[Federal Register Volume 78, Number 100 (Thursday, May 23, 2013)]
[Rules and Regulations]
[Pages 31284-31313]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-12156]



[[Page 31283]]

Vol. 78

Thursday,

No. 100

May 23, 2013

Part III





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; Final 
Rule

  Federal Register / Vol. 78, No. 100 / Thursday, May 23, 2013 / Rules 
and Regulations  

[[Page 31284]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 422 and 423

[CMS-4173-F]
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: Final rule.

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SUMMARY: This final rule implements new medical loss ratio (MLR) 
requirements for the Medicare Advantage Program and the Medicare 
Prescription Drug Benefit Program established under the Patient 
Protection and Affordable Care Act.

DATES: These regulations are effective on July 22, 2013.

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

SUPPLEMENTARY INFORMATION:

I. Background

    We are publishing this final rule for the Medicare Advantage (Part 
C) and prescription drug (Part D) programs to make changes as required 
by the Patient Protection and Affordable Care Act (Pub. L. 111-148) as 
amended by the Health Care and Education Reconciliation Act (Pub. L. 
111-152) (``Reconciliation Act''), which we refer to 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 12, 2012 (77 FR 22072) and a 
correction was published June 1, 2012 (77 FR 32407).
    This final rule implements 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) of the Act, 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 the 
Secretary, a prohibition on enrolling new members, and ultimately 
contract termination. In the February 22, 2013 Federal Register (78 FR 
12428), we published a proposed rule with revisions to the Medicare 
Advantage (MA) program (Part C) and prescription drug benefit program 
(Part D). This final rule sets forth CMS' implementation of these new 
MLR requirements for the MA and Part D programs.

II. Provisions of the Proposed Rule and Summary of and Responses to the 
Public Comments

    We received approximately 51 items of timely correspondence 
containing comments in response to the February 22, 2013 proposed rule. 
These public comments addressed issues on multiple topics. Commenters 
included health and drug plan organizations, insurance industry trade 
groups, provider associations, pharmacist and pharmacy associations, 
beneficiary advocacy groups, private citizens, and others. Overall, 
commenters supported our decision to model Medicare MLR policy after 
the commercial MLR rules.
    In this final rule, we address comments and concerns regarding the 
policies included in the proposed rule. We present a summary of public 
comments received, as well as our responses to them in the applicable 
section of this final rule.

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 such as marketing costs, profits, and 
other uses of the funds earned by MA organizations and Part D sponsors 
and to help ensure that taxpayers and enrolled beneficiaries receive 
value from Medicare health plans. Under this final rule, an MLR will be 
determined based on the percentage of Medicare 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 an MA organization or Part D 
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.

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
    This section discusses the scope of the Medicare MLR requirements 
and the applicability to various plan types. 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 final rule implements 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.'' Subpart X for the MA program has the same structure as Subpart 
X for the Part D program. Thus, discussion in this preamble is 
organized by each Subpart X section, and both MA and Part D provisions 
are discussed within each section. Any differences between the MA and 
Part D provisions

[[Page 31285]]

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, we are finalizing that MLR requirements 
set forth in this final rule only apply to the Part D portion of the 
benefits offered by Cost HMOs/CMPs and employers/unions offering HCPPs. 
We are finalizing our proposal that we would treat these contracts like 
PDPs for MLR purposes. If a Cost HMO/CMP or an HCPP does not meet the 
minimum MLR requirement on the Part D portion of the benefits it 
provides to Medicare enrollees, for 3 consecutive years, it will be 
forced to stop enrolling new individuals in such Part D coverage and, 
after 5 consecutive years, will potentially lose the Part D portion of 
its contract.
    As explained in the proposed rule, we believe that for PACE 
organizations offering Part D, the situation is different such that we 
should use our authority under the PACE statute to waive Medicare MLR 
requirements for PACE organizations. We received a comment on this 
proposal, which supported our proposed approach, and thus we are 
finalizing this proposal without modification, and are not applying the 
Part D MLR requirements to the Part D offerings of PACE organizations.
    Comment: Several commenters supported the proposed rule and CMS's 
general approach of using the commercial MLR rules as a reference point 
for developing the Medicare MLR requirements.
    Response: We appreciate the support.
    Comment: Many commenters believe that CMS has the discretion to not 
apply the Medicare MLR requirements to the Part D program, citing what 
they contended was a lack of evidence of Congressional intent to do so, 
or noting that holding Part D stand-alone contracts to the same minimum 
MLR as MA contracts is unfair because of relatively low drug claims 
costs or more volatility compared to medical-only plans or plans with 
both medical and drug benefits. Several commenters pointed to the 
provision in section 1857(e)(3) of the Act that applies to contracts 
with federally qualified health centers (FQHCs) as a precedent for not 
applying a provision in section 1857(e) of the Act to Part D, 
presumably based on the belief that the FQHC provision does not apply 
to Part D.
    Another commenter stated that, if Medicare MLR applies to Part D, 
we should consider a multiplier to increase Part D MLRs. Another 
commenter asked us to consider lowering the 85 percent requirement for 
Part D contracts. Some commenters argued that enforcing an MLR for Part 
D contracts would be unnecessary because plans are already subject to 
risk corridors that serve as an upper limit on net revenue. A commenter 
suggested that, at a minimum, CMS delay the applicability of Medicare 
MLR requirements to Part D until 2015. Several commenters supported 
applying Medicare MLR requirements to the Part D program.
    Response: In the proposed rule, we explained that the statute 
requires us to apply all provisions in section 1857(e) of the Act to 
the Part D program. We disagree that the FQHC provision is relevant 
precedent for understanding the Medicare MLR statute. While this 
provision is not applicable as a practical matter, as Part D sponsors 
do not subcontract with FQHCs to provide FQHC services, if a Part D 
plan ever did so, that contract would be subject to this provision. In 
the case of the MLR rule, however, it clearly can be applied to drug 
costs, as it is under the commercial MLR rule upon which this rule is 
based.
    With respect to the commenters seeking special treatment for Part D 
under the MLR rule, our analysis suggests that by including Part D 
reinsurance payments in the MLR calculation, meeting the minimum MLR 
requirement will be reasonably achievable for Part D stand-alone 
contracts and thus a multiplier to increase MLRs for these contracts is 
not necessary. We believe that the MLR requirements and risk sharing 
achieve different goals, though they are related. The purpose of risk 
sharing as part of the Part D payment reconciliation is for sponsors 
and the government to share in the unexpected gains or losses to a 
sponsor that are not already included in the reinsurance subsidy or 
taken into account through risk adjustment. The MLR requirement places 
a lower bound on the percent of total revenue that must be spent on 
claims and quality improving activities, which risk sharing does not. 
Furthermore, one objective that the MLR policy will accomplish, that 
risk sharing does not, is to provide beneficiaries a measure by which 
they can compare relative value of Medicare products.
    Comment: A few commenters believe that the Medicare MLR 
requirements should not apply to Part D stand-alone contracts because 
the Medicare MLR should mirror the commercial MLR, which the commenters 
believe does not require MLR reporting for drug-only coverage.
    Response: As discussed in the prior response, the statute requires 
us to apply the Medicare MLR requirement to the Part D program. 
Moreover, the commercial MLR rule does apply to an insurance policy 
covering only drugs, as it applies to all health insurance coverage as 
defined by the Public Health Service Act, so the premise of the 
question is incorrect.
    Comment: A commenter believed that applying MLR to Part D would 
make it difficult for beneficiaries to compare Medicare MLRs within the 
Medicare market and between the Medicare and commercial markets.
    Response: By applying the Medicare MLRs to the Part D program, we 
believe that beneficiaries can meaningfully compare health insurance 
products between the Medicare and commercial markets. We recognize that 
the advantage to beneficiaries of applying the Medicare MLRs to Part D 
stand-alone contracts is to allow for comparison among the stand-alone 
contracts more so than comparison with the MA-PD contracts.
    Comment: A commenter expressed concern about the MLR requirements 
placing Cost Plans at a competitive disadvantage. The commenter gave 
the example of a beneficiary comparing an MA-PD with a Cost Plan that 
offers Part D and concluding that the MA-PD offers better value based 
on the MLR even if Cost Plan is more efficient in providing drug 
coverage. In this situation, the commenter was concerned that it would 
reflect poorly on the Cost Plan as a whole and not just on the Part D 
portion of the plan.
    Response: Because the MLR rule is applied to the Part D portion of 
the benefits offered by Cost Plans, we will be treating them like PDPs 
for MLR purposes. Thus, when we make MLR information available to the 
public, we plan to make clear which MLRs are associated with 
comprehensive benefits and which are associated only with a drug 
benefit.
    Comment: Because beneficiary premiums fund 25 percent of the value 
of benefits offered under Part D plans, a commenter believes that 
absence of any mechanism to share the remittances with beneficiaries is 
further evidence that the Medicare MLR requirement is not applicable to 
Part D.
    Response: That would not be a reason to exempt Part D coverage, as 
beneficiaries with Part C coverage may also have a premium.
    Comment: A commenter sought clarification regarding the 
applicability of the rule for section 1876 Cost HMO/

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CMPs and section 1833 Cost HCPPs (Health Care Prepayment Plans) that 
offer Part D.
    Response: As the Medicare MLR rule will only apply to the Part D 
portion of the benefits offered by Cost HMOs/CMPs and employers/unions 
offering HCPPs, we will treat them like PDPs instead of MA-PDs for MLR 
purposes.
    Comment: A commenter stated that application of the MLR to Part D 
would create an uneven playing field due to the manner by which LIS 
beneficiaries are auto-enrolled into certain plans without sponsors 
paying agent and broker fees to acquire this new enrollment. Because 
agent and broker fees are considered administrative costs under this 
rule, the commenter suggests that those contracts with high levels of 
auto-enrolled beneficiaries would be advantaged in meeting the MLR 
requirements.
    Response: We do not believe this introduces a systemic bias that 
favors particular plan sponsors. Every plan sponsor has the potential 
to bid below the LIS benchmark and receive auto-enrollment for its non-
enhanced PDPs.
    Comment: A commenter supported applying the Medicare MLR 
requirements to EGWPs, while another commenter requested that we waive 
the Medicare MLR requirements for all EGWPs. A few commenters requested 
clarification that the MLR applies only to the defined standard benefit 
for Part D EGWPs in light of CMS' policy effective as of January 2014 
that supplemental benefits for Part D EGWPs will be considered non-
Medicare benefits for purposes of adjudicating the benefit and 
populating PDE records.
    Response: The MLR statutory provision does not provide for an 
exemption for EGWPs and thus applies to contracts offering MA and Part 
D plans. As a significant percentage of MA enrollees are members of 
EGWPs (about 20 percent), we believe that it is important not to exempt 
EGWPs. We expect EGWPs to report costs and revenue per Sec.  422.2420 
and Sec.  423.2420 on the Medicare-funded portion of each contract. 
Additional information regarding how to determine the Medicare-funded 
portion of each contract will be provided in sub-regulatory guidance or 
in the Paperwork Reduction Act notice and comment process. We note that 
though we currently do not collect information on EGWP benefit 
packages, we have the authority to request this information if needed. 
For non-CY EGWPs, we expect that MLR calculations and remittances would 
occur on a calendar year basis, similar to how payments and most 
submissions to CMS are on a calendar year basis.
    Comment: A commenter supported not applying the Part D MLR 
requirements to the Part D offerings of PACE organizations.
    Response: We appreciate the support, and as noted previously we are 
adopting this policy in this final rule.
    Comment: A few commenters inquired how the Medicare MLR 
requirements will apply to private health plans participating in state 
demonstration to integrate care for dually eligible Medicare and 
Medicaid beneficiaries.
    Response: Unless waived, all applicable statutory and regulatory 
requirements of the Medicare program apply to plans participating in 
these demonstrations. During the demonstration development process, we 
will determine, in conjunction with participating states, whether and 
to what extent to waive the Medicare MLR requirement.
2. Definitions
    In proposed Sec.  422.2401 and Sec.  423.2401, we stated that the 
acronym MLR would be used to refer to the medical loss ratio referenced 
in Part 422, Subpart X and Part 423, Subpart X. We also defined 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.
    After consideration of the public comments received, we are 
finalizing these provisions as proposed.
C. General Requirements for MA Organizations and Part D Sponsors
    Sections 1857(e)(4) and 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.
    Comment: A few commenters requested that we deviate from requiring 
an 85 percent MLR for a contract year in favor of a lower MLR 
requirement, or that we calculate MLRs using a rolling 3-year average 
as required in the commercial markets.
    Response: The 85 percent standard is set in statute, as is the fact 
that an MLR is calculated for each ``contract year.''
1. Aggregation of MLR to the Contract Level
    We proposed 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, instead of at the MA plan level or at the MA 
organization level. We also proposed requiring MA organizations to 
report one MLR for each contract that includes MA-PD plans, instead of 
one for nondrug benefits and another for prescription drug benefits.
    Comment: Many commenters supported reporting MLRs at a higher level 
than the contract level, such as at the parent organization level. The 
commenters noted that this approach would be preferable as there would 
be less claims variation, would be administratively less burdensome to 
report, would reflect the national character of the Medicare program, 
is the closest option to the commercial MLR, and would ensure a level 
playing field. A few commenters recommended that CMS require 
aggregation of the MLR for MA organizations at the contract level 
within a state and for Part D stand-alone contracts at the contract 
level by region. Another commenter suggested that the appropriate level 
of aggregation is aggregated to the state level by MA or Part D plan, 
noting that beneficiaries enroll in plans and not contracts, that a 
good MLR at the contract level may mask low-value plans underneath it, 
and that applying sanctions at plan level would cause the least 
beneficiary disruption. These commenters recognized the potential value 
of reporting plan-level MLRs and urged us to continue considering this 
option after the final rule is published. Several commenters suggested 
that sponsors be able to choose a level of aggregation when reporting 
MLRs similar to the manner in which they can choose the level of 
aggregation when determining gain/loss margins for bidding. Many 
commenters agreed with reporting at the contract level as proposed.
    Response: We continue to believe that reporting MLRs at the 
contract level strikes an appropriate balance of

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administrative burden, meaningful MLRs, and comparability with 
commercial MLR reporting. Although Medicare is a national program, 
beneficiaries consider the coverage options available to them in a 
particular geographic area, which often correlates with the state in 
which they live. As MA and PDP contracts are often executed at the 
state level and no other reporting for MA and Part D organizations is 
done at the state level of aggregation, we believe that reporting 
Medicare MLRs at the contract level is preferable. This level of 
aggregation parallels the commercial MLR approach, which aggregates the 
MLR to the state and market level, and avoids imposing administrative 
burden for the minority of contracts that span multiple states. 
Contrary to the claim that aggregating at the parent organization level 
is necessary to ensure a level playing field, it would in fact favor 
parent organizations that operate nationally by allowing claims and 
revenues to be shifted around to meet the MLR requirements, which a 
parent organization with more limited scope would be unable to do.
    Though we recognize that the value of individual plans in a 
contract may differ from one another, we also need to keep in mind that 
calculating MLRs at the plan level would necessitate higher credibility 
adjustments due to higher random claims variation; and therefore, may 
not result in a better measure of value. If we allowed sponsors to 
choose their level of reporting, then the foremost concern is that 
resulting MLRs would not be comparable by beneficiaries. We presume 
that most MA organizations and Part D sponsors would choose to report 
at the highest level of parent organization, which would raise the 
concerns we have previously discussed of meaningfulness of the MLR and 
significant beneficiary disruption in the event of enrollment sanction 
or contract termination.
    Comment: Many commenters agreed with our proposed approach of 
reporting one combined MLR for MA only and MA-PD contracts for clarity 
to beneficiaries and the public.
    Response: We appreciate the support.
    After consideration of the public comments received, we are 
finalizing the level of aggregation for reporting Medicare MLR at the 
contract level as proposed.
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 
will not have been met and the sponsoring organization will be required 
to remit a payment to CMS. The amount of the remittance will 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 final 
rule.
    Comment: Notwithstanding the statutory requirement for remittances 
to be paid to the Secretary, a few commenters believe that we should 
reimburse Medicare beneficiaries who paid premiums to plans that did 
not meet the 85 percent MLR during the plan year.
    Response: As the commenters note, the statute expressly provides 
that MA organizations and Part D sponsors must remit to the Secretary 
when the minimum MLR is not met.
    After consideration of the public comments received, we are 
finalizing these provisions as proposed.
3. Enrollment Sanction
    As set forth in 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, enrollment of new enrollees in plans under 
that contract will be prohibited. The year for which this enrollment 
sanction will apply will 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 will be reported in 2015 through 2017. If a contract 
did not meet the MLR requirement for the 2014, 2015, and 2016 contract 
years, new enrollment in plans under that contract will be prohibited 
beginning in 2018, which is the second succeeding contract year after 
the third consecutive year of failure (2016) to meet the MLR 
requirement.
    Comment: A few commenters suggested establishing a special 
enrollment period to allow beneficiaries under MA or Part D contracts 
that do not meet the minimum MLR to disenroll and select a new plan.
    Response: As discussed in section II.G. of this final rule, we are 
requiring MA organizations and Part D sponsors that fail to meet the 
minimum MLR 2 years in a row to report earlier the following year, such 
that any beneficiary would have sufficient time to select a new plan 
during the annual election period. Thus, we do not believe that a 
special enrollment period would be necessary. We note that in the 
circumstance of a contract termination for failure to meet the MLR, 
during the special enrollment period, enrollees in the plans under that 
contract being terminated would be notified that they have to elect 
another option for the year the termination takes effect, or would be 
placed under original Medicare.
    Comment: A commenter requested that CMS interpret the enrollment 
sanction required after the ``second succeeding contract year'' as the 
second succeeding contract year following submission of the report. The 
commenter noted that such an interpretation would avoid imposing 
enrollment suspensions on MA organizations and Part D sponsors after 
they have already submitted their bids.
    Response: We believe that one purpose of the enrollment sanction is 
to keep beneficiaries from enrolling in low value plans. The plain 
reading of the statute supports this goal, whereas interpreting the 
enrollment sanction to apply the second succeeding contract year 
following submission of the report would allow new enrollment into low 
value plans for another year.
    Comment: A commenter asked for new enrollment to be allowed for 
plans that meet MLR requirements in the fourth year of reporting but 
had failed to meet the requirements for 3 consecutive years.
    Response: If a contract fails to meet the minimum MLR for contract 
years 2014, 2015, and 2016, the enrollment sanction for all plans under 
that contract will be for contract year 2018. If the contract then 
meets the minimum MLR for 2017, new enrollment for plans under that 
contract will be allowed during contract year 2019.
    Comment: A commenter urged that the processes that currently apply 
to suspensions of enrollment imposed as an intermediate sanction should 
apply to prohibitions on new enrollment based on a failure to meet MLR 
requirements.
    Response: We would not expect an MA organization or Part D sponsor 
to contest a suspension of enrollment since it is required by statute 
and would be based on an MLR that the organization itself reported. 
However, if an MA organization or Part D sponsor wished to argue that 
an enrollment sanction should not have been imposed because they did 
not report 3 consecutive years of below 85 percent MLRs, we would make 
available the processes that currently apply to suspensions of 
enrollment imposed as an intermediate sanction. We note that under that 
process, the prohibition on new enrollment would remain in place

[[Page 31288]]

during any appeal of the enrollment sanction.
    After consideration of the public comments received, we are 
finalizing these provisions as proposed.
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 
proposed to implement section 1857(e)(4)(C) of the Act by terminating 
the contract for the year following the year in which the MA 
organization or Part D sponsor is required to report the MLR for the 
fifth year. For termination, we proposed to implement the ``second 
succeeding contract year'' requirement in a manner similar to how we 
proposed 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 will terminate the contract in 2020.
    Comment: A commenter concerned about beneficiary displacement asked 
how beneficiaries would be notified and transitioned in the event of a 
contract termination for failure to meet the MLR requirements.
    Response: As discussed in section II.G. of this proposed rule, we 
are requiring MA organizations and Part D sponsors that fail to meet 
the minimum MLR 2 years in a row and onwards to report earlier the 
following year, such that any beneficiary would have sufficient time to 
select a new plan during the annual election period should the 
beneficiary wish to do so based on the MLR finding. As noted 
previously, in the case of a termination, enrollees would be informed 
that they needed to elect another option for the year the termination 
takes effect, or would be placed under original Medicare. Thus, in the 
event of a contract termination for failure to meet the MLR, the plans 
under that contract would not be available as an option for 
beneficiaries during the annual election period.
    Comment: A commenter requested for appeal rights in the event of a 
contract termination due to failure to meet the MLR requirements for 5 
consecutive years.
    Response: We would not expect an MA organization or Part D sponsor 
to contest a contract termination since it is required by statute and 
would be based on an MLR that the organization itself reported. 
However, in response to this comment we are making notice and appeal 
rights in Sec.  422.510(b)(1) and (d) and Sec.  423.509(b)(1) and (d) 
available in the event of a contract termination for MLR reasons. 
Therefore, we are not finalizing Sec.  422.510(a)(16) as proposed and 
instead revising Sec.  422.2410(d) and Sec.  423.2410(d) to state that 
CMS would terminate a contract per Sec.  422.510(b)(1) and (d) and 
Sec.  423.509(b)(1) and (d).
    After consideration of the public comments received, we are 
finalizing these provisions as proposed, with the exceptions of not 
finalizing Sec.  422.510(a)(16) and instead revising Sec.  422.2410(d) 
to state that ``CMS terminates the contract per Sec.  422.510(b)(1) and 
(d) effective as of the second succeeding contract year'' and not 
finalizing Sec.  423.509(a)(16) and instead revising Sec.  423.2410(d) 
to state that CMS terminates the contract per Sec.  423.509(b)(1) and 
(d) effective as of the second succeeding contract year.

D. Calculation of Medical Loss Ratio

1. Definition of Medical Loss Ratio
    Proposed Sec.  422.2420(a) and 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). In general, the MA and 
Part C costs are in the numerator and revenues are in the denominator. 
A credibility adjustment is discussed in section II.F. of this final 
rule.
    Proposed Sec.  422.2410(a)(2) provides that the MLR for an MA 
contract not offering Part D prescription drug benefits will 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 the 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 
specified that the MLR for a PDP contract would be required to reflect 
costs and revenues for standard coverage, alternative coverage, and 
enhanced alternative coverage.
    Comment: A number of commenters commended CMS for adopting the same 
MLR rules that apply to commercial plans (which were based on 
recommendations of the National Association of Insurance 
Commissioners), modifying them when appropriate for the Medicare 
program. Commenters noted that this reduces issuer burden by avoiding 
needless duplication for issuers participating in both Medicare and 
commercial markets, facilitating common standards allowing comparisons 
and evaluations, and minimizes confusion for the public.
    Response: We appreciate the support for aligning commercial and 
Medicare approaches to MLR reporting.
    After consideration of the public comments received, we are 
finalizing these provisions as proposed.
2. MLR Numerator
    Proposed sections 422.2420(b) and Sec.  423.2420(b) for MA and Part 
D contracts identify the elements to be included in the numerator for a 
contract's MLR. Sections 422.2420(b)(1) and 423.2420(b)(1) identify two 
basic elements that would 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.
a. Incurred Claims
    For the MA program, under the proposed rule, 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, as set forth at 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, which are net of direct or indirect 
remuneration from any source. ``Actually paid'' claims refer to those 
costs for which the MA organization or Part D sponsor is liable through 
all phases of the benefit, including the reinsurance portion of claim 
costs in the catastrophic phase of the benefit. MA and Part D contracts 
would also be required to reflect the various items under Sec.  
422.2420(b)(2)(iii) through (xi) and Sec.  423.2420(b)(2)(ii).
    Comment: A commenter inquired whether claims costs for members with 
end-stage renal disease (ESRD) or who have elected hospice should be 
included in the numerator as incurred claims.
    Response: Sections 422.2420(b)(1)(i) and 423.2420(b)(1)(i) state 
that the MLR numerator should include incurred claims for all 
enrollees. Thus, claims costs for ESRD enrollees should be included in 
the numerator as incurred

[[Page 31289]]

claims, as well as claims paid by the plan (and not fee-for-service 
Medicare) for enrollees who have elected hospice.
    Comment: A commenter argued that use of Part C rebate dollars to 
reduce Part D premium and cost sharing should be added to the numerator 
for MA-PD contracts, in the same manner that the proposed rule allows 
rebate dollars allocated to reduce the Part B premium to be added to 
the numerator, because the Part D reductions also benefit 
beneficiaries. The commenter noted that this approach would be 
especially important to SNPs, which typically use some or all of the 
bid savings to buy down the cost of prescription drugs.
    Response: The MLR is based on actual costs and revenues for plan 
benefit packages under a contract. Part C rebates are revenue to the MA 
organization, and thus are in the MLR denominator. The numerator 
includes expenses for benefits. A reduced Part B premium is a plan 
benefit, and only accounting flows make this appear other than a 
benefit expense. Currently, CMS makes a monthly payment to the MA 
organization for each enrollee in a plan, which includes the plan-
specific rebate amount minus the amount (if any) for Part B premium 
reduction. This is revenue. Then CMS sends the amounts allocated to 
reduce Part B premiums to the Social Security Administration (SSA). If 
CMS instead paid the MA organization the Part B premium rebate amount 
and then required the MA organization to pay the SSA on behalf of its 
enrollees, it would be more apparent that such a payment is payment for 
a benefit, that is, a cost in the numerator. Given existing accounting 
flows, we find it appropriate to add the Part B rebate amount to the 
numerator, as proposed at Sec.  422.2420(b)(ii) and Sec.  
422.2420(b)(ii). In contrast, rebates used to reduce Part D premiums 
and cost-sharing are associated with expenditures on drugs, and these 
costs are included in the numerator as incurred claims. Incurred claims 
reflect the benefit design for each plan under the contract, including 
design features such as reduced cost-sharing and supplemental drug 
coverage (which are in the benefit design in part because of rebate 
revenue). In reviewing this comment, we realized that making an 
adjustment for Part B premiums is not applicable to stand-alone Part D 
contracts and we have therefore deleted proposed Sec.  
423.2420(b)(1)(ii) and renumbered accordingly.
    Comment: A few commenters requested that CMS clarify whether MA 
organizations employing capitated provider reimbursement arrangements 
may consider the full capitation amount as a benefit expense unless the 
provider contract specifies a distinct fee for administrative services. 
A commenter noted that an approach including the full capitation amount 
in incurred claims would mirror the commercial MLR requirements. 
Another commenter noted that capitated services often may include care 
management or disease management activities and other activities 
intended to improve quality.
    Response: In Sec.  422.2420(b)(2), we are following the commercial 
MLR approach where incurred claims are direct claims paid to providers, 
including under capitation contracts. Where an MA organization of Part 
D sponsor has arranged with a clinical provider for capitation payments 
rather than fee-for-service reimbursement for covered services to 
enrollees, and such capitation payments include reimbursement for 
certain provider administrative costs, then the entire per member per 
month capitation payment paid to the provider may be included in 
incurred claims. The full capitation amount paid to a provider for 
covered services described at Sec.  422.2420(a)(2) could be reported as 
a benefit expense, unless, as the commenters noted, the provider 
contract specifies a distinct fee for administrative services. Note 
that if the capitated payment includes payment for quality-improving 
activities that also would meet the requirements under Sec.  422.2430 
and Sec.  423.2430 (activities that improve health care quality), the 
MA organization must ensure that costs for these activities are only 
counted once in the numerator.
    Comment: A commenter requested that CMS exclude from provider 
bonuses and incentive payments, which must be included in the 
numerator, the treatment of incentive bonuses to providers for the 
purposes of exclusive provider-sponsor contracting.
    Response: One requirement of incentives and bonus payments to 
providers under Sec.  422.2420(b)(2) and Sec.  423.2420(b)(2) is that 
the payments must be ``related to clinical services and prescription 
drug costs'', which would not include bonus payments specifically as an 
incentive not to contract with another organization.
    Comment: A commenter stated that CMS' proposal to include costs and 
revenues for optional supplemental benefits in the MLRs for MA 
contracts is unjustified because revenue for these benefits comes 
solely from beneficiary premium, and by law beneficiaries do not share 
in any remittances that must be made by MA organizations and Part D 
sponsors for contracts that fail to meet the MLR requirement. The 
commenter believed that the MLR should only include benefits funded by 
the Medicare program.
    Response: The commenter is correct that we intend for the MA MLR to 
include all of the MA benefits defined at Sec.  422.100(c): Basic 
benefits, mandatory supplemental benefits, and optional supplemental 
benefits. We believe that all Medicare costs and revenues under an MA 
contract should be included in the MLR, and the optional supplemental 
benefit package is defined by law as a type of Medicare benefit under 
the MA program. The fact that the optional supplemental benefit is 
funded completely by beneficiary premiums is a reason for including 
these benefits in the MLR. A key goal of the MLR provision is to 
provide beneficiaries with information needed to better understand how 
much of revenue--including beneficiary premiums--is being used to pay 
for their Medicare services and quality-improving activities.
    Comment: A commenter recommended that CMS establish a multiplier to 
apply to the numerator for Part D contracts in recognition of 
significant differences between the structure of these limited benefit 
policies and comprehensive medical coverage, analogous to the 
multiplier developed for mini-med policies under the commercial MLR 
rule.
    Response: We do not believe that the Medicare Part D benefit 
package is analogous to the limited benefit packages referred to as a 
mini-med policies, which the commercial MLR has defined as policies 
that have a total annual limit of $250,000 or less, and thus do not 
believe that application of an adjuster analogous to the mini-med 
adjuster is appropriate. Like stand-alone Part D contracts, commercial, 
stand-alone pharmacy policies are subject to the commercial MLR 
standard and do not receive an adjustment.
    Comment: A few commenters requested that CMS follow the commercial 
rule and implement a 3-year reporting period to allow for smoothing of 
abatement years, thus resulting in a more accurate MLR calculation.
    Response: The statutory language for the Medicare MLR requirement, 
unlike the commercial statute, requires that ``the Secretary determines 
for a contract year'' whether the MLR meets the threshold of 85 
percent. We believe that CMS does not have the authority to implement a 
rolling 3-year average MLR.
    Comment: A commenter determined that the proposed treatment of 
commercial reinsurance in the proposed rule deviated from the 
commercial MLR regulation. The commenter noted that

[[Page 31290]]

under 45 CFR 158.130(a)(3) of the commercial regulation, the only 
instances in which the premiums and claims associated with a ``100 
percent indemnity reinsurance treaty'' are reported as part of the MLR 
calculation by the ``assuming entity'' instead of by the ``ceding 
entity'' are--(1) when the reinsurance treaty was in force prior to the 
date of enactment of the Affordable Care Act; and (2) in situations in 
which the assuming entity is also completely responsible for performing 
administrative functions.
    Response: We thank the commenter for pointing out this unintended 
inconsistency with the commercial MLR regulation in our proposed 
provisions at Sec.  422.2420(b)(1)(iv), Sec.  422.2420(c)(4), Sec.  
423.2420(b)(1)(iv) and Sec.  423.2420(c)(4).
    Our proposed regulation would require that claims and revenue be 
reported on a direct basis, at Sec.  422.2420(b)(2)(i), Sec.  
422.2420(c)(1), Sec.  423.2420(b)(2)(i), and Sec.  423.2420(c)(1). We 
agree that our proposed regulations about the exceptions to direct 
reporting should be corrected to mirror the commercial regulation as we 
intended. As we stated in the preamble to the proposed rule, we only 
intended to depart from the commercial MLR rule to the extent necessary 
and appropriate given the Medicare context. In this case, the 
provisions at issue do not involve Medicare. Thus, we are revising the 
proposed regulation text to mirror more exactly the commercial 
regulation at 45 CFR 158.130(a)(2) and (a)(3). We are separating 
provisions on assumptive and 100 percent indemnity reinsurance, and 
incorporating the commercial rule language at 45 CFR 158.130(a)(3), 
which provides that the only instance in which the premiums (revenue) 
and claims associated with a 100 percent indemnity reinsurance treaty 
are reported by the assuming entity, instead of by the ceding entity, 
is when the reinsurance treaty was in force prior to the date of 
enactment of the Affordable Care Act. In short, with this change our 
provisions now mirror the distinction between paragraphs Sec.  
158.130(a)(2) and (a)(3) in the commercial rule.
    We are including these reinsurance provisions under Sec.  422.2420 
and Sec.  423.2420 for both the MLR numerator (costs) and MLR 
denominator (revenue.) (The commercial MLR rule addresses the treatment 
of reinsurance for the MLR numerator at Sec.  158.103 through a 
definition of direct paid claims.) Finally, we are moving the numerator 
provision at Sec.  158.103 (b)(1)(iv) to (b)(5) and adding paragraph 
(b)(6).
    Comment: A few commenters questioned whether, and how, the MLR 
requirement applies to MA Medical Savings Account (MSA) plans. One of 
these commenters requested that MSA plans be exempted, and another 
commenter argued that if the requirement applies to this unique plan 
type, the beneficiary deposit should be included in both the numerator 
and denominator of the calculation.
    Response: Medicare MSA plans are a type of MA plan, and they are 
not exempted from the MLR statutory provisions. We agree with the 
commenter, however, that the annual deposit into the beneficiary's MSA 
should be included in both the numerator and denominator of the MLR 
calculation. In response to this comment, we are revising proposed 
Sec.  422.2420(b)(1), to indicate that the annual deposit to the 
beneficiary's medical savings account should be included in the MLR 
numerator.
    Note that the requirement to include optional supplemental benefit 
costs and revenue under the contract applies to all MA plan types.
    After consideration of the public comments received, we are 
finalizing these provisions as proposed, with the exception of revising 
the proposed Sec.  422.2420(b)(1) to indicate that the annual deposit 
to the beneficiary's medical savings account should be included in the 
MLR numerator, and making changes to the 100 percent indemnity and 
assumptive reinsurance provisions under Sec.  422.2420 and Sec.  
423.2420.
b. Adjustments to and Exclusions From Incurred Claims
    Under proposed Sec.  422.2420(b)(3) and Sec.  423.2420(b)(3), any 
amounts paid to providers that were recovered because they were 
overpayments would have to be deducted from incurred claims. There are 
also several expenditures that would not be included in incurred claims 
for MA and PDP contracts, as provided in Sec.  422.2420(b)(4) and Sec.  
423.2420(b)(4). 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) 
are not permitted to be included in incurred claims for any contract 
year.
    Comment: A few commenters noted that direct and indirect 
remuneration was inadvertently being backed out of incurred claims 
twice, as the definition of drug costs ``actually paid'' per Sec.  
423.308 is already net of DIR and then again in the section listing 
adjustments that must be deducted from incurred claims.
    Response: We agree and are correcting this error by removing 
proposed Sec.  422.2420(b)(3)(i) and renumbering Sec.  
422.2420(b)(3)(ii) accordingly, as well as removing proposed Sec.  
423.2420(b)(3)(i) and renumbering Sec.  423.2420(b)(3)(ii) accordingly. 
For clarity in the regulatory text, we added a reference to direct and 
indirect remuneration in Sec.  423.2420(b)(2)(i).
    Comment: Several commenters recommended that all low income premium 
and cost sharing subsidies (LIPS and LICS) and discounts on brand drugs 
advanced to beneficiaries as part of the Coverage Gap Discount Program 
be taken into account in the numerator (and denominator), similar to 
the treatment of Part D reinsurance.
    Response: We make LIPS payments to MA organizations and Part D 
sponsors to make the sponsor whole for reduced premiums that eligible 
beneficiaries are paying the plan. Beneficiary premiums are revenue, 
not costs, and thus LIPS payments are taken into account in the 
denominator of the MLR. We view LICS payments and coverage gap discount 
payments as pass-through payments, unlike federal reinsurance, which 
pays for a portion--but not all--of plan liability in the catastrophic 
phase of the benefit. Thus, LICS and CGDP amounts do not belong in the 
MLR numerator or the MLR calculation.
    We are finalizing this provision with the following modifications. 
We have made changes to the regulatory text by deleting proposed Sec.  
422.2420(b)(3)(i) and renumbering Sec.  422.2420(b)(3)(ii) accordingly, 
as well as deleting proposed Sec.  423.2420(b)(3)(i) and renumbering 
Sec.  423.2420(b)(3)(ii) accordingly. We inserted the reference to 
direct and indirect remuneration in Sec.  423.2420(b)(2)(i). We made 
these changes to make clear that direct and indirect remuneration must 
already be netted out of drug costs that are actually paid per Sec.  
423.308 and therefore should not be deducted again.
3. MLR Denominator
    We proposed 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 include our risk-adjusted payments 
to the MA

[[Page 31291]]

organization for all enrollees under a contract, reflecting final risk 
scores, including Part C rebate payments, 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 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 or Part D sponsor as a condition of receiving 
coverage under an MA or Part D plan; our payments for low income 
premium subsidies under Sec.  423.780; and risk corridor payments under 
Sec.  423.315(e).
    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, reflecting final risk scores, 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; 
all changes in unearned premium reserves; and risk corridor payments 
under Sec.  423.315(e).
    At Sec.  422.2420(c)(2), we proposed three categories of taxes and 
fees that must be deducted from total revenue: Licensing and regulatory 
fees, federal taxes and assessments, and state taxes and assessment. We 
also proposed that a fourth amount be deducted from total revenue: 
community benefit expenditures. We proposed to align with the 
commercial MLR regulations to allow a federal income tax-exempt issuer 
to deduct community benefit expenditures by defining them in Sec.  
422.2420(c)(2)(iv) and Sec.  423.2420(c)(2)(iv), up to a cap 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 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.
    Next, we proposed that some items not be included in total revenue. 
First is the amount of unpaid premiums that the MA organization or Part 
D sponsor can demonstrate to us that it made a reasonable effort to 
collect. We proposed that HITECH, or EHR, incentive payments and 
payment adjustments would not be considered for purposes of the MLR 
calculation. Thus, neither 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), nor EHR payment adjustments for a failure to meet meaningful use 
requirements (as administered under Part 495 subpart C) will be in the 
MLR calculation. We proposed that Coverage Gap Discount Program 
payments under Sec.  423.2320 would not be included in total revenue.
    Finally, as explained in the preamble to the proposed rule, we did 
not propose an adjustment to total revenue for commercial reinsurance.
    Comment: A few commenters requested clarification on the proposed 
regulatory requirement that total revenue must include all unpaid 
premium amounts that an MA organization or Part D sponsor could have 
collected from enrollees under a contract, but should exclude from 
total revenue all unpaid premium amounts for which they can demonstrate 
to CMS they made a reasonable effort to collect. Both commenters wanted 
to exclude all unpaid beneficiary premium revenue from the denominator. 
A commenter noted that the citations in the proposed rule to Sec.  
422.74(d)(1)(i) and Sec.  423.44(d)(1)(i) are references to CMS' 
disenrollment policy, which includes the option that an MA organization 
or Part D sponsor may forgive unpaid amounts and not disenroll 
beneficiaries, and they requested clarification.
    Response: We appreciate that the commenters brought to our 
attention that these provisions of the proposed rule are somewhat 
confusing because our disenrollment policy is cited. Specifically, at 
Sec.  422.2420(c)(1)(v), Sec.  422.2420(c)(3)(i), Sec.  
423.2420(c)(1)(iv), and Sec.  423.2420(c)(3)(i)), where we regulate the 
treatment of unpaid premium amounts, we included references to Sec.  
422.74(d)(1)(i) and Sec.  423.44(d)(1)(i). These citations are to our 
policy on the conditions under which an MA organization or Part D 
sponsor may disenroll a beneficiary for non-payment of plan premiums. 
This disenrollment policy is focused on beneficiary protection by 
setting limits around disenrollment. We believe that these citations 
are confusing in the context of MLR calculation and reporting. Thus, we 
are revising proposed Sec.  422.2420(c)(3)(i) and Sec.  
423.2420(c)(3)(i) to delete these citations. The policy intention 
remains the same: The MA organization or Part D sponsor will include 
all beneficiary premium amounts under a contract in total revenue (the 
MLR denominator) minus any premium amounts that remain unpaid after 
reasonable collection efforts.
    Comment: Several commenters requested that CMS allow the MLR for 
dual SNPs and FIDE SNPs to include Medicaid and Medicare costs and 
revenues.
    Response: We do not believe that we have the authority to include 
Medicaid costs and revenues in the Medicare MLR requirement, including 
the authority to require payment of a remittance calculated on a 
combined MLR.
    Comment: A number of commenters contended that there are a number 
of administrative costs that are in the denominator of the MLR that are 
barriers to contracts meeting the MLR requirement. A few commenters 
argued that administrative costs associated with the rules of 
participating in the Medicare program should specifically be excluded 
from the calculation of their MLRs, similar to the treatment of taxes 
and fees in the MA and Part D MLR calculation. Examples of these costs 
include provider credentialing, costs associated with meeting the 
annual bidding requirements, member communications, compliance 
activities over which MA organizations and Part D sponsors have no 
control, and expenses incurred for maintaining compliance and quality 
assurance programs in accordance with state and federal requirements, 
maintaining effective grievance and appeals processes, and audits that 
require additional investments. Other commenters argued that it is an 
unbalanced approach to include administrative costs associated with 
managing several components of the Part D program in total revenue, 
with no costs related to these items allowed in the numerator: low-
income cost-sharing (LICS) payments, low-income subsidy payments that 
cover beneficiary premiums (LIPS), and discounts on brand drugs 
advanced to beneficiaries as part of the Coverage Gap Discount Program 
(CGDP). These commenters argued that LICS, LIPS, and CGDP should be 
treated similarly to how CMS proposed to treat Part D reinsurance 
payments, as allowable in both the numerator and denominator of the 
MLR.
    Response: As the commenters noted, administrative costs are an 
element of doing business. A goal of the MLR is to indicate the share 
of medical and prescription drug costs under a contract, relative to 
total revenue. Total revenue includes amounts that cover administrative 
costs and margin. We do

[[Page 31292]]

not believe that excluding administrative costs from revenue (or adding 
such costs to the numerator) would provide an accurate representation 
of the MLR for a contract. This is reflected in the commercial MLR 
rule, which does not permit administrative expenses like provider 
credentialing, annual bidding, member communications, compliance, 
quality assurance, grievance and appeals, or audit costs to be deducted 
from the premium or added to the numerator. In fact, one of the key 
goals of the MLR is to have a measure to compare how cost-effectively 
MA organizations and Part D sponsors can meet their administrative 
requirements.
    Regarding administrative costs specific to the CGDP, we believe 
that CMS bears most of these administrative costs, including executing 
agreements with manufacturers participating in the CGDP, paying monthly 
interim coverage gap payments, invoicing manufacturers, and conducting 
coverage gap discount reconciliation. We require all MA organizations 
and Part D sponsors to engage in certain administrative activities as a 
condition of participation in the MA and Part D programs, and believe 
that the burden of meeting these requirements is fairly distributed.
    For these reasons, we do not believe it necessary or appropriate to 
adjust the MLR calculation for administrative costs beyond what we 
proposed. We will be mindful of placing additional administrative 
requirements on MA organizations and Part D sponsors that could have 
differential impacts on the MLR calculation.
    LICS, LIPS, and CGDP payments are not allowable in both the 
numerator and denominator of the MLR, like the way Part D reinsurance 
payments are treated. As we make LIPS payments on behalf of eligible 
beneficiaries, this amount is treated as revenue just as if the 
beneficiary had paid these amounts directly to the plan. We view LICS 
and CGDP payments as pass-through payments, unlike federal reinsurance, 
for which MA organizations and Part D sponsors retain some plan 
liability in the catastrophic phase of the benefit.
    Comment: One commenter requested clarification regarding the 
exclusion of commercial reinsurance from total revenue and inquired 
whether the ``commercial reinsurance'' exclusion means net reinsurance 
(that is, reinsurance premium less reinsurance recoveries) or whether 
both premiums and recoveries are excluded from the MLR calculation.
    Response: We followed the commercial MLR approach by not allowing 
MA organizations and Part D sponsors to adjust the MLR for commercial 
reinsurance (we note that this response is addressing commercial 
insurance and not the federal reinsurance provision under the Part D 
program). That is, both reinsurance premiums and recoveries are 
excluded from the MLR calculation. Both costs and revenues must be 
reported on a direct basis, that is, before ceded reinsurance as stated 
at Sec.  422.2420(b)(2)(1) regarding incurred claims as direct claims 
direct drug costs that are actually paid, and Sec.  422.2420(c)(1) and 
Sec.  423.2420(c)(1) regarding total revenue reported on a direct 
basis.
    Comment: Some commenters supported the alignment of the proposed 
rule with the commercial MLR regulations, by allowing federal income 
tax-exempt MA organizations and Part D sponsors to deduct community 
benefit expenditures from total revenue, up to a cap. In regards to 
contracts that span more than one state, a commenter supported the 
blending of the highest premium tax rates for the states in which the 
contract is offered. Another commenter recommended applying the state 
premium tax rate to the proportion of community benefit expenditures 
furnished by plans under the contract in that state, or allocating 
based on proportions of enrollment in each applicable state, then 
deducting the amount up to the cap. Several commenters noted that 
community benefit expenditures should not be considered a category of 
expenditures to be deducted from total revenue. Generally, commenters 
who did not support the deduction of community benefit expenditures 
argued that since MA and Part D plans do not pay state premium taxes on 
their Medicare revenue, the proposed rule provides an unfair advantage 
for federal income tax-exempt issuers and does not recognize the 
community benefit expenditures made by for-profit issuers.
    Response: We agree that, because an MA organization or Part D 
sponsor that is exempt from federal income taxes must make community 
benefit expenditures, such an MA organization or Part D sponsor should 
be allowed to deduct community benefit expenditures. This final rule 
allows a federal income tax-exempt MA organization or Part D sponsor to 
deduct its community benefit expenditures in the same manner that a 
for-profit plan sponsor is allowed to deduct its federal income taxes. 
This rule explains the community benefit expenditure deduction 
available to an MA organization or Part D sponsor that is exempt from 
federal income taxes. Such MA organizations and Part D sponsors will be 
allowed to deduct actual community benefit expenditures up to the 
higher of 3 percent of total revenue as defined for MLR purposes, or 
the highest premium tax rate in the state where the MA organization or 
Part D sponsor is licensed, multiplied by the MA organization or Part D 
sponsor's earned premium for the contract. We note that the amount of 
community benefit expenditures deducted is not allowed to exceed the 
amount of actual community benefit expenditures in the reporting year. 
In the instance where a contract spans more than one state, we will 
blend the highest premium tax rates for the states in which the 
contract is offered in a manner to be determined through sub-regulatory 
guidance or the Paperwork Reduction Act notice and comment process.
    After consideration of the public comments received, we are 
finalizing these provisions with the following technical corrections. 
First, we are revising proposed Sec.  422.2420(c)(3)(i) by removing the 
citation to Sec.  422.74(d)(1)(i), and we are revising proposed Sec.  
423.2420(c)(3)(i) by removing the citation to Sec.  423.44(d)(1)(i). 
These changes to the provisions on treatment of unpaid premiums remove 
a confusing reference to our disenrollment policy, which is not 
directly relevant to the determination of total revenue for MLR 
purposes. The second technical correction clarifies what is meant by 
total revenue under the contract, specifically, that total revenue for 
a contract is not simply the amount under paragraph Sec.  
422.2420(c)(1) and Sec.  423.2420(c)(1) but is the amount under 
paragraph (c) that reflects (c)(1) through (c)(4). Finally, we are 
correcting proposed Sec.  422.2420(c)(3) and Sec.  423.2420(c)(3), 
which are provisions on amounts to be excluded from total revenue; we 
erroneously proposed ``incurred claims,'' which are in the MLR 
numerator. We have corrected this to state ``revenue.''
4. Projection of Net Total Revenue
    When calculating Medicare MLRs, we proposed that MA organizations 
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.
    Comment: Several commenters stated concerns about CMS' proposal 
that the MLR would be reported once, based on the Medicare revenue for 
the year at the time of the report, and that neither

[[Page 31293]]

reopening(s) of a reconciliation process nor any risk adjustment data 
validation (RADV) audits that could change the final revenue amount 
would result in a reopening of the MLR reported for a contract year. A 
few commenters agreed that the MLR calculation should not be reopened 
on a routine basis, but recommended that CMS allow the reopening of the 
MLR for contracts with MLRs below the threshold. Finally, some 
commenters requested that, at a minimum, if there is a finding from a 
RADV or other audit that requires an issuer to remit funds to CMS, CMS 
should allow recalculation of a past MLR to reflect this adjustment to 
revenue based on an audit finding, or alternatively allow an adjustment 
to revenue in the MLR reported for the year of the audit finding.
    Response: We believe that the remittances owed based on a failure 
to meet the MLR standard should be based on the revenue figure at the 
time of the report, and should not be subject to change if this revenue 
figure is decreased or increased in a future year. First, that is the 
revenue that in fact was received by the MA organization or Part D 
sponsor at the time it made its decisions on how to apportion it 
between patient care and quality improvement and other costs. The 
remittance (and other sanctions) can be considered a penalty for plans 
that apportioned more than 15 percent of the revenue received to costs 
other than patient care or quality improvement. Presumably, the MA 
organization did not make those decisions based upon an assumption that 
its revenue would be reduced or increased in a future year as a result 
of an audit or reconciliation that changes the final Medicare payment 
amount in some future year.
    Moreover, if the payment amount is adjusted downward in a future 
year (for example, because it is found that the organization or sponsor 
submitted inflated risk scores that were not justified), we do not 
believe it would be appropriate for the MA organization or Part D 
sponsor to be provided with an adjustment to its MLR that could reduce 
or eliminate its penalty for violating the MLR standard for the year in 
question. The fact that the MA organization or Part D sponsor had to 
refund amounts to which it should not have been entitled does not 
retroactively affect the value it delivered with the funds it had 
during the contract year at issue. Thus, if an MLR violates the 85 
percent standard as reported, that MLR is final.
    We are finalizing these provisions as proposed.
5. Allocation of Expenses
    We proposed that MA organizations and Part D sponsors would be 
required to properly allocate all expenses stemming from each contract, 
as provided under Sec.  422.2420(d) and Sec.  423.2420(d). 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 will 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 under our proposal 
have to be reported on a pro rata share basis. This approach aligns 
with the commercial MLR rules.
    Comment: A commenter requested clarification regarding the 
alignment with the commercial MLR in reference to the proposal that, MA 
organizations and Part D sponsors must use Statutory Accounting 
Principles for the purposes of MLR determination except in cases when 
another regulatory authority such as state insurance departments 
requires other reporting for a particular contract or product using 
Generally Accepted Accounting Principles (GAAP).
    Response: We agree that use of Statutory Accounting Principles for 
Medicare MLR requirements would align with current practices in 
determining commercial MLR and minimize administrative burden on 
issuers. We thus are adopting this approach by requiring MA 
organizations and Part D sponsors to explain how revenue is used to pay 
for non-claims expenditures. MA organizations and Part D sponsors must 
allocate their non-claims and quality improving expenses by contract. 
If an expense is attributable to a specific activity, then MA 
organizations and Part D sponsors should allocate the expense to that 
particular activity. However, if this is not feasible, then the MA 
organization or Part D sponsor must apportion the costs using a 
generally accepted accounting method that yields the most accurate 
results.
    After consideration of the public comments received, we are 
finalizing these provisions as proposed.

E. Activities That Improve Health Care Quality

    We proposed to adopt definitions of activities that improve health 
care quality for the purposes of this MLR rule that will result in a 
uniform accounting of the associated costs for MA organizations and 
Part D sponsors. As noted in the proposed rule, this definition of 
quality would apply 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. This final rule provides a set of criteria in Sec.  422.2430 
and Sec.  423.2430 which MA organizations or Part D sponsors will be 
required to comply with in order for the activity in question to be 
treated as quality improving. In the proposed rule, we requested 
comment on the types of drug utilization review that should be 
considered a quality improving activity for Medicare MLR purposes.
    Comment: A few commenters noted that concurrent and retrospective 
utilization reviews are often used for cost containment purposes. 
However, commenters generally recommended the inclusion of concurrent 
and retrospective reviews and remarked that the activities provide an 
opportunity to prevent overutilization, increase the likelihood of 
desired health outcomes, and improve education of providers and future 
patients, thereby making them quality-improving. Many commenters 
recommended expanding the definition under proposed Sec.  423.2430 to 
allow all utilization review as a QIA. A few commenters suggested 
categorizing utilization management as an allowable QIA.
    Response: As discussed in the proposed rule, prospective 
utilization is considered a QIA because it is rendered before care or 
services are delivered and can help ensure that the most appropriate 
treatment or services is given in the most appropriate setting. While 
concurrent and retrospective review in Part D cannot meet the ``before 
care or services are delivered'' prong, we understand that these types 
of utilization reviews could promote quality in certain circumstances, 
especially in the Part D context. In reviewing the comments received on 
QIA in the commercial MLR and the experience we have had in collecting 
commercial MLR data, which includes expenditures to provide a drug 
benefit, we are not persuaded that deviating from the proposed QIA 
definition is necessary. Thus, we believe that the interest of 
maintaining consistency with the definition of QIA in the commercial 
rule outweighs changing the treatment of utilization review in the QIA 
definition.
    Comment: Many commenters supported the definition of QIA and our 
efforts to align the Medicare MLR

[[Page 31294]]

regulation with the commercial MLR policy. A few of these commenters 
particularly supported requiring QIA to be grounded in evidence-based 
practice that can be objectively measured. Many commenters suggested 
that CMS expand their interpretation of QIA for MA organizations and 
Part D sponsors, as well as expand the guidance on QIA.
    Response: We appreciate the commenters' support. We believe it is 
important to maintain definitions of QIA that are consistent with the 
commercial MLR regulation for more accurate comparability for 
beneficiaries and to minimize the administrative burden on MA 
organizations and Part D sponsors that have both commercial and 
Medicare lines of business.
    Comment: A number of commenters responded to the solicitation for 
comments regarding Medication Therapy Management (MTM) programs in a 
Part D context, with the recommendation that programs be considered for 
inclusion in the MLR as quality improving activities. Generally, 
commenters remarked that MTM programs required by CMS improve quality 
and care coordination and therefore, should be included in the MLR. In 
addition, commenters noted the importance of MTM programs in 
individualized disease management and some commenters believe the 
inclusion of MTM programs would further encourage and incentivize 
providers to strengthen their MTM programs.
    Response: We appreciate the comments on this topic and will use 
them to inform our MTM requirements. We also agree that so long as the 
MTM activities meet the requirements set forth in Sec.  422.2430 and 
Sec.  423.2430, they would qualify as a QIA.
    Comment: Many commenters requested that CMS consider as QIA all 
activities to prevent and reduce fraud, waste, and abuse, noting that 
CMS requires such activities as a condition of participation in the 
Part C and D programs. Commenters stated their concerns that by not 
allowing plans to count all expenses incurred in reducing fraud, waste, 
and abuse, it will result in a disincentive to engage in these 
beneficial activities.
    Response: Fraud reduction efforts include both fraud prevention and 
fraud recovery. We are allowing 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 per Sec.  
422.240(b)(2)(ix) and Sec.  423.240(b)(2)(xiii). Thus, even though 
fraud prevention is not a QIA, we believe this provides an incentive 
for MA organizations and Part D sponsors to engage in fraud reduction 
activities. To the extent that MA organizations and Part D sponsors are 
engaging in other activities that meet the requirements in Sec.  
422.2430 and Sec.  423.2430, they may be considered as quality 
improving activities.
    Comment: A number of commenters advised caution in regards to 
categorizing wellness programs as QIA. They suggest that CMS only 
include wellness programs that have evidence to support their 
effectiveness, those that do not penalize beneficiaries who do not 
participate, and those that are at low-risk for ``cherry-picking'' the 
healthiest beneficiaries. In particular, commenters were worried about 
wellness programs that disproportionately penalize groups of older 
adults, those with disabilities, racial minority groups, and low-income 
individuals. Similarly, one commenter urged us to be critical of 
coaching programs that are not evidence-based.
    Response: Our longstanding policy is that a plan benefit design 
cannot offer differential benefits to its enrollees, and that an MA 
organization or Part D sponsor may not deny, limit, or condition 
enrollment to individuals eligible to enroll in an MA plan offered by 
the organization on the basis of any factor that is related to health 
status, including medical history, disability, race, or age. Moreover, 
MA organizations and Part D sponsors must have procedures in place to 
ensure that members are not discriminated against in the delivery of 
health care services, consistent with the benefits covered in their 
policy, based on race, ethnicity, national origin, religion, gender, 
age, mental or physical disability, genetic information, or source of 
payment. With regard to comments that we only include wellness programs 
that have evidence to support their effectiveness, we developed 
subregulatory recommendations of acceptable evidence-based criteria 
which may be found in section 90.5 of Chapter 4 of the Managed Care 
manual. The suggestions for evidence-based approaches include: ``(i) 
Studies from government agencies (for example, the FDA); (ii) 
Evaluations performed by independent technology assessment groups (for 
example, BCBSA); and (iii) Well-designed controlled clinical studies 
that have appeared in peer review journals. Chapter 4 of the managed 
care manual (Section 10.5.3) outlines general criteria, additional to 
the federal anti-discrimination laws, that plans are required to follow 
when designing benefits. These criteria are applicable to wellness 
programs. We would note that these criteria also include a prohibition 
against steerage: ``An MAO may not design a plan with supplemental 
benefits that only appeal to healthier beneficiaries.'' We believe it 
is important to provide plans the flexibility needed to design wellness 
programs that maximize the potential for improved health outcomes for 
their enrolled populations. We see this as both an opportunity to 
prevent the onset of chronic illness and to improve the health status 
of chronically ill enrollees. Therefore, for MLR purposes, these 
programs are appropriately considered a QIA subject to the requirements 
in Sec.  422.2430 and Sec.  423.2430.
    Comment: A few commenters agreed that marketing expenses should not 
be included in QIA and asked us to clarify that fees paid to brokers 
and agents are included within the term ``marketing expenses.''
    Response: Like the commercial MLR, we consider agents and brokers 
fees as non-claims costs and therefore impermissible as being 
considered included as incurred claims. We also exclude marketing as a 
quality improving activity. Though MA organizations and Part D sponsors 
are responsible for applying the QIA criteria to determine if a 
particular activity is permissible to be reported as QIA, we take this 
opportunity to note that our subregulatory guidance discusses agent and 
broker compensation in Manual chapters titled ``Medicare Marketing 
Guidelines.''
    Comment: A few commenters requested including statutorily required 
quality-related activities that are specific to SNPs in the definition 
of QIA.
    Response: To the extent that SNPs' quality activities meet the 
criteria of sections Sec.  422.2430 and Sec.  423.2430, they may be 
considered QIA.
    After consideration of the public comments received, we are 
finalizing these provisions as proposed.

F. Credibility Adjustment

    As noted in section II.A. of this final rule, we are using the 
commercial MLR rules as a reference point for developing the Medicare 
MLR. We proposed that the methodology for the Medicare MLR calculation 
take into account the special circumstances of contracts with lower 
enrollment by applying credibility adjustment factors to smaller 
enrollment contracts that are designed to reduce the probability that 
an issuer with smaller enrollment has to pay a remittance in a given 
year to 25 percent of the time or less. Unlike the commercial rule, we 
did not propose including a deductible factor.
    The Office of the Actuary derived the proposed MA-PD and Part D 
stand-

[[Page 31295]]

alone credibility adjustments based on the variability of expected 
claims, assuming plans are priced exactly at an 85 percent MLR. The 
target failure rate is 25 percent for contracts priced at an 85 percent 
MLR. We followed 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 is partially credible, as 
defined by CMS. Fully-credible contracts are not eligible for a 
credibility adjustment. Finally, we proposed that for contract years 
when a contract has non-credible experience, the sanctions specified in 
the statute for having an MLR that does not meet the minimum 
requirement of 85 percent would not apply.
    We defined 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 defined partially-credible experience for Part D stand-alone 
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, non-credible MA contracts would have annual 
enrollment of less than 2,400 member months, and non-credible Part D 
stand-alone contracts would have annual enrollment of less than 4,800 
member months. Further, fully-credible MA contracts would have an 
enrollment greater than 180,000 member months, and fully-credible Part 
D stand-alone contracts would have an enrollment greater than 360,000 
member months.
    Tables 1A and 1B provide the proposed credibility adjustments for 
partially-credible MA-PD contracts and Part D stand-alone contracts 
beginning in 2014. Credibility adjustments for contracts with 
enrollment sizes that fall between the categories of member months 
displayed in the tables would be determined using linear interpolation. 
We proposed to use member months (instead of life years, which is used 
in the commercial MLR credibility adjustment) to describe the 
enrollment thresholds pertinent to application of the Medicare 
credibility adjustments, such that 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, we intend to 
evaluate the credibility adjustments and update them, if necessary.

       Table 1A--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.
------------------------------------------------------------------------

    Comment: Several commenters supported CMS' proposal to apply 
credibility adjustments to low enrollment contracts, to best balance 
the goals of providing value to beneficiaries and ensuring that 
contracts with relatively low enrollment would be able to function 
effectively.
    Response: We appreciate the commenters' support.
    Comment: A commenter expressed concern that proposed text at Sec.  
423.2440 on credibility adjustments could be interpreted in future 
years to allow CMS the option of eliminating credibility adjustments 
for a year. The commenter confirmed the importance of credibility 
adjustments and requested that the regulation be amended to state that 
in no case can CMS eliminate a credibility adjustment.
    Response: At Sec.  422.2440 and Sec.  423.2440, the regulation text 
states that we will define and publish definitions of partial, full, 
and non-credibility through the annual Advance Notice and Rate 
Announcement process. We agree that credibility adjustments are 
important for small enrollment contracts, which we described at length 
in the proposed rule. Moreover, we would not be able to completely 
eliminate the credibility adjustment for MLR purposes without notice 
and comment rulemaking outside of the Advance Notice/Rate Announcement 
process.
    Comment: A commenter recommended that CMS consider broadening 
further the enrollment thresholds for a Part D credibility adjustment 
to provide an additional element to improve compatibility of the 85 
percent MLR threshold with Part D. Another commenter requested that CMS 
establish full credibility thresholds at 700,000 member months for MA-
PD and 1.4 million member months for Part D stand-alone contracts.
    Response: We are mirroring the commercial MLR rule's approach, 
where credibility adjustments are designed to reduce the probability 
that an issuer with smaller enrollment has to pay a rebate in a given 
year to 25 percent of the time or less. Establishing full credibility 
thresholds at greater than 700,000 member months for MA-PD contracts 
and greater than 1.4 million member months for Part D stand-alone 
contracts would be approximately equivalent to using a 10 percent 
target failure rate. As we discussed in the proposed rule, the National 
Association of Insurance Commissioners (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 that setting credibility adjustments based on a 25 percent 
probability of paying a rebate struck a more equitable balance of 
consumer and issuer interests.
    Comment: A few commenters questioned that the threshold for fully-
credible enrollment is set at 1 percent and not zero percent. The 
commercial MLR regulation sets the fully-credible threshold at 0 
percent. One of these commenters also requested CMS to confirm that 
there is a lower coefficient of variation for MA-PD claims than for 
Part D stand-alone claims; this commenter expected the full-credibility 
threshold for MA-PD contracts to be higher than that for Part D stand-
alone contracts.
    Response: We mirrored the commercial approach of setting 25 percent 
as the target failure rate for partially credible contracts. Our policy 
for transitioning from partial to full credibility is to maintain the 
25 percent target failure rate for all partially credible contracts, up 
to (but excluding) the full credibility threshold. Thus, we are 
finalizing the credibility adjustment factors published in the proposed 
rule.
    Regarding full credibility thresholds, it is correct that MA-PD 
contracts have a lower coefficient of variation (less variation around 
the mean) than Part D stand-alone contracts. Thus, the full credibility 
threshold for MA-PD contracts is set at fewer member months

[[Page 31296]]

than the threshold for Part D stand-alone contracts.
    After consideration of the public comments received, we are 
finalizing our proposals for the credibility adjustments, and will 
apply the factors listed in Tables 1A and 1B as described.

G. Reporting Requirements

    Consistent with existing reporting requirements at Sec.  
422.504(f)(2) and Sec.  423.505(f)(2), we proposed that MA 
organizations and Part D sponsors be required to submit an MLR report 
in a timeframe and manner specified by CMS, and that the organizations 
be required to calculate MLRs and remittance as part of their report 
submission. In addition, we proposed that the reports will include, but 
not be 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.
    The proposed rule also described three options for reporting dates 
after the end of the contract year, and requested comment on these 
options: July, September (after the risk score reconciliation), and 
December (after the Part D reconciliation and calculation of risk 
corridor payments). We noted that we must balance any preference for a 
later reporting date with disruption that beneficiaries will experience 
if we halted new enrollment or terminated a contract after open 
enrollment has begun.
    Comment: Many commenters were concerned about the timeframe for MLR 
reporting. None supported MLR reporting before September and almost all 
recommended December reporting to reduce the extent to which MLRs are 
based on projections of costs and revenues. One commenter recommended 
against December reporting because of the disruption it could cause 
beneficiaries who might be enrolled in plans about to be terminated. 
Several commenters suggested that in the event an MA organization or 
Part D sponsor fails to meet the MLR threshold for 2 consecutive years, 
in the third year the MA organizations or Part D sponsor should be 
required to meet an earlier MLR reporting deadline to avoid disruptions 
to beneficiaries enrolled in plans that would become subject to 
enrollment sanctions or termination.
    Response: We agree with the commenters that the best balance 
between beneficiary protection and calculating MLRs based on the most 
complete data is to require that, in general, MLR reporting for a 
contract year will occur in the December following the contract year, 
on a date and in a manner specified by CMS. The exception will be for 
contracts that fail to meet the MLR threshold for 2 consecutive years. 
For these contracts, MLR reporting will occur in the following contract 
year prior to December, in a month that will be specified by us. This 
reporting deadline will allow time for us to implement, prior to the 
open enrollment period, an enrollment sanction for any contract that 
fails to meet the MLR threshold for 3 or more consecutive years and 
contract termination for any contract that fails to meet the MLR 
threshold for 5 consecutive years. We will specify this early reporting 
date for contracts that failed to meet the MLR threshold for 2 
consecutive years in forthcoming guidance on MLR reporting 
requirements.
    After consideration of the public comments received, we are 
finalizing these provisions with the following clarification in the 
preamble: in general, MLR reporting for a contract year will occur in 
December following the contract year, on a date and in a manner 
specified by us. The exception will be for contracts that fail to meet 
the MLR threshold for 2 consecutive years; MLR reporting will occur in 
the following contract year prior to December, in a month that will be 
specified by us and that will allow time for us to implement, prior to 
the open enrollment period, an enrollment sanction for any contract 
that fails to meet the MLR threshold for 3 or more consecutive years 
and contract termination for any contract that fails to meet the MLR 
threshold for 5 consecutive years.

H. Remittances if Applicable MLR Requirement Is Not Met

    Sections 422.2470 and 423.2470, paragraphs (a), (b), (c), and (d), 
delineate the proposed general requirements regarding sanctions, the 
calculation of the amount to be remitted, the timeframe 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, 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 MA organization or 
Part D sponsor will remit payment to CMS as calculated under this final 
rule.
    Sections 422.2470(b) and 423.2470(b) explain the amount of the 
payment that will be due to CMS. Consistent with the remittance 
provisions in the Affordable Care Act in this final rule, we propose 
that MA organizations and Part D sponsors be required to remit to CMS 
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 will subtract 
remittances from plan payment amounts in a timely manner after the MLR 
is reported, on a schedule determined by CMS. Remittances by MA and 
Part D organizations will occur as part of regular monthly payments 
that CMS makes to MA organizations and Part D sponsors. Sections 
422.2470(d) and 423.2470(d) specify that remittances paid in any 1 year 
will not be included in the numerator or denominator of the next year's 
or any year's MLR.
    Comment: Several commenters commented on the special circumstances 
of MA organizations and Part D sponsors in Puerto Rico with respect to 
the Medicare MLR requirement. The commenters requested that Medicaid 
and Medicare benefits be combined when calculating the contract's MLR 
because expenses for Platino benefits, relative to revenue, are truly 
medical losses. In addition, commenters noted the unique circumstances 
facing plan sponsors serving Puerto Rico, where Part D low-income 
subsidy funding does not apply.
    Response: The Medicare MLR requirement, including calculation of a 
remittance amount, applies to Medicare benefits and not to Medicaid 
benefits. However, we have added language to Sec.  422.2420(a) and 
Sec.  423.2420(a) authorizing us to make adjustments to the MLR 
produced by the standard formula to address exceptional circumstances 
for areas outside the 50 states and the District of Columbia that we 
determine would warrant an adjustment. We will explore whether or how 
to adjust the MLR calculation under this language to take into account 
the unique circumstances of these areas.
    After consideration of the public comments received, with the 
exception of the new language in Sec.  422.2420(a) and Sec.  
423.2420(a) permitting us to make adjustments warranted by exceptional 
circumstances for areas outside the 50 states and the District of 
Columbia, we are finalizing these provisions as proposed.

I. MLR Review and Non-Compliance

    We proposed that we would conduct selected reviews of reports 
submitted under Sec.  422.2460 and Sec.  423.2460 to determine that 
remittance amounts

[[Page 31297]]

under Sec.  422.2410(b) and Sec.  423.2410(b) and sanctions under 
Sec. Sec.  422.2410(c), Sec.  422.2410(d), Sec.  423.2410(c), and Sec.  
423.2410(d) were accurately calculated, reported, and applied.
    MA organizations and Part D sponsors would under this proposal 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 were 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 proposed 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 CMS.
    In addition, we proposed 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 would provide CMS 
authority to invoke the contract termination procedures in Sec.  
422.510(b) through (d) and Sec.  423.509(b) through (d) for failure by 
an MA organization or Part D sponsor to provide timely and accurate MLR 
data. Further, we proposed that 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.
    Comment: A commenter supported the requirement for third party 
vendors to disclose claims data to MA organizations and Part D sponsors 
by request and suggested that we require third party electronic audit 
for 100 percent of paid claims, clarify what ``all underlying data'' 
means, and require a PBM to link claims to the underlying retail 
contract.
    Response: By ``all underlying data,'' we mean complete claim 
detail. This would include, at a minimum, individual claim transaction 
file layout records, relevant pharmacy contractual terms and rate 
schedules dictating payment terms for purposes of claim detail 
comparison, and a similar level of detail on rebates and any other 
price concessions received. We decline to require third party auditing 
for 100 percent of paid claims, as we believe this would be an overly 
onerous requirement on MA organizations and Part D sponsors.
    After consideration of the public comments received, we are 
finalizing these provisions as proposed.

III. Provisions of the Final Rule

    For the most part, this final rule incorporates the provisions of 
the proposed rule. Those provisions of this final rule that differ from 
the proposed rule are as follows:
     Stating in preamble that in general, MLR reporting for a 
contract year will occur in December following the contract year, on a 
date and in a manner specified by us. The exception will be for 
contracts that fail to meet the MLR threshold for 2 consecutive years; 
MLR reporting will occur in the following contract year prior to 
December, in a month that will be specified by us and that will allow 
time for us to implement, prior to the open enrollment period, an 
enrollment sanction for any contract that fails to meet the MLR 
threshold for 3 or more consecutive years and contract termination for 
any contract that fails to meet the MLR threshold for 5 consecutive 
years.
     Not finalizing proposed Sec.  422.510(a)(16) and instead 
revising Sec.  422.2410(d) to state that ``CMS terminates the contract 
per Sec.  422.510(b)(1) and (d) effective as of the second succeeding 
contract year''
     Not finalizing proposed Sec.  423.510(a)(16) and instead 
revising Sec.  423.2410(d) to state that ``CMS terminates the contract 
per Sec.  423.509(b)(1) and (d) effective as of the second succeeding 
contract year.''
     Making changes to the 100 percent indemnity and assumptive 
reinsurance provisions under Sec.  422.2420 and Sec.  423.2420 to 
conform with the commercial MLR rule.
     Adding new language in Sec.  422.2420(a) and Sec.  
423.2420(a), permitting CMS to make adjustments warranted by 
exceptional circumstances for areas outside the 50 states and the 
District of Columbia.
     Revising the proposed Sec.  422.2420(b)(1) to indicate 
that the annual deposit to the beneficiary's medical savings account 
should be included in the MLR numerator.
     Deleting proposed Sec.  422.2420(b)(3)(i) and renumbering 
Sec.  422.2420(b)(3)(ii) accordingly.
     Deleting proposed Sec.  423.2420(b)(3)(i), renumbering 
Sec.  423.2420(b)(3)(ii) accordingly, and inserting a reference to 
direct and indirect remuneration in Sec.  423.2420(b)(2)(i)
     Revising proposed Sec.  422.2420(c)(3)(i) by removing the 
citation to Sec.  422.74(d)(1)(i), and we are revising proposed Sec.  
423.2420(c)(3)(i) by removing the citation to Sec.  423.44(d)(1)(i).
     In proposed Sec.  422.2420(c)(3) and Sec.  423.2420(c)(3), 
revising the term ``revenue'' to read ``incurred claims.''
     Correcting proposed Sec.  422.2420(c)(3) and Sec.  
423.2420(c)(3).

IV. 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 final rule describes the information that will be reported by 
MA organizations and Part D sponsors on an annual basis to the 
Secretary starting in 2014. We proposed 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,

[[Page 31298]]

among other data elements. MA organizations and Part D sponsors will be 
required to calculate MLRs and remittance as part of their submission 
to the Secretary.
    At this time, we have not developed the MLR reporting instructions 
and forms that MA organizations and Part D sponsors will 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 proposed 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 final 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.
    Comment: One commenter requested the format for the MLR report in 
draft with sufficient time for stakeholder comments, including 
specification of which information in the report will be made public.
    Response: There will be two opportunities for public comment on the 
draft reporting form and instructions as is required by the PRA.
    We are finalizing these provisions as proposed.

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

    Subpart I of the final 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 final rule, and that the MLR is calculated and any remittances 
owed are calculated and provided in accordance with this final rule. 
The proposed Sec.  422.2480(c) and Sec.  423.2480(c) will require MA 
organizations and Part D sponsors to maintain all of the documents and 
other evidence for 10 years.
    We expect that all MA organizations and Part D sponsors will have 
to retain data relating to the calculation of MLRs; those who have owed 
remittances will 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 final 
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 will 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 a 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 
the proposed MLR remittance reporting requirements discussed in Sec.  
422.2470 and Sec.  423.2470.

V. Regulatory Impact Analysis

A. Introduction

    This final 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 and 
retaining as profit. As stated 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 will remit 
a payment to CMS. If the contract continues to fall below the minimum 
MLR standard, the contract will be subject to enrollment sanctions and 
possibly termination. This final rule sets forth 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

[[Page 31299]]

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 final 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 final rule. 
Accordingly, OMB has reviewed this final rule pursuant to the Executive 
Order.
    We did not receive any comments on the RIA and are therefore 
finalizing the analysis as proposed.

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 final 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 in 
this final rule, 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 final 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 final 
rule will 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, which we characterize in this RIA as remittances to CMS 
could be substantial. Estimates for CY 2014 remittances are $717 
million for MA-PD contracts and $141 million for Part D stand-alone 
contracts. As discussed in section V.D.4, these estimates do not 
account for potential plan sponsor behavioral changes. (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 will be 
approximately $9.6 million upfront and $2.8 million in subsequent 
years.

                                    Table 2--Estimated Remittance for CY 2014
                                          [With credibility adjustment]
----------------------------------------------------------------------------------------------------------------
                                                           Remittance estimates (in millions)
                                      --------------------------------------------------------------------------
            Contract type                                                                All contracts below MLR
                                        Contracts with MLRs  <    Contracts with MLRs      requirement  of 85%
                                                 80%               from 80% to 84.99%       [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 MA
  organizations or Part D sponsor behavioral changes.

D. Detailed Economic Analysis

1. Benefits
    In developing this final 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 final rule is greater market 
transparency and improved ability of beneficiaries to make informed 
insurance choices. The uniform reporting required under this final 
rule, along with other programs such as www.Medicare.gov, a Web site

[[Page 31300]]

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 will not otherwise meet the MLR minimum 
defined by this final 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 will 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 final rule could result 
in improved beneficiary health outcomes, thereby creating a societal 
benefit.
2. Costs
    We have identified the direct costs associated with this final rule 
as the costs associated with reporting, recordkeeping, remittance 
payments, enrollment sanctions and termination, and other costs.
a. Direct Costs
    We estimate that each MA organization and Part D sponsor will incur 
approximately $16,000 in 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 final 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 final 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 products offered as a result of this final 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 final 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 will 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 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 final rule, individual 
enrollees in the plans under 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 will 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 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 will 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 proposed 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

[[Page 31301]]

plans are only from the MA portions of the bids.
    As discussed at greater length in section V.D.4 of this final rule, 
we expect that MA organization and Part D sponsor behavior will change 
as a result of this final rule, which will impact the MLRs and 
remittances due. Because we are limited in our ability to predict 
behavioral changes, we do not explicitly model these behavioral changes 
in our estimates. We asked for 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 final rule.
4. Number of Affected Entities Subject to the MLR Provisions
    We proposed 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 will be affected by 
the requirements of this final rule at the contract level because this 
is the level at which we proposed 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 will 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
                                               Contract     number of
                Contract type                   count     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 CMS 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.
    We note that the estimates in Table 3 will be used to estimate 
potential CY 2014 remittances and therefore exclude non-credible 
contracts, which are not subject to the remittance requirements. This 
RIA does not account for the changes to remittance amounts if the 
distributions of credibility status changes. If more contracts become 
partially or fully credible, then remittance amounts would increase. 
Conversely, if more contracts become non-credible, then remittances 
amounts would decrease.
5. MLR Remittance Payments
a. Data Limitations and Modeling Assumptions
    As described in the commercial MLR rule, we expect that as a result 
of this final rule, MA organization and Part D sponsor behavior will 
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 MA organization or Part D 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 final rule are as follows:
     Pricing Policy--MA organizations and Part D sponsors will 
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 modify existing activities to meet the 
QIA definition, 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 final 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 final rule, we proposed 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 proposed 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 proposed 
that these contracts receive a credibility adjustment to their MLRs to 
account for

[[Page 31302]]

statistical variability in their claims experience that is inherent in 
contracts with smaller enrollment. We proposed 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 will not reflect a 
credibility adjustment. Finally, we proposed 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 will 
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 final 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)).
    We did not receive any comments and we are finalizing these 
analyses as proposed.
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 will be designated as ``partially-
credible'' according to the standards of this final 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) will be partially-credible, and about 43 percent of Part D 
stand-alone contracts (representing about 1 percent of projected total 
stand-alone enrollment) will 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 final rule, 
contracts with non-credible experience during a given contract year 
that do not meet the minimum MLR requirement will not be required to 
provide any remittance to CMS nor be subject to enrollment sanctions or 
termination because the contract will not have a sufficiently large 
number of member months to yield a statistically valid MLR.

                  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 MA organization or Part D 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-credible 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 contracts that do not meet the minimum MLR requirement, as 
shown in Table 5.
    For the purpose of this RIA (and not the actual MLR calculation), 
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.
    For the purpose of this RIA (and not the actual MLR calculation), 
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

[[Page 31303]]

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 of     below 85% MLR      without        below 85%         with
               Contract type                     Credibility status          contracts        before        credibility        after        credibility
                                                                                            credibility   adjustment (in    credibility     adjustment
                                                                                            adjustment       millions)      adjustment     (in 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 MA organization or Part D 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 will be categorized as partially-
credible, 68 will 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 will pass the MLR requirement, and 34 will 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 will 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 
will pass the requirement, and 9 will 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-credible 
contracts were excluded from this analysis because no sanctions under 
Sec.  422.2410(b) through (d) will 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 final 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 final 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.
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 
final 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 
final 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 final 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

[[Page 31304]]

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 final rule and in a time and manner that the Secretary determines. 
For purposes of these impact estimates, we assume that this report will 
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 final 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 used the 
commercial MLR RIA as a basis for estimating the total hours of 
administrative work related to the Medicare MLR 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 will 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 final 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         101,000          $94.88      $9,600,000         $16,000
Ongoing Costs...........................................             616             616          29,000           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.

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 will incur annual ongoing 
costs relating to the MLR reporting requirements in this final 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 CMS are expected to be relatively negligible, 
in particular because we proposed 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 
considered a variety of regulatory alternatives to the policies 
proposed thus far, and solicited comments on these alternatives.
1. Credibility Adjustment
    One alternative to the credibility adjustment in this final rule 
will 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

[[Page 31305]]

credibility adjustment, the estimated remittance in 2014 will 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 will best balance the goals of providing value to 
beneficiaries and assuring that contracts with relatively low 
enrollment will 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 will 
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 will obscure local variation in resource allocation that 
will be important to enrollees. As described elsewhere in this final 
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 that in the 
commercial MLR rule. As discussed elsewhere in this final 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 or the specific types of activities included in the 
definition.
    This final rule defines quality-improving activities as being those 
that are 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 
that demonstrate 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 final 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 final rule.
    We do not have data available to estimate the effects of 
alternative definitions of quality improving activities on MLRs, but a 
broader definition of quality improving activities would produce 
smaller estimated remittances, and a narrower definition would result 
in larger estimated remittances.

F. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) (RFA) 
requires agencies that issue a regulation to analyze options for 
regulatory relief for 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), will be affected by the final rule. We believe that health 
insurers will 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 will 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 will 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, issuers underwriting health 
insurance coverage (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 final 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 final rule 
because very few small entities are subject to the provisions in this 
final rule, the estimated administrative costs associated with 
reporting MLR data to the Secretary are very low (see section V.D.6. of 
this final rule), and the credibility adjustment addresses the special 
circumstances of contracts with lower enrollment. For these reasons, we 
believe this final rule will have minimal impact on small entities. As 
a result, the Secretary has determined that this final rule will not 
have a significant impact on a substantial number of small entities.

[[Page 31306]]

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 final 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 will 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 final 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 final rule does not impose substantial direct 
requirement costs on state and local governments, this final 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 final rule state that the Secretary 
has enforcement authority and does not require the states to do 
anything.
    As discussed earlier, in developing this final rule for the 
Medicare Advantage and the Medicare Prescription Drug Benefit programs, 
HHS used the commercial MLR regulation as a reference point for 
developing the Medicare MLR requirements. In compliance with the 
requirement of Executive Order 13132 that agencies examine closely any 
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 regulation, 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 final rule in a meaningful and timely manner.

I. Congressional Review Act

    This final 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 
final 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 final rule 
for CY 2014.

[[Page 31307]]



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]
----------------------------------------------------------------------------------------------------------------
                                                                     Transfers
                                  ------------------------------------------------------------------------------
             Category                                 Discount rate
                                  -----------------------------------------------------      Period covered
                                               7%                        3%
----------------------------------------------------------------------------------------------------------------
Annualized Monetized Transfers:
    Primary Estimate.............             $802                      $833            CY 2014
----------------------------------------------------------------------------------------------------------------
    From/To......................        From MA Organizations and Part D Sponsors / To Federal Government
----------------------------------------------------------------------------------------------------------------
             Category                                                  Costs
----------------------------------------------------------------------------------------------------------------
                                                      Discount rate                          Period covered
----------------------------------------------------------------------------------------------------------------
Annualized Costs to MA                         7%                        3%             CY 2014
 Organizations and Part D
 Sponsors:
                                  -----------------------------------------------------
    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 amends 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 paragraph (a)(15) 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.
* * * * *

Subpart U--[Reserved]

Subpart W--[Reserved]

0
3. Remove and reserve 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.

Subpart X--Requirement for a Minimum Medical Loss Ratio


Sec.  422.2400  Basis and scope.

    This subpart is based on section 1857(e)(4) of the Act, and sets 
forth 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 per Sec.  422.510(b)(1) and (d) 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, or subject to an adjustment determined 
by CMS to be warranted based on

[[Page 31308]]

exceptional circumstances for areas outside the 50 states and the 
District of Columbia.
    (2) The MLR for an MA contract--
    (i) Not offering Medicare prescription drug benefits must only 
reflect costs and revenues related to the benefits defined at Sec.  
422.100(c); and
    (ii) 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) of this chapter.
    (b) Determining the MLR numerator. (1) For a contract year, the 
numerator of the MLR for an MA contract (other than an MSA contract) 
must equal the sum of paragraphs (b)(1)(i) through (iii) of this 
section, and the numerator of the MLR for an MSA contract must equal 
the sum of paragraphs (b)(1)(i), (iii), and (iv) of this section. The 
numerator must be determined in accordance with paragraphs (b)(5) and 
(6) 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) The amount of the annual deposit into the medical savings 
account described at Sec.  422.4(a)(2).
    (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) of this 
chapter.
    (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) 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 any 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).
    (5) Incurred claims under this part for policies issued by one MA 
organization and later assumed by another entity 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.
    (6) Reinsured incurred claims for a block of business that was 
subject to indemnity reinsurance and administrative agreements 
effective before March 23, 2010, for which the assuming entity is 
responsible for 100 percent of the ceding entity's financial risk and 
takes on all of the administration of the block, must be reported by 
the assuming issuer and must not be reported by the ceding issuer.
    (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. Total revenue under the contract is 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 in accordance with 
paragraph (c)(4) of this section.
    (1) CMS' payments to the MA organization for all enrollees under a 
contract, reported on a direct basis, including the following:
    (i) Payments under Sec.  422.304(a)(1) through (3) and (c).
    (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) of this chapter.
    (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) of this chapter.
    (2) The following amounts must be deducted from total revenue in 
calculating the MLR:
    (i) Licensing and regulatory fees. (A) Statutory assessments to 
defray the 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

[[Page 31309]]

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 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.
    (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 42 CFR part 495 subpart 
C.
    (B) EHR payment adjustments for a failure to meet meaningful use 
requirements that are administered under 42 CFR part 495 subpart C.
    (iii) Coverage Gap Discount Program payments under Sec.  423.2320 
of this chapter.
    (4) Total revenue (as defined at Sec.  422.2420(c)) for policies 
issued by one MA organization and later assumed by another entity must 
be reported by the assuming entity for the entire MLR reporting year 
during which the policies were assumed and no revenue under this part 
for that contract year must be reported by the ceding MA organization.
    (5) Total revenue (as defined at Sec.  422.2420(c)) that is 
reinsured for a block of business that was subject to indemnity 
reinsurance and administrative agreements effective prior to March 23, 
2010, for which the assuming entity is responsible for 100 percent of 
the ceding entity's financial risk and takes on all of the 
administration of the block, must be reported by the assuming issuer 
and must not be reported by the ceding issuer.
    (d) Allocation of expense--(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.
    (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.

[[Page 31310]]

    (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 paragraph (a)(14) to read as 
follows:


Sec.  423.509  Termination of contract by CMS.

    (a) * * *
    (14) Has failed to report MLR data in a timely and accurate manner 
in accordance with Sec.  423.2460.
* * * * *
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.
423.2450 [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.

Subpart X--Requirements for a Minimum Medical Loss Ratio


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.

[[Page 31311]]

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, or subject to an adjustment determined 
by CMS to be warranted based on exceptional circumstances for areas 
outside the 50 states and the District of Columbia.
    (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 of this chapter) must also reflect costs and revenues for 
benefits described at Sec.  422.100(c) of this chapter.
    (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 expenditures under the contract for activities that 
improve health care quality, as defined in Sec.  423.2430;
    (2) Incurred claims for prescription drug costs. Incurred claims 
must include the following:
    (i) Direct drug costs that are actually paid (as defined in Sec.  
423.308, which are net of prescription drug rebates and other direct or 
indirect remuneration as defined herein) 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) 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).
    (5) Incurred claims under this part for policies issued by one Part 
D sponsor and later assumed by another entity must be reported by the 
assuming organization 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.
    (6) Reinsured incurred claims for a block of business that was 
subject to indemnity reinsurance and administrative agreements 
effective before March 23, 2010, for which the assuming entity is 
responsible for 100 percent of the ceding entity's financial risk and 
takes on all of the administration of the block, must be reported by 
the assuming issuer and must not be reported by the ceding issuer.
    (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 paragraph (c)(4) of this section and equal the total 
revenue under the contract. Total revenue is 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 and (c)(3) of this section, and be in accordance with (c)(4) 
of this section.
    (1) CMS' payments to the Part D sponsor for all enrollees under a 
contract, reported on a direct basis, 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) of this chapter.
    (iv) All unpaid premium amounts that a Part D sponsor could have 
collected from enrollees in the Part D plan(s) under the contract.

[[Page 31312]]

    (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.
    (ii) Coverage Gap Discount Program payments under Sec.  423.2320.
    (4) Total revenue (as defined at Sec.  422.2420(c)) of this 
chapter) for policies issued by one Part D sponsor and later assumed by 
another entity must be reported by the assuming entity for the entire 
MLR reporting year during which the policies were assumed and revenue 
under this part for that contract year must be reported by the ceding 
Part D sponsor.
    (5) Total revenue (as defined at Sec.  422.2420(c) of this chapter) 
that is reinsured for a block of business that was subject to indemnity 
reinsurance and administrative agreements effective before March 23, 
2010, for which the assuming entity is responsible for 100 percent of 
the ceding entity's financial risk and takes on all of the 
administration of the block, must be reported by the assuming issuer 
and must not be reported by the ceding issuer.
    (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:
    (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

[[Page 31313]]

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.  423.752.

(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)


    Dated: May 15, 2013.
Marilyn Tavenner,
Acting Administrator, Centers for Medicare & Medicaid Services.
    Approved: May 15, 2013.
Kathleen Sebelius,
Secretary, Department of Health and Human Services.
[FR Doc. 2013-12156 Filed 5-17-13; 4:15 pm]
BILLING CODE 4120-01-P