[Federal Register Volume 78, Number 36 (Friday, February 22, 2013)]
[Proposed Rules]
[Pages 12428-12458]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-03921]



[[Page 12427]]

Vol. 78

Friday,

No. 36

February 22, 2013

Part II





Department of Health and Human Services





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Centers for Medicare & Medicaid Services





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42 CFR Parts 422 and 423





Medicare Program; Medical Loss Ratio Requirements for the Medicare 
Advantage and the Medicare Prescription Drug Benefit Programs; Proposed 
Rule

  Federal Register / Vol. 78, No. 36 / Friday, February 22, 2013 / 
Proposed Rules  

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 422 and 423

[CMS-4173-P]
RIN 0938-AR69


Medicare Program; Medical Loss Ratio Requirements for the 
Medicare Advantage and the Medicare Prescription Drug Benefit Programs

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would implement medical loss ratio (MLR) 
requirements for the Medicare Advantage Program and the Medicare 
Prescription Drug Benefit Program under the Patient Protection and 
Affordable Care Act.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. EST on April 16, 
2013.

ADDRESSES: In commenting, please refer to file code CMS-4173-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (please choose only one 
of the ways listed):
    1. Electronically. You may submit electronic comments on this 
regulation to http://www.regulations.gov. Follow the ``Submit a 
comment'' instructions.
    2. By regular mail. You may mail written comments to the following 
address ONLY: Centers for Medicare & Medicaid Services, Department of 
Health and Human Services, Attention: CMS-4173-P, P.O. Box 8013, 
Baltimore, MD 21244-8013.
    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-4173-P, Mail 
Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.
    4. By hand or courier. Alternatively, you may deliver (by hand or 
courier) your written comments ONLY to the following addresses prior to 
the close of the comment period:
    a. For delivery in Washington, DC-- Centers for Medicare & Medicaid 
Services, Department of Health and Human Services, Room 445-G, Hubert 
H. Humphrey Building, 200 Independence Avenue SW., Washington, DC 
20201.
    (Because access to the interior of the Hubert H. Humphrey Building 
is not readily available to persons without federal government 
identification, commenters are encouraged to leave their comments in 
the CMS drop slots located in the main lobby of the building. A stamp-
in clock is available for persons wishing to retain a proof of filing 
by stamping in and retaining an extra copy of the comments being 
filed.)
    b. For delivery in Baltimore, MD-- Centers for Medicare & Medicaid 
Services, Department of Health and Human Services, 7500 Security 
Boulevard, Baltimore, MD 21244-1850.
    If you intend to deliver your comments to the Baltimore address, 
call telephone number (410) 786-1066 in advance to schedule your 
arrival with one of our staff members.
    Comments erroneously mailed to the addresses indicated as 
appropriate for hand or courier delivery may be delayed and received 
after the comment period.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Ilina Chaudhuri, 410-786-8628 or 
[email protected].

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

I. Background

    The Patient Protection and Affordable Care Act (Pub. L. 111-148), 
was enacted on March 23, 2010; the Health Care and Education 
Reconciliation Act (Pub. L. 111-152) (``Reconciliation Act''), was 
enacted on March 30, 2010. In this preamble we refer to the two 
statutes collectively as the Affordable Care Act. The Affordable Care 
Act includes significant reforms to both the private health insurance 
industry and the Medicare and Medicaid programs. Provisions in the 
Affordable Care Act concerning the Part C Medicare Advantage (MA) and 
Part D Prescription Drug programs largely focus on beneficiary 
protections, MA payment reforms, and simplification of MA and 
Prescription Drug program processes for both programs. Regulations 
implementing most Affordable Care Act provisions pertaining to the MA 
and Prescription Drug Program provisions were published on April 5, 
2011 (77 FR 22072) and a correction was published June 1, 2012 (77 FR 
32407).
    This proposed rule would implement section 1103 of Title I, Subpart 
B of the Reconciliation Act. This section of the Affordable Care Act 
amends section 1857(e) of the Social Security Act (the Act) to add new 
medical loss ratio (MLR) requirements. An MLR is expressed as a 
percentage, generally representing the percentage of revenue used for 
patient care, rather than for such other items as administrative 
expenses or profit. Because section 1860D-12(b)(3)(D) of the Act 
incorporates by reference the requirements of section 1857(e), these 
new Affordable Care Act medical loss ratio requirements also apply to 
the Part D program. Under these new requirements, MA organizations and 
Part D sponsors are required to report their MLR, and are subject to 
financial and other penalties for a failure to meet a new statutory 
requirement that they have an MLR of at least 85 percent. The 
Affordable Care Act requires several levels of sanctions for failure to 
meet the 85 percent minimum MLR requirement, including remittance of 
funds to CMS, a prohibition on enrolling new members, and ultimately 
contract termination. This proposed rule sets forth CMS' proposed 
approach to implement these new MLR requirements for the MA and Part D 
programs.

II. Provisions of the Proposed Regulations

A. Introduction

    The new minimum MLR requirement in section 1857(e)(4) of the Act is 
intended to create incentives for MA organizations and Part D sponsors 
to reduce administrative costs, and marketing, profits, and other uses 
of the funds earned by plan sponsors and help

[[Page 12429]]

to ensure that taxpayers and enrolled beneficiaries receive value from 
Medicare health plans. Under this proposed rule, an MLR would be 
determined based on the percentage of contract revenue spent on 
clinical services, prescription drugs, quality improving activities, 
and direct benefits to beneficiaries in the form of reduced Part B 
premiums. The higher the MLR, the more the MA organization or Part D 
sponsor is spending on claims and quality improving activities and the 
less they are spending on other things. MA organizations and Part D 
sponsors will remit payment to CMS when their spending on clinical 
services, prescription drugs, quality improving activities, and Part B 
premium rebates, in relation to their total revenue, is less than the 
85 percent MLR requirement established under section 1857(e)(4) of the 
Act. We believe the payment remittance of section 1857(4)(e)(A) of the 
Act is designed to encourage the provision of value to policyholders by 
creating incentives for MA organizations and Part D sponsors to become 
more efficient in their operations. If a plan sponsor fails to meet MLR 
requirements for more than 3 consecutive years, they will also be 
subject to enrollment sanctions and, after 5 consecutive years, to 
contract termination.
    The Affordable Care Act also enacted a new MLR requirement under 
section 2718 of the Public Health Service Act (PHSA) that applies to 
issuers of employer group and individual market private insurance. We 
have already issued regulations implementing this private insurance 
MLR. A request for information (RFI) relating to the PHSA MLR provision 
was published in the April 4, 2010 (75 FR 19297) Federal Register. In 
the December 1, 2010 Federal Register (75 FR 74864), we published an 
interim final rule implementing the PHSA MLR requirements for health 
insurance issuers. Under this interim final rule, health insurance 
issuers must report an MLR and related supporting data by state and 
market (individual, small group or large group). If the required MLR 
threshold is not met in any one year, generally 85 percent in the large 
group market and 80 percent in the small group or individual market, 
health insurance issuers must provide a rebate to enrollees, which is 
generally done by providing it to the policyholder on behalf of the 
enrollees. Finally, enforcement of the reporting and rebate 
requirements of section 2718(a) and (b) of the PHSA are addressed, as 
specifically authorized in section 2718(b)(3) of the PHSA. This interim 
final rule applies to covered private health insurance issuers 
beginning January 1, 2011.
    Since then, we have made several revisions and technical 
corrections to 45 CFR part 158. On March 23, 2012, we also published a 
final rule (75 FR 17220), entitled ``Patient Protection and Affordable 
Care Act; Standards Related to Reinsurance, Risk Corridors, and Risk 
Adjustment,'' that establishes standards for the establishment and 
operation of a transitional reinsurance program, temporary risk 
corridors program, and a permanent risk adjustment program. These 
programs do not go into effect until January 1, 2014. Therefore, the 
commercial MLR and rebate calculations in the December 1, 2010 interim 
final rule do not take these programs into account. Section 2718(c) of 
the PHSA directs the National Association of Insurance Commissioners 
(NAIC), subject to certification by the Secretary, to establish uniform 
definitions and calculation methodologies related to MLRs. In the MLR 
IFR, we adopt the recommendations in the NAIC's model MLR regulations. 
In 45 CFR 158.221(c) of the MLR IFR allows an issuer to deduct from 
earned premium federal and state taxes, and assessments, and in some 
instances, community benefit expenditures. We interpreted the MLR IFR 
to mean that a tax exempt not-for-profit issuer could deduct either 
state premium tax or community benefit expenditures, but not both. 
Therefore, on December 7, 2011, we published a final rule with comment 
period (76 FR 76574) to revise the MLR IFR, in which we clarified that 
any issuer may deduct either state premium tax or community benefit 
expenditures, but not both. The final rule limited the community 
benefit expenditures deduction at the highest premium tax rate in the 
state. On December 7, 2012, we published a proposed rule (73 FR 73117), 
which discusses revising the policy of community benefit expenditures, 
in addition to discussion on the treatment of premium stabilization 
payments, timing of the annual commercial MLR reports, and distribution 
of rebates. We will call the body of rules on commercial MLR 
requirements the ``commercial MLR rules.''
    Section 2718 of the PHSA directed the NAIC to make recommendations 
to the Secretary of Health and Human Services (the Secretary), subject 
to certification by the Secretary. NAIC's recommendations regarding 
definitions and methodologies for calculating MLRs were adopted in the 
commercial MLR rules. The NAIC, in making its recommendations, 
conducted a thorough and transparent process in which the views of 
regulators and stakeholders were discussed, analyzed, addressed and 
documented in numerous open forums held by a number of stakeholders, 
including state insurance departments (which includes the commissioner/
superintendent and directors), the NAIC, issuers, and consumer 
representatives. The commercial MLR rules largely adopted the NAIC 
recommendations.
    In this proposed rule for the MA and Prescription Drug Benefit 
Programs, we are using the commercial MLR rules as a reference point 
for developing the Medicare MLR requirements. We have decided to do 
this for several reasons. First, the intent of the provisions to help 
ensure value for health coverage is comparable. Second, keeping the 
requirements similar will limit the burden on organizations that 
participate in both markets (the overwhelming majority of those 
offering Medicare products). Third, aligning the commercial and 
Medicare regulations will make commercial and Medicare MLRs as 
comparable as possible for comparison and evaluation purposes, 
including by Medicare beneficiaries. We recognize that some areas of 
the regulation for private health insurance plans needed to be revised 
to fit the unique characteristics of the MA and Prescription Drug plan 
(PDP) markets. For example, we propose that MA and Part D PDP MLRs will 
be reported on a contract basis, rather than by state and market.

B. Scope, Applicability, and Definitions

    As noted previously, section 1857(e)(4) of the Act, which 
establishes requirements for a minimum MLR directly applies to the MA 
program. The requirements at section 1857(e)(4) of the Act also apply 
to the Medicare Prescription Drug Benefit Program, because section 
1860D-12(b)(3)(D) of the Act requires that the contractual requirements 
at section 1857(e) of the Act apply to the Part D program.
1. Scope and Applicability
    Part 422 of the Code of Federal Regulations (CFR) regulates the MA 
Program, and Part 423 of the CFR regulates the Part D program. This 
proposed rule would implement sections 1857(e)(4) and 1860D-12(b)(3)(D) 
of the Act by adding to both Parts 422 and 423 a new Subpart X, 
``Requirements for a Minimum Medical Loss Ratio.''
    The proposed Subpart X for the MA program has the same structure as 
the proposed Subpart X for the Part D program. Thus, discussion in this

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preamble is organized by each Subpart X section, and both MA and Part D 
proposals are discussed within each section. Any differences between 
the MA and Part D proposals are described within the relevant section.
    Because section 1857(e) of the Act, where the MLR requirement 
appears in statute, does not directly apply to Cost HMOs/CMPs (Cost 
Health Maintenance Organizations/Competitive Medical Plans), HCPPs 
(Health Care Prepayment Plans) or PACE (Program of All-Inclusive Care 
for the Elderly) organizations, the proposed MLR requirements set forth 
in this rule generally do not apply to section 1876 Cost HMO/CMPs, 
section 1833 HCPPs, or to PACE organizations, which are authorized 
under section 1894 of the Act.
    However, given the incorporation of section 1857(e)(4) by 1860-
12(b)(3) of the Act, we believe that, to the extent Cost HMOs/CMPs 
offer Part D as an optional supplemental benefit under Sec.  
417.440(b)(2)(ii), these requirements would apply to that Part D 
product. While an HCPP cannot offer Part D, to the extent an employer 
or union offering an HCPP to its members separately offers Part D 
coverage as an Employer/Union Only PDP under section 1860D-22(b) of the 
Act, the MLR requirement does apply to these Part D programs. 
Therefore, for Cost HMOs/CMPs and employers or unions offering HCPPs, 
only those offering Part D are subject to the MLR requirements, and 
then only for the Part D portion of their benefit offerings. Since the 
MLR rule can only apply to the Part D portion of the benefits offered 
by Cost HMOs/CMPs and employers/unions offering HCPPs, we will treat 
them more like PDPs than MA-PDs for MLR purposes. Cost HMOs/CMPs and 
employers/unions offering HCPPs bid on Part D and receive Part D 
payments based on their bid. Thus, we propose to require remittances, 
suspend enrollment, and/or terminate such Part D contracts based on 
whether the cost HMOs/CMPs or employers/unions offering HCPPs meet the 
MLR requirement for the Part D benefits they offer under their contract 
with CMS. In essence, a Cost HMO/CMP or an HCPP that did not meet the 
minimum MLR requirement on the Part D portion of the benefits it 
provides to Medicare enrollees would potentially (after 3 consecutive 
years) be forced to stop enrolling new individuals in such Part D 
coverage and, after 5 consecutive years, would potentially lose the 
Part D portion of its contract.
    For PACE organizations offering Part D, the situation is different. 
Similar to Cost HMOs/CMPs and HCPPs, we do not believe that the MLR 
requirements at section 1857(e)(4) of the Act and this proposed rule 
apply to the A/B portion of a PACE organization's benefit offering. In-
so-far as section 1857(e)(4) of the Act does not apply to PACE 
organizations directly, its application to them would be only through 
its application to Part D through incorporation at section 1860D-
12(b)(3) of the Act. However, unlike Cost HMOs/CMPs and section 1833 
HCPPs addressed in section 1876 of the Act, which are not compelled by 
any specific statutory or regulatory authority to offer Part D 
benefits, PACE organizations are required by both statute and 
regulation to provide drug coverage (see section1894(b)(1)(A)(i) of the 
Act and Sec.  460.92(a)). Thus, while Cost HMOs/CMPs and HCPPs could 
continue to operate without offering Part D coverage to their enrolled 
members, PACE organizations as a practical matter could not, as they 
would likely have to absorb the full cost of fulfilling their 
obligation to cover drugs. To the extent that drug coverage other than 
Part D drug coverage could not be offered by PACE organizations, such a 
result would effectively terminate not only the Part D drug plan 
offered by a PACE organization, but the PACE organization itself. This 
result would have the effect of applying a Part D penalty on Part A 
benefits, Part B benefits and Medicaid benefits offered to dual 
eligibles. The Congress did not directly apply the MLR rule directly to 
these benefits (as MA-PD rules only apply to the Part D component of 
PACE plans). We believe this result would be inconsistent with the 
intent of the statutory authority establishing the PACE program at 
section 1894 of the Act as an option for dual eligibles. We note, 
however, that we have the authority to waive application of Part D 
requirements (including the new MLR requirements) to PACE organizations 
as such application could potentially result in the inability of a PACE 
program to continue, which we do not believe the Congress intended. 
Specifically, section 1860D-21(c)(2) of the Act (incorporated for PACE 
under section 1860D-21(f)(1)) of the Act provides authority to waive 
provisions, such as the MLR requirement, to the extent such provisions 
duplicate, conflict with, or as may be necessary in order to improve 
coordination between Part D and PACE. We believe that application of 
the Part D MLR requirement to PACE organizations, even for only their 
Part D offering, would conflict with our understanding of the intent of 
the PACE statute and implementing regulations, as it could thwart the 
ability of the PACE plan to serve its special needs enrollees. 
Therefore, we propose not to apply the Part D MLR requirements to the 
Part D offerings of PACE organizations.
2. Definitions
    In Sec.  422.2401 and Sec.  423.2401, we propose certain 
definitions pertaining to the MLR provisions. Note that there also are 
terms defined in other sections of the Part 422 Subpart X and Part 423 
Subpart X (for example, ``incurred claims'' is defined in Sec.  
422.2420(b) and Sec.  423.2420(b), and ``quality improving activities'' 
are defined in Sec.  422.2430 and Sec.  423.2430.)
    First, we propose that the acronym MLR be used to refer to the 
medical loss ratio referenced in throughout Part 422, Subpart X and 
Part 423, Subpart X.
    We propose to define non-claims costs as those expenses for 
administrative services that are not: incurred claims, payments toward 
reducing the Part B premium for MA plan enrollees, expenditures on 
quality improving activities, licensing and regulatory fees, or state 
and federal taxes and assessments that cannot be deducted from total 
revenue.

C. General Requirements for MA Organizations and Part D Sponsors

    Sections 1857(e)(4) and section 1860D-12 of the Act (which 
incorporates section 1857(e)(4) of the Act by reference) set forth a 
requirement that MA organizations and Part D sponsors report MLRs, and 
that these MLRs meet the statutory standard of 85 percent. Those 
organizations that do not meet this MLR requirement will be required to 
pay remittances. If organizations are unable to meet the minimum MLR 
for 3 consecutive years, they will also be subject to enrollment 
sanctions and for 5 consecutive years, contract termination. MA 
organizations and Part D sponsors will be required to submit data to 
CMS that will allow enrollees of health plans, consumers, regulators, 
and others to take into consideration MLRs as a measure of health 
insurers' efficiency. Similar to the intentions of section 2718 of the 
PHSA, we believe that this provision is intended to provide 
beneficiaries both with information needed to better understand how 
much of plan sponsor revenue is used to pay for services, quality 
improving activities, and direct rebates for enrollees versus how much 
is used to pay for the ``non-claims,'' or administrative expenses, 
incurred by the plan sponsor as well as profits, and to provide 
incentives to spend more on the former group activities and less on the 
latter.

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    This section discusses two general issues regarding our proposed 
implementation of the MLR requirement: the level of aggregation at 
which MLRs must be reported, and the sanctions facing MA organizations 
and Part D sponsors when they do not meet the MLR requirement.
1. Aggregation of MLR to the Contract Level
    Under the MA program, MA organizations offer MA plan benefit 
packages (MA plans, defined at Sec.  422.2) under contracts with CMS. 
Plans offered under an MA contract can be MA-only plans (which only 
offer non-drug benefits) and/or MA-PD plans (which also offer Part D 
qualified prescription drug coverage). Further, under the Part D 
program, Part D sponsors, as defined in Sec.  423.4, offer plan benefit 
packages (prescription drug plans or PDPs) under contracts with CMS. An 
MA organization or a Part D sponsor can have one or multiple contracts 
with CMS and, under each contract, the MA organization or Part D 
sponsor can offer one or multiple plans in which beneficiaries may 
enroll.
    We propose at Sec.  422.2410(a) and Sec.  423.2410(a) that an MA 
organization and a Part D sponsor must report an MLR for each contract 
they have with CMS. We believe that the contract is the best level of 
aggregation for MLR reporting in Medicare. The contract provides the 
legal framework for our statutory and regulatory authority over MA 
organizations and Part D sponsors. For example, an MA organization is 
defined, at section 1857(a) of the Act and Sec.  422.2, as a state-
licensed entity that is certified by CMS as meeting the CMS contract 
requirements.
    Aggregating MLRs to the contract level is an approach that closely 
parallels the commercial MLR approach, which aggregates the MLR to the 
state and market level, rather than to each specific health plan policy 
or benefit offering. We note that MA and PDP contracts are also often 
executed at the state level.
    Moreover, we believe that requiring contract-level MLRs will 
promote program stability and the continued availability to 
beneficiaries of a variety of benefit structures in MA and Part D 
plans. Lastly, contract-level reporting is administratively less 
burdensome for MA organizations and Part D sponsors; for example, 
administrative costs will not need to be disaggregated by plan.
    We also considered the approach of requiring MLR reporting at the 
plan level, since beneficiaries enroll in a plan and experience their 
health care at the plan level (known as plan benefit package level), 
and since CMS' bids and payments occur at this level. In addition, for 
a contract with a large number of plans, it arguably would be less 
disruptive to apply an enrollment or termination sanction at the plan 
level rather than the contract level. Plan-level MLRs also would be 
based on fewer enrollees and be more prone to random variations in 
claims experience. Contract-level MLRs would generally represent a more 
stable population and a larger claims base, resulting in more reliable 
and, therefore, more meaningful MLRs. In future years, we may 
reconsider the approach of calculating MLRs at the plan level.
    Finally, we considered applying the MLR at the organization level. 
Because many MA organizations and Part D sponsors are national 
organizations, an MLR at this level of aggregation would be less 
meaningful, particularly for beneficiaries who are comparing plans in a 
specific geographic area. Because resource commitments to services 
offered may differ by market, due to differences in labor costs, 
demand, and competition, a national MLR would provide less information 
to consumers. In addition, we determined that the application of 
enrollment-related and termination action sanctions to an MA 
organization or Part D sponsor that is nationally representative would 
have a much larger enrollee impact than contract-level sanctions.
    In short, we believe our proposal of contract-level aggregation for 
MLR calculation is both reasonable and in alignment with important 
goals of program stability and administrative simplification.
    We note that, while the statutory language at 1857(e)(4) of the Act 
uses the terms ``MA plan,'' it also uses the term ``contract'' six 
times. Further, the requirement that an MA ``plan'' ``remit'' an amount 
to CMS when the minimum MLR is not met clearly refers to the 
organization offering one or more MA plans, and not to a specific plan 
benefit package, which cannot take an action such as remitting an 
amount to CMS. We believe that the statute uses the term ``plan'' in 
the generic sense in which it is often used to refer to an organization 
offering products, and that CMS thus has the discretion to apply and 
enforce the MLR requirement at the contract level.
    Note that the proposed requirement at Sec.  422.2410(a) and Sec.  
423.2410(a) refers to ``an MLR'' for each contract. This proposal means 
that the MLR calculation for a contract that includes MA-PD plans must 
combine non-drug costs with prescription drug costs and non-drug 
revenues with prescription drug revenues, across all plans under the 
contract. We also considered the approach of requiring MA organizations 
to report two MLRs for each contract that include MA-PD plans: one for 
nondrug benefits and another for prescription drug benefits. We decided 
to require one MLR per MA contract, as this aligns better with the 
commercial MLR requirements, which require one MLR per issuer 
regardless of plan type, and which include prescription drug costs 
along with other expenditures on health care services. Further, it is 
not clear how meaningful having two effectively partial MLRs would be 
to consumers.
    Finally, Part C rebates often fund the Part D premiums for MA-PD 
plans and thus are used to provide Part D benefits. Since most MA 
contracts include MA-PD plans, requiring a single MLR for each MA 
contract is an administratively simple approach that eliminates the 
need for disaggregation of these rebates.
2. Remittance Requirement
    Per section 1857(e)(4)(A) of the Act and as set forth in proposed 
Sec.  422.2410(b) and Sec.  423.2410(b), if we determine for a contract 
year that an MA organization or Part D sponsor has an MLR for a 
contract year that is less than 0.85 (85 percent), the MLR requirement 
would not have been met and the sponsoring organization would be 
required to remit a payment to CMS. The amount of the remittance would 
be equal to the product of: (1) The total revenue under the contract 
for the contract year; and (2) the difference between 0.85 and the 
contract's MLR. Total revenue is discussed later in section II.D. of 
this proposed rule.
    In order to support the reported MLR for each contract year, and in 
order to further allow comparison of MLRs across product lines (for 
example, Medicare and commercial), MA organizations and Part D sponsors 
would be required to report to CMS certain data concerning the MLR. 
Reporting requirements are addressed in section II.G. of this proposed 
rule.
3. Enrollment Sanction
    As set forth in proposed Sec.  422.2410(c) and Sec.  423.2410(c), 
if an MA or PDP contract fails to have an MLR of at least 0.85 for 3 or 
more consecutive contract years, we would not permit the enrollment of 
new enrollees in plans under that contract during the second succeeding 
contract year. We interpret this requirement to mean that, if a 
contract fails to have an MLR of 0.85 for 3 or more consecutive years, 
we would halt all new enrollment into all plans covered under that 
contract. The year

[[Page 12432]]

for which the enrollment sanction would apply would be the second 
succeeding year after the third consecutive year in which the MA 
organization or Part D sponsor fails to meet the MLR requirement. For 
example, the MLRs for contract years 2014 through 2016 would be 
reported in 2015 through 2017. If a contract did not meet the MLR 
requirement for the 2014, 2015, and 2016 contract years, we would not 
permit new enrollment in plans under that contract in 2018, which is 
the second succeeding contract year after the third consecutive year of 
failure (2016) to meet the MLR requirement.
    As discussed later in this section, if an MA or PDP contract fails 
to meet the MLR requirement for 5 consecutive years, we are required by 
statute to terminate the contract. Because a contract that fails to 
meet the MLR requirement for 4 consecutive years has failed to meet the 
requirement for 3 consecutive years, we are thus proposing in Sec.  
422.2410(c) and Sec.  423.2410(c) to clarify that an enrollment 
sanction would apply to contracts that fail to meet the MLR for 3 or 
more (that is, 4) consecutive years.
4. Termination
    If the contract fails to have an MLR of at least 0.85 (85 percent) 
for 5 consecutive contract years, we are required under section 
1857(e)(4)(C) of the Act to terminate the contract. This requirement is 
reflected in proposed Sec.  422.2410(d) and Sec.  423.2410(d). We 
propose to implement section 1857(e)(4)(C) of the Act by terminating 
the contract for the year following the year in which the plan sponsor 
is required to report the MLR for the fifth year. With respect to 
termination, we propose to implement the ``second succeeding contract 
year'' requirement in a manner similar to how we propose to implement 
the enrollment termination after 3 or more consecutive years of not 
meeting the minimum MLR requirement. Thus, for a contract that failed 
to meet the MLR requirement in 2014 through 2018, we would terminate 
the contract in 2020.

D. Calculation of Medical Loss Ratio

1. Definition of Medical Loss Ratio
    In this section, we address the calculation of an MLR for MA and 
Part D contracts. Generally, our approach to what counts as costs and 
revenues (which are in the numerator and denominator, respectively) is 
consistent with the approach in the commercial MLR rules. Proposed 
Sec.  422.2420(a) and Sec.  423.2420(a) set forth a high-level 
definition of the MLR as a ratio of the numerator defined in paragraph 
(b) to the denominator defined in paragraph (c). We propose to follow 
the commercial MLR rules by allowing MA organizations and Part D 
sponsors to increase the MLRs of low-enrollment contracts with a 
credibility adjustment. This adjustment is discussed in section F.
    Proposed section Sec.  422.2410(a)(2) provides that the MLR for an 
MA contract not offering Part D prescription drug benefits would only 
be required to reflect the costs and revenues related to the benefits 
defined at Sec.  422.100(c), basic benefits, mandatory supplemental 
benefits, and optional supplemental benefits. If the MA contract 
includes MA-PD plans, the MLR would also under this proposed rule be 
required to reflect costs and revenues for benefits described at Sec.  
423.104(d)(e), and (f), standard coverage, alternative coverage, and 
enhanced alternative coverage. Proposed Sec.  423.2410(a)(2) also 
specifies that the MLR for a PDP contract would be required to reflect 
costs and revenues for standard coverage, alternative coverage, and 
enhanced alternative coverage.
    Details about our proposal for the calculation of the numerator and 
denominator for MA and PDP contracts are discussed later in this 
section. For MA and PDP contracts, the MLR would be calculated using 
the cost and revenue data for a contract year, which is a 1-year 
reporting period in accordance with 1857(e)(4) of the Act, in contrast 
to the 3-year period (starting in 2014) for the commercial MLR.
2. MLR Numerator
    In proposed Sec.  422.2420(b) and Sec.  423.2420(b) for MA and Part 
D contracts, respectively, we identify the elements that we would 
require to be included in the numerator for a contract's MLR. Proposed 
Sec.  422.2420(b)(1) and Sec.  423.2420(b)(1) identify two basic 
elements that constitute the MLR numerator: incurred claims (as defined 
in paragraphs (b)(2) through (b)(4) for both programs) and expenditures 
under the contract for activities that improve health care quality, 
which are referenced at paragraph (b)(1)(iii) for both programs, and 
described in detail at sections Sec.  422.2430 and Sec.  423.2430. This 
approach of including incurred claims and quality improving activities 
mirrors the commercial MLR rules.
    In addition, under our proposal, the MLR numerator for MA contracts 
would include a third element, which is unique to MA contracts: the 
amount to reduce the Part B premium, if any, for all MA plans under the 
contract for the contract year. The Part B premium reduction is a 
benefit design option available to MA organizations, and is one of five 
uses of Part C rebate dollars described at Sec.  422.266(b) and in 
section II.D.3. of this proposed rule. Because this is an allowed 
benefit under MA, we are allowing the use of these dollars to pay for 
the Part B premium to be in the numerator.
    We propose that, under an assumptive or 100 percent indemnity 
reinsurance agreement, the assuming MA organization or Part D sponsor 
be required to report incurred claims in the numerator for those 
contracts, and that no incurred claims for the contracts under the 
agreement be permitted to be reported by the ceding MA organization or 
Part D sponsor. This clarification would ensure that incurred claims 
implicated in assumptive or 100 percent indemnity agreements are 
neither double counted by both the assuming and ceding MA organizations 
and Part D sponsors nor omitted by both the assuming and ceding 
organizations. Instead, the incurred claims would be counted for MLR 
purposes only once; by the assuming MA organization or Part D sponsor.
a. Incurred Claims
    We propose that incurred claims consist of several amounts. For the 
MA program, incurred claims would include direct claims that the MA 
organization pays to providers (including under capitation contracts) 
for covered services that are provided to all enrollees under the 
contract, as described at Sec.  422.2420(b)(2)(i).
    In addition, under proposed Sec.  422.2420(b)(2)(ii) and Sec.  
423.2420(b)(2)(i), for MA contracts that include MA-PD plans and for 
PDP contracts, respectively, incurred claims would be required to 
include only drug costs that are ``actually paid'' by the Part D 
sponsor. The concept of ``actually paid'' is defined at in Sec.  
423.308 and refers to Part D costs that must be actually incurred by 
the Part D sponsor, net of any direct or indirect remuneration from any 
source. Prescription drug rebates are rebates that pharmaceutical 
companies pay to MA organizations or Part D sponsors based upon the 
drug utilization of the MA organization's or Part D sponsor's enrollees 
and should be deducted from incurred claims. This approach aligns with 
the commercial MLR rules, which require that prescription drug rebates 
be deducted from incurred claims. In addition, ``actually paid'' claims 
refers to those costs for which the MA organization or Part D sponsor 
is liable,

[[Page 12433]]

through all phases of the benefit. Thus, the reinsurance portion of 
claim costs in the catastrophic phase of the benefit is also included 
in the numerator of the MLR.
    For both MA and Part D contracts, under proposed Sec.  
422.2420(b)(2)(iii) through (xi) and Sec.  423.2420(b)(2)(ii) through 
(x), incurred claims would also be required to reflect the following: 
unpaid claims reserves for the current contract year, including claims 
reported and in the process of adjustment; percentage withholds from 
payments made to contracted providers; incurred but not reported claims 
based on past experience, and modified to reflect current conditions 
such as changes in exposure, claim frequency or severity and changes in 
other claims-related reserves; claims that are recoverable for 
anticipated coordination of benefits (COB); and claims payments 
recoveries received as a result of subrogation; reserves for contingent 
benefits and the medical or Part D claim portion of lawsuits. We follow 
the commercial MLR rules in proposing to allow the amount of claim 
payments recovered through fraud reduction efforts, not to exceed the 
amount of fraud reduction expenses, to be included in incurred claims. 
Fraud reduction efforts include fraud prevention as well as fraud 
recovery. The preamble to the commercial MLR rule stated and we 
continue to believe that without such an adjustment, the recovery of 
paid fraudulent claims would reduce an MLR and could create a 
disincentive to engage in fraud reduction activities. Thus, requiring 
that incurred claims reflect claims payments recoveries up to a limit 
would help mitigate whatever disincentive might occur if fraud 
reduction expenses were treated solely as non-claims and non-quality 
improving expenses. However, allowing an unlimited adjustment for fraud 
reduction expenses would undermine the purpose of requiring issuers to 
meet the MLR standard.
    For MA and MA-PD contracts, incurred claims would be required to 
reflect the amount of incentive and bonus payments made to providers, 
as set forth at Sec.  422.2420(b)(2)(xi). Medical incentive pools are 
arrangements with providers and other risk sharing arrangements whereby 
the MA organization agrees to either share savings with or make 
incentive payments to providers. These payments would be required to be 
included under incurred claims and would not be permitted to be counted 
under quality improving expenditures.
b. Adjustments to and Exclusions From Incurred Claims
    After proposing which elements should be included in incurred 
claims, we propose which elements would be deducted from incurred 
claims and which elements would not be included in incurred claims at 
all. Under proposed Sec.  422.2420(b)(3) and Sec.  423.2420(b)(3), two 
adjustments would be deducted from incurred claims for the MA and Part 
D programs, both of which are currently required in the commercial MLR 
rules. First, prescription drug rebates and other direct or indirect 
remuneration as defined in Sec.  423.308 that are received by the MA 
organization or Part D sponsor would be required to be deducted. 
Second, any amounts paid to providers that were recovered because they 
were overpayments would have to be deducted from incurred claims.
    Next, there are several expenditures that would not be included in 
incurred claims for MA and PDP contracts, as provided in proposed Sec.  
422.2420(b)(4) and Sec.  423.2420(b)(4). The three types of 
administrative costs that would be required to be excluded from 
incurred claims reflect the provisions in the commercial MLR rules: (1) 
Amounts paid to third party vendors for secondary network savings; (2) 
amounts paid to third party vendors for network development, 
administrative fees, claims processing, and utilization management; and 
(3) amounts paid, including amounts paid to a provider, for 
professional or administrative services that do not represent 
compensation or reimbursement for covered services provided to an 
enrollee, such as medical record copying costs, attorneys' fees, 
subrogation vendor fees, bona fide service fees, compensation to 
paraprofessionals, janitors, quality assurance analysts, administrative 
supervisors, secretaries to medical personnel and medical record clerks 
would not be permitted to be included in incurred claims. Regarding 
item (2), for example, if an MA organization, contracts with a 
behavioral health, chiropractic network, or high technology radiology 
vendor, or if an MA organization or Part D sponsor contracts with a 
pharmacy benefit manager, and the vendor reimburses the provider at one 
amount but bills the MA organization or Part D sponsor at a higher 
amount to cover the vendor's network development, utilization 
management costs, claims processing, and profits, then the amount that 
exceeds the reimbursement to the provider would not under our proposal 
be permitted to be included in incurred claims.
    Finally, under proposed Sec.  422.2420(b)(4)(ii) and Sec.  
423.2420(b)(4)(ii), amounts paid to CMS by an MA organization or Part D 
sponsor as a remittance under Sec.  422.2410(b) or Sec.  423.2410(b) 
would not be permitted to be included in incurred claims for any 
contract year.
3. MLR Denominator
    We propose at Sec.  422.2420(c) and Sec.  423.2420(c) that the MLR 
denominator would equal the total revenue under the contract (as 
described in Sec.  422.2420(c)(1) and Sec.  423.2420(c)(1)), net of 
deductions set forth in Sec.  422.2420(c)(2) and Sec.  423.2420(c)(2), 
taking into account the exclusions described in Sec.  422.2420(c)(3) 
and Sec.  423.2420(c)(3), and in accordance with Sec.  422.2420(c)(4) 
and Sec.  423.2420(c)(4). Total revenue for the MA program, as defined 
under proposed Sec.  422.2420(c)(1) and Sec.  423.2420(c)(1), must be 
reported on a direct basis and would mean our payments to the MA 
organization for all enrollees under a contract, including, for MA 
plans under a contract that offer Part D, direct subsidy payments and 
reinsurance payments as reconciled per Sec.  423.329(c)(2)(ii); all 
premiums paid by or on behalf of enrollees to the MA organization as a 
condition of receiving coverage under an MA plan; our payments for low 
income premium subsidies under Sec.  423.780; all unpaid premium 
amounts that an MA organization or Part D sponsor could have collected 
from enrollees in the plan(s) under the contract; all changes in 
unearned premium reserves, and risk corridor payments under Sec.  
423.315(e). We note that MA organizations or Part D sponsors that 
volunteer to waive the portion of the monthly adjusted basic 
beneficiary premium that is a de minimis amount above the low-income 
benchmark for a subsidy eligible individual per section 3303(a) of the 
Affordable Care Act would not be permitted to consider the de minimis 
amount an unpaid premium amount that could have been collected from 
beneficiaries. We propose that calculation and reporting of total 
revenue for purposes of the Medicare MLR would include total risk-
adjusted payments, and would take into account payments or receipts for 
risk corridors and payments under the reinsurance phase of the Part D 
benefit (adjusted for reconciled amounts). While this approach is 
generally consistent with the commercial MLR rules, it is not 
identical. We believe that the nature of the payment mechanisms 
required under these programs support this

[[Page 12434]]

approach. The payments which we make to MA organizations and Part D 
sponsors are risk-adjusted as part of the payment calculation to 
reflect the appropriate adjustment to revenue to reflect the risk 
profile of each enrolled beneficiary. Further, risk corridors and 
reinsurance, which are permanent features of Part D payment, are 
adjustments to plan payment. In the case of risk corridors, payment 
adjustments reflect the extent to which an MA organization or Part D 
sponsor over- or under-bid for their projected population. Part D 
reinsurance is more appropriately classified as a cost-based 
reimbursement methodology than reinsurance, per se, and as such is 
appropriately treated as revenue.
    MA organizations would also be required to account for Part C 
rebate payments in their total revenue. Rebates are paid for enrollees 
in plans with bids below the benchmark described under section 
1853(a)(1)(E) of the Act, and may be allocated to one or more uses: 
reduction of A/B cost sharing and reduction of the premium for 
additional non-drug benefits, reduction of the Part B premium 
(mentioned previously), and reduction of the Part D basic premium and 
Part D supplemental premium. Essentially, the effect of rebates is that 
the beneficiary pays a smaller share of total plan premium (the total 
price of the plan benefit package) and the government pays a larger 
share. Thus, these funds would correctly be accounted for as revenue.
    Total revenue for the Part D program, as defined at Sec.  
423.2420(c)(1), means CMS' payments to the Part D sponsor for all 
enrollees under a contract, including: direct subsidy payments at Sec.  
423.329(a)(1), reinsurance payments at Sec.  423.329(a)(2), and payment 
adjustments resulting from reconciliation per Sec.  423.329(c)(2)(ii); 
all premiums paid by or on behalf of enrollees to the Part D sponsor as 
a condition of receiving coverage under a plan; CMS' payments for low 
income premium subsidies under Sec.  423.780; all unpaid premium 
amounts that a Part D sponsor could have collected from enrollees in 
the plan(s) under the contract; and risk corridor payments under Sec.  
423.315(e).
    Adjustments to and exclusions from total revenue. After proposing 
which elements should be included in total revenue, we propose which 
elements must be deducted from and which elements should not be 
included in total revenue. CMS is largely following the commercial MLR 
rule in the treatment of adjustments and exclusions.
    There are four categories of expenditures that would be required to 
be deducted from total revenue for both MA and PDP contracts, as 
provided under proposed Sec.  422.2420(c)(2) and Sec.  423.2420(c)(2). 
Note that, unlike commercial issuers, MA organizations and Part D 
sponsors are exempt from state premium tax ``or similar tax'' on their 
Part C and D premium revenues, per sections 1854(g) and 1860D-12(g) of 
the Act.
    Three of these categories that would be deducted from total revenue 
for a contract are taxes and fees. First, federal taxes and assessments 
allocated to MA plans and enrollees would be deducted from total 
revenue for purposes of calculating the MLR. Two examples are the 
``user fee'' described in section 1857(e)(2) of the Act and the portion 
of the ``annual fee on health insurance providers'' attributable to 
Part C and D premium revenues described in section 9010 of the 
Affordable Care Act. Second, licensing and regulatory fees, consisting 
of statutory assessments to defray operating expenses of any state or 
federal department and examination fees in lieu of premium taxes as 
specified by state law, would be deducted from total revenue for 
purposes of calculating the MLR. Third, state taxes and assessments 
that would be deducted from total revenue for purposes of calculating 
the MLR would include: (1) Any industry-wide (or subset) assessments 
(other than surcharges on specific claims) paid to the state directly; 
(2) guaranty fund assessments; (3) assessments of state industrial 
boards or other boards for operating expenses or for benefits to sick 
employed persons in connection with disability benefit laws or similar 
taxes levied by states; and (4) state income, excise, and business 
taxes other than premium taxes.
    We note that there are some taxes and fees that would not be 
permitted to be deducted from the MLR denominator. For example, we 
propose that the denominator would not include fines and penalties of 
regulatory authorities, and fees for examinations by any state or 
federal departments that are not specified in Sec.  422.2420(c)(2)(i) 
and Sec.  423.2420(c)(2)(i). Fines, penalties, and fees that do not 
fall under Sec.  422.2420(c)(2)(i) and Sec.  423.2420(c)(2)(i) would be 
appropriately reported as non-claims costs, not as an adjustment to 
total revenue. Federal income taxes on investment income and capital 
gains would not be deducted from total revenue for purposes of 
calculating the MLR and would instead be considered a non-claims cost. 
Finally, we propose that state sales taxes may not be deducted from 
total revenue if the MA organization or Part D sponsor does not 
exercise the options of including such taxes with the cost of goods and 
services purchased. Examples include any portion of commissions or 
allowances on reinsurance assumed that represent specific reimbursement 
of premium taxes and any portion of commissions or allowances on 
reinsurance ceded that represents specific reimbursement of premium 
taxes.
    The fourth category of expenditures that would be deducted from 
total revenue under our proposal is community benefit expenditures. 
Federal income tax-exempt issuers are required to make community 
benefit expenditures to maintain their federal income tax exempt 
status. The commercial MLR rules allow a federal income tax-exempt 
issuer to deduct community benefit expenditures in the same manner that 
a for-profit issuer is allowed to deduct its federal income taxes. We 
propose to align with the commercial MLR regulations by defining 
community benefit expenditures, up to a cap, at Sec.  
422.2420(c)(2)(iv) and Sec.  423.2420(c)(2)(iv) as expenditures for 
activities or programs that seek to achieve the objectives of improving 
access to health services, enhancing public health, and relief of 
government burden.
    For purposes of the commercial MLR rule, the NAIC determined that 
the deduction for community benefit expenditures should be limited to a 
reasonable amount to discourage fraud and abuse. We propose to follow 
the commercial MLR approach as suggested in the December 7, 2012 
proposed rule (73 FR 73117) by allowing federal income tax-exempt MA 
organizations and Part D sponsors to deduct community benefit 
expenditures in the same manner that a for-profit issuer is allowed to 
deduct its federal income taxes, up to the limit of 3 percent of total 
revenue under this part or the highest premium tax rate in the state 
for which the MA organization or Part D sponsor is licensed. As one 
contract may span more than one state, we seek comment on methods to 
apply the limit in these circumstances, perhaps by blending the highest 
premium tax rates for the states in which the contract is offered. 
Organization-wide community benefit expenditures would be required to 
be allocated to a contract or multiple contracts as required under 
paragraph (d)(1).
    Next, amounts that would not be included in total revenue under our 
proposal include the amount of unpaid premiums that the MA organization 
or Part D sponsor can demonstrate to us

[[Page 12435]]

that it made a reasonable effort to collect, as required under Sec.  
422.74(d)(i), and Sec.  423.44(d)(1)(i), respectively. In addition, 
HITECH, or EHR, payments would not be included, specifically EHR 
incentive payments for meaningful use of certified electronic health 
records by qualifying MAOs, MA EPs and MA-affiliated eligible hospitals 
(as administered under Part 495 subpart C), and EHR payment adjustments 
for a failure to meet meaningful use requirements (as administered 
under Part 495 subpart C). Such incentive payments and payment 
adjustments would not be considered for purposes of MLR calculations to 
be covered under this part. Finally, Coverage Gap Discount Program 
payments under Sec.  423.2320 would not be included in total revenue 
under our proposal. The Coverage Gap Discount amounts represent a 50 
percent discount on the negotiated price of applicable (generally, 
brand) drugs for applicable (generally, non-low-income) beneficiaries, 
and is essentially an amount paid by pharmaceutical manufacturers and 
passed through to applicable beneficiaries and does not represent 
revenue to the MA organization or Part D sponsor.
    Note that we are not proposing to adjust total revenue for 
commercial reinsurance in this proposed rule because, as stated in the 
preamble to the commercial MLR rules, this largely would provide a tool 
for issuers to manipulate reported premiums.
4. Projection of Net Total Revenue
    We are proposing that, when calculating Medicare MLRs, MA 
organization and Part D sponsors would be required to account for all 
Part C and D revenue that would be paid after the final risk adjustment 
reconciliation occurs, and all Part D revenue that would be paid after 
all reinsurance and risk corridor reconciliations occur.
    Risk adjustment is an adjustment to payment that reflects expected 
relative risk of a beneficiary. Reinsurance reconciliation is a cost-
based adjustment to the Part D prospective payments made throughout the 
year, and the net reinsurance payments would be counted as total 
revenue. Risk corridors are risk-sharing arrangements around the Part D 
direct subsidy payments, and we are proposing to count all adjustments 
through the risk corridor process as adjustments to total revenue.
    We propose to require MA organizations and Part D sponsors to 
project revenue from all expected reconciliation processes, and account 
for the net adjustments from all and any risk adjustment 
reconciliations, risk corridor reconciliations, and reinsurance 
reconciliations as adjustments to total revenue. Because the same data 
underlies reconciliation and MLR reporting, we would not expect large 
discrepancies between data reported before and after reconciliation. We 
propose to validate that the data used in reconciliation is consistent 
with that used in MLR reporting, and make appropriate payment 
adjustments should there be irregularities in reporting. We also 
propose that the MLR would be reported once and that neither any 
reopening(s) of any reconciliation processes nor any risk adjustment 
data validation audits would result in a reopening of the MLR reported 
for a contract year.
5. Allocation of Expenses
    MA organizations and Part D sponsors would, under our proposal, be 
required to properly allocate all expenses stemming from each contract, 
as provided under proposed Sec.  422.2420(d) and Sec.  423.2420(d). We 
propose that each expense would be required to be included under only 
one type of expense, unless a portion of the expense fits under the 
definition of one type of expense and the remainder fits into a 
different type of expense, in which case the expense would be required 
to be pro-rated between types of expenses. Expenditures that benefit 
multiple contracts, or contracts other than those being reported, 
including but not limited to those that are for, or benefit, commercial 
plans, would have to be reported on a pro rata share basis. This 
proposed approach aligns with the commercial MLR rules.
    There are several different methods for allocating costs incurred 
by MA organizations and Part D sponsors that would be allowable under 
our interpretation of statutory accounting principles. All costs 
reported by MA organizations or Part D sponsors would have to be 
allocated according to generally accepted accounting methods that yield 
the most accurate results and are well-documented. An MA organization's 
or Part D sponsor's allocation method would be required to illustrate 
the costs associated with a specific activity and any resulting effect 
the activity has had on its MA or Part D line of business. If the 
expense is related to a specific activity, the allocation of such 
expenditure would have to be on a direct basis. If an expense is not 
easily attributable to a specific activity, then the expense would, 
under our proposal, have to be apportioned based on pertinent factors 
or ratios, such as studies of employment activities, salary ratios or 
similar analyses. Any shared expenses between two or more affiliated 
entities would have to be ``apportioned pro rata to the entities 
incurring the expense'' even if the expense has been paid solely by one 
of the incurring entities.
    We are proposing that each expense that is allocated by an MA 
organization or Part D sponsor to a type of expenditure would have to 
be appropriately attributed using a generally accepted accounting 
method to each contract. However, all federal and state taxes paid by 
an organization would be required to be attributed proportionately and 
appropriately to each contract. While federal taxes are not typically 
allocated to contracts on a state-by-state basis, for purposes of 
complying with the MLR requirements in this subpart, all organizations 
would be required to report some percentage of federal taxes paid on 
their behalf, along with applicable state taxes (other than premium 
taxes, which do not apply to the plans offered under the MA and Part D 
programs).
    We are proposing that MA organizations and Part D sponsors would be 
required to allocate their non-claims and quality improving expenses on 
a contract basis as stated in the commercial MLR rules. If an expense 
is attributable to a specific activity, then the MA organization or 
Part D sponsor would allocate the expense to that particular activity. 
However, if it is not feasible to allocate such expenditure to a 
specific activity, then the organization would, under our proposal, be 
required to apportion the costs using a generally accepted accounting 
method that yields the most accurate results.

E. Activities That Improve Health Care Quality

    We propose to adopt a definition of activities that improve health 
care quality for the purposes of this MLR rule that would result in a 
uniform accounting of the associated costs for MA organizations and 
Part D sponsors. This proposed definition aligns with that in the 
commercial MLR requirements at 45 CFR 158.150 through 45 CFR 158.151. 
We propose to align with the definition of activities that improve 
health care quality, also referred to as ``quality improving 
activities,'' in the commercial MLR rules so that there is a uniform 
definition across lines of business. This alignment would help reduce 
burden on plan sponsors that also have commercial business by aligning 
the accounting and tracking of quality improving activities. It also 
allows for the comparison of quality spending across products. We note 
that we are proposing to adopt this

[[Page 12436]]

definition of quality solely for the purposes of MLR reporting and 
calculation, and not for other purposes, such as Medicare star ratings 
that determine MA quality bonus payments as authorized under the 
Affordable Care Act or any quality activities related to the Medicaid 
program. However, we anticipate large areas of overlap.
    The definition of quality improving activities that was adopted for 
the commercial MLR, which we are proposing to adopt for the Medicare 
MLR, is derived from section 2717 of the PHSA. The PHSA has the goal of 
improving the quality of care by encouraging health care spending on 
the following activities that would:
     Improve health outcomes through the implementation of 
activities such as quality reporting, effective case management, care 
coordination, chronic disease management, and medication and care 
compliance initiatives, including through the use of the medical homes 
model as defined for purposes of section 3602 of the Affordable Care 
Act, for treatment or services under the plan or coverage.
     Implement activities to prevent hospital readmissions 
through a comprehensive program for hospital discharge that includes 
patient-centered education and counseling, comprehensive discharge 
planning, and post-discharge reinforcement by an appropriate health 
care professional.
     Implement activities to improve patient safety and reduce 
medical errors through the appropriate use of best clinical practices, 
evidence-based medicine, and health information technology under the 
plan or coverage.
     Implement wellness and health promotion activities; or
     Enhance the use of health care data to improve quality, 
transparency, and outcomes and support meaningful use of health 
information technology.
    This proposed rule would allow for a non-claims expense incurred by 
an MA organization or Part D sponsor to be accounted for as a quality 
improving activity only if the activity falls into one of the 
categories described previously and meets all of the following 
requirements:
     It must be designed to improve health quality.
     It must be designed to increase the likelihood of desired 
health outcomes in ways that are capable of being objectively measured 
and of producing verifiable results and achievements.
     It must be directed toward individual enrollees or 
incurred for the benefit of specified segments of enrollees or provide 
health improvements to the population beyond those enrolled in coverage 
as long as no additional costs are incurred due to the non-enrollees.
     It must be grounded in evidence-based medicine, widely 
accepted best clinical practice, or criteria issued by recognized 
professional medical associations, accreditation bodies, government 
agencies or other nationally recognized health care quality 
organizations.
    Examples of activities that improve health outcomes would include 
those that increase the likelihood of desired outcomes compared to a 
baseline and reduce health disparities among specified populations, and 
may involve the direct interaction of the MA organization or Part D 
sponsor (including those services delegated by contract for which the 
MA organization or Part D sponsor retains ultimate responsibility under 
the insurance policy), providers and the enrollee or the enrollee's 
representative (for example, face-to-face, telephonic, web-based 
interactions or other means of communication) to improve health 
outcomes. These activities would under our proposal include the 
following:
     Effective case management, care coordination, chronic 
disease management, and medication and care compliance initiatives 
including through the use of the medical homes model as defined in 
section 3606 of the Affordable Care Act.
     Identifying and addressing ethnic, cultural or racial 
disparities in effectiveness of identified best clinical practices and 
evidence based medicine.
     Quality reporting and documentation of care in non-
electronic format.
     Health information technology to support these activities.
     Accreditation fees directly related to quality of care 
activities.
    Examples of activities that prevent hospital readmissions through a 
comprehensive program for hospital discharge would include the 
following:
     Comprehensive discharge planning (for example, arranging 
and managing transitions from one setting to another, such as hospital 
discharge to home or to a rehabilitation center) in order to help 
assure appropriate care that will, in all likelihood, avoid readmission 
to the hospital.
     Patient-centered education and counseling.
     Personalized post-discharge reinforcement and counseling 
by an appropriate health care professional.
     Any quality reporting and related documentation in non-
electronic form for activities to prevent hospital readmission.
     Health information technology to support these activities.
    Examples of activities that improve patient safety, reduce medical 
errors, and lower infection and mortality rates would include the 
following:
     The appropriate identification and use of best clinical 
practices to avoid harm.
     Activities to identify and encourage evidence-based 
medicine in addressing independently identified and documented clinical 
errors or safety concerns.
     Activities to lower the risk of facility-acquired 
infections.
     Prospective prescription drug Utilization Review aimed at 
identifying potential adverse drug interactions.
     Any quality reporting and related documentation in non-
electronic form for activities that improve patient safety and reduce 
medical errors.
     Health information technology to support these activities.
    Examples of activities that implement, promote, and increase 
wellness and health activities would include the following:
     Wellness assessments.
     Wellness/lifestyle coaching programs designed to achieve 
specific and measurable improvements.
     Coaching programs designed to educate individuals on 
clinically effective methods for dealing with a specific chronic 
disease or condition.
     Public health education campaigns that are performed in 
conjunction with state or local health departments.
     Actual rewards, incentives, bonuses, reductions in 
copayments (excluding administration of such programs), that are not 
already reflected in premiums or claims should be allowed as a quality 
improving activity for the group market to the extent permitted by 
section 2705 of the PHSA.
     Any quality reporting and related documentation in non-
electronic form for wellness and health promotion activities.
     Coaching or education programs and health promotion 
activities designed to change member behavior and conditions (for 
example, smoking or obesity).
     Health information technology to support these activities.
    Examples of activities that enhance the use of health care data to 
improve quality, transparency, and outcomes and support meaningful use 
of health information technology would include activities related to 
health information technology (HIT). HIT offers providers, MA 
organizations, Part D sponsors, and beneficiaries the capability to 
share clinical information in a real-time

[[Page 12437]]

setting. Any HIT expenditure that is attributable to improving health 
care, preventing hospital readmissions, improving safety and reducing 
errors, or promoting health activities and wellness to an individual or 
an identified segment of the population, would under our proposal be 
classified as a quality improving activity. HIT resources that are 
designed to improve the quality of care received by an enrollee would 
include the provision of electronic health records and patient portals, 
as well as the monitoring, measuring, and reporting of clinical 
effectiveness measures. HIT expenses that are consistent with 
meaningful use requirements would be treated as expenditures to improve 
health care quality.
    We are proposing to follow the commercial MLR rules and recognize 
HIT as a category of quality improving activities, provided that the 
use of HIT meets the criteria discussed earlier.
    In this proposed rule, we recognize that some quality improving 
activities may be what are sometimes referred to as ``population-
directed'' and may not involve face-to-face interaction between an 
employee or contractor of the MA organization or Part D sponsor and the 
enrollee. However, such activities would have to be directed to 
identified segments of the MA organization's or Part D sponsor's 
enrollees. The MA organization or Part D sponsor would be required to 
be able to measure the level of engagement with these enrollees in 
addition to tracking the effect(s) of these activities on health 
outcomes in this population through a process that is well defined, 
well developed, and utilized.
    Any quality improving activity that results in cost savings to a 
contract would not, by itself, cause expenditures on that activity to 
be classified as non-quality improving expenditures under our proposal, 
if they meet the criteria set forth in this proposed rule. However, if 
the activity is designed primarily to control or contain costs, then 
expenditures for it would not be permitted to be included as a quality 
improving activity, as provided in proposed Sec.  422.2430(b) and Sec.  
423.2430(b).
    As many quality improving activities are fluid in nature, they may 
properly be classified in more than one quality improving activity 
category. However, the proposed rule would not permit issuers to count 
any occurrence of a quality improving activity more than once, as 
explained in Sec.  422.2420(d) and Sec.  423.2420(d). Moreover, shared 
expenses among related entities as well as expenses that are for lines 
of business or products other than those being reported, including 
self-funded plans, would have to be apportioned among the entities and 
among the lines of business or products. For example, a quality 
improving program that is developed and implemented for commercial 
plans would have to be pro-rated among the lines of business, and the 
portion of expenditures for the program that are for the commercial 
plans may not be included in quality improving activities reported 
under 1857 of the Act.
    We propose to adopt at Sec.  422.2430(b) and Sec.  423.2430(b) the 
list of activities in its entirety that are not to be reported as a 
quality improving activity under the commercial MLR rules at 45 CFR 
158.150(c). These include the following:
     Those that are designed primarily to control or contain 
costs.
     The pro rata share of expenses that are for lines of 
business or products other than those being reported, including but not 
limited to, those that are for or benefit self-funded plans.
     Those which otherwise meet the definitions for quality 
improving activities but which were paid for with grant money or other 
funding separate from premium revenue.
     Those activities that can be billed or allocated by a 
provider for care delivery and which are, therefore, reimbursed as 
clinical services.
     Establishing or maintaining a claims adjudication system, 
including costs directly related to upgrades in health information 
technology that are designed primarily or solely to improve claims 
payment capabilities or to meet regulatory requirements for processing 
claims, including maintenance of ICD-10 code sets adopted pursuant to 
the Health Insurance Portability and Accountability Act (HIPAA), 42 
U.S.C. 1320d-2, as amended, and ICD-10 implementation costs in excess 
of 0.3 percent of a MA organization or Part D sponsor's total revenue.
     That portion of the activities of health care professional 
hotlines that does not meet the definition of activities that improve 
health quality.
     All retrospective and concurrent utilization review.
     Fraud prevention activities.
     The cost of developing and executing provider or pharmacy 
contracts and fees associated with establishing or managing a provider 
or pharmacy network, including fees paid to a vendor for the same 
reason.
     Provider credentialing and pharmacy network credentialing.
     Marketing expenses.
     Costs associated with calculating and administering 
individual enrollee or employee incentives.
     That portion of prospective utilization review that does 
not meet the definition of activities that improve health quality.
     Any function or activity not expressly permitted as a 
quality improving activity in this rule.
    This proposed rule provides a set of criteria in Sec.  422.2430 and 
Sec.  423.2430 which MA organizations or Part D sponsors would be 
required to comply with in order for the activity in question to be 
treated as improving quality. The definition, or foundational criteria, 
of a quality improving activity would have to be specific enough so as 
to provide clear guidance without overly prescribing acceptable 
activities and possibly stifling future innovative quality improving 
activities. We believe that the definition used in the commercial MLR 
rules, which we have proposed to adopt, would achieve these goals.
    A quality improving activity would have to be grounded in evidence-
based practice, widely accepted best clinical practice, or criteria 
issued by recognized medical associations, accreditation bodies, 
government agencies, or other nationally recognized health care quality 
organizations. Any proposed quality improving activities would be 
required to be designed to improve the quality of care received by an 
enrollee and capable of being objectively measured (taking into account 
the individual needs of the beneficiary) and of producing verifiable 
results and achievements. While an MA organization or Part D sponsor 
would not have to present initial evidence proving the effectiveness of 
a quality improving activity, the MA organization or Part D sponsor 
would have to show measurable results stemming from the executed 
quality improving activity.
    While administrative expenses such as network fees would not be 
counted as quality improving, some traditional administrative 
activities could under our proposal qualify as quality improving if 
they met the criteria set forth in proposed Sec.  422.2430 and Sec.  
423.2430. For example, expenses for prospective utilization review 
could under our proposal be classified as expenses for quality 
improving activities. Prospective utilization review would be 
considered a quality improving activity because it is rendered before 
care or services are delivered and can help ensure that the most 
appropriate treatment or service is given in the most appropriate 
setting. In contrast, the network fees associated

[[Page 12438]]

with third party provider networks do not stem from a quality improving 
activity and therefore would only count as an administrative expense.
    We also propose to limit the amount spent converting from 
International Classification of Disease code set ICD-9 to ICD-10 that 
may be counted as a quality improving activity, in line with the 
commercial rules approach. As a general matter, the development and 
maintenance of claims adjudication systems are not designed primarily 
to improve the quality of care received by an individual and, 
therefore, are not classified as a quality improving activity. However, 
there is general recognition that the conversion to ICD-10 will enhance 
the provision of quality care through the collection of better and more 
refined data. The difficulty is in parsing expenses associated with 
ICD-10 conversions that may be solely ``development and maintenance of 
claims adjudication systems'' as opposed to those that are uniquely 
conversion costs. As with some other cost categories defined in this 
proposed rule, little public data currently exist to guide decision 
making regarding this distinction. For the commercial MLR rules, we 
considered the impacts of ICD-10 on improving data collection for 
diagnoses and medical procedure coordination, patient safety, health 
outcomes, and medical research. In addition, we consulted with our 
Office of E-Health Standards and Services (OESS). OESS oversees ICD-10 
and considers some of the impact of ICD-10 to be quality improving 
activities, and supports the treatment of ICD-10 set forth in this 
proposed rule. We recognize that ICD-10 has some claims processing 
functions as well. Recognizing the dual nature of ICD-10, we propose to 
include as a quality improving activity those ICD-10 conversion costs 
incurred in 2014 (or until the deadline for converting to ICD-10) up to 
0.3 percent of an MA organization's or Part D sponsor's total revenue 
under this part in 2014, which would be reported on a direct basis. We 
chose this proposed cap to be consistent with the approach in the 
commercial MLR rules, which allows as quality improving activity 
amounts that issuers projected spending on ICD-10 conversion, without 
permitting issuers to include claims adjudication systems costs in 
quality improving activities. In addition, ICD-10 maintenance costs are 
excluded from quality improving activities in this proposed rule, based 
on the industry's collective comments on the commercial MLR rules, 
stating that separating conversion costs from maintenance costs is 
feasible, and based on their support for excluding ICD-10 maintenance 
costs from quality improving activities. Similarly, we propose 
excluding any ICD-10 implementation costs in excess of the 0.3 percent 
limitation from quality improving activities in this proposed rule.
    We recognize that there may be certain quality improving activities 
that are unique to a Part D context, and we seek comment as to whether 
modifications to our proposed definition in Sec.  423.2430 are needed. 
In particular, we are interested to consider whether the concepts of 
prospective, concurrent, and retrospective utilization review apply in 
a Part D context. Whereas beneficiaries receive medical services at the 
time they are rendered, a safety-related review of a beneficiary's 
chronic or recurring use of medications, such as opiates or other high 
risk medications, could result in a prospective change to the 
beneficiary's drug regimen and a resulting improvement to his or her 
health and safety. However, we hesitate to define all utilization 
review, without any bounds, as a quality improving activity. Further, 
we solicit comment on whether Medication Therapy Management 
requirements for the Part D program would be considered to qualify as a 
health care improving activity under Sec.  423.2430.
F. Credibility Adjustment
    As noted in section II.A. of this proposed rule, we are using the 
commercial MLR rules as a reference point for developing the Medicare 
MLR. We propose that the methodology for the Medicare MLR calculation 
take into account the special circumstances of contracts with lower 
enrollment. Proposed Sec.  422.2440 and Sec.  423.2440 set forth a 
credibility adjustment that would be designed to meet the same goals as 
the commercial MLR requirements in 45 CFR 158.230.
    A credibility adjustment is a method that can be used to address 
the impact of claims variability on the MLR for smaller contracts. All 
MA organizations and Part D sponsors experience some random claims 
variability, where actual claims experience deviates from expected 
claims experience. In a contract with a large enrollment, the 
predictability of expected claims experience is more reliable than in a 
contract with fewer members. One source of variability is the impact of 
outlier claims, which can be infrequent and in either direction. For 
smaller contracts, these random variations in the claims experience for 
enrollees could cause a contract's reported MLR to be considerably 
below or above the statutory requirement in any particular year, even 
though the MA organization or Part D sponsor estimated in good faith 
that the combination of the projected premium and projected claims 
would produce an MLR that meets the statutory requirement. The 
credibility adjustment is a method to address the effect of this random 
variation. A credibility adjustment serves to increase the MLR of a 
contract, thereby reducing the probability that a contract will fail to 
meet the statutory requirement simply because of random claims 
variability.
    In evaluating the desirability of including a credibility 
adjustment, it is important to emphasize that MA organizations and Part 
D sponsors bid prospectively, based on trends, assumptions and 
estimates from previous claims experience. When an actuary estimates 
that a plan bid will produce an 85 percent MLR in the upcoming year, 
whether or not that 85 percent MLR materializes depends on how closely 
members' actual use of health care services aligns with the assumptions 
the actuary has made, including estimates of the mix of enrollees the 
plans under the contract will attract, the intensity and frequency with 
which its enrollees will use health care services, and unit costs for 
payments to providers. All things being equal, it is more likely that 
those assumptions driving the level of the bid and estimated claims 
costs will align with actual experience when a contract enrolls a large 
number of members rather than a small number.
    To avoid requiring MA organizations and Part D sponsors to pay 
remittances due to random claim variation, rather than due to their 
underlying pricing and benefits structure, it is necessary to assess 
MLRs on sufficient numbers of member months for statistical 
credibility. Requiring MA organizations and Part D sponsors to pay 
remittances when random variation leads to surpluses (low MLRs), while 
requiring issuers to absorb losses when random variation leads to 
losses (high MLRs), could lead to product volatility, market exit, and 
inadequate levels of surplus to ensure solvency. We agree that 
remittance amounts should be based on the underlying premium pricing, 
rather than chance variation in claims experience. However, any 
credibility adjustment could also serve to deprive the federal 
government (and, thus, taxpayers and Medicare beneficiaries) of 
remittance amounts that they would otherwise be paid under the 
Affordable Care Act.

[[Page 12439]]

    For the commercial MLR rules, we adopted a credibility adjustment 
methodology developed from statistical analysis conducted for the NAIC 
by an independent actuarial consulting firm, using historical claims 
data for commercial insurers.
    After extensive analysis and public discussion, the methodology 
that we adopted to adjust the commercial MLR in instances of partial 
credibility was designed to reduce the probability that an issuer with 
smaller enrollment had to pay a rebate in a given year to 25 percent of 
the time or less. As discussed in the proposed commercial MLR rule, 
NAIC did consider setting the commercial base credibility adjustments 
so that such an issuer would be required to pay a rebate less than 10 
percent of the time. The NAIC concluded, and we agreed, that setting 
credibility adjustments based on a 25 percent probability of paying a 
rebate struck a more equitable balance of consumer and issuer 
interests.
    For the MA and Part D prescription drug programs, we propose to 
mirror the commercial approach by designing credibility adjustment 
factors for smaller enrollment contracts that result in a 25 percent 
chance of having to pay a remittance for contracts priced at an 85 
percent MLR. We believe that this approach provides an acceptable 
balance between the interests that MA organizations and Part D sponsors 
have in not paying remittance when a low MLR is the result of ordinary 
variation in claims experience, and the interests of Medicare 
beneficiaries in having plan benefits at prices that provide value and 
the government receiving remittances, as required by the Affordable 
Care Act. One difference from the approach in the commercial MLR rules 
is that we do not propose to include a deductible factor, because 
Medicare deductibles are more confined than in the commercial market. 
Thus, the limited range of Medicare cost sharing does not prompt the 
need for such an adjustment.
    Our proposal for calculation of the probability of a remittance is 
based solely on the variability of expected claims, assuming plans are 
priced exactly at an 85 percent MLR. In order to estimate the 
variability of expected MA-PD claims, we analyzed 4 years of fee-for-
service (FFS) claims data for medical claims and 4 years of 
prescription drug event claims and reconciliation data for the Part D 
benefit under MA-PD contracts (2008 to 2011). In order to estimate the 
variability of expected claims for Part D stand-alone contracts, we 
analyzed 4 years of prescription drug event claims and reconciliation 
data (2008 to 2011).
    Generally, Medicare claims vary less than commercial claims around 
the average per person claim amount (in statistical terms, the 
coefficient of variation of claims costs (standard deviation of claims 
costs relative to the mean claims cost) is lower for Medicare than 
commercial business relative to the mean claim cost). As a result, the 
threshold for full-credibility falls at a lower level of enrollment for 
MA-PD and Part D stand-alone contracts compared to commercial insurers. 
Further, claims for MA-PD contracts have a lower coefficient of less 
variation around the average than do claims for Part D stand-alone 
contracts, thus the full-credibility threshold for MA-PD contracts is 
lower than for Part D stand-alone contracts.
    The Office of the Actuary (OACT), Centers for Medicare and Medicaid 
Services, derived the MA-PD and Part D stand-alone credibility 
adjustments using the following methodology. The credibility adjustment 
is intended to reduce the probability that a contract will fail to meet 
the MLR requirement due to random variation in claims experience. The 
target failure rate is 25 percent for contracts priced at an 85 percent 
MLR. The adjustments only account for variation in the claim 
experience, as related to the numerator of the MLR. Variations due to 
other risks and other components of the MLR formula are not considered. 
This approach is equivalent to the approach used in developing the 
commercial MLR credibility adjustments.
    OACT modeled the distribution of the MLR using the following 
statistical formula by applying the Central Limit Theorem:
[GRAPHIC] [TIFF OMITTED] TP22FE13.000


Where

Xi is the annual claim amount with mean ([micro]) and variance 
([sigma]2) for an individual. Xi is assumed to be independently and 
identically distributed for each individual. OACT calculated the 
mean and variance from historical claim experience from Medicare 
Parts A and B (as a proxy for Part C) and Medicare Part D. Claims 
were tabulated consistent with the definitions used to define the 
MLR. We reviewed four calendar years of experience from 2008 through 
2011 for consistency and trends over time;
n is the number of individuals in the group; and
N
[GRAPHIC] [TIFF OMITTED] TP22FE13.001

denotes the Normal distribution with mean, 0.85, and variance,
[GRAPHIC] [TIFF OMITTED] TP22FE13.002


    .The numerator of the formula represents the aggregate claims (a 
variable), and the denominator represents the aggregate premium. The 
denominator is modeled as a single point equal to the expected premium 
because we are not evaluating the variability in the denominator.
    The credibility adjustment equals the expected value of the MLR 
less the 25th percentile (25 percent target failure rate). This 
difference can be calculated by multiplying the z-score for the 
standard Normal distribution by the standard deviation for the MLR. The 
credibility adjustment equals,
[GRAPHIC] [TIFF OMITTED] TP22FE13.003

where -0.6745 is the z-score for the 25th percentile of the standard 
normal distribution.
    We propose to use member months (instead of life years, used in the 
commercial MLR credibility adjustment) to describe the enrollment 
thresholds pertinent to application of the Medicare credibility 
adjustments, because member months are consistently and predominantly 
used in other reporting requirements for Medicare Advantage 
organizations and Part D sponsors. Member months for a contract year 
equal the sum across the 12 months of a year of the total number of 
enrollees for each month. This includes enrollees who are in ESRD and 
hospice status for a month. As with the commercial rule,

[[Page 12440]]

we intend to evaluate the credibility adjustments and update them, if 
necessary.
    In proposed Sec.  422.2440(a) and Sec.  423.2440(a), we follow the 
commercial MLR rule by proposing that an MA organization and a Part D 
sponsor may add a credibility adjustment to a contract's MLR if the 
contract's experience (level of enrollment) is partially credible, as 
determined by us. In Sec.  422.2440(b) and Sec.  423.2440(b), we note 
that an MA organization and Part D sponsor would not be permitted to 
add a credibility adjustment if the contract's experience is fully-
credible, as determined by us. In Sec.  422.2440(c) and Sec.  
423.2440(c), we propose that for contract years when a contract has 
non-credible experience, as determined by us, the sanctions specified 
in statute (and implemented at Sec.  422.2410(b), (c), and (d) and 
Sec.  423.2410(b) through (d)) for having an MLR that does not meet the 
minimum requirement of 85 percent would not apply. Finally, in Sec.  
422.2440(d) and Sec.  423.2440(d), we state that we will propose 
updates to the credibility adjustments, solicit comments, and finalize 
any updates through the Advance Notice and Final Rate Announcement 
process.
    Credibility adjustments would be applied to contracts with 
partially-credible experience. We propose to define partially-credible 
experience for MA contracts as enrollment that is greater than or equal 
to 2,400 member months and no greater than 180,000 member months of 
enrollment for a contract year. We propose to define partially-credible 
experience for Part D standalone contracts as enrollment that is 
greater than or equal to 4,800 member months and no greater than 
360,000 member months of enrollment for a contract year.
    Accordingly, we propose that non-credible MA contracts would have 
annual enrollment of less than 2,400 member months, and non-credible 
Part D ``standalone'' contracts would have annual enrollment of less 
than 4,800 member months. Further, we propose that a fully-credible MA 
contract would have an enrollment greater than 180,000 member months, 
and a fully-credible Part D ``standalone'' contract would have an 
enrollment greater than 360,000 member months.
    Table 1a provides the proposed credibility adjustments for 
partially-credible MA-PD contracts, and Table 1B provides the proposed 
credibility adjustments for partially-credible Part D stand-alone 
contracts. We propose that the credibility adjustments in these tables 
will be effective for 2014 and subsequent years. We propose that the 
credibility adjustments for the contracts with enrollment sizes that 
fall between the categories of member months displayed in Tables 1a and 
1b would be determined using linear interpolation. (For example, an MA-
PD contract with 75,000 member months would have a credibility 
adjustment of 1.575, calculated as 1.7 x (120,000-75,000) / (120,000-
60,000) + 1.2 x (75,000-60,000) / (120,000-60,000).)

   Table 1A.--Proposed MLR Credibility Adjustments for MA-PD*Contracts
------------------------------------------------------------------------
             Member months                   Credibility adjustment
------------------------------------------------------------------------
<=2,400...............................  Non-credible
2,400.................................  8.4%
6,000.................................  5.3%
12,000................................  3.7%
24,000................................  2.6%
60,000................................  1.7%
120,000...............................  1.2%
180,000...............................  1.0%
180,000....................  Fully-credible
------------------------------------------------------------------------
 * MA-PD combined with MA-only


 Table 1B.--Proposed MLR Credibility Adjustments for Part D Stand-Alone
                                Contracts
------------------------------------------------------------------------
             Member months                   Credibility adjustment
------------------------------------------------------------------------
<4,800................................  Non-Credible
4,800.................................  8.4%
12,000................................  5.3%
24,000................................  3.7%
48,000................................  2.6%
120,000...............................  1.7%
240,000...............................  1.2%
360,000...............................  1.0%
> 360,000.............................  Fully-credible
------------------------------------------------------------------------

    For years after 2014, we propose that any updates to the enrollment 
thresholds demarcating partial credibility and updates to the 
credibility adjustments be proposed in the annual Advance Notice of 
Methodological Changes for Medicare Advantage (MA) Capitation Rates and 
Part C and Part D Payment Policies, also known as the Advance Notice. 
After the comment period for the Advance Notice ends, the updates would 
be finalized in the annual Announcement of Medicare Advantage 
Capitation Rates and Medicare Advantage and Part D Payment Policies, 
otherwise known as the Final Rate Announcement. We do not envision that 
it will be necessary to make annual updates to the credibility 
adjustments, but should the need arise to make any updates in future 
years (for example, due to changes in payment policies that would 
require changes to the variables included in the MLR numerator and/or 
denominator), we propose to use the Advance Notices as a vehicle for 
additional opportunity for notice and comment.

G. Reporting Requirements

    Consistent with already established reporting requirements in Sec.  
422.504(f)(2) and Sec.  423.505(f)(2), we are proposing that MA 
organizations and Part D sponsors be required to submit a report to us. 
For each contract year, each MA organization and Part D sponsor would 
submit a report to us, in a timeframe and manner specified by us. We 
propose that MA organizations and Part D sponsors' submissions will 
include information that includes, but is not limited to the data 
needed by the MA organization and Part D sponsor to calculate and 
verify the MLR and remittance amount, if any, for each contract. This 
information may include reimbursement for clinical services and 
prescription drugs, total revenue, expenditures on quality improving 
activities, non-claim costs, taxes, licensing and regulatory fees, and 
any remittance owed to us under Sec.  422.2410 and Sec.  423.2410. MA 
organizations and Part D sponsors would be required to calculate MLRs 
and remittance as part of their submission to the Secretary.
    At a later date, we will provide information on the nature of this 
report, when it will be due, and how and where on the internet the 
information will be made available to the public, in a time and manner 
that we determine.
    We are requesting comment on when the MLR should be reported. While 
it is arguably preferable to set a reporting date after the payment 
reconciliations are complete, there are at least two reasons why this 
may not be feasible. First, there are occasional reopenings of 
reconciliations that occur after the year immediately following the 
contract year, and it seems unreasonable to wait until all reopenings 
have been completed. Second, we are statutorily required to halt new 
enrollment the second succeeding year after a contract has an MLR of 
less than the MLR required at Sec.  422.2410(b) and Sec.  423.2410(b) 
for 3 or more consecutive years, and to terminate a contract after that 
contract has had an MLR of less than the required MLR for 5 consecutive 
years. We are proposing to apply the termination sanction the second 
succeeding year after the fifth consecutive year that a contract does 
not meet the required MLR. We must balance any preference for a later 
reporting date with disruption that beneficiaries would experience if 
we halted new enrollment or terminated a

[[Page 12441]]

contract after open enrollment has begun.
    We are considering several options. First, we are considering 
requiring the reporting of Medicare MLRs data in July, even before risk 
adjustment reconciliation is complete. MA organizations and Part D 
sponsors must submit their bids by the first Monday in June and the 
base year for the bids is the same year as the contract year for MLR 
reporting. We typically provide nearly complete risk scores to MA 
organizations and Part D sponsors to support this bidding process, and 
base year costs must be developed by this time. The cutoff for PDEs to 
be reported for reinsurance and risk corridor reconciliation is June 
30th after the contract year, and MA organizations and Part D sponsors, 
which report the prescription drug events (PDEs) themselves, should be 
able to project their final risk corridor and reinsurance reconciled 
amounts by this time. A July 31 reporting date would provide time for 
MA organizations and Part D sponsors to project their final costs and 
revenues for the contract year, and allow us time to apply new 
enrollment and termination sanctions.
    Another option we are considering is to require reporting of a 
contract year MLR data in September, after risk adjustment 
reconciliation, but before Part D reinsurance and risk corridor 
reconciliation. This would better inform the calculation of the total 
revenue for the contract year, and still permit us sufficient time to 
apply enrollment and termination sanctions, and also to adjust Part D 
reassignments for low-income beneficiaries.
    A further option we are considering is setting a reporting date in 
December, after Part D reconciliation of risk corridors and 
reinsurance. While MA organizations and Part D sponsors would still 
need to project any future reconciliations, this approach would provide 
more information for MA organizations' and Part D sponsors' total 
revenue calculations. However, we have concerns about this timing since 
it would mean that we would not receive reported MLRs data until after 
open season has started, and the enforcement of enrollment and 
termination sanctions would create disruptions for beneficiaries who 
are newly enrolled in plans under a contract (for enrollment sanctions) 
or all beneficiaries enrolled in plans under a contract (for 
termination sanctions).
    We reiterate that, regardless of when a contract's MLR is actually 
reported, we are proposing that the MA organization or Part D sponsor 
must project future run-out of all payments and receipts as a result of 
the reconciliation of risk adjustment, reinsurance, or risk corridors. 
Because of the need to prevent disruption to beneficiaries who are 
choosing health plans for the coming year, and the necessity of 
projecting all future run-out, we are proposing a July 31 reporting 
date and request comment on this proposal.

H. Remittances to CMS if Applicable MLR Requirement Is Not Met

    Proposed Sec.  422.2470 and Sec.  423.2470, paragraphs (a), (b), 
(c), and (d), delineate the proposed general requirements regarding 
sanctions, the calculation of the amount to be remitted to us, the time 
frame for payment of any amount that may be due, and the treatment of 
remittances in future years' numerator and denominator. In accordance 
with section 1857(e)(4) of the Act, proposed Sec.  422.2470(a) and 
Sec.  423.2470(a) simply provide that if a contract is partially or 
fully-credible and does not meet the applicable MLR standard set forth 
in Sec.  422.2410(b) and Sec.  423.2410(b), then the plan sponsor would 
remit payment to CMS as calculated under this proposed rule. As 
discussed earlier, because an MA-PD or Part D stand-alone contract that 
has fewer than 2,400 or 4,800 member months, respectively, does not 
have sufficiently credible data to determine whether the minimum MLR 
standard has not been met, we are proposing that an MA organization or 
Part D sponsor would not be required to remit any payment to us for 
non-credible contracts.
    Proposed Sec.  422.2470(b) and Sec.  423.2470(b) explain the amount 
of the payment that would be due to CMS. The Affordable Care Act 
provides that MA organizations and Part D sponsors must remit to CMS 
the amount by which the MLR requirement exceeds the contract's actual 
MLR, multiplied by total revenue under this part. In this proposed 
rule, we specifically propose that MA organizations and Part D sponsors 
be required to remit to us the amount by which the applicable MLR 
requirement in Sec.  422.2410(b) and Sec.  423.2410(b) exceeds the 
contract's actual MLR, multiplied by the total revenue of the contract, 
as provided under proposed Sec.  422.2420(c) and Sec.  423.2420(c).
    Sections 422.2470(c) and 423.2470(c) specify that we would subtract 
remittances from plan payment amounts in a timely manner after the MLR 
is reported, on a schedule determined by us. Remittances by MA and Part 
D organizations would occur as part of regular monthly payments that we 
make to plan sponsors. In Sec.  422.2470(d) and Sec.  423.2470(d), we 
specify that remittances paid in any 1 year would not be included in 
the numerator or denominator of the next year's or any year's MLR.
    We request comment on the specials circumstances of certain MA 
organizations in Puerto Rico with respect to the Medicare MLR 
requirement. MA organizations in Puerto Rico that have Platino 
agreements with the Commonwealth of Puerto Rico tend to have higher 
Part C profit margins than other MA organizations and are thus less 
likely to meet the 85 percent MLR requirement.

I. MLR Review and Non-Compliance

    Under this proposed rule, we would conduct selected reviews of 
reports submitted under Sec.  422.2460 and Sec.  423.2460 to determine 
that remittance amounts under Sec.  422.2410(b) and Sec.  423.2410(b) 
and sanctions under Sec. Sec.  422.2410(c), 422.2410(d), 423.2410(c), 
and 423.2410(d) were accurately calculated, reported, and applied.
    MA organizations and Part D sponsors would be required to retain 
documentation relating to the data reported, and provide access to that 
data to CMS, HHS, the Comptroller General, or their designees, in 
accordance with proposed Sec.  422.504 and Sec.  423.505. These 
proposed provisions are intended to give CMS or its designees access to 
information needed to determine whether the reports and amounts 
submitted with respect to the MLR are accurate and valid. Sanctions 
would be imposed for non-compliance with the MLR requirements. 
Furthermore, under Sec.  422.2480(c) and Sec.  423.2480(c), MA 
organizations and Part D sponsors with third party vendors would be 
required to have or be able to obtain and validate, in a timely manner, 
all underlying data associated with their services prior to the 
preparation and submission of MLR reporting to CMS. This includes all 
claims data paid on behalf of the MA organization or Part D sponsor, 
direct and indirect remuneration data and supporting materials, and all 
pricing components and utilization data that were used or rendered to 
substantiate invoices submitted to sponsors or financial data submitted 
to us.
    In addition, we propose to add a failure to provide accurate and 
timely MLR data to the list of items in Sec.  422.510(a) and Sec.  
423.509(a) that constitute grounds for termination, and for 
intermediate sanctions and civil money penalties, by adding a paragraph 
(15) related to MLR reporting. Such an addition will provide CMS 
authority to invoke the contract termination procedures in Sec.  
422.510(b) through (d)

[[Page 12442]]

and Sec.  423.509(b) through (d) for failure by an MA organization or 
Part D plan sponsor to provide timely and accurate MLR data. Further, 
intermediate sanctions at Sec.  422.752(b) and (c) and Sec.  423.752(b) 
and (c) would also be available, as well as civil monetary penalties at 
Sec.  422.760 and Sec.  423.760.

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.
    We are soliciting public comment on each of these issues for the 
following sections of this document that contain information collection 
requirements:

A. ICRs Regarding MLR and Remittance Reporting Requirement (Sec.  
422.2470 and Sec.  423.2470)

    This proposed rule describes the information that would be reported 
by MA organizations and Part D sponsors on an annual basis to the 
Secretary starting in 2014. We propose that MA organizations and Part D 
sponsors' submissions will include information regarding reimbursement 
for clinical services, expenditures for activities that improve health 
care quality, other non-claim costs, total revenue, and federal and 
state taxes and regulatory fees, among other data elements. MA 
organizations and Part D sponsors would be required to calculate MLRs 
and remittance as part of their submission to the Secretary.
    At this time, CMS has not developed the MLR reporting instructions 
and forms that MA organizations and Part D sponsors would have to 
complete on an annual basis beginning for contract years starting 
January 1, 2014. We expect the first year of MLR reporting for MA 
organizations and Part D sponsors to occur in 2015 for the 2014 
contract year, and we propose to continue collecting MLR data for the 
foreseeable future. We plan to publish the instructions and forms that 
issuers must file for all plans in future guidance. At that time, we 
will solicit public comments on both the forms and the estimated burden 
imposed on health insurance issuers for complying with the provisions 
of this proposed rule. We will publish the required 60-day and 30-day 
notices in the Federal Register notifying the public of OMB approval as 
required by the PRA.

B. ICRs Regarding Retention of Records (Sec.  422.2480(b) and (c) and 
Sec.  423.2480(b) and (c)

    Subpart I of the proposed rule establishes our enforcement 
authority regarding the reporting requirements under section 1857(e) of 
the Act. MA organizations and Part D sponsors must maintain all 
documents and other evidence necessary to enable us to verify that the 
data required to be submitted comply with the definitions and criteria 
set forth in this proposed rule, and that the MLR is calculated and any 
remittances owed are calculated and provided in accordance with this 
proposed rule. The proposed rule at Sec.  422.2480(c) and Sec.  
423.2480(c) would require plan sponsors to maintain all of the 
documents and other evidence for 10 years.
    We expect all MA organizations and Part D sponsors will have to 
retain data relating to the calculation of MLRs; those who have owed 
remittances would also have to retain information regarding the payment 
of remittances. We believe that the burden associated with our record 
retention requirements does not exceed standard record retention 
practices because MA organizations and Part D sponsors are already 
required to retain the records and information required by this 
proposed rule in order to comply with the legal requirements of their 
states' departments of insurance. For that reason, we are assigning a 
lesser burden to these requirements as compared with the commercial MLR 
requirements. We estimate that about 616 contracts would be subject to 
the aforementioned requirements. (The 616 contracts are comprised of 
605 contracts subject to the remittance requirement plus 11 non-
credible contracts that are subject to reporting requirements). We 
further estimate that it will take MA organizations and Part D sponsors 
about 28 hours in total to meet the record retention requirements, at a 
cost of about $4.00 per report. The total estimated annual burden 
associated with the requirements in Sec.  422.2480(b) and (c) and Sec.  
423.2480(b) and (c) is shown in the regulatory impact analysis.
    While we have developed preliminary burden estimate, we are not 
seeking OMB approval at this time. We will seek OMB approval for the 
aforementioned recordkeeping requirements at the same time we seek OMB 
approval for the information collection requirements associated with 
proposed MLR remittance reporting requirements discussed in Sec.  
422.2470 and Sec.  423.2470.
    We welcome comments regarding the burden associated with 
maintaining the information described in subpart I of this proposed 
rule.
    If you comment on these information collection and recordkeeping 
requirements, please mail copies directly to the following:

Centers for Medicare & Medicaid Services, Office of Strategic 
Operations and Regulatory Affairs, Regulations Development Group, 
Attn.: William Parham (CMS-4173-P), Room C4-26-05, 7500 Security 
Boulevard, Baltimore, MD 21244-1850; and
Office of Information and Regulatory Affairs, Office of Management and 
Budget, Room 10235, New Executive Office Building, Washington, DC 
20503, Attn: CMS Desk Officer, (CMS-4173-P), Fax (202) 395-6974.

IV. Response to Comments

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

V. Regulatory Impact Analysis

A. Introduction

    This proposed rule implements section 1857(e)(4) of the Act, which 
sets forth requirements for a medical loss ratio (MLR) for MA 
organizations and Part D sponsors. The MLR is an accounting statistic 
that, stated simply, measures the percentage of total revenue that MA 
organizations and Part D sponsors spend on health care and quality 
initiatives (and, under this rule, amounts spent to reduce Part B 
premiums), versus what they spend on such other items as 
administration, marketing and profit. The higher the MLR, the more the 
MA organization or Part D sponsor is spending on claims and quality 
improving activities and the less they are spending on other items

[[Page 12443]]

and retaining as profit. As proposed earlier, MA organizations and Part 
D sponsors must submit MLR-related data to the Secretary on an annual 
basis, and in the event that a contract's MLR fails to meet the minimum 
statutory requirement, MA organizations and Part D sponsors would remit 
a payment to CMS. If the contract continues to fall below the minimum 
MLR standard, the contract would be subject to enrollment sanctions and 
possibly termination. This proposed regulation also proposes uniform 
definitions and standardized methodologies for calculating the MLR and 
addresses enforcement of the reporting requirements. These provisions 
are generally effective for contract years beginning on or after 
January 1, 2014.
    We have examined the effects of this rule as required by Executive 
Order 12866 on Regulatory Planning and Review (September 30, 1993), 
Executive Order 13563 on Improving Regulation and Regulatory Review 
(January 18, 2011), the Regulatory Flexibility Act (RFA) (September 19, 
1980, Pub. L. 96-354), section 1102(b) of the Act, section 202 of the 
Unfunded Mandates Reform Act of 1995 (March 22, 1995, Pub. L. 104-4), 
Executive Order 13132 on Federalism (August 4, 1999), and the 
Congressional Review Act (5 U.S.C. 804(2)).
    Executive Orders 12866 (58 FR 51735) and 13563 direct agencies to 
assess all costs and benefits of available regulatory alternatives and, 
if regulation is necessary, to select regulatory approaches that 
maximize net benefits (including potential economic, environmental, 
public health and safety effects, distributive impacts, and equity). 
Executive Order 13563 is supplemental to and reaffirms the principles, 
structures, and definitions governing regulatory review as established 
in Executive Order 12866, emphasizing the importance of quantifying 
both costs and benefits, of reducing costs, of harmonizing rules, and 
of promoting flexibility.
    Section 3(f) of Executive Order 12866 defines a ``significant 
regulatory action'' as an action that is likely to result in a rule: 
(1) Having an annual effect on the economy of $100 million or more in 
any 1 year, or adversely and materially affecting a sector of the 
economy, productivity, competition, jobs, the environment, public 
health or safety, or state, local or tribal governments or communities 
(also referred to as ``economically significant''); (2) creating a 
serious inconsistency or otherwise interfering with an action taken or 
planned by another agency; (3) materially altering the budgetary 
impacts of entitlement grants, user fees, or loan programs or the 
rights and obligations of recipients thereof; or (4) raising novel 
legal or policy issues arising out of legal mandates, the President's 
priorities, or the principles set forth in the Executive Order.
    A regulatory impact analysis (RIA) must be prepared for major rules 
with economically significant effects ($100 million or more in any 1 
year), and a ``significant'' regulatory action is subject to review by 
the Office of Management and Budget (OMB). This proposed rule is likely 
to have economic impacts of $100 million or more in any 1 year, and 
therefore has been designated an ``economically significant'' rule 
under section 3(f)(1) of Executive Order 12866. Therefore, we have 
prepared an RIA that details the anticipated effects (costs, savings, 
and expected benefits), and alternatives considered in this proposed 
rule. Accordingly, OMB has reviewed this proposed rule pursuant to the 
Executive Order.

B. Statement of Need

    Consistent with the provisions in section 1857(e)(4) of the Act, 
which are incorporated by reference in section 1860D-12(b)(3)(D) of the 
Act, this proposed rule requires MA organizations and Part D sponsors 
to meet the minimum MLR requirement of 85 percent. If this requirement 
is not met at the contract level, which is the level of aggregation 
proposed in this notice, MA organizations and Part D sponsors are 
subject to penalties. Section 1857(e)(4) of the Act requires MA 
organizations and Part D sponsors to ``remit to the Secretary an amount 
equal to the product of the total revenue of the MA plan under this 
part for the contract year and the difference between 0.85 and the 
medical loss ratio.'' Section 1857(e)(4) of the Act also provides that 
the Secretary shall not permit enrollment of new enrollees if the plan 
does not meet the MLR requirement of 85 percent for 3 or more 
consecutive years and shall terminate the contract if the plan 
(contract) fails to have such a medical loss ratio for 5 consecutive 
contract years.

C. Summary of Impacts

    We limited the period covered by the regulatory impact analysis 
(RIA) to calendar year (CY) 2014 (with the exception of section V.D.5. 
of this proposed rule, which presents estimates for ongoing annual 
administrative costs for 2014 and subsequent years). We anticipate that 
the transparency and standardization of MLR reporting in this proposed 
rule would help ensure that taxpayers, the federal government, and 
enrolled beneficiaries receive value from Medicare health plans. 
Additionally, including in the MLR calculation those costs related to 
quality-improving activities could help to increase the level of 
investment in and implementation of effective quality improving 
activities, which could result in improved quality outcomes and lead to 
a healthier beneficiary population.
    Executive Order 12866 also requires consideration of the 
``distributive impacts'' and ``equity'' of a rule. As described in this 
RIA, this regulatory action will help ensure that MA organizations and 
Part D sponsors spend at least a specified portion of total revenue on 
reimbursement for clinical services, prescription drugs, quality 
improving activities, and direct benefits to beneficiaries in the form 
of reduced Part B premiums, and will result in a decrease in the 
proportion of health insurance revenue spent on administration and 
profit. It will require MA organizations and Part D sponsors to remit 
payment to CMS if this standard is not met. MA organizations and Part D 
sponsors may also experience sanctions if this standard is not met over 
a period of 3 to 5 consecutive years. The remittance will help incent 
MA organizations and Part D sponsors to price their benefit packages 
such that a specified portion of premium income is likely to be spent 
on reimbursement for clinical services and quality improving 
activities, resulting in increased value to beneficiaries enrolled in 
MA and Part D. In accordance with Executive Order 12866, we believe 
that the benefits of this regulatory action justify the costs.
    Although we are unable to quantify benefits, Table 2 shows that the 
estimated transfer amounts due to failure to meet the minimum MLR 
requirement (that is, remittances to the HHS Secretary) could be 
substantial. Estimates for CY 2014 remittances are $717 million for MA-
PD contracts and $141 million for Part D stand-alone contracts. (Note 
that the estimates in Tables 2 through 5 are based on CY 2013 bid data, 
which are a proxy for actual CY 2014 costs and revenues that will be 
used in actual MLR calculations.) Additional details relating to these 
estimates are discussed later in this regulatory impact analysis. We 
also estimate that administrative costs of the rule would be 
approximately $9.6 million upfront and $2.8 million in subsequent 
years.

[[Page 12444]]



                                    Table 2--Estimated Remittance for CY 2014
                                          [With Credibility Adjustment]
----------------------------------------------------------------------------------------------------------------
                                                                    Remittance estimates (in millions)
                                                        --------------------------------------------------------
                                                                                                 All Contracts
                     Contract type                                            Contracts with       Below MLR
                                                           Contracts with   MLRs from  80% to    Requirement of
                                                             MLRs < 80%           84.99%          85%  [Total
                                                                                                  Remittance]
----------------------------------------------------------------------------------------------------------------
MA-PD..................................................               $293               $424               $717
Part D Stand-alone.....................................                  5                136                141
----------------------------------------------------------------------------------------------------------------
    Total..............................................                298                560                858
----------------------------------------------------------------------------------------------------------------
Source: 2013 approved bids.
Notes: Estimates reflect application of the credibility adjustment to MLRs for partially-credible contracts. The
  remittance for a contract is the product of the difference between 0.85 and the contract's MLR and the total
  revenue of the contract, as provided in Sec.   422.2420(c) and Sec.   423.2420(c). All MA contracts include at
  least one MA-PD plan, so are labeled MA-PD. This analysis does not explicitly model the impact of potential
  plan sponsor behavioral changes.

D. Detailed Economic Analysis

1. Benefits
    In developing this proposed rule, we carefully considered its 
potential effects including both costs and benefits. We identify 
several potential benefits which are discussed later in this section.
    A potential benefit of this proposed rule is greater market 
transparency and improved ability of beneficiaries to make informed 
insurance choices. The uniform reporting required under this proposed 
rule, along with other programs such as www.Medicare.gov, a Web site 
with plan-level information, will mean that beneficiaries will have 
better data to inform their choices, enabling the market to operate 
more efficiently.
    In addition, contracts that would not otherwise meet the MLR 
minimum defined by this proposed rule may opt to increase spending on 
quality-promoting activities. These programs, which include case 
management, care coordination, chronic disease management and 
medication compliance, have the potential to create a societal benefit 
by improving outcomes and beneficiary population health.
    MA organizations and Part D sponsors that would not otherwise meet 
the MLR minimum may also expand covered benefits or reduce cost sharing 
for beneficiaries. To the extent that these changes result in increased 
consumption of effective health services, the proposed rule could 
result in improved beneficiary health outcomes, thereby creating a 
societal benefit.
2. Costs
    We have identified the direct costs associated with this proposed 
rule as the costs associated with reporting, recordkeeping, remittance 
payments, enrollment and termination sanctions, and other costs.
a. Direct Costs
    We estimate that each MA organizations and Part D sponsor would 
incur approximately $16,000 one-time administrative costs (per report), 
and about $5,000 in annual ongoing administrative costs (per report) 
related to complying with the requirements of this proposed rule. 
Additional details relating to these costs are discussed later in this 
RIA.
b. Other Costs
    Additionally, there are three other potential types of costs 
associated with this proposed rule: costs of potential increases in 
medical care use, the cost of additional quality-improving activities, 
and costs to beneficiaries if MA organizations and Part D sponsors 
decide to limit offered products as a result of this proposed rule.
    As discussed in the benefits section, there may be increases in 
quality-improving activities, provision of medical services, and Part D 
covered items due to this proposed rule. This is likely have some 
benefit to beneficiaries but also potentially represents an additional 
cost to MA organizations, Part D sponsors, and the federal government.
    It is also possible that some MA organizations and Part D sponsors 
in particular areas or markets would not be able to operate profitably 
when required to comply with the proposed requirements. They may 
respond by changing or reducing the number of products they offer. MA 
organizations and Part D sponsors are likely to consider whether they 
expect to be successful competitors in a given market. Entire contracts 
or subsets of plans under contracts with low MLRs contracts may be 
withdrawn from a given market entirely, while MA organizations and Part 
D sponsors with low MLR contracts (particularly those that are 
subsidiaries of larger organizations) may find ways to achieve higher 
MLRs through increased efficiencies.
    To the extent that MA organizations and Part D sponsors decide to 
limit product offerings in response to this proposed rule, individual 
enrollees in these contracts may bear some costs associated with 
searching for and enrolling in a new Medicare health plan. For Medicare 
beneficiaries, this may also lead to reduced choice, the inability to 
purchase similar coverage, and higher search costs related to finding 
affordable insurance coverage.
c. Transfers
    To the extent that MA organizations and Part D sponsors have 
contracts with MLRs that fall short of the minimum requirement, they 
must remit payment to the Secretary. These remittances would reflect 
transfers from the MA organizations or Part D sponsors to the 
Secretary. Using 2013 approved bid data, we have estimated remittances 
for CY 2014, which are presented in Table 2.
d. Additional Sanctions
    To the extent that MA organizations' and Part D sponsors' MLRs fall 
short of the minimum MLR requirements for a period of 3 or 5 
consecutive years, they will undergo additional sanctions. If an MA 
organization's or Part D sponsor's MLR falls below 85 percent for 3 
consecutive contract years, the Secretary shall not permit the 
enrollment of new enrollees under the contract for coverage. If the MLR 
falls below 85 percent for 5 consecutive contract years, the Secretary 
shall terminate the contract. To the extent that enrollment sanctions 
are issued, this may lead to

[[Page 12445]]

reduced choice for Medicare beneficiaries. To the extent that contracts 
are terminated, individual enrollees in these contracts may bear some 
costs associated with searching for and enrolling in a new Medicare 
health or drug plan. One benefit of enrollment sanctions would be the 
movement of beneficiaries into contracts with a more efficient 
operating cost structure.
3. Overview of Data Sources, Methods, and Limitations
    The most recent data on the number of licensed entities offering 
Medicare coverage through MA or Part D prescription drug plans are the 
2013 approved bids. These bid data contain information on MA 
organizations' and Part D sponsors' projected revenues, expenses, and 
enrollment. Generally, these projections are based on actual plan 
experience from previous years. CY 2013 bid data are a proxy for actual 
CY 2014 costs and revenues that will be used in actual MLR 
calculations.
    We used 2013 approved plan bid data, aggregated to the contract 
level. An MA organization or Part D sponsor can have one or multiple 
contracts with CMS and, under each contract, the MA organization or 
Part D sponsor can offer one or multiple plans (plan benefit packages) 
in which beneficiaries may enroll. Although these data represent the 
most recent data source with which to estimate impacts of the MLR 
regulations, there are limitations that should be noted. For example, 
plan bids are projected estimates of per person per month revenue 
needed to offer a benefit package, where required revenue is the sum of 
direct medical costs or prescription drug costs, administrative costs 
and margin. Member month projections may differ from actual enrollment, 
and revenue projections in the bid may differ from the actual revenue 
MA organizations and Part D sponsors truly require given actual claims 
experience in a year.
    Moreover, we propose to follow the commercial MLR regulations by 
including expenditures on quality improving activities in the numerator 
of the MLR (and, under this rule, amounts spent to reduce Part B 
premiums), and allowing certain amounts to be subtracted from the 
denominator of the MLR, such as licensing and regulatory fees; federal 
and state taxes and assessments; and community benefit expenditures. 
Some data for this RIA was collected in the bid pricing tool for the 
first time in 2013, such as reported estimates by MA organizations and 
Part D sponsors of expenditures on quality and levels of taxes and 
fees. Part D employer-group waiver plans are not required to submit 
bids, and therefore they are not included in the data analysis. 
Therefore, these plans are excluded from the analysis of Part D stand-
alone contracts. Employer group waiver plans offered under MA-PD 
contracts are included in the RIA, although the bid data available for 
these plans are only from the MA portions of the bids.
    As discussed at greater length in section V.D.4 of this proposed 
rule, we expect that MA organization and Part D sponsor behavior would 
change as a result of this proposed rule, which would impact the MLRs 
and remittances calculated. Because we are limited in our ability to 
predict behavioral changes, we do not explicitly model these behavioral 
changes in our estimates. We seek comment on our methods and 
limitations presented in this regulatory impact analysis, anticipated 
impacts of behavioral changes, and additional ideas for quantifying the 
costs and benefits of this proposed rule.
4. Number of Affected Entities Subject to the MLR Provisions
    We are proposing that the MLR provisions will apply to all MA 
organizations and Part D sponsors offering Part C or D coverage (except 
for the proposed exclusion of PACE organizations, and the proposed 
inclusion of cost plans' Part D coverage). For purposes of the RIA, we 
have estimated the total number of entities that would be affected by 
the requirements of this proposed rule at the contract level because 
this is the level at which we propose to apply the MLR. We believe that 
this is the best read of the statute at 1857(e) of the Act and that 
applying the MLR adjustment at the contract level would promote program 
stability and a variety of benefit structures.
    Table 3 shows the estimated distribution of entities offering Part 
C and D contracts subject to MLR remittance requirements. Note that 
section 1876 Cost HMO/CMPs and section 1833 Cost HCPPs (Health Care 
Prepayment Plans) are excluded from this MLR analysis, as they do not 
submit Part C bids and only a few Part D bids for 2013 were submitted 
for section 1876 cost plans.

    Table 3--Estimated Number of Contracts Subject to MLR Remittance
                              Requirements
------------------------------------------------------------------------
                                                       Estimated number
          Contract type             Contract count     of beneficiaries
                                                         (in millions)
------------------------------------------------------------------------
MA-PD*..........................                 544                14.3
Part D Stand-alone**............                  61                19.3
                                 ---------------------------------------
    Total.......................                 605                33.6
------------------------------------------------------------------------
* All MA contracts include at least one MA-PD plan, so are labeled MA-
  PD. Non-credible contracts, of which there are 11, are not displayed
  or included in this table as they are not subject to the remittance
  requirements.
** PACE and costs contracts are excluded.
Source: CMS administrative data on MA and Part D contracts, based on
  2013 accepted bids. Beneficiary counts are bid projections.

    Of the 605 MA-PD and Part D stand-alone contracts subject to the 
remittance requirement, we estimate that only 14 percent of these 
contracts will be required to pay an MLR related remittance to the 
Secretary in 2014. (see Table 5). This RIA provides estimates only for 
CY 2014, and, as a result, does not estimate the number of contracts 
that could undergo MLR-related enrollment suspensions or terminations 
in subsequent years.
5. MLR Remittance Payments
a. Data Limitations and Modeling Assumptions
    As described in the commercial MLR rules, we expect that as a 
result of this proposed rule, MA organization and Part D sponsor 
behavior would change. Even if the 2013 bid data were a precise 
indication of actual claims costs and revenue for 2013, MLRs in 2014 
may well be different as a result of plan sponsor behavioral change. 
However, for purposes of this analysis, we do not explicitly model 
these behavioral changes in our estimates. Potential behavioral changes 
as a result of this

[[Page 12446]]

proposed rule and the anticipated impact on our estimates are as 
follows:
     Pricing Policy--MA organizations and Part D sponsors would 
likely consider a number of responses in 2014 to minimize or avoid 
remittance (for example, reducing premium increases, or paying 
providers bonuses if incurred claims fall short of a certain 
threshold).
     Activities That Improve Quality--MA organizations and Part 
D sponsors may increase their quality-improving activities given the 
financial incentive to do so, or newly describe existing activities as 
such, and spending on these activities may change and vary 
significantly by MA organization or Part D sponsor.
     Other Changes--MA organizations and Part D sponsors are 
expected to carefully scrutinize all of their expenditures to determine 
whether some could legitimately be categorized as expenditures for 
clinical services, prescription drugs, or quality improving activities 
based on the definitions implemented by this regulation. Further, it is 
unclear to what extent companies may make other behavioral changes that 
could affect MLR remittances (for example, expanding coverage to 
increase medical claims, consolidation, requesting permission to split 
contracts into smaller contracts in order to receive credibility 
adjustments, etc.).
b. Methods for Estimating MLR Remittances
    The analysis includes estimates that are based on both unadjusted 
and adjusted MLRs. An ``adjusted MLR'' refers to the MLR for a contract 
to which a credibility adjustment has been added, as described in 
section II.F. of this proposed rule. Accordingly, an unadjusted MLR is 
calculated without any credibility adjustment. Comparisons of 
unadjusted and adjusted MLRs are provided to assess the impact of the 
proposed credibility adjustments on partially-credible contracts. All 
MLRs reported in this analysis have denominators net of estimated 
federal and state taxes and licensing and regulatory fees, using data 
reported by MA organizations and Part D sponsors in their 2013 bids. 
Because the definitions of these taxes and fees are new to this rule, 
the estimates from the 2013 bid data may differ from how much they will 
actually spend on taxes and fees in 2014. Similarly, all estimated MLRs 
reported in this analysis also incorporate 2013 bid estimates of 
expenses for quality improving activities, as reported by MA 
organizations and Part D sponsors. Because the definitions of quality 
improving activities are new to this rule, the estimates from the 2013 
bid data may differ from how much they will actually spend on these 
activities in 2014.
    The adjusted MLRs reflect application of the credibility 
adjustments for contracts that have partially credible experience. As 
described in section II.F. of this proposed rule, we propose that an 
MA-PD contract be defined as partially-credible when the enrollment is 
greater than or equal to 2,400 member months and no greater than 
180,000 member months for a contract year. We propose that a Part D 
stand-alone contract be defined as partially-credible when the 
enrollment is greater than or equal to 4,800 member months and no 
greater than 360,000 member months for a contract year. We propose that 
these contracts receive a credibility adjustment to their MLRs to 
account for statistical variability in their claims experience that is 
inherent in contracts with smaller enrollment. We propose that MA-PD 
contracts are defined as fully-credible when the enrollment is greater 
than 180,000 member months and Part D stand-alone contracts are defined 
as fully-credible when the enrollment is greater than 360,000 member 
months. Reported MLR values for fully-credible contracts would not 
reflect a credibility adjustment. Finally, we propose that contracts 
are defined as having non-credible experience if the enrollment for a 
year is less than 2,400 member months for MA-PD contracts and less than 
4,800 member months for Part D stand-alone contracts. Non-credible 
contracts would not be subject to the remittance requirements or other 
MLR-related sanctions specified in statute (and implemented in the 
regulations at Sec.  422.2410(b), (c), and (d) and Sec.  423.2410(b) 
through (d)). Section II.F. of the proposed rule describes the 
rationale and method for calculating credibility adjustments.
    First, the unadjusted MLR for a contract is calculated as follows. 
Each component of the MLR numerator (incurred claims, expenditures for 
quality activities, Part B premium rebates amount, and Part D 
reinsurance) is summed across all plans under the contract for all 
projected enrollees and the contract-level components are then summed. 
Next, each component of the MLR denominator (revenue net of taxes and 
fees, and Part D reinsurance) is summed across all plans under the 
contract for all projected enrollees, and the contract-level components 
are then summed. The ratio is then calculated to determine the 
unadjusted MLR. Finally, for contracts that are partially-credible and 
thus eligible for a credibility adjustment, and have an MLR below 85 
percent prior to application of a credibility adjustment, we calculate 
an adjusted MLR for the contract by adding the applicable percentage 
points.
    To estimate a remittance for a contract whose MLR falls below the 
minimum MLR requirement of 85 percent, we multiply the contract's 
difference between the minimum MLR requirement of 85 percent and the 
contract's MLR by the contract's total revenue (as provided at Sec.  
422.2430(c) and Sec.  423.2420(c).
c. Numbers and Enrollment of MA Organizations and Part D Sponsors 
Affected by the MLR Requirements and Associated MLR Remittance Payments
    As shown in Table 4, we estimate that 336 MA-PD contracts and 26 
Part D stand-alone contracts would be designated as ``partially-
credible'' according to the standards of this proposed rule, and thus 
eligible for a credibility adjustment. That is, about 62 percent of MA-
PD contracts (representing about 13 percent of projected total MA-PD 
enrollment) would be partially-credible, and about 43 percent of Part D 
stand-alone contracts (representing about 1 percent of projected total 
stand-alone enrollment) would be eligible for a credibility adjustment 
if the MLR falls below 85 percent. (Many MLRs for partially-credible 
contracts are estimated to meet the minimum MLR requirement, as shown 
in Table 5.).
    A total of 208 MA-PD contracts and 35 Part D stand-alone contracts 
are estimated to be fully-credible, so are not eligible for a 
credibility adjustment. As discussed elsewhere in this proposed rule, 
contracts with non-credible experience during a given contract year 
that do not meet the minimum MLR requirement would not be required to 
provide any remittance to the Secretary nor be subject to enrollment or 
termination sanctions because the contract would not have a 
sufficiently large number of member months to yield a statistically 
valid MLR.

[[Page 12447]]



                  Table 4--Estimated Enrollment, Revenue, and Average MLR by Credibility Status
----------------------------------------------------------------------------------------------------------------
                                                                    Number of
        Contract type            Credibility    Contract count    beneficiaries    Total revenue     Avg MLR*
                                    status                        (in millions)    (in billions)      percent
----------------------------------------------------------------------------------------------------------------
MA-PD........................  Partial........             336               1.8           $20.8            89.6
                               Full...........             208              12.5           135.8            88.9
Part D Stand-alone...........  Partial........              26               0.2             0.4            86.7
                               Full...........              35                19            31.3            88.4
----------------------------------------------------------------------------------------------------------------
Notes: The table excludes 9 MA-PD contracts and 2 Part D stand-alone contracts that are non-credible. Employer
  group waiver plans do not submit Part D bids, so are absent from the Part D stand-alone analysis, and only
  their MA bid data are included in the MA-PD analysis. This analysis does not explicitly model the impact of
  potential plan sponsor behavioral changes.
* Average MLRs reflect adjusted MLRs for those partially-credible contracts with MLRs below 85% prior to
  application of a credibility adjustment. Averages are enrollment-weighted. The average MLR for partially-
  credible contracts uses the MLR with credibility adjustment. Enrollment and total revenue are projections from
  the 2013 approved bids.
Source: CMS analysis of administrative data on MA and Part D contracts, based on 2013 accepted bids.

    Finally, Table 4 shows average MLRs for the subgroups of MA-PD and 
Part D stand-alone partially- and fully-credible contracts. (The 
average MLRs for partially-credible contracts reflect the MLRs after 
application of a credibility adjustment for those partially-credible 
contracts with an MLR below 85 percent prior to application of a 
credibility adjustment.) On average, each of these four subgroups of 
contracts is estimated to meet the minimum MLR requirement, with 
average MLRs ranging from 86.7 percent to 89.6 percent. However, there 
are contracts within both subgroups of partially-credible and fully-
credible that do not meet the minimum MLR requirement, as shown in 
Table 5.
    Total revenue for MA-PD contracts is the total MA revenue 
requirement + MA optional supplemental benefit premium (if any) + Part 
D basic bid + Part D reinsurance--Parts C and D taxes and fees.
    Total revenue for Part D stand-alone contracts is the sum of the 
basic bid and Part D reinsurance, minus taxes and fees. Low-income cost 
sharing (LICS) payments are excluded.
    Table 5 shows the number of MA-PD and Part D stand-alone contracts 
estimated to owe a remittance payment, before and after application of 
a credibility adjustment to eligible partially-credible contracts. The 
figures in Table 5 were determined as follows. First, we used 
enrollment projections to determine which contracts are fully-credible 
and which are partially-credible. Next we calculated the MLRs with the 
credibility adjustment added for those partially-credible contracts 
with MLRs below 85 percent. Finally, to show the overall program impact 
of credibility adjustments, we calculated the estimated remittances for 
partially-credible and fully-credible contracts before and after 
application of credibility adjustments.

                          Table 5--Estimated Impact of Credibility Adjustment on Estimated MLR Remittance Payments for CY 2014
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                             Number of       Estimated       Number of       Estimated
                                                                                             contracts      remittance       contracts      remittance
                                                                              Number       below 85% MLR      without        below 85%         with
               Contract type                     Credibility status          contracts        before        credibility        after        credibility
                                                                                            credibility   adjustment (in    credibility   adjustment (in
                                                                                            adjustment       millions)      adjustment       millions)
--------------------------------------------------------------------------------------------------------------------------------------------------------
MA-PD.....................................  Partial.....................             336              68            $109              34             $55
                                            Full........................             208              37             662              37             662
                                            Total.......................             544             105             771              71             717
Part D stand-alone........................  Partial.....................              26              12              11               9               8
                                            Full........................              35               2             133               2             133
                                            Total.......................              61              14             144              11             141
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Partially-credible contracts are those with enrollment levels that make them eligible for a credibility adjustment.
This analysis does not explicitly model the impact of potential plan sponsor behavioral changes.
Source: CMS analysis of administrative data on MA and Part D contracts, based on 2013 accepted bids.

    Of the 336 MA-PD contracts that would categorized as partially-
credible, 68 would fail to meet the MLR minimum requirement of 85 
percent in the absence of a credibility adjustment. The average MLR for 
this group of 68 contracts, prior to adding a credibility adjustment, 
is 82.6 percent. Upon application of the credibility adjustment, 34 of 
these 68 would pass the MLR requirement, and 34 would still have MLRs 
below 85 percent. The subset of 34 contracts that passes with 
application of the credibility adjustment has an average MLR of 85.7 
percent. As a result, the credibility adjustment decreases the 
estimated remittance amount by about $54 million (from $771 to $717 
million). However, it should be noted that the majority of the 
estimated remittance of $717 million, that is, $662 million, is owed by 
fully-credible contracts.
    For Part D stand-alone contracts, 12 of the 26 partially-credible 
contracts would fail to meet the MLR minimum requirement in the absence 
of a credibility adjustment. The average MLR for this group of 12 
contracts, prior to adding a credibility adjustment, is 80.4 percent. 
Upon application of the credibility adjustment, 3 of these 12 contracts 
would pass the requirement, and 9 would still have MLRs below 85 
percent. The subset of 3 contracts that passes with application of the 
credibility adjustment has an average MLR of 86.8 percent. As a result, 
the credibility adjustment decreases the estimated remittance amount by 
about $3 million (from $144 to $141 million). However, it should be 
noted that the majority of the estimated remittance of $141 million, 
that is $133 million, is owed by fully-credible contracts. Non-

[[Page 12448]]

credible contracts were excluded from this analysis because no 
sanctions under Sec.  422.2410(b) through (d) would apply to these 
contracts; as these contracts will not have remittances, they do not 
factor into the analysis of the estimated impacts.
6. Administrative Costs Related to MLR Provisions
    As stated previously this proposed rule implements the reporting 
requirements of section 1857(e)(4) of the Act, describing the medical 
loss ratio requirements and sanctions for not meeting those 
requirements, including a remittance payment of the difference to the 
Secretary and enrollment suspensions and contract termination for those 
who do not meet the requirements. Implementation of these requirements 
necessitates that a report be submitted to the Secretary and that MLR 
information be made available to the public in a time and manner that 
we determine, as well as the remittance calculation, payment and 
enforcement provisions of section 1857(e)(4) of the Act. We have 
quantified the primary sources of start-up costs that MA organizations 
and Part D sponsors will incur to bring themselves into compliance with 
this proposed rule, as well as the ongoing annual costs that they will 
incur related to these requirements. These costs and the methodology 
used to estimate them are discussed later in this section, on which we 
welcome comment.
a. Methodology and Assumptions for Estimating Administrative Costs
    Many MA organizations and Part D sponsors already report to CMS 
several elements needed for the MLR calculation, for example, certain 
fields in the Part D prescription drug events records, and some 
information in the annual Part C and Part D Technical Reporting. This 
proposed rule includes requirements related to additional data 
elements. As discussed earlier in this impact analysis, in order to 
assess the potential administrative burden relating to the requirements 
in this proposed rule, we drew on the regulatory impact analysis from 
the commercial MLR rules to gain insight into the tasks and level of 
effort required, and modified these estimated impacts for Medicare. 
Based on this review, we estimate that MA organizations and Part D 
sponsors will incur one-time start-up costs associated with developing 
teams to review the requirements in this proposed rule, and with 
developing processes for capturing the necessary data (for example, 
automating systems, writing new policies for tracking expenses in the 
general ledger, and developing methodologies for allocating expenses by 
lines of business and by contract). We estimate that MA organizations 
and Part D sponsors will also incur ongoing annual costs relating to 
data collection, populating the MLR reporting forms, conducting a final 
internal review, submitting the reports to the Secretary, conducting 
internal audits, record retention, preparing and submitting 
remittances, suspending enrollment (where appropriate), modifying 
marketing, and/or terminating contracts (where appropriate).
    We anticipate that the level of effort relating to these activities 
will vary depending on the scope of an MA organization or Part D 
sponsor's operations. The complexity of each MA organization or Part D 
sponsor's estimated reporting burden is likely to be affected by a 
variety of factors, including the number of contracts it offers, 
enrollment size, the degree to which it currently captures relevant 
data, whether it is a subsidiary of a larger carrier, and whether it 
currently offers coverage in the commercial market (and is therefore 
subject to the commercial MLR requirements).
b. Costs Related to MLR Reporting
    For each contract year, MA organizations or Part D sponsors must 
submit a report to the Secretary that complies with the requirements of 
this proposed rule and in a time and manner that the Secretary 
determines. For purposes of these impact estimates, we assume that this 
report would include data relating to both the amounts expended on 
reimbursement for clinical services and prescription drugs, activities 
that improve quality and other non-clinical costs, as well as 
information relating to remittance payments.
    The estimated total number of MLR data reports that MA 
organizations and Part D sponsors will be required to submit to the 
Secretary under the provisions of this proposed rule depends on the 
number of contracts held. We anticipate one report per contract. Our 
analysis here is based on 553 MA contracts and 63 Part D stand-alone 
contracts, for a total of 616 reports. The 616 contracts are comprised 
of 605 contracts subject to the remittance requirement plus 11 non-
credible contracts that are subject to reporting requirements. We 
estimated the average cost per hour to be $94.88. This figure was 
derived by using the May 2011 mean hourly wage of $60.41 for computer 
and information systems managers from the Department of Labor's Bureau 
of Labor Statistics. This rate was increased by 48 percent to account 
for fringe benefits and overhead (36 percent for fringe benefits and 12 
percent for overhead). This figure was then converted to 2014 dollars 
using an average annual growth rated derived from the changes to the 
Consumer Price Index. This is an upper-bound estimate that assumes all 
MA organizations and Part D sponsors would be submitting a separate MLR 
report for each contract. Table 6 shows our estimates that MA 
organizations and Part D sponsors will incur one-time costs in 2014 and 
ongoing costs thereafter, relating to the MLR reporting requirements in 
this proposed rule of approximately $16,000 per contract on average in 
2014.

                           Table 6--Estimated Administrative Costs Related to Medical Loss Ratio (MLR) Reporting Requirements
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                             Estimated                       Estimated
               Type of administrative cost                 Total number    Total number      Estimated     average cost      Estimated     average cost
                                                           of contracts     of reports      total hours      per hour       total cost      per report
--------------------------------------------------------------------------------------------------------------------------------------------------------
One-Time Costs..........................................             616             616          90,000          $94.88      $9,600,000         $16,000
Ongoing Costs...........................................             616             616          26,000           94.88       2,800,000           5,000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes: Total number of reports represents the estimated total number of MLR reports that will be submitted to the Secretary. The source data has been
  modified to reflect estimated costs for MA organizations and Part D sponsors. Values may not be exact due to rounding. Estimates reflect 2011 wage
  data from the U.S. Department of Labor, Bureau of Labor Statistics.


[[Page 12449]]

c. Costs Related to MLR Record Retention Requirements
    Consistent with the assumptions discussed earlier, MLR record 
retention costs are assumed to be relatively negligible, since MA 
organizations and Part D sponsors already retain similar data for 
general MA and Prescription Drug audits and per the established 
requirements in Sec.  422.504(f)(2) and Sec.  423.505(f)(2). Therefore, 
to arrive at an estimate for MA organizations and Part D sponsors, we 
adjusted downward the 3.5 minute-per-report estimate that appears in 
the RIA for the commercial MLR rule. Table 7 shows that we estimate 
that MA organizations and Part D sponsors would incur annual ongoing 
costs relating to the MLR reporting requirements in this proposed rule 
of approximately $4.00 per report on average. We estimated the average 
cost per hour to be $94.88. This figure was derived by using the May 
2011 mean hourly wage of $60.41 for computer and information systems 
managers from the Department of Labor's Bureau of Labor Statistics. 
This rate was increased by 48 percent to account for fringe benefits 
and overhead (36 percent for fringe benefits and 12 percent for 
overhead). This figure was then converted to 2014 dollars using an 
average annual growth rated derived from the changes to the Consumer 
Price Index.

                                   Table 7--MLR Record Retention Requirements--Estimated Ongoing Administrative Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                          Estimated                         Estimated
                    Description                     Total number of  Total number of  Estimated total    average cost   Estimated total    average cost
                                                       contracts         reports           hours           per hour           cost          per report
--------------------------------------------------------------------------------------------------------------------------------------------------------
Ongoing Costs.....................................             616              616               28           $94.88           $2,600               $4
--------------------------------------------------------------------------------------------------------------------------------------------------------
Notes: Total number of reports represents the estimated total number of MLR reports that will be submitted to the Secretary.
The source data has been modified to reflect estimated costs for MA organization and Part D sponsors. Values may not be exact due to rounding. Estimates
  reflect 2011 wage data from the U.S. Department of Labor, Bureau of Labor Statistics.

d. Costs Related to MLR Remittance Payments
    Consistent with the assumptions discussed earlier, costs around 
submitting remittances to the Secretary are expected to be relatively 
negligible, in particular because we propose to implement payment of 
remittances using a standard payment adjustment procedure in our 
payment system, which is a routine systems interface for the industry.

E. Alternatives Considered

    Under the Executive Order, we are required to consider alternatives 
to issuing regulations and alternative regulatory approaches. We 
consider a variety of regulatory alternatives to the policies proposed 
thus far, and solicit comments on these alternatives.
1. Credibility Adjustment
    One alternative to the credibility adjustment in this proposed rule 
would be to not make any adjustment for credibility, and to require 
smaller plans to make remittance payments on the same terms as larger 
plans. If we do not adopt a credibility adjustment, the estimated 
remittance in 2014 would be approximately $915 million for MA-PD and 
Part D stand-alone contracts, or approximately $57 million larger, as 
shown in Table 5. As described elsewhere in this preamble, we believe 
that the credibility adjustment as proposed would best balance the 
goals of providing value to beneficiaries and assuring that contracts 
with relatively low enrollment would be able to function effectively.
2. Aggregation of MLR to the Contract Level
    We considered two alternatives to aggregating MLRs to the contract 
level. Determining MLRs at the level of plan benefit package would 
increase the burden on MA organizations and Part D sponsors and the 
size of many plan benefit packages is too small for an MLR to 
reasonably represent the MA organization's or Part D sponsor's approach 
to resource allocation. We also considered calculating MLRs at the 
parent organization level, but we believe that this high level of 
aggregation would obscure local variation in resource allocation that 
would be important to enrollees. As described elsewhere in this 
proposed rule, we believe that the contract-level of aggregation is 
closest to the commercial MLR regulations of state-level aggregation 
and best promotes program stability.
3. Quality Improving Activities
    After considering the commercial MLR regulations' approach to 
defining quality improving activities, we decided to propose aligning 
our definition of quality improving activities with the commercial MLR 
rule's approach. As discussed elsewhere in this proposed rule, 
potential alternatives would be to adopt narrower or broader 
definitions of quality improving activities. These distinctions could 
be made based on the criteria for selecting quality improving 
activities and/or the specific types of activities included in the 
definition.
    This proposed rule defines quality-improving activities as being 
grounded in evidence-based medicine, designed to improve the quality of 
care received by an enrollee, and capable of being objectively measured 
and producing verifiable results and achievements. A narrower 
definition might include only evidence-based quality improving 
initiatives, while excluding activities that have not been demonstrated 
to improve quality. Similarly, a narrower definition would not allow 
for inclusion of future innovations before data are available 
demonstrating their effectiveness.
    Conversely, a broader definition might allow additional types of 
administrative expenses to be counted as activities that improve 
quality, such as network fees associated with third party provider 
networks or costs associated with converting International 
Classification of Disease (ICD) code sets from ICD-9 to ICD-10 that are 
in excess of 0.3 percent of a MA organization or Part D sponsor's total 
revenue. As discussed elsewhere in this proposed rule, while we agree 
that certain administrative expenses should not be counted as 
expenditures on quality improving activities, some traditional 
administrative activities could qualify as expenditures on quality 
improving activities if they meet the criteria set forth in this 
proposed rule.
    We do not have data available to estimate the effects of 
alternative definitions of quality improving activities on MLRs, 
although it should be clear that if a broader definition of quality 
improving activities were adopted, then estimated remittances would be 
smaller, and if a narrower definition were adopted, estimated 
remittances would be larger.

F. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) (RFA) 
requires

[[Page 12450]]

agencies that issue a regulation to analyze options for regulatory 
relief of small businesses if a rule has a significant impact on a 
substantial number of small entities. The 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 earlier, in general, health insurance issuers offering 
Part C and D coverage, including MA organizations, Part D sponsors, 
1876 Cost HMO/CMPs, and section 1833 HCPPs (Health Care Prepayment 
Plans), would be affected by the proposed rule. We believe that health 
insurers would be classified under the North American Industry 
Classification System (NAICS) Code 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 this NAICS code. Health issuers could possibly also be 
classified in NAICS Code 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 RIA 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 relevant size thresholds for ``small'' business established by the 
SBA.
    Similarly, MA organizations and Part D sponsors, the entities that 
will largely be affected by the provisions of this proposed rule, are 
not generally considered small business entities. They must follow 
minimum enrollment requirements (5,000 in urban areas and 1,500 in 
nonurban areas) and because of the revenue from such enrollments, these 
entities are generally above the revenue threshold required for 
analysis under the RFA. While a very small rural plan could fall below 
the threshold, we do not believe that there are more than a handful of 
such plans. Additionally, a fraction of MA organizations and sponsors 
could be considered small businesses because of their non-profit status 
and lack of dominance in their field. As its measure of significant 
economic impact on a substantial number of small entities, HHS uses a 
change in revenue of more than 3 to 5 percent. We do not believe that 
this threshold will be reached by the requirements in this proposed 
rule because very few small entities are subject to the provisions in 
this proposed rule, the estimated administrative costs associated with 
reporting MLR data to the Secretary are very low (see section V.D.6. of 
this proposed rule), and the credibility adjustment addresses the 
special circumstances of contracts with lower enrollment. For these 
reasons, we believe this proposed rule would have minimal impact on 
small entities. As a result, the Secretary has determined that this 
proposed rule would not have a significant impact on a substantial 
number of small entities. We welcome comment on the analysis described 
in this section and on HHS' conclusion.

G. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits before 
issuing any rule that includes a federal mandate that could result in 
expenditure in any 1 year by state, local or tribal governments, in the 
aggregate, or by the private sector, of $100 million in 1995 dollars, 
updated annually for inflation. In 2013, that threshold level is 
approximately $141 million.
    UMRA does not address the total cost of a rule. Rather, it focuses 
on certain categories of cost, mainly those ``federal mandate'' costs 
resulting from: (1) Imposing enforceable duties on state, local, or 
tribal governments, or on the private sector; or (2) increasing the 
stringency of conditions in, or decreasing the funding of, state, 
local, or tribal governments under entitlement programs.
    Consistent with policy embodied in UMRA, this proposed regulation 
has been designed to a low-burden alternative for state, local and 
tribal governments, and the private sector while achieving the 
objectives of the Affordable Care Act.
    This proposed rule contains reporting requirements and data 
retention requirements for MA organizations and Part D sponsors. We 
estimate that administrative costs related to MLR reporting 
requirements would be $9.6 million in total one-time costs in 2014 and 
$2.8 million per year in ongoing costs. We estimate that ongoing costs 
per year for record retention requirements will be $2,600. This 
proposed rule also contains requirements related to remittance payments 
paid by MA organizations and Part D sponsors that do not meet the 
minimum MLR standards. We estimate approximately $858 million in 
remittance payments to the Secretary in 2014, contingent upon certain 
changes in bidding and payment behavior. It includes no mandates on 
state, local, or tribal governments.

H. Federalism

    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on state 
and local governments, preempts state law, or otherwise has federalism 
implications.
    States generally regulate health insurance coverage. However in 
2003, section 232(a) of the MMA amended section 1856 for MA plans by 
eliminating the general and specific preemption distinctions from 
section 1856 and expanded federal preemption of state standards to 
broadly apply preemption to all state law or regulation (other than 
state licensing laws or state laws relating to plan solvency). In our 
view, while this proposed rule does not impose substantial direct 
requirement costs on state and local governments, this proposed rule 
has minimal Federalism implications due to direct effects on the 
distribution of power and responsibilities among the state and federal 
governments relating to determining and enforcing minimum MLR 
standards, reporting and remittance requirements relating to coverage 
that MA organizations and Part D sponsors offer.
    We anticipate that the federalism implications (if any) are 
substantially mitigated because the Affordable Care Act does not 
provide any role for the states in terms of receiving or analyzing the 
data or enforcing the requirements of section 1857(e)(4) of the Act. 
The enforcement provisions of this proposed rule state that the 
Secretary has enforcement authority and does not require the states to 
do anything.
    As discussed earlier, in developing this proposed rule for the 
Medicare Advantage and the Medicare Prescription Drug Benefit programs, 
HHS used the commercial MLR regulations as a reference point for 
developing the Medicare MLR requirements. In compliance with the 
requirement of Executive Order 13132 that agencies examine closely any

[[Page 12451]]

policies that may have federalism implications or limit the 
policymaking discretion of the states, HHS made efforts to consult with 
and work cooperatively with states during the development of the 
commercial MLR regulation, 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 the commercial 
MLR regulations, to the extent feasible within the specific preemption 
provisions of HIPAA as it applies to the Affordable Care Act, the 
Department attempted to balance the states' interests in regulating 
health insurance issuers, and Congress' intent to provide uniform 
minimum protections to 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 we 
have complied with the requirements of Executive Order 13132 for the 
attached proposed rule in a meaningful and timely manner.

I. Congressional Review Act

    This proposed rule is subject to the Congressional Review Act 
provisions of the Small Business Regulatory Enforcement Fairness Act of 
1996 (5 U.S.C. 801 et seq.) and has been transmitted to the Congress 
and the Comptroller General for review.
    In accordance with the provisions of Executive Order 12866, this 
proposed rule was reviewed by the Office of Management and Budget.

J. Accounting Statement

    As required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars_a004_a-4), we have prepared an 
accounting statement in Table 8 showing the classification of the 
transfers and costs associated with the provisions of this proposed 
rule for CY 2014.

 Table 8--Accounting Statement: Classification of Estimated Expenditures
for the MA-PD and Part D Stand-Alone MLR Remittance Payments for CY 2014
                      [In millions of 2013 dollars]
------------------------------------------------------------------------
 
------------------------------------------------------------------------
           Category                            Transfers
------------------------------------------------------------------------
Annualized monetized              Discount Rate        Period Covered
 transfers
------------------------------------------------------------------------
                                     7%        3%  CY 2014
--------------------------------------------------
Primary Estimate.............      $802      $833
------------------------------------------------------------------------
From/To......................  From MA Organizations and Part D Sponsors/
                                         To Federal Government
------------------------------------------------------------------------
           Category                              Costs
------------------------------------------------------------------------
Annualized Costs to MA            Discount Rate        Period Covered
 Organizations and Part D
 Sponsors
------------------------------------------------------------------------
                                     7%        3%  CY 2014
--------------------------------------------------
Primary Estimate.............      $9.0      $9.3
------------------------------------------------------------------------

List of Subjects

42 CFR Part 422

    Administrative practice and procedure, Health facilities, Health 
maintenance organizations (HMO), Medicare, Penalties, Privacy, 
Reporting and recordkeeping requirements.

42 CFR Part 423

    Administrative practice and procedure, Emergency medical services, 
Health facilities, Health maintenance organizations (HMO), Health 
professionals, Medicare, Penalties, Privacy, Reporting and 
recordkeeping requirements.
    For the reasons set forth in the preamble, the Centers for Medicare 
& Medicaid Services proposes to amend 42 CFR parts 422 and 423 as set 
forth below:

PART 422 MEDICARE ADVANTAGE PROGRAM

0
1. The authority citation for part 422 continues to read as follows:

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 
U.S.C. 1302 and 1395hh).

0
2. Section 422.510 is amended by adding paragraphs (a)(15) and (16) to 
read as follows:


Sec.  422.510  Termination of contract by CMS.

    (a) * * *
    (15) Has failed to report MLR data in a timely and accurate manner 
in accordance with Sec.  422.2460.
    (16) Has failed to have a minimum MLR per Sec.  422.2410(d) for 5 
consecutive contract years.
* * * * *

Subpart U--[Reserved]

Subpart W--[Reserved]

0
3. Add reserved subparts U and W.
0
4. Add subpart X to read as follows:

Subpart X--Requirement for a Minimum Medical Loss Ratio

Sec.
422.2400 Basis and scope.
422.2401 Definitions.
422.2410 General requirements.
422.2420 Calculation of the medical loss ratio.
422.2430 Activities that improve health care quality.
422.2440 Credibility adjustment.
422.2450 [Reserved].
422.2460 Reporting requirements.
422.2470 Remittance to CMS if the applicable MLR requirement is not 
met.
422.2480 MLR review and non-compliance.


Sec.  422.2400  Basis and scope.

    This subpart is based on section 1857(e)(4) of the Act, and sets 
forth

[[Page 12452]]

medical loss ratio requirements for Medicare Advantage organizations, 
and financial penalties and sanctions against MA organizations when 
minimum medical loss ratios are not achieved by MA organizations.


Sec.  422.2401  Definitions.

    Non-claims costs means those expenses for administrative services 
that are not--
    (1) Incurred claims (as provided in Sec.  422.2420(b)(2) through 
(4));
    (2) Expenditures on quality improving activities (as provided in 
Sec.  422.2430);
    (3) Licensing and regulatory fees (as provided in Sec.  
422.2420(c)(2)(ii));
    (4) State and federal taxes and assessments (as provided in Sec.  
422.2420(c)(2)(i) and (iii)).


Sec.  422.2410  General requirements.

    (a) For contracts beginning in 2014 or later, an MA organization 
(defined at Sec.  422.2) is required to report an MLR for each contract 
under this part for each contract year.
    (b) MLR requirement. If CMS determines for a contract year that an 
MA organization has an MLR for a contract that is less than 0.85, the 
MA organization has not met the MLR requirement and must remit to CMS 
an amount equal to the product of the following:
    (1) The total revenue of the MA contract for the contract year.
    (2) The difference between 0.85 and the MLR for the contract year.
    (c) If CMS determines that an MA organization has an MLR for a 
contract that is less than 0.85 for 3 or more consecutive contract 
years, CMS does not permit the enrollment of new enrollees under the 
contract for coverage during the second succeeding contract year.
    (d) If CMS determines that an MA organization has an MLR for a 
contract that is less than 0.85 for 5 consecutive contract years, CMS 
terminates the contract under the authority at Sec.  422.510(a)(12) and 
(15) effective as of the second succeeding contract year.


Sec.  422.2420  Calculation of the medical loss ratio.

    (a) Determination of MLR. (1) The MLR for each contract under this 
part is the ratio of the numerator (as defined in paragraph (b) of this 
section) to the denominator (as defined in paragraph (c) of this 
section). An MLR may be increased by a credibility adjustment according 
to the rules at Sec.  422.2440.
    (2) The MLR for an MA contract not offering Medicare prescription 
drug benefits must only reflect costs and revenues related to the 
benefits defined at Sec.  422.100(c). The MLR for an MA contract that 
includes MA-PD plans (defined at Sec.  422.2) must also reflect costs 
and revenues for benefits described at Sec.  423.104(d) through (f).
    (b) Determining the MLR numerator. (1) For a contract year, the 
numerator of the MLR for an MA contract must equal the sum of 
paragraphs (b)(1)(i) through (iii) of this section and be in accordance 
with paragraph (b)(1)(iv) of this section.
    (i) Incurred claims for all enrollees, as defined in paragraphs 
(b)(2) through (4) of this section.
    (ii) The amount of the reduction, if any, in the Part B premium for 
all MA plan enrollees under the contract for the contract year.
    (iii) The expenditures under the contract for activities that 
improve health care quality, as defined in Sec.  422.2430.
    (iv) Incurred claims under this part for policies issued by one MA 
organization and later assumed by another MA organization under an 
assumptive or 100 percent indemnity reinsurance must be reported by the 
assuming organizations for the entire MLR reporting year during which 
the policies were assumed and no incurred claims under this part for 
that contract year must be reported by the ceding MA organization.
    (2) Incurred claims for clinical services and prescription drug 
costs. Incurred claims must include the following:
    (i) Direct claims that the MA organization pays to providers 
(including under capitation contracts with physicians) for covered 
services described at paragraph (a)(2) of this section provided to all 
enrollees under the contract.
    (ii) For an MA contract that includes MA-PD plans (described in 
paragraph (a)(2) of this section), drug costs provided to all enrollees 
under the contract, as defined at Sec.  423.2420(b)(2)(i).
    (iii) Unpaid claims reserves for the current contract year, 
including claims reported in the process of adjustment.
    (iv) Percentage withholds from payments made to contracted 
providers.
    (v) Incurred but not reported claims based on past experience, and 
modified to reflect current conditions such as changes in exposure, 
claim frequency or severity.
    (vi) Changes in other claims-related reserves.
    (vii) Claims that are recoverable for anticipated coordination of 
benefits.
    (viii) Claims payments recoveries received as a result of 
subrogation.
    (ix) Claims payments recoveries as a result of fraud reduction 
efforts not to exceed the amount of fraud reduction expenses.
    (x) Reserves for contingent benefits and the medical claim portion 
of lawsuits.
    (xi) The amount of incentive and bonus payments made to providers.
    (3) Adjustments that must be deducted from incurred claims include 
the following:
    (i) Prescription drug rebates and other direct or indirect 
remuneration as defined in Sec.  423.308 received by the MA 
organization under the contract.
    (ii) Overpayment recoveries received from providers.
    (4) Exclusions from incurred claims. The following amounts must not 
be included in incurred claims:
    (i) Non-claims costs, as defined in Sec.  422.2401, which include 
the following:
    (A) Amounts paid to third party vendors for secondary network 
savings.
    (B) Amounts paid to third party vendors for all of the following:
    (1) Network development.
    (2) Administrative fees.
    (3) Claims processing.
    (4) Utilization management.
    (C) Amounts paid, including amounts paid to a provider, for 
professional or administrative services that do not represent 
compensation or reimbursement for covered services provided to an 
enrollee, such as the following:
    (1) Medical record copying costs.
    (2) Attorneys' fees.
    (3) Subrogation vendor fees.
    (4) Bona fide service fees.
    (5) Compensation to any of the following:
    (i) Paraprofessionals.
    (ii) Janitors.
    (iii) Quality assurance analysts.
    (iv) Administrative supervisors.
    (v) Secretaries to medical personnel.
    (vi) Medical record clerks.
    (ii) Amounts paid to CMS as a remittance under Sec.  422.2410(b).
    (c) Determining the MLR denominator. For a contract year, the 
denominator of the MLR for an MA contract must equal the total revenue 
under the contract, as described in paragraph (c)(1) of this section, 
net of deductions described in paragraph (c)(2) of this section, taking 
into account the exclusions described in paragraph (c)(3) of this 
section, and be in accordance with paragraph (c)(4) of this section.
    (1) Total revenue must be reported on a direct basis and means CMS' 
payments to the MA organization for all enrollees under a contract, 
including the following:
    (i) Payments under Sec.  422.304(a) through (3) and (c).

[[Page 12453]]

    (ii) The amount applied to reduce the Part B premium, as provided 
under Sec.  422.266(b)(3).
    (iii) Payments under Sec.  422.304(b)(1), as reconciled per Sec.  
423.329(c)(2)(ii).
    (iv) All premiums paid by or on behalf of enrollees to the MA 
organization as a condition of receiving coverage under an MA plan, 
including CMS' payments for low income premium subsidies under Sec.  
422.304(b)(2).
    (v) All unpaid premium amounts that an MA organization could have 
collected from enrollees in the MA plan(s) under the contract.
    (vi) All changes in unearned premium reserves.
    (vii) Payments under Sec.  423.315(e).
    (2) The following amounts must be deducted from total revenue in 
calculating the MLR:
    (i) Licensing and regulatory fees. (A) Statutory assessments to 
defray operating expenses of any State or Federal department, such as 
the ``user fee'' described in section 1857(e)(2) of the Act.
    (B) Examination fees in lieu of premium taxes as specified by state 
law.
    (ii) Federal taxes and assessments. All federal taxes and 
assessments allocated to health insurance coverage.
    (iii) State taxes and assessments. State taxes and assessments such 
as the following:
    (A) Any industry-wide (or subset) assessments (other than 
surcharges on specific claims) paid to the state directly.
    (B) Guaranty fund assessments.
    (C) Assessments of state industrial boards or other boards for 
operating expenses or for benefits to sick employed persons in 
connection with disability benefit laws or similar taxes levied by 
States.
    (D) State income, excise, and business taxes other than premium 
taxes.
    (iv) Community benefit expenditures are payments made by a federal 
income tax-exempt MA organization for community benefit expenditures as 
defined in paragraph (c)(2)(iv)(A) of this section, limited to the 
amount defined in paragraph (c)(2)(iv)(B) of this section, and 
allocated to a contract as required under paragraph (d)(1) of this 
section.
    (A) Community benefit expenditures means expenditures for 
activities or programs that seek to achieve the objectives of improving 
access to health services, enhancing public health and relief of 
government burden.
    (B) Such payment may be deducted up to the limit of either 3 
percent of total revenue under this part or the highest premium tax 
rate in the State for which the Part D sponsor is licensed, multiplied 
by the Part D sponsor's earned premium for the contract.
    (3) The following amounts must not be included in total revenue:
    (i) The amount of unpaid premiums for which the MA organization can 
demonstrate to CMS that it made a reasonable effort to collect, as 
required under Sec.  422.74(d)(i).
    (ii) The following EHR payments and adjustments:
    (A) EHR incentive payments for meaningful use of certified 
electronic health records by qualifying MAOs, MA EPs and MA-affiliated 
eligible hospitals that are administered under Part 495 subpart C.
    (B) EHR payment adjustments for a failure to meet meaningful use 
requirements that are administered under Part 495 subpart C.
    (iii) Coverage Gap Discount Program payments under Sec.  423.2320.
    (4) All incurred claims under this part for policies issued by one 
MA organization and later assumed by another MA organization under an 
assumptive or 100 percent indemnity reinsurance must be reported by the 
assuming organizations for the entire MLR reporting year during which 
the policies were assumed and no incurred claims under this part for 
that contract year must be reported by the ceding MA organization.
    (d) Allocation of expenses. (1) General requirements. (i) Each 
expense must be included under only one type of expense, unless a 
portion of the expense fits under the definition of or criteria for one 
type of expense and the remainder fits into a different type of 
expense, in which case the expense must be pro-rated between types of 
expenses.
    (ii) Expenditures that benefit multiple contracts, or contracts 
other than those being reported, including but not limited to those 
that are for or benefit self-funded plans, must be reported on a pro 
rata share.
    (2) Description of the methods used to allocate expenses. (i) 
Allocation to each category must be based on a generally accepted 
accounting method that is expected to yield the most accurate results. 
Specific identification of an expense with an activity that is 
represented by one of the categories in Sec.  422.2420(b) or (c) will 
generally be the most accurate method.
    (ii) Shared expenses, including expenses under the terms of a 
management contract, must be apportioned pro rata to the contracts 
incurring the expense.
    (iii)(A) Any basis adopted to apportion expenses must be that which 
is expected to yield the most accurate results and may result from 
special studies of employee activities, salary ratios, premium ratios 
or similar analyses.
    (B) Expenses that relate solely to the operations of a reporting 
entity, such as personnel costs associated with the adjusting and 
paying of claims, must be borne solely by the reporting entity and are 
not to be apportioned to other entities within a group.


Sec.  422.2430  Activities that improve health care quality.

    (a) Activity requirements. Activities conducted by an MA 
organization to improve quality must fall into one of the categories in 
paragraph (a)(1) of this section and meet all of the requirements in 
paragraph (a)(2) of this section.
    (1) Categories of quality improving activities. The activity must 
be designed to achieve one or more of the following:
    (i) To improve health outcomes through the implementation of 
activities such as quality reporting, effective case management, care 
coordination, chronic disease management, and medication and care 
compliance initiatives, including through the use of the medical homes 
model as defined for purposes of section 3602 of the Patient Protection 
and Affordable Care Act, for treatment or services under the plan or 
coverage.
    (ii) To prevent hospital readmissions through a comprehensive 
program for hospital discharge that includes patient-centered education 
and counseling, comprehensive discharge planning, and post-discharge 
reinforcement by an appropriate health care professional.
    (iii) To improve patient safety and reduce medical errors through 
the appropriate use of best clinical practices, evidence-based 
medicine, and health information technology under the plan or coverage.
    (iv) To promote health and wellness.
    (v) To enhance the use of health care data to improve quality, 
transparency, and outcomes and support meaningful use of health 
information technology. Such activities, such as Health Information 
Technology (HIT) expenses, are required to accomplish the activities 
that improve health care quality and that are designed for use by 
health plans, health care providers, or enrollees for the electronic 
creation, maintenance, access, or exchange of health information, and 
are consistent with meaningful use requirements, and which may in whole 
or in part improve quality of care, or provide the technological 
infrastructure to enhance current quality improving activities or make 
new quality improvement initiatives possible.

[[Page 12454]]

    (2) The activity must be designed for all of the following:
    (i) To improve health quality.
    (ii) To increase the likelihood of desired health outcomes in ways 
that are capable of being objectively measured and of producing 
verifiable results and achievements.
    (iii) To be directed toward individual enrollees or incurred for 
the benefit of specified segments of enrollees or provide health 
improvements to the population beyond those enrolled in coverage as 
long as no additional costs are incurred due to the non-enrollees.
    (iv) To be grounded in evidence-based medicine, widely accepted 
best clinical practice, or criteria issued by recognized professional 
medical associations, accreditation bodies, government agencies or 
other nationally recognized health care quality organizations.
    (b) Exclusions. Expenditures and activities that must not be 
included in quality improving activities include, but are not limited 
to, the following:
    (1) Those that are designed primarily to control or contain costs.
    (2) The pro rata share of expenses that are for lines of business 
or products other than those being reported, including but not limited 
to, those that are for or benefit self-funded plans.
    (3) Those which otherwise meet the definitions for quality 
improving activities but which were paid for with grant money or other 
funding separate from premium revenue.
    (4) Those activities that can be billed or allocated by a provider 
for care delivery and that are reimbursed as clinical services.
    (5) Establishing or maintaining a claims adjudication system, 
including costs directly related to upgrades in health information 
technology that are designed primarily or solely to improve claims 
payment capabilities or to meet regulatory requirements for processing 
claims, including ICD-10 implementation costs in excess of 0.3 percent 
of total revenue under this part, and maintenance of ICD-10 code sets 
adopted in accordance with to the Health Insurance Portability and 
Accountability Act (HIPAA), 42 U.S.C. 1320d-2, as amended.
    (6) That portion of the activities of health care professional 
hotlines that does not meet the definition of activities that improve 
health quality.
    (7) All retrospective and concurrent utilization review.
    (8) Fraud prevention activities.
    (9) The cost of developing and executing provider contracts and 
fees associated with establishing or managing a provider network, 
including fees paid to a vendor for the same reason.
    (10) Provider credentialing.
    (11) Marketing expenses.
    (12) Costs associated with calculating and administering individual 
enrollee or employee incentives.
    (13) That portion of prospective utilization review that does not 
meet the definition of activities that improve health quality.
    (14) Any function or activity not expressly permitted by CMS under 
this part.


Sec.  422.2440  Credibility adjustment.

    (a) An MA organization may add a credibility adjustment to a 
contract's MLR if the contract's experience is partially credible, as 
determined by CMS.
    (b) An MA organization may not add a credibility adjustment to a 
contract's MLR if the contract's experience is fully credible, as 
determined by CMS.
    (c) For those contract years for which a contract has non-credible 
experience for their MLR, sanctions under Sec.  422.2410(b) through (d) 
will not apply.
    (d) CMS defines and publishes definitions of partial credibility, 
full credibility, and non-credibility and the credibility factors 
through the notice and comment process of publishing the Advance Notice 
and Final Rate Announcement.


Sec.  422.2450  [Reserved].


Sec.  422.2460  Reporting requirements.

    For each contract year, each MA organization must submit a report 
to CMS, in a timeframe and manner specified by CMS, which includes but 
is not limited to the data needed by the MA organization to calculate 
and verify the MLR and remittance amount, if any, for each contract, 
such as incurred claims, total revenue, expenditures on quality 
improving activities, non-claims costs, taxes, licensing and regulatory 
fees, and any remittance owed to CMS under Sec.  422.2410.


Sec.  422.2470  Remittance to CMS if the applicable MLR requirement is 
not met.

    (a) General requirement. For each contract year, an MA organization 
must provide a remittance to CMS if the contract's MLR does not meet 
the minimum MLR requirement required by Sec.  422.2410(b) of this 
subpart.
    (b) Amount of remittance. For each contract that does not meet the 
MLR requirement for a contract year, the MA organization must remit to 
CMS the amount by which the MLR requirement exceeds the contract's 
actual MLR multiplied by the total revenue of the contract, as provided 
in Sec.  422.2420(c), for the contract year.
    (c) Timing of remittance. CMS deducts the remittance from plan 
payments in a timely manner after the MLR is reported, on a schedule 
determined by CMS.
    (d) Treatment of remittance. Payment to CMS must not be included in 
the numerator or denominator of any year's MLR.


Sec.  422.2480  MLR review and non-compliance.

    To ensure the accuracy of MLR reporting, CMS conducts selected 
reviews of reports submitted under Sec.  422.2460 to determine that 
that the MLRs and remittance amounts under Sec.  422.2410(b) and 
sanctions under Sec.  422.2410(c) and (d), were accurately calculated, 
reported, and applied.
    (a) The reviews include a validation of amounts included in both 
the numerator and denominator of the MLR calculation reported to CMS.
    (b) MA organizations are required to maintain evidence of the 
amounts reported to CMS and to validate all data necessary to calculate 
MLRs.
    (c)(1) Documents and records must be maintained for 10 years from 
the date such calculations were reported to CMS with respect to a given 
MLR reporting year.
    (2) MA organizations must require any third party vendor supplying 
drug or medical cost contracting and claim adjudication services to the 
MA organization to provide all underlying data associated with MLR 
reporting to that MA organization in a timely manner, when requested by 
the MA organization, regardless of current contractual limitations, in 
order to validate the accuracy of MLR reporting.
    (d) Reports submitted under Sec.  422.2460, calculations, or any 
other MLR submission required by this subpart found to be materially 
incorrect or fraudulent--
    (1) Is noted by CMS;
    (2) Appropriate remittance amounts are recouped by CMS; and
    (3) Sanctions may be imposed by CMS as provided in Sec.  422.752.

PART 423--VOLUNTARY MEDICARE PRESCRIPTION DRUG BENEFIT

0
5. The authority for part 423 continues to read as follows:

    Authority:  Secs. Sections 1102, 1106, 1860D-1 through 1860D-42, 
and 1871 of the Social Security Act (42 U.S.C. 1302, 1306, 1395w-101 
through 1395w-152, and 1395hh).

0
6. Section 423.509 is amended by adding paragraphs (a)(15) and (16) to 
read as follows:

[[Page 12455]]

Sec.  423.509  Termination of contract by CMS.

    (a) * * *
    (15) Has failed to report MLR data in a timely and accurate manner 
in accordance with Sec.  423.2460.
    (16) Has failed to have a minimum MLR per Sec.  423.2410(d) for 5 
consecutive contract years.
* * * * *
0
7. Add subpart X to read as follows:

Subpart X--Requirements for a Minimum Medical Loss Ratio

Sec.
423.2300 Basis and scope.
423.2401 Definitions.
423.2410 General requirements.
423.2420 Calculation of medical loss ratio.
423.2430 Activities that improve health care quality.
423.2440 Credibility adjustment.
422.2450 [Reserved]
423.2460 Reporting requirements.
423.2470 Remittance to CMS if the applicable MLR requirement is not 
met.
423.2480 MLR review and non-compliance.


Sec.  423.2400  Basis and scope.

    This subpart is based on section 1857(e)(4) of the Act, and sets 
forth medical loss ratio requirements for Part D sponsors, and 
financial penalties and sanctions against Part D sponsors when minimum 
medical loss ratios are not achieved by Part D sponsors.


Sec.  423.2401  Definitions.

    Non-claims costs means those expenses for administrative services 
that are not--
    (1) Incurred claims (as provided in Sec.  423.2420(b)(2) through 
(b)(4));
    (2) Expenditures on quality improving activities (as provided in 
Sec.  423.2430);
    (3) Licensing and regulatory fees (as provided in Sec.  
423.2420(c)(2)(i)); or
    (4) State and Federal taxes and assessments (as provided in Sec.  
423.2420(c)(2)(ii) and (iii)).


Sec.  423.2410  General requirements.

    (a) For contracts beginning in 2014 or subsequent contract years, a 
Part D sponsor (defined at Sec.  423.4) is required to report an MLR 
for each contract under this part for each contract year.
    (b) If CMS determines for a contract year that a Part D sponsor has 
an MLR for a contract that is less than 0.85, the Part D sponsor must 
remit to CMS an amount equal to the product of the following:
    (1) The total revenue of the prescription drug plan for the 
contract year.
    (2) The difference between 0.85 and the MLR for the contract year.
    (c) If CMS determines that a Part D sponsor has an MLR for a 
contract that is less than 0.85 for 3 or more consecutive contract 
years, CMS does not permit the enrollment of new enrollees under the 
contract for coverage during the second succeeding contract year.
    (d) If CMS determines that a Part D sponsor has an MLR for a 
contract that is less than 0.85 for 5 consecutive contract years, CMS 
does terminate the contract under the authority at Sec.  423.509(a)(11) 
and (14) effective as of the second succeeding contract year.


Sec.  423.2420  Calculation of medical loss ratio.

    (a) Determination of the MLR. (1) The MLR for each contract under 
this part is the ratio of the numerator (as defined in paragraph (b) of 
this section) to the denominator (as defined in paragraph (c) of this 
section). An MLR may be increased by a credibility adjustment according 
to the rules at Sec.  423.2440.
    (2) The MLR must reflect costs and revenues for benefits described 
at Sec.  423.104(d) through (f). The MLR for MA-PD plans (defined at 
Sec.  422.2) must also reflect costs and revenues for benefits 
described at Sec.  422.100(c).
    (b) Determining the MLR numerator. (1) For a contract year, the 
numerator of the MLR for a Part D prescription drug contract must equal 
the sum of paragraphs (b)(1)(i) through (iii) of this section and must 
be in accordance with paragraph (b)(1)(iv) of this section.
    (i) Incurred claims for all enrollees, as defined in paragraphs 
(b)(2) through (4) of this section.
    (ii) The amount of the reduction, if any, in the Part B premium for 
all MA plan enrollees under the contract for the contract year.
    (iii) The expenditures under the contract for activities that 
improve health care quality, as defined in Sec.  423.2430;
    (iv) Incurred claims under this part for policies issued by one 
Part D sponsor and later assumed by another Part D sponsor under an 
assumptive or 100 percent indemnity reinsurance must be reported by the 
assuming organizations for the entire MLR reporting year during which 
the policies were assumed and no incurred claims under this part for 
that contract year must be reported by the ceding Part D sponsor.
    (2) Incurred claims for prescription drug costs. Incurred claims 
must include the following:
    (i) Drug costs that are actually paid (as defined in Sec.  423.308) 
by the Part D sponsor.
    (ii) Unpaid claims reserves for the current contract year, 
including claims reported in the process of adjustment.
    (iii) Percentage withholds from payments made to contracted 
providers.
    (iv) Claims incurred but not reported based on past experience, and 
modified to reflect current conditions such as changes in exposure, 
claim frequency or severity.
    (v) Changes in other claims-related reserves.
    (vi) Claims that are recoverable for anticipated coordination of 
benefits.
    (vii) Claims payments recoveries received as a result of 
subrogation.
    (viii) Claims payments recoveries received as a result of fraud 
reduction efforts not to exceed the amount of fraud reduction expenses.
    (ix) Reserves for contingent benefits and the Part D claim portion 
of lawsuits.
    (3) Adjustments that must be deducted from incurred claims include 
the following:
    (i) Prescription drug rebates and other direct or indirect 
remuneration as defined in Sec.  423.308 received by the Part D sponsor 
under the contract.
    (ii) Overpayment recoveries received from providers.
    (4) Exclusions from incurred claims. The following amounts must not 
be included in incurred claims:
    (i) Non-claims costs, as defined in Sec.  423.2401, which include 
the following:
    (A) Amounts paid to third party vendors for secondary network 
savings.
    (B) Amounts paid to third party vendors for any of the following:
    (1) Network development.
    (2) Administrative fees.
    (3) Claims processing.
    (4) Utilization management.
    (C) Amounts paid, including amounts paid to a pharmacy, for 
professional or administrative services that do not represent 
compensation or reimbursement for covered services provided to an 
enrollee, such as the following:
    (1) Medical record copying costs.
    (2) Attorneys' fees.
    (3) Subrogation vendor fees.
    (4) Bona fide service fees.
    (5) Compensation to any of the following:
    (i) Paraprofessionals.
    (ii) Janitors.
    (iii) Quality assurance analysts.
    (iv) Administrative supervisors.
    (v) Secretaries to medical personnel.
    (vi) Medical record clerks.
    (ii) Amounts paid to CMS as a remittance under Sec.  423.2410(b).
    (c) Determining the MLR denominator. For a contract year, the 
denominator of the MLR for a Part D prescription drug contract must be 
in accordance with (c)(4) and equal the total revenue under the 
contract, as described in paragraph (c)(1) of this section, net of 
deductions described in

[[Page 12456]]

paragraph (c)(2) of this section, taking into account the exclusions 
described in paragraph and (c)(3) of this section, and be in accordance 
with (c)(4) of this section.
    (1) Total revenue must be reported on a direct basis and means CMS' 
payments to the Part D sponsor for all enrollees under a contract, 
including the following:
    (i) Payments under Sec.  423.329(a)(1) and (2).
    (ii) Payment adjustments resulting from reconciliation per Sec.  
423.329(c)(2)(ii).
    (iii) All premiums paid by or on behalf of enrollees to the Part D 
sponsor as a condition of receiving coverage under a Part D plan, 
including CMS' payments for low income premium subsidies under Sec.  
422.304(b)(2).
    (iv) All unpaid premium amounts that a Part D sponsor could have 
collected from enrollees in the Part D plan(s) under the contract.
    (v) All changes in unearned premium reserves.
    (vi) Payments under Sec.  423.315(e).
    (2) The following amounts must be deducted from total revenue in 
calculating the MLR:
    (i) Licensing and regulatory fees. Statutory assessments to defray 
operating expenses of any state or federal department, such as the 
``user fee'' described in section 1857(e)(2) of the Act, and 
examination fees in lieu of premium taxes as specified by state law.
    (ii) Federal taxes and assessments. All federal taxes and 
assessments allocated to health insurance coverage.
    (iii) State taxes and assessments. State taxes and assessments such 
as the following:
    (A) Any industry-wide (or subset) assessments (other than 
surcharges on specific claims) paid to the state directly.
    (B) Guaranty fund assessments.
    (C) Assessments of state industrial boards or other boards for 
operating expenses or for benefits to sick employed persons in 
connection with disability benefit laws or similar taxes levied by 
States.
    (D) State income, excise, and business taxes other than premium 
taxes.
    (iv) Community benefit expenditures. Community benefit expenditures 
are payments made by a federal income tax-exempt Part D sponsor for 
community benefit expenditures as defined in paragraph (c)(2)(iii)(A) 
of this section, limited to the amount defined in paragraph 
(c)(2)(iii)(B) of this section, and allocated to a contract as required 
under paragraph (d)(1) of this section.
    (A) Community benefit expenditures means expenditures for 
activities or programs that seek to achieve the objectives of improving 
access to health services, enhancing public health and relief of 
government burden.
    (B) Such payment may be deducted up to the limit of either 3 
percent of total revenue under this part or the highest premium tax 
rate in the state for which the Part D sponsor is licensed, multiplied 
by the Part D sponsor's earned premium for the contract.
    (3) The following amounts must not be included in total revenue:
    (i) The amount of unpaid premiums for which the Part D sponsor can 
demonstrate to CMS that it made a reasonable effort to collect, as 
required under Sec.  423.44(d)(1)(i).
    (ii) Coverage Gap Discount Program payments under Sec.  423.2320.
    (4) All incurred claims under this part for policies issued by one 
Part D sponsor and later assumed by another Part D sponsor under an 
assumptive or 100 percent indemnity reinsurance must be reported by the 
assuming organizations for the entire MLR reporting year during which 
the policies were assumed and no incurred claims under this part for 
that contract year must be reported by the ceding Part D sponsor.
    (d) Allocation of expenses. (1) General requirements. (i) Each 
expense must be included under only one type of expense, unless a 
portion of the expense fits under the definition of or criteria for one 
type of expense and the remainder fits into a different type of 
expense, in which case the expense must be pro-rated between types of 
expenses.
    (ii) Expenditures that benefit multiple contracts, or contracts 
other than those being reported, including but not limited to those 
that are for or benefit self-funded plans, must be reported on a pro 
rata share.
    (2) Description of the methods used to allocate expenses. (i) 
Allocation to each category must be based on a generally accepted 
accounting method that is expected to yield the most accurate results.
    (ii) Specific identification of an expense with an activity that is 
represented by one of the categories in Sec.  423.2420(b) or (c) will 
generally be the most accurate method.
    (ii) Shared expenses, including expenses under the terms of a 
management contract, must be apportioned pro rata to the entities 
incurring the expense.
    (iii)(A) Any basis adopted to apportion expenses must be that which 
is expected to yield the most accurate results and may result from 
special studies of employee activities, salary ratios, premium ratios 
or similar analyses.
    (B) Expenses that relate solely to the operations of a reporting 
entity, such as personnel costs associated with the adjusting and 
paying of claims, must be borne solely by the reporting entity and are 
not to be apportioned to other entities within a group.


Sec.  423.2430  Activities that improve health care quality.

    (a) Activity requirements. Activities conducted by a Part D sponsor 
to improve quality fall into one of the categories in paragraph (a)(1) 
of this section and meet all of the requirements in paragraph (a)(2) of 
this section.
    (1) Categories of quality improving activities. The activity must 
be designed to achieve one or more of the following:
    (i) To improve health outcomes through the implementation of 
activities such as quality reporting, effective case management, care 
coordination, chronic disease management, and medication and care 
compliance initiatives, including through the use of the medical homes 
model as defined for purposes of section 3602 of the Patient Protection 
and Affordable Care Act, for treatment or services under the plan or 
coverage.
    (ii) To prevent hospital readmissions through a comprehensive 
program for hospital discharge that includes patient-centered education 
and counseling, comprehensive discharge planning, and post-discharge 
reinforcement by an appropriate health care professional.
    (iii) To improve patient safety and reduce medical errors through 
the appropriate use of best clinical practices, evidence-based 
medicine, and health information technology under the plan or coverage.
    (iv) To promote health and wellness.
    (v) To enhance the use of health care data to improve quality, 
transparency, and outcomes and support meaningful use of health 
information technology. Activities, such as Health Information 
Technology (HIT) expenses, are required to accomplish the activities 
that improve health care quality and that are designed for use by 
health plans, health care providers, or enrollees for the electronic 
creation, maintenance, access, or exchange of health information, and 
are consistent with meaningful use requirements, and which may in whole 
or in part improve quality of care, or provide the technological 
infrastructure to enhance current quality improving activities or make 
new quality improvement initiatives possible.
    (2) The activity must be designed for all of the following:

[[Page 12457]]

    (i) To improve health quality.
    (ii) To increase the likelihood of desired health outcomes in ways 
that are capable of being objectively measured and of producing 
verifiable results and achievements.
    (iii) To be directed toward individual enrollees or incurred for 
the benefit of specified segments of enrollees or provide health 
improvements to the population beyond those enrolled in coverage as 
long as no additional costs are incurred due to the non-enrollees.
    (iv) To be grounded in evidence-based medicine, widely accepted 
best clinical practice, or criteria issued by recognized professional 
medical associations, accreditation bodies, government agencies or 
other nationally recognized health care quality organizations.
    (b) Exclusions. Expenditures and activities that must not be 
included in quality improving activities include, but are not limited 
to, the following:
    (1) Those that are designed primarily to control or contain costs.
    (2) The pro rata share of expenses that are for lines of business 
or products other than those being reported, including but not limited 
to, those that are for or benefit self-funded plans.
    (3) Those which otherwise meet the definitions for quality 
improving activities but which were paid for with grant money or other 
funding separate from premium revenue.
    (4) Those activities that can be billed or allocated by a pharmacy 
for care delivery and that are reimbursed as clinical services.
    (5) Establishing or maintaining a claims adjudication system, 
including costs directly related to upgrades in health information 
technology that are designed primarily or solely to improve claims 
payment capabilities or to meet regulatory requirements for processing 
claims, including ICD-10 implementation costs in excess of 0.3 percent 
of total revenue under this part, and maintenance of ICD-10 code sets 
adopted in accordance with the Health Insurance Portability and 
Accountability Act (HIPAA), 42 U.S.C. 1320d-2, as amended.
    (6) That portion of the activities of health care professional 
hotlines that does not meet the definition of activities that improve 
health quality.
    (7) All retrospective and concurrent utilization review.
    (8) Fraud prevention activities.
    (9) The cost of developing and executing pharmacy contracts and 
fees associated with establishing or managing a pharmacy network, 
including fees paid to a vendor for the same reason.
    (10) Pharmacy network credentialing.
    (11) Marketing expenses.
    (12) Costs associated with calculating and administering individual 
enrollee or employee incentives.
    (13) That portion of prospective utilization review that does not 
meet the definition of activities that improve health quality.
    (14) Any function or activity not expressly permitted by CMS under 
this part.


Sec.  423.2440  Credibility adjustment.

    (a) A Part D sponsor may add a credibility adjustment to a 
contract's MLR if the contract's experience is partially credible, as 
determined by CMS.
    (b) A Part D sponsor may not add a credibility adjustment to a 
contract's MLR if the contract's experience is fully credible, as 
determined by CMS.
    (c) For those contract years for which a contract has non-credible 
experience for their MLR, sanctions under Sec.  423.2410(b) through (d) 
will not apply.
    (d) CMS defines and publishes definitions of partial credibility, 
full credibility, and non-credibility and the credibility factors 
through the notice and comment process of publishing the Advance Notice 
and Final Rate Announcement.


Sec.  423.2450  [Reserved].


Sec.  423.2460  Reporting requirements.

    (a) For each contract year, each Part D sponsor must submit a 
report to CMS, in a timeframe and manner specified by CMS, which 
includes but is not limited to the data needed by the Part D sponsor to 
calculate and verify the MLR and remittance amount, if any, for each 
contract, such as incurred claims, total revenue, costs for quality 
improving activities, non-claims costs, taxes, licensing and regulatory 
fees, and any remittance owed to CMS under Sec.  423.2410.
    (b) Total revenue reported as part of the MLR report must be net of 
all projected reconciliations.
    (c) The MLR will be reported once, and will not be reopened as a 
result of any payment reconciliation processes.


Sec.  423.2470  Remittance to CMS if the applicable MLR requirement is 
not met.

    (a) General requirement. For each contract year, a Part D sponsor 
must provide a remittance to CMS if the contract's MLR does not meet 
the minimum percentage required by Sec.  423.2410(b).
    (b) Amount of remittance. For each contract that does not meet MLR 
requirement for a contract year, the Part D sponsor must remit to CMS 
the amount by which the MLR requirement exceeds the contract's actual 
MLR multiplied by the total revenue of the contract, as provided in 
Sec.  423.2420(c), for the contract year.
    (c) Timing of remittance. CMS will deduct the remittance from plan 
payments in a timely manner after the MLR is reported, on a schedule 
determined by CMS.
    (d) Treatment of remittance. Payment to CMS must not be included in 
the numerator or denominator of any year's MLR.


Sec.  423.2480  MLR review and non-compliance.

    To ensure the accuracy of MLR reporting, CMS conducts selected 
reviews of reports submitted under Sec.  423.2460 to determine that the 
MLRs and remittance amounts under Sec.  423.2410(b) and sanctions under 
Sec.  423.2410(c) and (d), were accurately calculated, reported, and 
applied.
    (a) The reviews will include a validation of amounts included in 
both the numerator and denominator of the MLR calculation reported to 
CMS.
    (b) Part D sponsors are required to maintain evidence of the 
amounts reported to CMS and to validate all data necessary to calculate 
MLRs.
    (c)(1) Documents and records must be maintained for 10 years from 
the date such calculations were reported to CMS with respect to a given 
contract year.
    (2) Part D sponsors must require any third party vendor supplying 
drug cost contracting and claim adjudication services to the Part D 
sponsors to provide all underlying data associated with MLR reporting 
to that Part D sponsor in a timely manner, when requested by the Part D 
sponsor, regardless of current contractual limitations, in order to 
validate the accuracy of MLR reporting.
    (d) Reports submitted under Sec.  423.2460, calculations, or any 
other MLR submission required by this subpart found to be materially 
incorrect or fraudulent--
    (1) Are noted by CMS;
    (2) Appropriate remittance amounts are recouped by CMS; and
    (3) Sanctions may be imposed by CMS as provided in Sec.  422.752.

(Catalog of Federal Domestic Assistance Program No. 93.778, Medical 
Assistance Program)

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


[[Page 12458]]


    Dated: December 28, 2012.
Marilyn Tavenner,
Acting Administrator, Centers for Medicare & Medicaid Services.
    Approved: February 14, 2013.
Kathleen Sebelius,
Secretary, Department of Health and Human Services.
[FR Doc. 2013-03921 Filed 2-15-13; 4:15 pm]
BILLING CODE 4120-01-P