 
5 years; use of the standards would continue to save the industry 
money.'' (65 FR 50345)
    Although the transaction standards promulgated under the HIPAA 
administrative simplification provisions do not specifically apply to 
data collections under section 1343 of the Affordable Care Act, we 
propose in paragraph (b)(1) and (b)(2) to require States to utilize two 
specific HIPAA transaction standards for risk adjustment data 
collection: the ASC X12N 837 Health Care Claim transaction standard for 
any claims-related data including encounters; and the ASC X12N 834 
Enrollment and Maintenance transaction standard for any enrollment or 
demographic data. In this paragraph, we also allow the use of the NCPDP 
claims transaction standard for prescription drug, claims and encounter 
data. We solicit comment on whether we should rely on the existing 
HIPAA and NCPDP standards or engage stakeholders to develop a new set 
of national standards for use in risk adjustment, for example, 
leveraging the claims standards developed with stakeholder input by the 
Agency for Healthcare Research and Quality. In paragraph (b)(3), to 
address consumer privacy concerns, we propose that States must utilize 
specific privacy standards in its data collection risk adjustment 
procedures. We solicit comments on whether submission of issuers' rate 
setting rules should be required.
    We believe that standardizing data collection will allow State 
flexibility in modeling while not unreasonably increasing issuer burden 
for multi-State issuers. Under the proposed approach, States may limit 
the minimum information required to specific data elements, provided 
that the information submitted represents standard code sets and values 
on the HIPAA transactions. We also propose that States must accept any 
valid transaction submitted by an issuer provided that the transaction 
contains the minimum data required by the State. In other words, the 
State may not reject a HIPAA compliant transaction strictly on the 
basis that it contains more data than the State requires.
    In paragraph (c), we propose that States with existing all payer 
claims databases may request an exception from the minimum standards 
for data collection. We are contemplating syncing the timing of the 
request submission with requirements for alternate risk adjustment 
models. Similarly, we are contemplating that HHS will notify States as 
to exception status concurrently with the publication of the 
forthcoming annual Federal notice of benefit and payment parameters. We 
seek comment on these contemplated timelines. We propose that requests 
for exception from minimum data collection standards must include 
technical specifications, as well as proposed modifications to support 
risk adjustment and other claims-related activities.
    Seeking data submission efficiencies, in paragraph (d), we propose 
that the State must make certain claims and encounter data collected 
under risk adjustment available to support other activities including: 
recalibrating Federally-certified risk adjustment models; verifying of 
risk corridor submissions; and verifying and auditing reinsurance 
claims. We also anticipate encounter and claims data collected for risk 
adjustment may be required to support other Exchange-related functions 
such as cost-sharing requirements and quality reporting. We solicit 
comment on these alternative uses of risk adjustment data.
6. Risk Adjustment Data Validation Standards (Sec.  153.350)
    In Sec.  153.350, we propose that States have a reliable data 
validation process, which is essential to the establishment of a 
credible risk adjustment program. The credibility of risk adjustment is 
important to establishing the issuer confidence required for risk 
adjustment to have a positive impact on premium reduction. We propose 
that States, and HHS, when HHS performs the risk adjustment function on 
behalf of States, will perform some form of validation regarding the 
data submitted. We also believe that issuers will want such data 
validations to be performed since the effect of risk adjustment will be 
a transfer of premiums between issuers. One of the critical aspects of 
risk adjustment under the Affordable Care Act is that it represents a 
relative actuarial risk calculation. Therefore, for any data validation 
to have the capacity to extrapolate to adjust specific charges and 
payments, the validation must cover a sufficient number of plans to 
allow an equitable adjustment to all health plan risk adjustment 
factors.
    In paragraph (a) of Sec.  153.350, we propose that the State, or 
HHS on behalf of the State, validate a statistically valid sample of 
all issuers that submit data for risk adjustment every year. We also 
propose an appropriate use of the information derived from the data 
validation. For a validation to work under this form of risk 
adjustment, States must be able to adjust the average actuarial risk of 
each plan to account for the inaccuracies noted during the data 
validation process. As such, we propose in paragraph (b) that the 
State, or HHS on behalf of the State, may adjust the average actuarial 
risk for each plan based on the error rate found in the validation. In 
paragraph (c), we further propose that the State, or HHS on behalf of 
the State, adjust payments and charges based on the changes to average 
actuarial risk. We seek comment on appropriate timeframes for 
completion of the data validation process. For example, we may propose 
a three-year deadline for completing data validation, so as to ensure 
some finality in the risk adjustment process. Finally, in paragraph 
(d), we propose that States, or HHS on behalf of the State, must 
provide an appeals process for issuers. We believe that there may be 
alternative methods that allow sufficient coverage to estimate the 
validation impact on all plans. We solicit comments on this data 
validation provision and any alternatives that may be able to satisfy 
the need to provide assurance that the charges and payments truly 
represent relative plan risk.

[[Page 41942]]

E. Subpart E--Health Insurance Issuer Standards Related to the 
Transitional Reinsurance Program

    In this subpart, we propose requirements for health insurance 
issuers that complement the requirements for the transitional 
reinsurance program fully described in the preamble for subpart C. 
Since the reinsurance program is operated at the State level, many 
elements related to the purpose, methods, and operation of this program 
will vary across States and are discussed in greater detail in the 
preamble for subpart C. In this subpart, we discuss the elements of the 
program that relate specifically to the requirements for health 
insurance issuers and third party administrators on behalf of self-
insured group health plans.
1. Reinsurance Contribution Funds (Sec.  153.400)
    In Sec.  153.400, we codify section 1341 of the Affordable Care 
Act, which requires that the reinsurance program be funded by 
contribution funds from contributing entities. In paragraph (a), we 
propose that all contributing entities make contributions, in a 
frequency and manner to be determined by the State or HHS, to the 
applicable reinsurance entity in the State. For example, contributing 
entities may be required to submit contributions on a monthly or 
quarterly basis starting in January 2014. We invite comments on the 
appropriate frequency and manner in which payments should be made by 
contributing entities.
    In paragraph (b), we propose that if any State establishes multiple 
applicable reinsurance entities, the contributing entities must 
contribute an appropriate payment to each applicable reinsurance entity 
according to the formula established by the State. We propose in 
paragraph (c) that contributing entities will be required to provide 
the data necessary for the applicable reinsurance entity to calculate 
the amounts due from each contributing entity. The type of data 
required will depend on the contributing entity. For contributing 
entities in the individual and fully insured market, we propose that 
data on enrollment and premiums be required. For contributing entities 
in the self-insured market, data on covered lives and total medical 
expenses would be required. This data, for example, could be collected 
on a monthly or quarterly basis beginning January 2014. We invite 
comments on the appropriate timing to collect data submissions from 
contributing entities. We also seek comment on whether there are 
existing sources of this data that can be drawn upon.
2. Requests for Reinsurance Payment (Sec.  153.410)
    The reinsurance program as proposed in subpart C will make payments 
to reinsurance-eligible plan issuers. In paragraph (a), we propose that 
reinsurance-eligible plan issuers must submit a request for reinsurance 
payment to the applicable reinsurance entity. We propose in paragraph 
(b) that this request is made according to the method that will be 
specified in the forthcoming annual Federal notice of benefit and 
payment parameters. We invite comments regarding methods for requesting 
payments, and the frequency and deadline for such requests. We also 
invite comments on how to manage late claims from reinsurance eligible 
plan issuers.

F. Subpart F--Health Insurance Issuer Standards Related to the 
Temporary Risk Corridors Program

    In this subpart, we propose requirements on health insurance 
issuers related to the temporary risk corridor program. Section 1342 of 
the Affordable Care Act establishes a program of risk corridors for the 
first three years of Exchange operation. In addition to risk adjustment 
and reinsurance, the risk corridor program limits adverse selection and 
stabilizes markets as changes are implemented starting in 2014. Risk 
corridors create a mechanism for sharing risk for allowable costs 
between the Federal government and QHP issuers. QHP issuers of QHPs 
with costs that are less than 97 percent of the QHP's costs projections 
will remit charges for a percentage of those savings to HHS, while QHP 
issuers of QHP's with costs greater than 103 percent of cost 
projections will receive payments from HHS to offset a percentage of 
those losses. The Affordable Care Act directs HHS to administer the 
risk corridors program.
1. Definitions (Sec.  153.500)
    In Sec.  153.500, we propose a number of definitions for the 
purpose of administering risk corridors. First, we define ``allowable 
costs'' as an amount equal to the total medical costs, which include 
clinical costs, excluding allowable administrative costs, paid by the 
QHP issuer in providing benefits covered by the QHP. We define 
``allowable administrative costs'' as total non-medical costs defined 
in Sec.  158.160(b), including costs for the administration and 
operation of the health insurance issuer. We invite comment on whether 
we should consider costs for activities that improve health care 
quality as described in Sec.  158.150 and Sec.  158.151 for allowable 
costs to be consistent with the medical loss ratio (MLR) policy in the 
Affordable Care Act. We also invite comment on whether we should limit 
administrative costs to 20 percent consistent with MLR. If the 
allowable administrative costs differ from calculations for the MLR 
rebate, issuers may be incentivized to use risk corridors payments to 
pay for their MLR rebates.
    We define ``charge'' as the flow of funds from QHP issuers to HHS. 
We define ``direct and indirect remuneration'' in the same way it was 
defined in the risk corridor provision implemented as a result of 
Medicare Prescription Drug, Improvement, and Modernization Act of 2003. 
It means prescription drug price concessions or similar benefits from 
manufacturers, pharmacies or similar entities obtained by a QHP issuer 
or an intermediary contracting organization with which a QHP issuer has 
contracted. Such concessions include but are not limited to: discounts, 
charge backs, rebates, free goods contingent on a purchase agreement, 
up-front payments, coupons, goods in kind, free or reduced-price 
services, and grants. We further specify that the term applies 
regardless of whether the intermediary contracting organization retains 
all or a portion of the direct and indirect remuneration or passes the 
entire direct and indirect remuneration to the QHP issuer and 
regardless of the terms of the contract between the issuer and the 
intermediary contracting organization.
    We define ``payment'' as the flow of funds from HHS to QHP issuers. 
We define ``qualified health plan'' consistent with the term proposed 
in the general definitions section of the Patient Protection and 
Affordable Care Act; Establishment of Exchanges and Qualified Health 
Plans, published in this issue of the Federal Register. We define 
``risk corridor'' as any payment adjustment system based on the ratio 
of allowable costs of a plan to the plan's target amount. Finally, we 
define ``target amount'' to be the amount equal to the total premiums 
incurred by the QHP, including any premium tax credits or financial 
assistance from any governmental program, reduced by the allowable 
administrative costs of the health insurance issuer.
2. Risk Corridor Establishment and Payment Methodology (Sec.  153.510)
    The risk corridor provision in 1342 of the Affordable Care Act 
directs HHS to

[[Page 41943]]

establish and administer a program of risk corridors. In Sec.  153.510, 
HHS proposes to establish risk corridors by specifying risk percentages 
above and below the target amount. In paragraph (a), we propose to 
require a QHP issuer to adhere to the requirements set by HHS for the 
establishment and administration of a risk corridor program for 
calendar years 2014 through 2016. We will issue guidance in the 
forthcoming annual Federal notice of benefits and payment parameters 
for QHPs regarding reporting and the administration of payments and 
charges similar to part 158. Risk corridors guidance will be plan 
specific and not issuer specific as indicated in part 158. We interpret 
the risk corridor provision to apply to all QHPs offered in the 
Exchange.
    In Sec.  153.510, we also establish the payment methodology for the 
risk corridor program, using the thresholds and risks-sharing levels 
specified in statute. The risk corridor thresholds are applied when a 
QHP's allowable costs reach plus or minus three percent of the target 
amount. Accordingly, HHS will pay a QHP issuer whose QHP incurred 
allowable costs for a benefit year that are greater than 103 percent of 
its target amount. Conversely, a QHP issuer must pay HHS if its QHP's 
allowable costs for a benefit year are less than 97 percent of its 
target amount. A QHP issuer whose QHP's allowable costs for a benefit 
year are greater than 97 percent but less than 103 percent of the 
target amount will neither make nor receive payments for risk 
corridors. For example, a QHP issuer with a QHP that has a target 
amount of $10 million will not receive or pay a risk corridor payment 
if its allowable charges range between $9.7 million and $10.3 million.
    Paragraph (b) of this section describes the method for determining 
payment amounts to QHP issuers as well as the timing of those payments. 
For a QHP with allowable costs in excess of 103 percent but not more 
than 108 percent of the target amount, HHS will pay the QHP issuer 50 
percent of the amount in excess of 103 percent of the target amount. 
For example, a QHP has a target amount of $10 million, and the QHP has 
allowable costs of $10.5 million, or 105 percent of the target amount. 
Since 103 percent of the target amount would equal $10.3 million, the 
amount of allowable costs that exceed 103 percent of the target amount 
is $200,000. Therefore, HHS would pay 50 percent of that amount, or 
$100,000 to the QHP issuer.
    For QHPs that have allowable costs that exceed 108 percent of the 
target amount, the Affordable Care Act directs HHS to pay the QHP 
issuer an amount equal to 2.5 percent of the target amount plus 80 
percent of the amount in excess of 108 percent of the target amount. 
For example, a QHP has a target amount of $10 million. The QHP has 
allowable costs of $11.5 million, or 115 percent of the target amount. 
Since 108 percent of the target amount would be $10.8 million, the 
amount of allowable costs that exceed 108 percent of the target amount 
is $700,000. Therefore, HHS pays 2.5 percent of the target amount, or 
$250,000, plus 80 percent of $700,000, or $560,000, for a total of 
$810,000.
    Paragraph (c) describes the circumstances under which QHP issuers 
will remit charges to HHS, as well as the means by which HHS will 
determine those charge amounts. We propose that QHP issuers will begin 
to remit charges to HHS for the first dollar of allowable charges less 
than 97 percent of the target amount. For a QHP that has allowable 
costs that are less than 97 percent of the target amount but greater 
than 92 percent of the target amount, HHS will charge the QHP issuer an 
amount equal to 50 percent of the difference between 97 percent of the 
target amount and the actual value of allowable costs. For example, a 
QHP has a target amount of $10 million. The amount of allowable costs 
for this QHP is $9.3 million, or 93 percent of the target amount. The 
difference between 97 percent of the target amount, or $9.7 million, 
and the actual allowable charges is $400,000. The QHP issuer must pay 
HHS 50 percent of that amount, or $200,000.
    For QHPs with allowable costs below 92 percent of the target 
amount, the QHP issuer will remit charges to HHS an amount equal to 2.5 
percent of the target amount plus 80 percent of the difference between 
92 percent of the target amount and the actual value of allowable 
costs. For that same QHP with a $10 million target amount, assume the 
allowable charges are now $8.8 million, or 88 percent of the target 
amount. Ninety-two percent of the target amount would be $9.2 million, 
and the difference between 92 percent of the target amount and the 
actual value of allowed costs is $400,000. The QHP issuer will remit 
charges to HHS an amount equal to 2.5 percent of the target amount, or 
$250,000, plus 80 percent of $400,000, or $320,000, for a total of 
$570,000.
    While we are not proposing deadlines at this time, HHS has 
considered timeframes for QHP issuers to remit charges to HHS. For 
example, a QHP issuer required to make a risk corridor payment may be 
required to remit charges within 30 days of receiving notice from HHS. 
Similarly, HHS would make payments to QHP issuers that are owed risk 
corridor amounts from HHS within a 30-day period after HHS determines 
that a payment should be made to the QHP issuer. We believe that QHP 
issuers who are owed these amounts will want prompt payment, and also 
believe that the payment deadlines should be the same for HHS and QHP 
issuers. We invite comments as to the appropriate frequency QHP issuers 
should remit charges to HHS.
3. Risk Corridor Standards for QHP Issuers (Sec.  153.520)
    To support the risk corridor program calculations, we propose in 
Sec.  153.520 that all QHP issuers submit data needed to determine 
actual performance relative to their target amounts. The data would be 
collected in standard formats specified by HHS. We propose in paragraph 
Sec.  153.520(a) that QHP issuers must submit data related to actual 
premium amounts collected by QHP issuers, including premium amounts 
paid by parties other than the enrollee in a QHP and specifically 
advance premium tax credits paid by the government. We also regard risk 
adjustment and reinsurance as an after-the-fact adjustment to premiums 
for purposes of determining risk corridor amounts. Medicare Advantage, 
Medicare Prescription Drug Benefit Program and Medicaid managed care 
risk adjustment programs similarly result in adjustments to total 
payments to plans. However, in these programs, the adjustment occurs 
concurrently with payments because they are made by the government 
(excluding monthly premium payments made by beneficiaries). For 
reinsurance, we anticipate health insurance issuers will reduce their 
premiums by an amount that would approximate the average reinsurance 
that they expect to receive, filling in the gap between the premium 
charged and the health insurance issuer's revenue needs.
    Therefore, in paragraph (a)(1), we propose that the reported 
premium amounts must be increased by the amounts paid to the QHP issuer 
for risk adjustment and reinsurance. Similarly, we propose in paragraph 
(a)(2) that the reported premium amounts be reduced for any risk 
adjustment charges the QHP issuer pays on behalf of the plan, 
reinsurance contributions that the QHP issuer makes on behalf of the 
plan, and Exchange user fees that the QHP issuer pays on behalf of the 
plan. We invite comment on the treatment of reinsurance and risk 
adjustment as after-the-fact adjustments to premium for purposes of 
determining risk corridor amounts.

[[Page 41944]]

    In paragraph (a)(3), we propose rules for accounting for 
reinsurance claims submitted on a date to be determined by HHS for a 
given reinsurance benefit year. Specifically, we propose that QHP 
issuers attribute reinsurance payments to risk corridors based on the 
date on which the valid reinsurance claim was submitted. For example, 
if the QHP issuer submits a claim on or before the deadline for a 
benefit year, that QHP issuer would attribute the claim payment to risk 
corridor calculation for the benefit year in which the costs were 
accrued. Conversely, if the QHP issuer submits a claim after the 
deadline for a benefit year, that health QHP would attribute the claim 
payment to risk corridor calculation for the following benefit year. We 
invite comments on how the risk corridor calculations would interact 
with the MLR process.
    We propose in paragraph (b) that QHP issuers must submit allowable 
cost data to calculate the risk corridors in a format specified by HHS. 
We propose that allowable costs must be reduced for any direct or 
indirect remuneration received in paragraph (b)(1). In paragraph 
(b)(2), we also propose that the allowable costs must be reduced by the 
amount of any cost-sharing reductions received from HHS. We invite 
comment on an appropriate deadline for QHP issuers to complete 
submission of all risk corridor data especially since this would 
interact with the MLR process. We also invite comment as to how HHS 
could determine allowable costs for QHP issuers in calculating risk 
corridors, if a QHP issuer fails to comply with the reporting 
provisions in paragraph (b).
    HHS seeks to limit the reporting requirements on issuers in 
submitting this information and would like to prevent duplicative data 
collection requirements on issuers for the temporary risk corridors 
program. As such, we seek comment on how we can utilize data from 2718 
to meet the data submission requirements for risk corridors.

G. Subpart G--Health Insurance Issuer Standards Related to the Risk 
Adjustment Program

    Section 1343 of the Affordable Care Act provides for a program of 
risk adjustment for all non-grandfathered plans in the individual and 
small group market both inside and outside of the Exchange. We noted in 
the introduction to subpart D of this part that the risk adjustment 
program described in section 1343 employs a model to determine 
comparative actuarial risk of plans within a State. That overview can 
serve as a reference for this subpart as well. We note that subpart D 
of this part describes some of the comments to the RFC related to risk 
adjustment and our approach to the process, methodology, and model for 
implementing the risk adjustment program under section 1343 of the 
Affordable Care Act. This subpart proposes the health issuer standards 
that are necessary to carry out risk adjustment as described in subpart 
D.
1. Definitions (Sec.  153.600)
    In Sec.  153.600, we define ``risk adjustment data'' to mean any 
data that is used in a risk adjustment model.
2. Risk Adjustment Issuer Requirements (Sec.  153.610)
    We propose in paragraph (a) of Sec.  153.610 that all issuers of 
risk adjustment covered plans submit risk adjustment data according to 
the timetable and format prescribed by the State, or HHS on behalf of 
the State. Since there will be some variety in approaches to risk 
adjustment, both across States as well as over time, we expect that 
these data will include demographic data; encounter data for items and 
services provided in conjunction with a risk adjustment covered plan; 
and prescription drug utilization data. We seek comment on whether 
other categories of data such as methods for setting rates should be 
required in support of risk adjustment.
    We considered proposing the following timelines for risk adjustment 
data submission: claims and encounter data must be submitted every 30 
days and no later than the end of 180 days following the date of 
service; enrollment and demographic information must be submitted by 
the end of the month following enrollment; issuer rate-setting rules 
must be submitted by the end of the month in which they become 
effective; prescription drug utilization data must be submitted every 
30 days, and no later than the end of 90 days following date of 
service. We recognize that these timeframes may limit the ability of 
States to collect a full calendar year of data on risk adjustment. 
However, given the traditional lag of claims submissions, we did not 
think a shortened timeframe was feasible. Additionally, monthly data 
submission would address anticipated issuer difficulty in transmitting 
large volumes of data at the end of the data collection period. We 
solicit comments on these and alternative data submission timeframes.
    We interpret the Affordable Care Act to require participation in 
the risk adjustment program for all risk adjustment covered plans. We 
believe that any voluntary participation provisions would result in 
non-participation by the lowest actuarial risk plans, which in turn 
would defeat the purpose of the provision. Additionally, in paragraph 
(b), we propose to permit contractual arrangements between issuers and 
providers, suppliers, physicians, and other practitioners to ensure 
that issuers receive the necessary risk adjustment data.
    We discuss the calculation of payments and charges extensively 
describing the methods by which we propose States could perform that 
function. After the State, or HHS on behalf of the State, has 
calculated all payments and charges for all risk adjustment covered 
plans, the State, or HHS on behalf of the State, will determine a net 
value of payments and charges for each risk adjustment covered plan 
issuer. In paragraph (c), we propose that risk adjustment covered plan 
issuers who owe a net balance of risk adjustment charges will be 
assessed those net charges upon completion of the risk adjustment 
process. We interpret the Affordable Care Act to mean that the payment 
of charges is mandatory for issuers who have a net charges payable 
balance based on the difference between the charges calculated for 
their low actuarial risk plans and the payments calculated for their 
high actuarial risk plans. Additionally, we considered proposing that 
issuers be given a 30 day timeframe in which to pay all these net 
charges to the State that assessed those charges, or to HHS on behalf 
of the State. We solicit comment on this and alternative timelines. 
Since risk adjustment pools individual and small group market risk on a 
State level, payments and charges will be netted out at the State 
level, and issuers in multiple States must settle with each State 
individually.
3. Compliance With Risk Adjustment Standards (Sec.  153.620)
    The credibility of risk adjustment is important to making health 
insurance premiums in Exchanges stable. Issuers should have confidence 
that, if they experience adverse selection, their actuarial risk as 
calculated under this risk adjustment program will reflect the degree 
to which they have experienced adverse selection and that, if competing 
plans have low actuarial risk, that those plans cannot inflate their 
risk score. Therefore, a data validation program is necessary. 
Consistent with proposed Sec.  153.350, we propose in Sec.  153.620 
that risk adjustment covered plan issuers provide the required 
documentation in response to any HHS or State validation to 
substantiate the risk adjustment data that they have submitted. We 
believe

[[Page 41945]]

that all risk adjustment covered plans should support such an audit to 
ensure the integrity of charges they may be required to pay, as well as 
to ensure that any payments they receive are sufficient to cover 
additional medical costs incurred due to adverse selection. In 
paragraph (b), we propose that risk adjustment covered plan issuers 
must retain the required documentation to substantiate the risk 
adjustment data that they have submitted for a period of ten years.

III. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act 
of 1995 requires that we solicit comment on the following issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     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.
    Below is a summary of the proposed information collection 
requirements outlined in this regulation. Throughout this section we 
employ assumptions regarding the frequency of data collection as this 
level of detail is not proposed in regulation text, but is discussed in 
preamble. A number of assumptions are made regarding the wages of 
personnel needed to accomplish the proposed collection of information. 
Wage rates are based on the Employer Costs for Employee Compensation 
report by U.S. Bureau of Labor Statistics and represent a national 
average. Some states or employers may face higher or lower wage 
burdens. Wage rates estimates include a 35% fringe benefit estimate for 
state employees and a 30% fringe benefit estimate for private sector 
employees. For purposes of presenting an estimate of paperwork burden 
for States, we reflect full participation of all States and the 
District of Columbia in operating an Exchange and assume all States 
operate the reinsurance and risk adjustment programs. However, we 
recognize that not all States will elect to operate their own 
Exchanges, so these estimates should be considered an upper bound of 
burden estimates. These estimates may be adjusted proportionally in the 
final rule based upon additional information as States progress in 
their Exchange development processes.
    We are soliciting public comment on each of these issues for the 
following sections of this document that contain information collection 
requirements (ICRs):

A. ICRs Regarding the State Notice of Insurance Benefits and Payment 
Parameters (Sec.  153.100)

    As discussed in Sec.  153.100, States would issue an annual notice 
of benefits and payment parameters specific to that State. We estimate 
a minimum burden for the development of the State notice as States have 
the option to adopt the parameters in the forthcoming annual Federal 
notice of benefits and payments parameters, and would only have to 
indicate their intention of using these parameters in their annual 
notice.
    We assume that all 50 States and the District of Columbia would be 
subject to these reporting requirements. Again, this estimate should be 
considered an upper bound, and we may revise these estimates in the 
final rule based upon additional information as States progress in 
their Exchange development processes. We estimate that it will take 
each State approximately 160 hours to meet the requirements of this 
subpart with a total estimated burden of 8,160 hours. We estimate that 
it will take a financial analyst 120 hours (at an average wage rate of 
$62 an hour) and a senior manager 40 hours (at $77 an hour) to meet 
these requirements. The cost estimate for each State is $10,520 for a 
total estimated cost burden of $536,520.

B. ICRs Regarding State Standards for the Transitional Reinsurance 
Program in the Individual Market (Sec.  153.240)

    Within Part 153, subpart C we describe reporting requirements and 
maintenance of records for States for reinsurance. States would ensure 
that the applicable reinsurance entity collects the data required from 
issuers to make reinsurance payments. The type of data required is 
currently not described in this proposed rule to allow for State 
flexibility in determining the data type and collection method. 
However, the type of data that might be used to make reinsurance 
payments may include claims data or encounter data. We estimate that it 
will take about 12 hours on an annual basis for the applicable 
reinsurance entity to collect this information in an electronic format 
from issuers on an annual basis. This estimate is similar to estimates 
provided in Medicare Part D rule for data submission. For example, 
Medicare Part D estimated that it would take plan sponsors 
approximately 10 hours annually for plan sponsors to submit data on 
aggregated negotiated drug pricing from pharmaceutical companies 
described in Sec.  423.104. We provide a slightly higher estimate for 
the collection of data from issuers for reinsurance payments due to the 
complexity of the program.
    States that operate an Exchange would also maintain any records 
associated with the reinsurance program. For this requirement, we 
estimate that it will take approximately 52 hours annually for States 
to maintain records. This is a broad estimate that includes not only 
the maintenance of data for the reinsurance program, but all books, 
records, documents, and other evidence of accounting procedures and 
practices related to the reinsurance program. This estimate is similar 
to Medicare Part D, where is was estimated that it will take 52 hours 
on an annual basis for plan sponsors to maintain books, records, and 
documents on accounting procedures and practices as described in Sec.  
423.505.
    We assume that 50 States and the District of Columbia will be 
subject to the reporting requirements in this subpart. This estimate is 
an upper bound of burden as a result of the reporting requirements in 
this subpart; we will revise these estimates in the final rule as 
States progress in their Exchange development. We estimate that it will 
take each State approximately 64 hours to meet the provisions of this 
subpart for a total burden estimate of 3,264 hours. We presume that it 
will take a financial analyst 54 hours (at $55 an hour) and a senior 
manager 10 hours (at $77 an hour) to meet the reporting requirements. 
The burden cost estimate for each State is $3,740 for a total burden 
cost estimate of $190,740.

C. ICRs Regarding State Standards for the Risk Adjustment Program 
(Sec.  153.310-Sec.  153.340)

    Part 153, subpart D describes reporting requirements for States 
related to the risk adjustment program. We provide minimum burden 
estimates in this section for the collection and submission of risk-
related data, particularly encounter data, as States would be required 
to collect this information for Medicaid beginning in 2012.
    States would be required to implement privacy standards for all 
data

[[Page 41946]]

to be collected for the risk adjustment program. We estimate it will 
take States approximately 40 hours to create and implement privacy 
standards for this data collection. This estimate presumes it will take 
a policy analyst 10 hours (at $55 per hour), an operations analyst 25 
hours (at $55 per hour) and a senior manager 5 hours (at $77 per hour). 
We expect it will cost each state $2,310 to create and implement 
privacy standards. The total burden of this requirement is $117,810.
    States may file for an exception from minimum data collection 
standards, as described in Sec.  153.430(c). We estimate that filing 
for an exception would take 17 hours and that 5 states will elect to 
file for exception. This includes 15 hours for an operations analyst 
(at $55 per hour) and 2 hours for a senior manager (at $77 per hour). 
The total burden of a minimum data reporting exception is $979 and a 
total of $4,895.
    States would also collect risk-related data from health insurance 
issuers. This risk-related data includes claims, encounter, 
demographic, and enrollment data as described in Sec.  153.340. While 
we do not specify the data collection timeframe for risk adjustment 
data, we provide an assumption on the timing of submission of this 
data. We estimate that it will take an issuer approximately 12 hours to 
collect this data electronically on an annual basis. We estimate that 
it will take an operations analyst 12 hours (at $55 per hour) to 
collect this data annually.
    States would submit to HHS de-identified claims and encounter data 
for use in recalibrating Federally-certified risk adjustment models. We 
estimate that it will take 3 hours for States to submit this 
information to HHS. This estimate is slightly lower that Medicare Part 
D estimates for data submission as discussed previously and is a 
minimum burden estimate for this requirement since States will have 
already collected this data in the format requested for the risk 
adjustment program. States would submit summarized claims cost for use 
in verifying risk corridor submissions. Again we provide a minimum 
burden estimate of 2 hours since States would have already collected 
this information for risk adjustment.
    States would submit summarized and individual-level claims and 
encounter data from reinsurance-eligible plans for audit purposes. We 
estimate a minimum burden of 2 hours for States to submit this 
information to HHS. Finally, States would also provide claims and 
encounter data for Exchange-related activities such as cost-sharing 
requirements and quality reporting. We estimate a minimum burden of 3 
hours for States to submit this information for this purpose.
    We assume that all 50 States and the District of Columbia will be 
subject to these reporting requirements. This estimate is an upper 
bound of burden as a result of the reporting requirements in this 
subpart; we will revise these estimates in the final rule as States 
progress in their Exchange development. We estimate that it will take 
each State approximately 30 hours to meet these requirements with a 
total estimated burden of 1,530 hours. We presume that it will take an 
operations analyst 22 hours (at $55 an hour) and a senior manager 8 
hours (at $77 an hour) to meet these requirements for a cost estimate 
of $1,826. The total estimated cost burden is $93,126.
    As discussed in Sec.  153.330, States must submit a request to HHS 
for review and approval of an alternate risk adjustment methodology. We 
estimate that 5 States will request an approval for an alternate risk 
adjustment methodology. We presume all states requesting approval of an 
alternative risk adjustment methodology will update their methodology 
once. We presume that it will take an operations analyst 22 hours (at 
$55 an hour) and a senior manager 6 hours (at $77 an hour). Updating 
the methodology is expected to take an operations analyst 8 hours and a 
senior manager 2 hours. In total, we estimate that it will take 
approximately 38 hours for a State electing to establish an alternate 
risk adjustment methodology to meet the reporting requirements with a 
total estimated burden of 190 hours. We expect it will cost each state 
$2,266 to meet these requirements. The total estimated cost burden for 
five States is $11,330.
    States choosing to run a risk adjustment program must validate 
their risk adjustment data annually. We estimate data collection and 
validation will take an operations analyst 25 hours (at $55 per hour) 
and a senior manager 5 hours (at $77 per hour). The cost estimate for 
validating the risk adjustment data annually is $1,760 per state and a 
total burden of $89,760.

D. ICRs Regarding Health Insurance Issuer Standards Related to the 
Transitional Reinsurance Program (Sec.  153.400 and Sec.  153.410)

    Within part 153, subpart E we discuss reporting requirements for 
health insurance issuers related to the transitional reinsurance 
program. We would require all health insurance issuers both inside and 
outside of the exchange to provide enrollment and premium data (covered 
lives and total expenses for the self-insured market) to the applicable 
reinsurance entity for the estimation and collection of contributions. 
We also would require that health insurance issuers of reinsurance-
eligible plans submit data necessary in order to receive reinsurance 
payment.
    For the purpose of this estimate and whenever we refer to burden 
requirements for issuers, we utilize estimates of the number of issuers 
provided by the Healthcare.gov Web site as this site provides the best 
estimate of possible issuers at this time. Based on preliminary 
findings there are approximately 1827 issuers in the individual and 
small group markets. While we recognize that not all issuers will offer 
QHPs, we use the estimate of 1827 issuers as the upper bound of 
participation and burden.
    We further estimate that it will take each issuer approximately 12 
hours to submit enrollment and premium data electronically on an annual 
basis and 12 hours to submit data for reinsurance payment on an annual 
basis. This estimate is similar to Medicare Part D estimates as 
discussed previously.
    As such, we estimate that it will take each issuer approximately 24 
hours to comply with these requirements for a total estimated annual 
burden of 43,848 hours. We presume that it will take a financial 
analyst 16 hours (at $57 an hour) and a senior manager 8 hours (at $72 
an hour) to meet these requirements. The cost estimate for meeting 
these requirements for each issuer is of $1,488. The total burden cost 
estimate for all issuers is $2,718,576.

E. ICRs Regarding Health Insurance Issuer Standards Related to the 
Temporary Risk Corridors Program (Sec.  153.520)

    Within part 153, subpart F we discuss reporting requirements for 
qualified health plan issuers related to the risk corridors program. We 
would require all qualified health plan issuers to submit data on 
premiums collected and allowable costs. While we recognize that not all 
issuers will offer QHPs, we use the estimate of 1827 issuers as the 
upper bound of participation and burden. We further estimate that it 
will take each issuer approximately 12 hours to comply with this 
requirement on an annual basis. This estimate is similar to estimates 
for data submission in Medicare Part D as discussed previously with a 
slight increase due to the complexity of the risk corridor program. The 
total estimated annual burden is 21, 924 hours. We presume that it will 
take a financial analyst 8 hours (at $57 an hour) and a senior manager 
4 hours (at

[[Page 41947]]

$72 an hour) for a cost estimate of $744. The total burden cost 
estimate for all issuers is $1,359,288.

F. ICRs Regarding Health Insurance Issuer Standards for the Risk 
Adjustment Program (Sec.  153.610-Sec.  153.630)

    Within part 153, subpart G, we described reporting requirements for 
health insurance issuers related to the risk adjustment program. Health 
insurance issuers would be required to submit data required for risk 
adjustment. This data may include claims and encounter data for items 
and services rendered; enrollment and demographic information; issuer 
rate-setting rules; and prescription drug utilization data. While we do 
not specify the data collection timeframe for risk adjustment data, we 
provide an assumption on the timing of submission of this data. We 
estimate that it will take an issuer approximately 20 hours to submit 
this data electronically on an annual basis. This estimate is a slight 
increase from the Medicare Advantage requirements for submitting data 
for drug claims as described for Sec.  423.329 for Medicare Part D and 
reflects the complexity of risk adjustment for the Exchange program.
    Health insurance issuers would also submit data for validation and 
verification activities to HHS and States. Again, we estimate that it 
will take an issuer approximately 12 hours to submit this data 
electronically on an annual basis as this should be data they already 
collect for risk adjustment. Finally, health insurance issuers would 
maintain risk adjustment data for a period of ten years. We estimate 
that it will take approximately 2 hours annually for issuers to 
maintain this data.
    We estimate that 1827 issuers must comply with these requirements. 
We further estimate that it will take each issuer approximately 34 
hours to meet the reporting provisions in this subpart for a total of 
62,118 hours. We presume that it will take a financial analyst 30 hours 
(at $57 an hour) and a senior manager 4 hours (at $72 an hour) for a 
cost estimate of $2,002 for each issuer. The total estimated annual 
burden cost for all issuers is $3,657,654.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                     Burden per                         Labor cost of
            Regulation section(s)                Respondents        Responses         response        Total annual      reporting per   Total labor cost
                                                                                       (hours)       burden  (hours)    response  ($)   of reporting ($)
--------------------------------------------------------------------------------------------------------------------------------------------------------
153.100.....................................                51                 1               160             8,160            10,520           536,520
153.240.....................................                51                 1                64             3,264             3,740           190,740
153.310 & 153.340...........................                51                 1                62             3,162             3,674           187,374
153.340(c)..................................                 5                 1                17                85               979             4,895
153.330.....................................                 5                 1                38               190             2,266            11,330
153.350.....................................                51                 1                30             1,530             1,760            89,760
153.400 & 153.410...........................              1827                 1                24            43,848             1,488         2,717,576
153.520.....................................              1827                 1                12            21,924               744         1,359,288
153.610 & 153.630...........................              1827                 1                34            62,118             2,002         3,657,654
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Salaries and fringe benefit estimates were taken from the Bureau of Labor Statistics Web site (http://www.bls.gov/oco/ooh_index.htm).

    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: CMS Desk Officer, 
CMS-9975-P; Fax: (202) 395-5806; or E-mail: [email protected]

IV. Summary of Preliminary Regulatory Impact Analysis

    The summary analysis of benefits and costs included in this 
proposed rule is drawn from the detailed Preliminary Regulatory Impact 
Analysis, available at http://cciio.cms.gov under ``Regulations and 
Guidance.'' That preliminary impact analysis evaluates the impacts of 
this proposed rule and a second proposed rule ``Patient Protection and 
Affordable Care Act; Establishment of Exchanges and Qualified Health 
Plans.'' The second proposed rule is published in this issue of the 
Federal Register. The following summary focuses on the benefits and 
costs of this proposed rule.

A. Introduction

    HHS has examined the impacts of the proposed rule under Executive 
Orders 12866 and 13563, the Regulatory Flexibility Act (5 U.S.C. 601-
612), and the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4). 
Executive Orders 13563 and 12866 direct agencies to assess all costs 
and benefits (both quantitative and qualitative) of available 
regulatory alternatives and, if regulation is necessary, to select 
regulatory approaches that maximize net benefits (including potential 
economic, environmental, public health and safety effects, distributive 
impacts, and equity). Executive Order 13563 emphasizes the importance 
of quantifying both costs and benefits, of reducing costs, of 
harmonizing rules, and of promoting flexibility. This rule has been 
designated an ``economically'' significant rule, under section 3(f)(1) 
of Executive Order 12866. Accordingly, the rule has been reviewed by 
the Office of Management and Budget.
    The Regulatory Flexibility Act requires agencies to analyze 
regulatory options that would minimize any significant impact of a rule 
on small entities. Few if any insurance issuers offering comprehensive 
health insurance policies fell below the size thresholds for ``small'' 
business established by the SBA. CMS tentatively concludes that this 
NPRM would not have a significant impact on a substantial number of 
small entities. We request comment on whether the small entities 
affected by this rule have been fully identified.
    Section 202(a) of the Unfunded Mandates Reform Act of 1995 requires 
that agencies prepare a written statement, which includes an assessment 
of anticipated costs and benefits, before proposing ``any rule that 
includes any Federal mandate that may result in the expenditure by 
State, local, and tribal governments, in the aggregate, or by the 
private sector, of $100,000,000 or more (adjusted annually for 
inflation) in any one year.'' The current threshold after adjustment 
for inflation is approximately $136 million, using the most current 
(2011) Implicit Price Deflator for the Gross Domestic Product. Because 
States are not required to set up an Exchange or operate reinsurance 
and risk adjustment, the NPRM does not impose a mandate to incur costs 
above that $136 million UMRA threshold on State, local, or tribal 
governments.

[[Page 41948]]

B. Need for This Regulation

    This proposed rule would implement standards for States related to 
reinsurance and risk adjustment, and for health insurance issuers 
related to reinsurance, risk corridors, and risk adjustment consistent 
with title I of the Patient Protection and Affordable Care Act (Pub. L. 
111-148) as amended by the Health Care and Education Reconciliation Act 
of 2010 (Pub. L. 111-152), referred to collectively as the Affordable 
Care Act. These programs will mitigate the impacts of potential adverse 
selection and stabilize the individual and small group markets as 
insurance reforms and the Affordable Insurance Exchanges 
(``Exchanges'') are implemented, starting in 2014. The transitional 
State-based reinsurance program serves to reduce the uncertainty of 
insurance risk in the individual market by making payments for high-
cost cases. The temporary Federally-administered risk corridor program 
serves to protect against rate-setting uncertainty in the Exchange by 
limiting the extent of issuer losses (and gains). On an ongoing basis, 
the State-based risk adjustment program is intended to protect health 
insurance issuers that attract high-risk populations (such as 
individuals with chronic conditions).

C. Summary of Costs and Benefits of the Proposed Requirements

    Two proposed regulations are being published simultaneously to 
implement components of the Exchange and health insurance premium 
stabilization policies in the Affordable Care Act. The detailed PRIA 
evaluates the impacts of both proposed rules, while this summary 
focuses on the benefits and costs of the proposed requirements in this 
NPRM.
Methods of Analysis
    This preliminary impact analysis references the estimates of the 
CMS Office of the Actuary (OACT) (CMS, April 22, 2010), but primarily 
uses the underlying assumptions and analysis done by the Congressional 
Budget Office (CBO) and the staff of the Joint Committee on Taxation. 
Their modeling effort accounts for all of the interactions among the 
interlocking pieces of the Affordable Care Act including its tax 
policies, and estimates premium effects that are important to assessing 
the benefits of the NPRM. A description of CBO's methods used to 
estimate budget and enrollment impacts is available.\1\ The CBO 
estimates are not significantly different than the comparable 
components produced by OACT; the Administration is working on 
developing an integrated modeling capacity that will estimate Federal 
spending, revenue, and private premium impacts comparable to those of 
CBO. Based on our review, we expect that the requirements in these 
NPRMs will not substantially alter the estimates of the budget impact 
of Exchanges or enrollment. The proposed requirements are well within 
the parameters used in the CBO modeling of the Affordable Care Act and 
do not diverge from assumptions embedded in the model. Our review and 
analysis of the proposed requirements indicate that the impacts are 
within the model's margin of error.
---------------------------------------------------------------------------

    \1\ CBO. ``CBO's Health Insurance Simulation Model: A Technical 
Description.'' (2007, October).
---------------------------------------------------------------------------

Summary of Costs and Benefits
    CBO estimated program payments and receipts for reinsurance and 
risk adjustment. As Exchanges do not begin operation until 2014, there 
are no outlays for reinsurance and risk adjustment in 2012 and 2013. 
CBO estimates that risk adjustment payments and collections are equal 
in the aggregate, but that risk adjustment payments lag revenues by one 
quarter. CBO did not score the impact of risk corridors, but assumed 
collections would equal payments to plans in the aggregate. The 
payments and receipts in risk adjustment, reinsurance, and risk 
corridors are financial transfers between issuers.

       Table 1--Estimated Outlays and Receipts for Reinsurance and Risk Adjustment Programs FY 2012-FY2016
                                            [In billions of dollars]
----------------------------------------------------------------------------------------------------------------
                      Year                           2012         2013         2014         2015         2016
----------------------------------------------------------------------------------------------------------------
Reinsurance and Risk Adjustment Program          ...........  ...........           11           18           18
 Payments \a\..................................
Reinsurance and Risk Adjustment Program          ...........  ...........           12           16           18
 Receipts \a\..................................
----------------------------------------------------------------------------------------------------------------
\a\ Risk-adjustment payments lag receipts by one quarter.
Source: CBO. 2011. Letter to Hon. Nancy Pelosi. March 20, 2010. Available at http://www.cbo.gov/ftpdocs/113xx/doc11379/AmendReconProp.pdf.

    Benefits. Payments through reinsurance, risk adjustment, and risk 
corridors reduce the increased risk of financial loss that health 
insurance issuers might otherwise expect to incur in 2014 due to market 
reforms such as guaranteed issue and the elimination of medical 
underwriting. Insurers charge premiums for expected costs plus a risk 
premium, in order to build up reserve funds in case medical costs are 
higher than expected. Reinsurance, risk adjustment and risk corridors 
payments reduce the risk to the issuer and the issuer can pass on a 
reduced risk premium to beneficiaries.
    Costs. There are administrative costs to States and Exchanges to 
set up and administer these risk mitigation programs. It is important 
to note that per section 1311 of the Affordable Care Act, States may 
use Exchange Planning and Establishment Grant funding to help with the 
development of these programs. For issuers not receiving payments, any 
contribution is an additional cost, which is typically passed on to 
beneficiaries through premium increases. There are also reporting costs 
for issuers to submit data and financial information.
Regulatory Options Considered
    Options considered for reinsurance, risk adjustment and risk 
corridor programs parallel the options considered for Exchanges. These 
programs aim to mitigate the impacts of potential adverse selection and 
stabilize the individual and small group markets as insurance reforms 
and the Affordable Insurance Exchanges are implemented, starting in 
2014. The Affordable Care Act structures reinsurance and risk 
adjustment as State-run programs with Federal guidelines on 
methodology, while it establishes risk corridors as a Federally-run 
program.
    In addition to the proposed baseline, HHS has identified two 
regulatory options for this proposed rule as required by Executive 
Order 12866.

[[Page 41949]]

Uniform Standard for Operations of Exchange and Exchange-Related 
Programs
    Under this option HHS would require a single standard for State 
operations of Exchanges, reinsurance, risk adjustment and risk 
corridors. This alternative model would restrict State flexibility, 
requiring a more uniform standard that States must enact in order to 
achieve certification.
State Flexibility for Operation of Exchange and Exchange-Related 
Programs
    Under this option, States would have a great deal of flexibility 
around whether and how to implement Exchanges, reinsurance and risk 
adjustment. This alternative would allow States to develop these 
programs to fit their State-specific characteristics. The programs 
would be subject to few Federal standards.
Summary of Estimate Costs for Each Option
    HHS notes that a single standard for State operations of Exchanges, 
reinsurance, risk adjustment and risk corridors could produce a benefit 
of reduced Federal oversight cost. However this option may reduce 
innovation and therefore limit diffusion of successful policies. HHS 
also notes that while State flexibility could allow for innovation for 
States, it would increase administrative burden on the Federal 
government and national issuers, as policies and procedures would vary 
between States. HHS proposes a middle approach that aims to limit 
administrative costs for temporary programs while also ensuring that 
the policy aims of these risk mitigation programs are met. These costs 
and benefits are discussed more fully in the detailed impact analysis.

D. Accounting Statement

----------------------------------------------------------------------------------------------------------------
                                                                                Unit discount
              Category                  Primary estimate       Year dollar     rate  (percent)   Period covered
----------------------------------------------------------------------------------------------------------------
                                                    Benefits
----------------------------------------------------------------------------------------------------------------
Annualized.........................  Not estimated........              2011                 7         2012-2016
Monetized ($millions/year).........  Not estimated........              2011                 3         2012-2016
====================================
               Costs
----------------------------------------------------------------------------------------------------------------
Annualized.........................  Not estimated........              2011                 7         2012-2016
Monetized ($millions/year).........  Not estimated........              2011                 3         2012-2016
====================================
             Transfers
----------------------------------------------------------------------------------------------------------------
Federal Annualized.................  9925.................              2011                 7         2012-2016
Monetized ($millions/year).........  9633.................              2011                 3         2012-2016
====================================
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                          Reinsurance collects funds from all issuers and distributes it to
                                                              individual market issuers.
----------------------------------------------------------------------------------------------------------------
Note: For full documentation and discussion of these estimated costs and benefits see the detailed PRIA,
  available at http://cciio.cms.gov under ``Regulations and Guidance.''

V. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) 
requires agencies to prepare an initial regulatory flexibility analysis 
to describe the impact of the proposed rule on small entities, unless 
the head of the agency can certify that the rule will not have a 
significant economic impact on a substantial number of small entities. 
The Act generally defines a ``small entity'' as (1) a proprietary firm 
meeting the size standards of the Small Business Administration (SBA), 
(2) a not-for-profit organization that is not dominant in its field, or 
(3) a small government jurisdiction with a population of less than 
50,000. States and individuals are not included in the definition of 
``small entity.'' HHS uses 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.
    As discussed above, this proposed rule is necessary to implement 
standards for States related to reinsurance and risk adjustment, and 
for health insurance issuers related to reinsurance, risk corridors, 
and risk adjustment consistent with title I of the Patient Protection 
and Affordable Care Act (Pub. L. 111-148) as amended by the Health Care 
and Education Reconciliation Act of 2010 (Pub. L. 111-152), referred to 
collectively as the Affordable Care Act. For purpose of the Regulatory 
Flexibility Analysis, we expect entities offering health insurance 
plans including fully insured health plan issuers, self-insured health 
plan issuers, TPAs and other organizations to be affected by this 
proposed rule. We believe that health insurers would be classified 
under the North American Industry Classification System (NAICS) Codes 
524114 (Direct Health and Medical Insurance Carriers) According to SBA 
size standards, entities with average annual receipts of $7 million or 
less would be considered small entities for both of these NAICS codes. 
Health issuers could possibly be classified in 621491 (HMO Medical 
Centers) and, if this is the case, the SBA size standard would be $10 
million or less.
    As discussed in the Web Portal interim final rule (75 FR 24481), 
HHS examined the health insurance industry in depth in the Regulatory 
Impact Analysis we prepared for the proposed rule on establishment of 
the Medicare Advantage program (69 FR 46866, August 3, 2004). In that 
analysis, 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 (currently $7 million in annual receipts for health insurers, 
based on North American Industry Classification System Code 524114).\2\
    Additionally, as discussed in the Medical Loss Ratio interim final 
rule (75 FR 74918), the Department used a data set created from 2009 
National Association of Insurance Commissioners (NAIC) Health and Life 
Blank annual

[[Page 41950]]

financial statement data to develop an updated estimate of the number 
of small entities that offer comprehensive major medical coverage in 
the individual and group markets. For purposes of that analysis, the 
Department used total Accident and Health (A&H) earned premiums as a 
proxy for annual receipts. The Department estimated that there were 28 
small entities with less than $7 million in A&H earned premiums 
offering individual or group comprehensive major medical coverage; 
however, this estimate may overstate the actual number of small health 
insurance issuers offering such coverage, since it does not include 
receipts from these companies' other lines of business.
    As discussed earlier in this summary of the preliminary RIA, the 
Department is seeking comments on the potential impacts of the 
requirements in this proposed regulation on issuers' administrative 
costs. The Department is also seeking comments relating to potential 
impacts on small issuers.
    This rule proposes standards for premium stabilization programs 
required of health plan issuers including the risk adjustment program 
as well as the transitional reinsurance and risk corridors programs. 
Because health plan issuers are the only entities impacted by this rule 
and as evidenced above, few if any insurance firms offering 
comprehensive health insurance policies fell below the size thresholds 
for ``small'' business established by the SBA. We request comment on 
whether the small entities affected by this rule have been fully 
identified. We also request comment and information on potential costs 
for these entities and on any alternatives that we should consider.

VI. Unfunded Mandates

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits and take 
certain other actions before issuing proposed rule (and subsequent 
final rule) that includes any Federal mandate that may result in 
expenditures in any one year by a State, local, or tribal governments, 
in the aggregate, or by the private sector, of $100 million in 1995 
dollars, updated annually for inflation. In 2011, that threshold is 
approximately $136 million. Because States are not required to set up 
an Exchange or operate reinsurance and risk adjustment, the NPRM does 
not impose a mandate to incur costs above the $136 million UMRA 
threshold on State, local, or tribal governments.

VII. 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 costs on State and local 
governments, pre-empts State law, or otherwise has Federalism 
implications. Because States have flexibility in designing their 
Exchange and Exchange-related programs, State decisions will ultimately 
influence both administrative expenses and overall premiums. States are 
not required to operate an Exchange, risk adjustment, or reinsurance. 
For States electing to operate an Exchange, risk adjustment and 
reinsurance, much of the initial costs to the creation of Exchanges and 
Exchange-related programs will be funded by Exchange Planning and 
Establishment Grants. After this time, Exchanges will be financially 
self-sustaining with revenue sources at the discretion of the State. 
Current State Exchanges charge user fees to issuers.
    In compliance with the requirement of Executive Order 13132 that 
agencies examine closely any policies that may have Federalism 
implications or limit the policy making discretion of the States, the 
Department has engaged in efforts to consult with and work 
cooperatively with affected States, including participating in 
conference calls with and attending conferences of the National 
Association of Insurance Commissioners, and consulting with State 
insurance officials on an individual basis.
    Throughout the process of developing this NPRM, the Department has 
attempted to balance the States' interests in regulating health 
insurance issuers, and Congress' intent to provide access to Affordable 
Insurance Exchanges for consumers in every State. By doing so, it is 
the Department's view that we have complied with the requirements of 
Executive Order 13132.
    Pursuant to the requirements set forth in section 8(a) of Executive 
Order 13132, and by the signatures affixed to this regulation, the 
Department certifies that CMS has complied with the requirements of 
Executive Order 13132 for the attached proposed regulation in a 
meaningful and timely manner.

VIII. Regulations Text

List of Subjects in 45 CFR Part 153

    Administrative practice and procedure, Adverse selection, Consumer 
protection, Health care, Health insurance, Health records, Hospitals, 
Indians, Individuals with disabilities, Organization and functions 
(Government agencies), Reporting and recordkeeping requirements, 
Reinsurance, Risk adjustment, Risk corridors, Risk mitigation, State 
and local governments.

    For the reasons set forth in the preamble, the Department of Health 
and Human Services proposes to amend 45 CFR subtitle A, subchapter B, 
as set forth below:

SUBTITLE A--DEPARTMENT OF HEALTH AND HUMAN SERVICES

SUBCHAPTER B--REQUIREMENTS RELATING TO HEALTH CARE ACCESS

    Part 153 is added as follows:

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

Subpart A--General Provisions

Sec.
153.10 Basis and scope.
153.20 Definitions.
Subpart B--State Notice of Insurance Benefits and Payment Parameters
153.100 Establishment of State insurance benefits and payment 
parameters.
153.110 Standards for the State Notice.
Subpart C--State Standards for the Transitional Reinsurance Program for 
the Individual Market
153.200 Definitions.
153.210 State establishment of a reinsurance program.
153.220 Collection of reinsurance contribution funds.
153.230 Calculation of reinsurance payments.
153.240 Disbursement of reinsurance payments.
153.250 Coordination with high-risk pools.
Subpart D--State Standards for the Risk Adjustment Program
153.300 Definitions.
153.310 Risk adjustment administration.
153.320 Federally-certified risk adjustment methodology.
153.330 State alternate risk adjustment methodology.
153.340 Data collection under risk adjustment.
153.350 Risk adjustment data validation requirements.
Subpart E--Health Insurance Issuer Standards Related to the 
Transitional Reinsurance Program
153.400 Reinsurance contribution funds.
153.410 Requests for reinsurance payment.
Subpart F--Health Insurance Issuer Standards Related to the Temporary 
Risk Corridors Program
153.500 Definitions.
153.510 Risk corridor establishment and payment methodology.

[[Page 41951]]

153.520 Risk corridors standards for QHP issuers.
Subpart G--Health Insurance Issuer Standards Related to the Risk 
Adjustment Program
153.600 Definitions.
153.610 Risk adjustment issuer requirements.
153.620 Compliance with risk adjustment standards.

    Authority:  Title I of the Affordable Care Act, Sections 1321, 
1341-1343.

Subpart A--General Provisions


Sec.  153.10  Basis and scope.

    (a) Basis. This part is based on the following sections of title I 
of the Affordable Care Act:

    1321. State flexibility in operation and enforcement of 
Exchanges and related requirements.
    1341. Transitional reinsurance program for individual market in 
each State.
    1342. Establishment of risk corridors for plans in individual 
and small group markets.
    1343. Risk adjustment.

    (b) Scope. This part establishes standards for the establishment 
and operation of a transitional reinsurance program, temporary risk 
corridors, and a permanent risk adjustment program.


Sec.  153.20  Definitions.

    The following definitions apply to this part, unless the context 
indicates otherwise:
    Applicable reinsurance entity means a not-for-profit organization 
that carries out the reinsurance program established under this part.
    Benefit year has the meaning given to the term in Sec.  155.20.
    Contributing entity means any health insurance issuer and, in the 
case of a self-insured group health plan, the third party administrator 
of the group health plan.
    Enrollee has the meaning given to the term in Sec.  155.20.
    Exchange has the meaning given to the term in Sec.  155.20.
    Grandfathered health plan means coverage provided by a group health 
plan, or a health insurance issuer as provided in accordance with 
requirements under Sec.  147.140.
    Group health plan has the meaning given to the term in Sec.  
144.103.
    Health insurance issuer or issuer has the meaning given to the term 
in Sec.  144.103.
    Health plan has the meaning given to the term in Sec.  155.20.
    Individual market means the market for health insurance coverage 
offered to individuals other than in connection with a group health 
plan.
    Reinsurance-eligible plan means, for the purpose of the reinsurance 
program, any health plan offered in the individual market with the 
exception of grandfathered plans.
    Risk adjustment covered plan means, for the purpose of the risk 
adjustment program, any plan offered in the individual or small group 
market with the exception of grandfathered plans.
    Small group market has the meaning given to the term in Sec.  
155.20.
    State has the meaning given to the term in Sec.  155.20.

Subpart B--State Notice of Insurance Benefits and Payment 
Parameters


Sec.  153.100  Establishment of State insurance benefits and payment 
parameters.

    (a) General requirement. A State operating an Exchange, as well as 
a State establishing a reinsurance program, must issue an annual notice 
of benefits and payment parameters specific to that State if that State 
intends to modify any reinsurance or risk adjustment parameters from 
those specified in the forthcoming annual Federal notice of benefit and 
payment parameters.
    (b) State notice deadlines. If a State elects to publish an annual 
notice of benefits and payment parameters, the State must issue the 
notice by early March of the year prior to the benefit year.
    (c) State failure to publish notice. Any State operating an 
Exchange or establishing a reinsurance program that fails to publish a 
notice within the period specified in paragraph (b) of this section 
must adhere to the parameters, as specified in the forthcoming annual 
Federal notice of benefit and payment parameters.


Sec.  153.110  Standards for the State Notice.

    (a) Reinsurance content. If a State operating an Exchange or 
establishing a reinsurance program intends to modify a Federal 
reinsurance payment parameter, the State notice must specify at least 
the following information:
    (1) The data requirements and data collection frequency for health 
insurance issuers to receive reinsurance payment.
    (2) The reinsurance attachment point, reinsurance cap, and 
coinsurance rate, as specified in Sec.  153.230, if different from the 
corresponding parameters specified in the forthcoming annual Federal 
notice of benefit and payment parameters;
    (3) If a State plans to use more than one applicable reinsurance 
entity, for each applicable reinsurance entity, the geographic 
boundaries for that entity and estimates of:
    (i) The number of enrollees in group health plans, including the 
fully insured and self insured market;
    (ii) The number of enrollees in the individual market;
    (iii) The amount of reinsurance payments that will be made to 
issuers; and
    (iv) The amount of all premiums in the geographic region that will 
be available for contributions for each reinsurance entity.
    (b) Risk adjustment content. If a State operating an Exchange 
intends to modify a Federal risk adjustment parameter, the State notice 
must provide a detailed description of and rationale for any 
modifications, including:
    (1) The methodology for determining average actuarial risk, 
including the establishment of risk pools and the Federally-certified 
risk adjustment model as specified in Sec.  153.320; and
    (2) The risk adjustment data validation methodology set forth in 
Sec.  153.350.

Subpart C--State Standards for the Transitional Reinsurance Program 
for the Individual Market


Sec.  153.200  Definitions.

    The following definitions apply to this subpart.
    Attachment point means the threshold dollar amount of costs 
incurred by a health insurance issuer for payment of essential health 
benefits, as defined in section 1302(b) of the Affordable Care Act, 
provided for an enrolled individual, after which threshold, the costs 
for covered essential health benefits, as defined in section 1302(b) of 
the Affordable Care Act, are eligible for reinsurance payments.
    Coinsurance rate means the rate at which the applicable reinsurance 
entity will reimburse the health insurance issuer for costs incurred to 
cover essential health benefits, as defined in section 1302(b) of the 
Affordable Care Act, after the attachment point and before the 
reinsurance cap.
    Contribution rate means the rate, based on a percent of premium, 
used to determine the dollar amounts each health insurance issuer and 
third party administrator, on behalf of a self-insured group health 
plan, must contribute to a State reinsurance program.
    Percent of premium means the percent of total revenue, based on 
earned premiums as described in Sec.  158.130(a), in a fully insured 
market or the percent of total medical expenses in a self-insured 
market.
    Reinsurance cap means the threshold dollar amount for costs 
incurred by a

[[Page 41952]]

health insurance issuer for payment of essential health benefits, as 
defined in section 1302(b) of the Affordable Care Act, provided for an 
enrolled individual, after which threshold, the costs for covered 
essential health benefits, as defined in section 1302(b) of the 
Affordable Care Act, are no longer eligible for reinsurance payments.
    Third party administrator means the claims processing entity for a 
self-insured group health plan.


Sec.  153.210  State establishment of a reinsurance program.

    (a) General requirement. Each State that elects to operate an 
Exchange must establish a reinsurance program for the years 2014 
through 2016.
    (1) The State must enter into a contract with an existing 
applicable reinsurance entity or establish an applicable reinsurance 
entity to carry out the provisions of this subpart.
    (2) If a State establishes or contracts with more than one 
applicable reinsurance entity, the State must:
    (i) Ensure that each applicable reinsurance entity operates in a 
distinct geographic area with no overlap of jurisdiction with any other 
applicable reinsurance entity; and
    (ii) Publish the geographic boundaries for each applicable 
reinsurance entity in a State notice described in Sec.  153.110.
    (3) Under authority granted by the State, an applicable reinsurance 
entity may subcontract specific administrative functions required under 
this subpart and part 156 subpart G.
    (4) States must review and approve subcontracting arrangements to 
ensure efficient and appropriate expenditures of administrative funds 
collected under this subpart.
    (5) States must ensure that the contract or establishment of the 
applicable reinsurance entity is of sufficient duration to cover 
completion of all reinsurance-related activities for benefit years 
commencing in 2014 through 2016 and any activities required to be 
undertaken in subsequent periods.
    (b) Multi-State reinsurance arrangements. Multiple States may 
contract with a single not-for-profit entity to serve as the applicable 
reinsurance entity for each State. In such cases, each contractual 
arrangement between the not-for-profit entity and the individual State 
will be treated as an individual State applicable reinsurance entity 
separate and distinct from all other applicable reinsurance entities 
operated by the not-for-profit entity.
    (c) Special State circumstances for establishing a reinsurance 
program. For each State that does not elect to establish an Exchange, 
the State may determine to operate its own reinsurance program and must 
carry out all of the provisions in this subpart.
    (d) Non-electing States. For each State that does not elect to 
establish an Exchange and does not determine to operate its own 
reinsurance program, HHS will carry out all of the provisions of this 
subpart on behalf of the State and establish the reinsurance program to 
perform all the reinsurance functions for that State.
    (e) Oversight. Each State that establishes an Exchange or operates 
a reinsurance program must ensure that each applicable reinsurance 
entity complies with all provisions of this subpart and subpart E 
throughout the duration of its contract or establishment.


Sec.  153.220  Collection of reinsurance contribution funds.

    (a) General requirement. The State must ensure that the applicable 
reinsurance entity collects contributions to fund the following:
    (1) Reinsurance contributions that will total, on a national basis, 
$10 billion in 2014, $6 billion in 2015, and $4 billion in 2016.
    (2) U.S. Treasury contributions that will total, on a national 
basis, $2 billion in 2014, $2 billion in 2015, and $1 billion in 2016.
    (b) Contribution rate. The State must adhere to a national 
contribution rate set by HHS for the amounts listed in paragraph (a)(1) 
and (a)(2) of this section.
    (1) HHS will set the contribution rate as a percent of premium 
through a forthcoming annual Federal notice of benefit and payment 
parameters.
    (2) At a minimum, the State must ensure that all applicable 
reinsurance entities operating in a State collect from all contributing 
entities the amount set forth by the national rate. The contributions 
allocated for--
    (i) Reinsurance payments must be used for reinsurance payments.
    (ii) Payments to the U.S. Treasury must be paid to the U.S. 
Treasury.
    (3) An applicable reinsurance entity may collect more than the 
amounts collected from the set national rate to provide--
    (i) Additional funding for reinsurance payments if the State 
believes the amount is not sufficient to fund required reinsurance 
payments; and
    (ii) Funding for administrative expenses of the applicable 
reinsurance entity.


Sec.  153.230  Calculation of reinsurance payments.

    (a) General requirement. A health insurance issuer of a non-
grandfathered individual market plan becomes eligible for reinsurance 
payments when its expenses for items and services within the essential 
health benefits, as defined in section 1302(b) of the Affordable Care 
Act, of an individual enrollee exceed an attachment point.
    (b) Reinsurance payment. States may use the payment formula and 
values for the attachment point, reinsurance cap, and coinsurance rate 
for each year commencing in 2014 and ending in 2016, established in the 
forthcoming annual Federal notice of benefit and payment parameters.
    (1) States must ensure that the reinsurance payment represents the 
product of the coinsurance rate times all health insurance issuer costs 
for an individual's essential health benefits, as defined in section 
1302(b) of the Affordable Care Act, which the health insurance issuer 
incurs between the attachment point and the reinsurance cap.
    (2) The State, or the applicable reinsurance entity on behalf of 
the State, must remit the amounts in paragraph Sec.  153.220(a)(2) of 
this section to the general fund of the U.S. Treasury at a frequency to 
be determined by HHS.
    (c) State modification of reinsurance payment formula. States may 
modify the reinsurance payment formula to values determined appropriate 
by the State.
    (1) States may use one or all of the following methods:
    (i) Increasing or decreasing the attachment point;
    (ii) Increasing, decreasing, or eliminating the reinsurance cap; 
and
    (iii) Increasing or decreasing the coinsurance rate.
    (2) States must publish any modification to the reinsurance payment 
formula and parameters in a State notice as described in Sec.  153.110.
    (3) States that develop a State formula for reinsurance payments 
must ensure that contributions toward reinsurance are sufficient to 
cover:
    (i) All payments that the applicable reinsurance entity is 
obligated to make under that State formula for the given calendar year 
for the reinsurance program;
    (ii) All contributions to the U.S. Treasury described in Sec.  
153.220(a)(2).


Sec.  153.240  Disbursement of reinsurance payments.

    (a) Data collection. The State must ensure that the applicable 
reinsurance entity collects from health insurance issuers of 
reinsurance-eligible plans data required to calculate payments 
described in Sec.  153.230, according to the data requirements and data 
collection

[[Page 41953]]

frequency specified by the State in the notice described in Sec.  
153.110 or in the forthcoming annual Federal notice of benefit and 
payment parameters.
    (b) Reinsurance entity payments. The State must ensure that each 
applicable reinsurance entity make payments to health insurance issuers 
that do not exceed contributions.
    (1) Payments must be made to health insurance issuers of 
reinsurance-eligible plans based on the applicable payment notice 
identified in Sec.  153.230(b) or the payment parameters set pursuant 
to Sec.  153.230(c).
    (2) Payments may be reduced on a pro rata basis to match the amount 
of contributions received by the State in a given reinsurance year. Any 
pro rata reductions that the State determines are necessary must be 
fair and equitable for all health insurance issuers in the individual 
market.
    (3) The State must ensure that an applicable reinsurance entity 
makes payment as specified in Sec.  153.410(b) to the health insurance 
issuer of a reinsurance-eligible plan after receiving a valid claim for 
payment from that health insurance issuer.
    (c) Maintenance of Records. The State must maintain books, records, 
documents, and other evidence of accounting procedures and practices of 
the reinsurance program for each benefit year for at least 10 years.


Sec.  153.250  Coordination with high-risk pools.

    (a) General requirement. The State shall eliminate or modify any 
State high risk pool to the extent necessary to carry out the 
reinsurance program established under this subpart.
    (b) Coordination with high-risk pools. The State may coordinate the 
State high risk pool with the reinsurance program to the extent it 
conforms to the provisions of this subpart.

Subpart D--State Standards for the Risk Adjustment Program


Sec.  153.300  Definitions.

    The following definitions apply to this subpart:
    Alternate risk adjustment methodology means a risk adjustment 
methodology proposed by a State for use instead of existing Federally-
certified risk adjustment models, but not yet certified by HHS.
    Federally-certified risk adjustment methodology means a risk-
adjustment methodology that has been either developed and promulgated 
by HHS or has been certified by HHS.
    Risk adjustment methodology means the specific procedures used to 
determine average actuarial risk.
    Risk adjustment model means an actuarial tool used to predict 
health plan costs based on the relative actuarial risk of enrollees in 
risk adjustment covered plans.
    Risk pool means the population across which risk is distributed in 
risk adjustment.


Sec.  153.310  Risk adjustment administration.

    (a) State eligibility to establish a risk adjustment program. (1) A 
State that elects to operate an Exchange is eligible to establish a 
risk adjustment program.
    (2) Any State that does not elect an Exchange, or that HHS has not 
approved to operate an Exchange, will forgo implementation of all State 
functions in this subpart and HHS will carry out all of the provisions 
of this subpart on behalf of the State.
    (3) Any State that elects to establish an Exchange but does not 
elect to administer risk adjustment will forgo implementation of all 
State functions in this subpart and HHS will carry out all of the 
provisions of this subpart on behalf of the State.
    (b) Entities eligible to carry out risk adjustment activities. A 
State may elect to have an entity other than the Exchange perform the 
risk adjustment functions of this subpart provided that the entity 
selected meets the requirements proposed in Sec.  155.110 of the notice 
of proposed rulemaking entitled, ``Patient Protection and Affordable 
Care Act; Establishment of Exchanges and Qualified Health Plans,'' 
published in this issue of the Federal Register.
    (c) Timeframes. A State, or HHS on behalf of the State, must 
commence calculating payment and charges with the 2014 benefit year.


Sec.  153.320  Federally-certified risk adjustment methodology.

    (a) General requirement. Any risk adjustment methodology used by a 
State, or HHS on behalf of the State, must be established as a 
Federally-certified risk adjustment methodology. A risk adjustment 
methodology may become Federally-certified by one of the following 
processes:
    (1) A risk adjustment methodology developed by HHS, with its use 
authorized and published in a forthcoming annual Federal notice of 
benefits and payment parameters; or
    (2) An alternative risk adjustment methodology submitted by a State 
in accordance with Sec.  153.330, and reviewed and certified by HHS. 
After HHS approves a State alternative risk adjustment methodology, 
that methodology is considered a Federally-certified risk adjustment 
methodology.
    (b) Publication of methodology in notices. A State must use one of 
the Federally-certified risk adjustment methodologies that will be 
published by HHS in a forthcoming annual Federal notice of benefits and 
payment parameters or that has been published by the State in the 
annual State notice described in Sec.  153.110(b). Each methodology 
will include:
    (1) A complete description of the risk adjustment model, 
including--
    (i) Factors to be employed in the model, including but not limited 
to demographic factors, diagnostic factors, and utilization factors, if 
any;
    (ii) The qualifying criteria for establishing that an individual is 
eligible for a specific factor;
    (iii) Weights assigned to each factor; and
    (iv) The schedule for collection of risk adjustment data and 
determination of factors; and
    (2) Any adjustments made to the risk adjustment model weights to 
determine average actuarial risk.
    (c) Use of methodology for States that do not elect an Exchange. 
HHS will specify in the forthcoming annual Federal notice of benefits 
and payment parameters the Federally-certified risk adjustment 
methodology that will apply in States that do not elect to operate an 
Exchange.


Sec.  153.330  State alternate risk adjustment methodology.

    (a) State request for alternate methodology certification.
    (1) The State request to HHS for the certification of an 
alternative risk adjustment model must include:
    (i) A description of specific risk pools to which the methodology 
will be applied;
    (ii) A complete description of the risk adjustment model, 
including--
    (A) Factors to be employed in the methodology, including but not 
limited to demographic factors, diagnostic factors, and utilization 
factors, if any;
    (B) The qualifying criteria for establishing that an individual is 
eligible for a specific factor;
    (C) Weights assigned to each factor;
    (D) The schedule for collection of risk adjustment data and the 
method of data collection;
    (E) Calibration methodology and frequency of calibration; and
    (F) Statistical performance metrics, as specified by HHS; and
    (iii) Any adjustments made to the base risk adjustment model 
weights to determine average actuarial risk.
    (2) The request must include the extent to which the methodology:
    (i) Accurately explains the variation in the expenses of a given 
population;

[[Page 41954]]

    (ii) Links risk factors to daily clinical practice and are 
clinically meaningful to providers;
    (iii) Encourages favorable behavior among providers and health 
plans and discourages unfavorable behavior;
    (iv) Uses data that is complete, high in quality and available in a 
timely fashion;
    (v) Is easy for stakeholders to understand and implement;
    (vi) Provides stable risk scores over time and across plans; and
    (vii) Minimizes administrative costs.
    (b) State renewal of alternate methodology. The State may not 
implement a recalibrated risk adjustment model or otherwise altered 
methodology without first obtaining HHS certification.
    (1) Recalibration of the risk adjustment model must be performed at 
least as frequently as described in paragraph (a)(1)(ii)(E);
    (2) Request must include any changes to the parameters described in 
paragraph (a)(1).


Sec.  153.340  Data collection under risk adjustment.

    (a) Data collection requirements. The State, or HHS on behalf of 
the State, must collect risk-related data to determine individual risk 
scores that form the basis for risk adjustment.
    (b) Minimum standards. The State, or HHS on behalf of the State, 
may vary the amount and type of data collected provided that the State, 
or HHS on behalf of the State, uses the following standards for risk 
adjustment data collection:
    (1) The NCPDP claims transaction or the HIPAA standard ASC X12N 837 
Health Care Claim transaction for all claims and encounter data;
    (2) The HIPAA standard ASC X12N 834 Benefit Enrollment and 
Maintenance transaction for all demographic and enrollment data; and
    (3) To ensure adequate data privacy standards, the State, or any 
official, employee, agent or representative of the State must use 
individually identifiable information only as specifically required or 
permitted by this part and must not disclose individually identifiable 
information except as provided in paragraph (d) of this section.
    (i) The State should interpret this provision as separate from the 
authority of other applicable laws for disclosing individual 
identifiable information under paragraph (d) of this section.
    (ii) The State must implement security standards that provide 
administrative, physical, and technical safeguards for the individually 
identifiable information consistent with the security standards 
described at 45 CFR 164.308, 164.310, and 164.312.
    (iii) The State must establish privacy standards that set forth 
approved uses and disclosures of individually identifiable information.
    (c) Exception for States with all payer claims databases. Any State 
with an all payer claims database that is operational on or before 
January 1, 2013 may request an exception from the data collection 
minimum standards described in paragraph (b) of this section by 
submitting:
    (1) Technical specifications for the all payer claims database 
including data formats;
    (2) Proposed system modifications to support risk adjustment 
activities;
    (3) Proposed system modifications to meet requirements set forth in 
paragraph (d) of this section and other Exchange-related activities.
    (d) Uses of risk adjustment data. The State, or HHS on behalf of 
the State, must make relevant claims and encounter data collected under 
risk adjustment available to support claims-related activities as 
follows:
    (1) Provide HHS with de-identified claims and encounter data for 
use in recalibrating Federally-certified risk adjustment models;
    (2) Provide HHS with summarized claims cost for use in verifying 
risk corridor submissions; and
    (3) Provide the reinsurance entity with summarized claims and 
encounter data from reinsurance-eligible plans for payment verification 
purposes and individual-level from reinsurance-eligible plans for audit 
purposes.


Sec.  153.350  Risk adjustment data validation standards.

    (a) General requirement. The State, or HHS on behalf of the State, 
must validate a statistically valid sample of risk adjustment data from 
each issuer that offers at least one risk adjustment covered plan in 
that State.
    (b) Use of data validation to adjust risk. The State, or HHS on 
behalf of the State, may adjust the average actuarial risk calculated 
in Sec.  153.310 for all risk adjustment covered plans offered by an 
issuer based on the risk score error determined in the data validation 
conducted pursuant to paragraph (a) of this section.
    (c) Adjustment to charges and payments. The State may adjust 
charges and payments to all risk adjustment covered plan issuers based 
on the adjustments calculated in paragraph (b) of this section.
    (d) Appeals. The State must provide an administrative process to 
appeal data validation findings.

Subpart E--Health Insurance Issuer Standards Related to the 
Transitional Reinsurance Program


Sec.  153.400  Reinsurance contribution funds.

    (a) General requirement. Each contributing entity must make 
payments of contributions, in a frequency and manner determined by the 
State or HHS, to the applicable reinsurance entity for each State in 
which the contributing entity issues health insurance for the 
contributions specified pursuant to Sec.  153.220(b).
    (b) Multiple reinsurance entities. If the State establishes or 
contracts with more than one reinsurance entity, the contributing 
entity must make payments to each applicable reinsurance entity that 
covers each geographic area in which the contributing entity issues 
health insurance.
    (c) Data requirements. Each contributing entity must submit to each 
applicable reinsurance entity data required to substantiate the 
contribution amounts for the contributing entity.
    (1) Each contributing entity in the individual and fully insured 
market must submit enrollment and premium data.
    (2) Each contributing entity in the self-insured market must submit 
data on covered lives and total expenses.


Sec.  153.410  Requests for reinsurance payment.

    (a) General requirement. A reinsurance-eligible plan issuer may 
make a request for payment when an enrollee of that reinsurance-
eligible plan has met the criteria for reinsurance payment.
    (b) Manner of request. Reinsurance-eligible plan issuers must make 
requests for payment in a manner that will be specified by the State as 
described in Sec.  153.110 or in the forthcoming annual Federal notice 
of benefit and payment parameters.

Subpart F--Health Insurance Issuer Standards Related to the 
Temporary Risk Corridors Program


Sec.  153.500  Definitions.

    Allowable administrative costs means the total non-medical costs as 
defined in Sec.  158.160(b), including costs for the administration and 
operation incurred by the plan as set forth in Sec.  158.160(b)(2).
    Allowable costs means an amount equal to the total medical costs, 
which include clinical costs, excluding allowable administrative costs, 
paid by the QHP issuer in providing benefits covered by the QHP.
    Charge means the flow of funds from QHP issuers to HHS.

[[Page 41955]]

    Direct and indirect remuneration means prescription drug price 
concessions or similar benefits from manufacturers, pharmacies or 
similar entities obtained by a QHP issuer or an intermediary 
contracting organization with which a QHP issuer has contracted. Such 
concessions include but are not limited to: Discounts, charge backs, 
rebates, free goods contingent on a purchase agreement, up-front 
payments, coupons, goods in kind, free or reduced-price services, and 
grants. We further specify that the term applies regardless of whether 
the intermediary contracting organization retains all or a portion of 
the direct and indirect remuneration or passes the entire direct and 
indirect remuneration to the QHP issuer and regardless of the terms of 
the contract between the issuer and the intermediary contracting 
organization.
    Payment means the flow of funds from HHS to QHP issuers.
    Qualified Health Plan, or QHP, has the meaning given to the term 
proposed in the general definitions section of the Patient Protection 
and Affordable Care Act; Establishment of Exchanges and Qualified 
Health Plans, published in this issue of the Federal Register.
    Risk corridor means any payment adjustment system based on the 
ratio of allowable costs of a plan to the plan's target amount.
    Target amount means an amount equal to the total premiums incurred 
by a QHP, including any premium tax credit under any governmental 
program, reduced by the allowable administrative costs of the plan.


Sec.  153.510  Risk corridor establishment and payment methodology.

    (a) General requirement. A QHP issuer must adhere to the 
requirements set by HHS in this subpart and in the forthcoming annual 
Federal notice of benefits and payment parameters for the establishment 
and administration of a program of risk corridors for calendar years 
2014, 2015, and 2016.
    (b) HHS payments to health insurance issuers. QHP issuers will 
receive payment from HHS in the following amounts under the following 
circumstances:
    (1) When a QHP's allowable costs for any benefit year are more than 
103 percent but not more than 108 percent of the target amount, HHS 
pays the QHP issuer an amount equal to 50 percent of the target amount 
in excess of 103 percent of the target amount; and
    (2) When a QHP's allowable costs for any benefit year are more than 
108 percent of the target amount, HHS pays to the QHP issuer an amount 
equal to the sum of 2.5 percent of the target amount plus 80 percent of 
allowable costs in excess of 108 percent of the target amount.
    (c) Health insurance issuers' remittance of charges. QHP issuers 
must remit charges to HHS in the following amounts under the following 
circumstances:
    (1) If a QHP's allowable costs for any benefit year are less than 
97 percent but not less than 92 percent of the target amount, the QHP 
issuer must remit charges to HHS an amount equal to 50 percent of the 
difference between 97 percent of the target amount and the allowable 
costs; and
    (2) When a QHP's allowable costs for any benefit year are less than 
92 percent of the target amount, the QHP issuer must remit charges to 
HHS an amount equal to the sum of 2.5 percent of the target amount plus 
80 percent of the difference between 92 percent of the target amount 
and the allowable costs.


Sec.  153.520  Risk corridor standards for QHP issuers.

    (a) Adjusted premium data. QHP issuers must submit to HHS data on 
the premiums collected for each QHP that the issuer offers in a format 
specified by HHS. These premium amounts must be adjusted in the 
following manner:
    (1) Increased by the amount of any payments received for--
    (i) Risk adjustment, and
    (ii) Reinsurance as described in Sec.  153.230; and
    (2) Reduced for any--
    (i) Risk adjustment charges assessed,
    (ii) Reinsurance contributions made as described in Sec.  153.220, 
and
    (iii) User fees paid.
    (3) Accounting for reinsurance payments. QHP issuers must attribute 
reinsurance payments to risk corridors based on the date, to be 
determined by HHS, on which the valid reinsurance claim was submitted.
    (b) Allowable costs. All QHP issuers offering QHP's must submit to 
HHS the allowable costs incurred for each QHP that the QHP issuer 
offers in a format to be specified in the forthcoming annual Federal 
notice of benefits and payment parameters.
    (1) Allowable costs must be net of direct and indirect 
remuneration.
    (2) Allowable costs must be reduced for any cost-sharing reductions 
payments received from HHS.

Subpart G--Health Insurance Issuer Standards Related to the Risk 
Adjustment Program


Sec.  153.600  Definitions.

    Risk adjustment data means all data that are used in the 
application of a risk adjustment payment model.


Sec.  153.610  Risk adjustment issuer requirements.

    (a) Data submission. All issuers that offer risk adjustment covered 
plans must submit all required risk adjustment data for those risk 
adjustment covered plans in the manner and timeframes established by 
the State, or by HHS on behalf of the State. This data may include but 
is not limited to:
    (1) Claims and encounter data for items and services rendered;
    (2) Enrollment and demographic information; and
    (3) Prescription drug utilization data.
    (b) Issuer contracts. Issuers that offer risk adjustment covered 
plans may include in their contracts with providers, suppliers, 
physicians, and other practitioners, provisions that require such 
contractor's submission of complete and accurate risk adjustment data 
in the manner and timeframes established by the State, or HHS on behalf 
of the State. These provisions may include financial penalties for 
failure to submit complete, timely, or accurate data.
    (c) Assessment of charges. After charges and payments for all risk 
adjustment covered plans have been calculated, issuers that offer risk 
adjustment covered plans with a net balance of risk adjustment charges 
payable will be notified by the State, or by HHS on behalf of the 
State, for those net charges and must remit those risk adjustment 
charges to the State, or to HHS on behalf of the State.


Sec.  153.620  Compliance with risk adjustment standards.

    (a) Issuer support of data validation. All issuers that offer risk 
adjustment covered plans must make available to HHS and the State any 
data requested to support validation of risk adjustment data reported 
under this subpart of this part.
    (b) Issuer records maintenance requirements. All issuers that offer 
risk adjustment covered plans must retain any risk adjustment data 
reported under this subpart of this part for a period of at least ten 
years after the date of the report.

(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance Program)


[[Page 41956]]


    Dated: June 29, 2011.
Donald M. Berwick,
Administrator, Centers for Medicare & Medicaid Services.
    Dated: July 7, 2011.
Kathleen Sebelius,
Secretary.
[FR Doc. 2011-17609 Filed 7-11-11; 11:15 am]
BILLING CODE 4120-01-P