[Federal Register Volume 79, Number 48 (Wednesday, March 12, 2014)]
[Rules and Regulations]
[Pages 13887-13906]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-05257]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 600

[CMS-2380-FN]
RIN 0938-ZB12


Basic Health Program; Federal Funding Methodology for Program 
Year 2015

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

ACTION: Final methodology.

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SUMMARY: This document provides the methodology and data sources to 
determine the federal payment amounts made to states in program year 
2015 that elect to establish a Basic Health Program certified by the 
Secretary under section 1331 of the Patient Protection and Affordable 
Care Act to offer health benefits coverage to low-income individuals 
otherwise eligible to purchase coverage through Affordable Insurance 
Exchanges.

DATES:  Effective Date: January 1, 2015.

FOR FURTHER INFORMATION CONTACT: Christopher Truffer, (410) 786-1264; 
or Jessica Schubel, (410) 786-3032.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Background
II. Summary of Proposed Provisions and Analysis of and Responses to 
Public Comments on the Proposed Methodology

[[Page 13888]]

    A. Background
    B. Overview of the Funding Methodology and Calculation of the 
Payment Amount
    C. Required Rate Cells
    D. Sources and State Data Considerations
    E. Discussion of Specific Variables Used in Payment Equations
    F. Adjustments for American Indians and Alaska Natives
    G. Example Application of the BHP Funding Methodology
    H. General/Miscellaneous Comments
III. Provisions of the Final Methodology
    A. Overview of the Funding Methodology and Calculation of the 
Payment Amount
    B. Federal BHP Payment Rate Cells
    C. Sources and State Data Considerations
    D. Discussion of Specific Variables Used in Payment Equations
    E. Adjustments for American Indians and Alaska Natives
    F. State Option to Use 2014 QHP Premiums for BHP Payments
    G. State Option to Include Retrospective State-specific Health 
Risk Adjustment in Certified Methodology
IV. Collection of Information Requirements
V. Regulatory Impact Statement
    A. Overall Impact
    B. Unfunded Mandates Reform Act
    C. Regulatory Flexibility Act
    D. Federalism

I. Background

    The Patient Protection and Affordable Care Act (Pub. L. 111-148, 
enacted on March 23, 2010), together with the Health Care and Education 
Reconciliation Act of 2010 (Pub. L. 111-152), enacted on March 30, 2010 
are collectively referred as the Affordable Care Act. The Affordable 
Care Act provides for the establishment of state Affordable Insurance 
Exchanges (Exchanges, also called the Health Insurance Marketplace) 
that provide access to affordable health insurance coverage offered by 
qualified health plans (QHPs) for most individuals under age 65 who are 
not eligible for health coverage under other federally supported health 
benefits programs or through affordable employer-sponsored insurance 
coverage, and who have incomes above 100 percent of the federal poverty 
line (FPL), or whose income is below that level but are lawfully 
present non-citizens ineligible for Medicaid because of immigration 
status. Individuals enrolled through Exchanges in coverage offered by 
QHPs with incomes below 400 percent of the FPL may qualify for the 
federal premium tax credit (PTC) and federally-funded cost-sharing 
reductions (CSRs) based on their household income, to ensure that such 
coverage meets certain standards for affordability.
    In the states that elect to operate a Basic Health Program (BHP), 
BHP will make affordable health benefits coverage available for 
individuals under age 65 with household incomes between 133 percent and 
200 percent of the FPL who are not otherwise eligible for Medicaid, the 
Children's Health Insurance Program (CHIP), or affordable employer 
sponsored coverage. (For those states that have expanded Medicaid 
coverage under section 1902(a)(10)(A)(i)(VIII) of the Act, the lower 
income threshold for BHP eligibility is effectively 138 percent due to 
the application of a required 5 percent income disregard in determining 
the upper limits of Medicaid income eligibility.) Federal funding will 
be available for BHP based on the amount of PTC and CSRs that BHP 
enrollees would have received had they been enrolled in QHPs through 
Exchanges.
    We are publishing, concurrently with this final methodology, a 
final rule entitled the ``Basic Health Program: State Administration of 
Basic Health Programs; Eligibility and Enrollment in Standard Health 
Plans; Essential Health Benefits in Standard Health Plans; Performance 
Standards for Basic Health Programs; Premium and Cost Sharing for Basic 
Health Programs; Federal Funding Process; Trust Fund and Financial 
Integrity'' (hereinafter referred to as the BHP final rule) 
implementing section 1331 of the Affordable Care Act, which requires 
the establishment of BHP. The BHP final rule establishes the 
requirements for state and federal administration of BHP, including 
provisions regarding eligibility and enrollment, benefits, cost-sharing 
requirements and oversight activities. While the BHP final rule 
codifies the overall statutory requirements and basic procedural 
framework for the funding methodology, it does not contain the specific 
information necessary to determine federal payments. We anticipated 
that the methodology would be based on data and assumptions that would 
reflect ongoing operations and experience of BHP programs as well as 
the operation of the Exchanges. For this reason, the BHP final rule 
specifies that the development and publication of the funding 
methodology, including any data sources, will be addressed in a 
separate annual Payment Notice process. The BHP final rule also 
specifies that the BHP Payment Notice process will include the annual 
publication of both a proposed and final BHP Payment Notice.

II. Summary of Proposed Provisions and Analysis of and Responses to 
Public Comments on the Proposed Methodology

    The following sections, arranged by subject area, include a summary 
of the public comments that we received, and our responses. For a 
complete and full description of the BHP proposed funding methodology, 
see the ``Basic Health Program; Proposed Federal Funding Methodology 
for Program Year 2015'' proposed document published in the December 23, 
2013 Federal Register (78 FR 77399).
    We received a total of 32 timely comments from state agencies, 
groups advocating on behalf of consumers, health care providers, health 
insurers, health care associations, Tribes, and tribal organizations. 
The public comments received ranged from general support or opposition 
to the proposed methodology to very specific questions or comments 
regarding the proposed methodological factors. In addition, we held a 
consultation session on December 19, 2013 that was open to all 
interested parties, to provide an overview of the BHP proposed funding 
methodology where interested parties were afforded an opportunity to 
ask questions and make comments. At the consultation session, 
participating parties were reminded to submit written comments before 
the close of the public comment period that was specified in the BHP 
proposed methodology.

A. Background

    In the December 23, 2013 (78 FR 77399) proposed methodology, as 
background and for contextual purposes, we discussed the proposed 
provisions from the September 25, 2013 BHP proposed rule (78 FR 77401). 
The proposed document also specified the methodology of how the federal 
BHP payments would be calculated. For specific discussions, please 
refer to the December 23, 2013 proposed methodology (78 FR 77401).
    We received the following comments on the background information 
included in the proposed methodology:
    Comment: One commenter expressed support for publishing the final 
Payment Notice annually in February.
    Response: We thank the commenter for their support.
    Comment: Several commenters requested that CMS provide an option 
for states to have BHP payments retrospectively reconciled for the 
factors specified in statute. Specifically, commenters requested that 
such a reconciliation process use actual, state-specific data by taking 
into account the state's actual health insurance market experience for 
the program year, measure the data and payment factors in manner agreed 
upon by both CMS and the state, and perform the reconciliation using a 
methodology that is generally consistent with the methodology of the 
proposed payment document.

[[Page 13889]]

    Response: We understand the commenters' concern regarding the 
market uncertainties in 2014 and appreciate the recommendations to 
refine the methodology to account for such uncertainties. However, 
based on initial feedback we received from interested states, we 
developed the BHP funding methodology on a prospective basis to provide 
states with a level of fiscal certainty as they consider implementing 
BHP in a given program year. Except for the population health factor, 
which is discussed further below in section III.G in this final 
methodology, we have determined not to retrospectively adjust or 
reconcile the various factors that comprise the methodology because we 
believe that states operating a BHP will need to have budget certainty 
in order to plan and operate their programs.
    In addition, as also discussed below, we are revising our 
methodology to use actual 2015 premium amounts to calculate BHP funding 
for 2015. While this would be part of the prospective methodology and 
not a retrospective adjustment, it would further address some of the 
issues raised in these comments.
    Comment: Many commenters noted that state-specific market 
conditions, such as in Minnesota where the state's high-risk pool will 
continue to operate in 2014, will not be reflected in the 2014 Exchange 
premiums but will affect the premium rates in 2015. As such, commenters 
recommended that CMS use actual 2015 Exchange premiums to improve the 
accuracy of the federal BHP payment rates for program year 2015.
    Response: In response to these comments, and in particular because 
of the various issues in the first year of BHP implementation, we have 
adopted the commenters' recommendation and will use actual 2015 
Exchange premiums to determine the final 2015 federal BHP payment rates 
in states. Given the fact that the Exchanges are new in 2014 and the 
potential for changes in 2015, we believe that it is appropriate to 
make this adjustment in the methodology for the first year of BHP 
implementation as it will improve the accuracy of the rates. For 
additional information on the process we will use to determine the 
final 2015 federal BHP payment rates, please see the additional 
discussion included in section III.D.1 (reference premium) of this 
final methodology.
    While using actual 2015 Exchange premiums will improve the accuracy 
of the federal BHP payment rates by taking into account certain market 
conditions, we understand that, for decision making purposes, some 
states may need to establish budgets based on final 2015 federal BHP 
payment rates before actual 2015 premium information becomes available. 
In such an event, we will provide the state with the option to have us 
use 2014 premium data (projected forward to 2015) to calculate its 
final 2015 federal BHP payment rates. As specified in this payment 
notice, a state must notify CMS by May 15, 2014 that it is electing 
this option. Upon completing the calculation process, we will publish 
the final rates for such states in a subsequent Federal Register 
notice, and use these final rates to determine the state's aggregate 
2015 BHP federal payments, which will be deposited into the state's BHP 
trust fund on a quarterly basis. We have amended this final methodology 
by adding section III.F to discuss this process in further detail. If a 
state does not elect this option to use 2014 Exchange premiums for 
calculating final 2015 BHP federal payments, we will calculate the 
payments using the 2015 premiums and also publish those rates in the 
Federal Register. Before publication, we are available to provide 
technical assistance to help the state better estimate the potential 
range of 2015 BHP federal payments. Finally, as we gain more experience 
in the Exchanges, and as data becomes more readily available, we will 
continue to review the methodology, including the data elements and 
other factors to further refine future BHP funding methodologies and 
improve the accuracy of the overall result.
    Comment: Several commenters requested that CMS consider adjusting 
the funding methodology during the annual program year to ensure the 
accuracy of the methodology in the event new data becomes available. 
The commenters also requested that CMS consider adjusting the 
methodology and recalculate the federal BHP payment rates in the event 
that the payment rates are determined to be inadequate and negatively 
affect the participation of standard health plan offerors.
    Response: We appreciate the commenters' concern with respect to the 
accuracy of the funding methodology as well as their interest in 
ensuring robust standard health plan offeror participation. While the 
statute directs the Secretary to adjust the payment for any fiscal year 
to reflect any error in the determination of the payment amount in the 
preceding fiscal year, the statute generally does not contemplate 
retrospective adjustment to amounts properly calculated under the 
certified methodology. Instead, the statute provides that adjustments 
are only made prospectively, and only to reflect errors. We read that 
term ``errors'' to mean mathematical errors or erroneous enrollment 
numbers (which are multiplied by the per enrollee amount determined by 
the certified methodology). While the statute does not expressly 
provide for retrospective adjustments to a certified methodology, as 
discussed below we are providing an optional process for states to 
propose to include in the certified methodology a state-specific 
retrospective adjustment to reflect any disparity in BHP population 
health status (a risk adjustment) in each rate cell in comparison to 
the Exchange population that would affect the federal payment for that 
population. Permitting retrospective adjustment on this one factor (the 
population health factor) given the difficulty in arriving at a 
national approach to accurately determine this factor prospectively, in 
particular due to the lack of data and experience from the exchanges 
available at the beginning of 2014.
    With respect to other commenters' concern that the federal BHP 
payment rates could be so low that they would negatively affect 
standard health plan offeror participation, the federal BHP payment is 
not necessarily determinative of the contract costs for standard health 
plans. The statute provides states that elect to operate a BHP with 
considerable flexibility to control costs through a competitive 
contracting process and other measures, and to supplement federal 
funding with additional state or local funding. The state may negotiate 
with its standard health plan offerors on the amount of capitation 
payments, the benefits in excess of the required essential health 
benefits, and the premiums consistent with the BHP enrollee 
protections. A state does not need to structure its standard health 
plan offeror payments to align with the federal BHP payment rate cells. 
A state has the flexibility to use the same rate cell structure, mimic 
the same structure that is used in other insurance affordability 
programs, or develop a new structure specifically for BHP.
    Comment: We received one comment requesting that CMS develop state-
specific BHP funding methodologies to more accurately account for the 
health status of a state's BHP population relative to consumers in the 
state's Exchange.
    Response: We appreciate the commenter's interest in ensuring the 
development of the most accurate population health factor, and as such, 
are revising our methodology from what was proposed to include in the 
certified methodology a temporary state-specific

[[Page 13890]]

adjustment to retrospectively adjust this factor for 2015. This 
retrospective adjustment, which would be subject to CMS review and 
approval, would be conducted to determine whether the difference in 
health status between the state's BHP population and consumers in the 
Exchange in 2015 would affect PTC, CSRs, risk adjustment and 
reinsurance payments that would have been made had BHP enrollees been 
enrolled in coverage through the Exchange. For additional information 
on this option, please refer to section III.G.
    Comment: One commenter requested that CMS clarify when the actual 
reconciliation of BHP payment amounts will occur, including the 
timeframes in each quarter.
    Response: We appreciate the commenter's interest in the payment 
reconciliation process, and anticipate providing future guidance on BHP 
payment operations.
    Comment: We received one comment requesting clarification on when a 
state must submit both projected and actual enrollment data in order 
for CMS to determine the prospective quarterly federal BHP payment.
    Response: For a state to receive a prospective federal BHP payment, 
the state must submit its projected BHP enrollment 60 days before the 
start of the fiscal quarter. Actual enrollment is required no later 
than 60 days after a fiscal quarter has ended. Once a state's BHP has 
been in operation for a few fiscal quarters, we anticipate using the 
state's actual enrollment in the previous quarter to determine the 
upcoming quarter's federal BHP payment thereby eliminating the need for 
the state to submit projected enrollment data.

B. Overview of the Funding Methodology and Calculation of the Payment 
Amount

    We proposed in the overview of the funding methodology to calculate 
the PTC and CSRs as consistently as possible and in general alignment 
with the methodology used by Exchanges to calculate the advance 
payments of the PTC and CSRs, and by the Internal Revenue Service (IRS) 
to calculate the final PTC. We proposed in this section four equations 
that comprise the overall BHP funding methodology. For specific 
discussions, please refer to the December 23, 2013 proposed methodology 
(78 FR 77401).
    We received the following comments regarding the equations proposed 
to calculate the PTC and CSR components of the BHP funding methodology:
    Comment: While we received support for the two-step process to 
calculate the federal BHP payment rate, one commenter requested that 
CMS release the data requirements states need to provide information 
related to the BHP risk profile so that rates are properly set to 
account for risk. The commenter also requested that CMS provide data 
alternatives in the event that states encounter difficulties in 
collecting the data needed to risk adjust.
    Response: We appreciate the support for the two-step process and 
are finalizing this approach as proposed in this final methodology. As 
explained further in section III.D.2 of this final methodology, we are 
not requiring any data from the states on the risk of these populations 
unless a state elects to notify CMS that it will conduct a 
retrospective risk adjustment analysis in accordance with the process 
set forth in section III.G of this methodology. If the state decides to 
conduct such an analysis, it has discretion when determining the data 
requirements and any necessary alternatives; however, the state must 
submit to CMS such information as well as the proposed methodology it 
intends to use during the reconciliation process for approval and 
certification. Regardless of whether or not states elect this option, 
we will continue to review this factor as we gain more experience in 
the Exchanges, and as data becomes more readily available, to refine 
future BHP funding methodologies.
    Comment: One commenter requested clarification on Equation 1. 
Specifically, the commenter asked whether the average expected PTC that 
all persons in the rate cell would receive is an average for people 
within a certain region, or if this is a statewide average.
    Response: The average expected PTC that all persons in the rate 
cell would receive is an average for persons within a state's 
geographic rating area, which in most instances would be a county or 
county-equivalent entity. These would not be statewide rates.
    Comment: One commenter requested that CMS revise Equation 1 to 
account for the impact of induced utilization on the base premiums used 
to calculate the advanced payment of the premium tax credit (APTC). 
Such an adjustment would account for a greater APTC value due to the 
increase in health care service utilization. The commenter proposed 
such an adjustment to equal 1.12 divided by the average assumed induced 
utilization adjustment inherent in commercial premiums absent BHP.
    Response: We do not believe that this adjustment is appropriate. 
This adjustment would be inconsistent with how the PTC is calculated 
and with the statute. In addition, we would note that only accounting 
for how the presence of the CSR may increase the average costs for 
enrollees would not be appropriate, as the CSR may also have an effect 
of lowering the average costs as well (for example, the provision of 
the CSR may encourage persons with lower expected health care costs to 
enroll).
    Comment: Several commenters expressed support for the PTC 
calculation as it takes into account the CSRs that are particular to 
American Indians and Alaska Natives.
    Response: We thank the commenters for their support and are 
finalizing the proposed provision.
    Comment: Several commenters requested that CMS reconsider applying 
100 percent of the CSR that would have been available in the Exchange 
to the BHP payment methodology, as opposed to 95 percent. Many 
commenters stated that the statute provides for this interpretation 
given the placement of the comma in section 1331(d)(3)(i) of the 
Affordable Care Act.
    Response: We appreciate the commenters' concern regarding this 
issue, and we have carefully considered and reviewed the commenters' 
suggestions. We have interpreted the 95 percent specified in statute to 
refer to both the PTC and CSR components of the BHP payment 
methodology. We believe that applying the 95 percent to both components 
of the methodology represents the best reading of the statute and the 
intent of the drafters, and we are therefore finalizing the proposed 
provision.
    Comment: We received one comment identifying a potential error in 
Equation 2. Specifically, the commenter believes that the equation 
should read ``FRAC x AV'' rather ``FRAC + AV.''
    Response: We appreciate the identification of a potential error; 
however, the equation, as written in the proposed methodology, is 
correct. The symbol in the proposed methodology is the division symbol, 
not the addition symbol. We have revised the display of the formula for 
the sake of clarity, as shown below.

[[Page 13891]]

[GRAPHIC] [TIFF OMITTED] TR12MR14.004

    Comment: We received a comment with respect to the premium trend 
factor included in the equations. Specifically, the commenter expressed 
concern that it will not capture changes in premiums due to non-claim 
issues such as increases in premium taxes, assessment, and Exchange 
user fees. The commenter recommended that non-claim issues be included 
in the equations, and that the equations should be calculated using 
only individual membership and vary by state.
    Response: The methodology does take into account non-claim issues, 
as the National Health Expenditure projections include all plan 
expenses (including administrative costs and plan taxes and fees). We 
recognize that the methodology does not use a factor specific to 
individual private health insurance premiums, but we believe this is a 
reasonable estimate of future growth of all private health insurance 
premiums. We believe that the equation reflects a consistent approach 
for calculating this portion of the federal BHP payment for all states, 
and note that it incorporates state-specific values for the adjusted 
reference premium and the tobacco rating factor adjustment.
    We also note that the federal 2015 BHP payment will be calculated 
using the actual 2015 Exchange premiums instead of the projected 2015 
Exchange premiums (unless a state elects to use its 2014 premium as the 
basis for the 2015 calculation). We believe that this addresses the 
concerns raised by the commenters that there may be differences in the 
premium growth rates across states because the calculation will use 
actual Exchange premiums in effect for the year.

C. Required Rate Cells

    In this section, we proposed that a state implementing BHP provide 
us with an estimate of the number of BHP enrollees it will enroll in 
the upcoming BHP program, by applicable rate cell, to determine the 
federal BHP payment amounts. For each state, we proposed using rate 
cells that separate the BHP population into separate cells based on the 
following five factors: age; geographic rating area; coverage status; 
household size; and income. For specific discussions, please refer to 
the December 23, 2013 proposed methodology (78 FR 77403).
    We received the following comments on the proposed rate cells:
    Comment: One commenter expressed support in using rate cells 
organized by income range to determine the aggregate federal BHP 
payment. The commenter believes that the variation in available PTC is 
minimal between the high and low points in each of the rates cells, and 
the proposed approach provides for an administratively simple way to 
calculate the federal BHP payment amount. The commenter believes that 
it was unclear in the proposed methodology how the averages in each 
rate cell will be calculated, and recommended that CMS provide states 
with the flexibility to determine the average PTC within each rate cell 
depending on the distribution of its BHP population.
    Response: We thank the commenter for their support; however, we 
believe that applying a uniform distribution across income ranges 
within each rate cell to determine the average PTC is the most 
appropriate approach. This approach will allow for timely calculation 
of the rates, will eliminate the risk that rate cells with a small 
number of persons projected to enroll would see the BHP payment rates 
skewed, and will not require any estimation of BHP enrollment for each 
rate cell prospectively. Furthermore, we do not believe that 
determining the average PTC based on the distribution of the BHP 
population would materially change the final BHP payment.
    Comment: Several commenters expressed concern that the age bands 
included in the proposed methodology were too broad, and recommended 
that CMS consider narrowing the age bands, particularly the 21-44 age 
band.
    Response: We appreciate these comments, and the final BHP payment 
methodology will split the proposed age band into two separate age 
bands: 21-34 and 35-44.
    Comment: One commenter requested that CMS offer as an option to 
states a smaller number of rate categories, actuarially rolled up from 
the population cells, to better align with the rate categories states 
already have established in their Medicaid information systems. The 
commenter believes that such an approach would reduce administrative 
burden on states implementing BHP.
    Response: We appreciate and share the commenter's interest in 
reducing the administrative burden on states implementing BHP. The use 
of distinct rate cells is necessary to accurately reflect the different 
costs of the PTCs and CSRs for subcomponent population groups that 
would be paid if the individuals had been enrolled in coverage through 
the Exchange. This approach is necessary to ensure an accurate and 
precise determination of available federal funding in the absence of 
reliable data on the composition of the BHP population. At some future 
point in time, when reliable data is available about the BHP 
population, it might be possible to reduce the number of rate cells 
based on actuarial projections.
    These rate cells will likely differ from the rate cells that the 
state uses to pay standard health plans (to the extent that a state 
uses rate cells at all), because they are based on a different 
underlying purpose. The BHP federal payment rate cells are to determine 
the PTCs and CSRs that would be paid in the absence of a BHP, while 
rate cells that a state may use for purpose of payment to standard 
health plans need to reflect the relative overall covered health care 
costs of each segment of the population. States have considerable 
flexibility in determining how to pay standard health plan offerors, 
and are not required to use rate cells at all. A state may elect to use 
the BHP federal payment rate cells, may use a payment structure 
borrowed from other insurance affordability programs, or may use a 
payment structure specifically designed for BHP.

D. Sources and State Data Considerations

    We proposed in this section to use, to the extent possible, data 
submitted to the federal government by QHP issuers seeking to offer 
coverage through an Exchange to determine the federal BHP payment cell 
rates. However, in states operating a State Based Exchange (SBE), we 
proposed that such states submit required data for CMS to calculate the 
federal BHP payment rates in those states. For specific discussions, 
please refer to the December 23, 2013 proposed methodology (78 FR 
77404).
    We received the following comments on the data needed from SBEs to 
determine the federal BHP payment rates:
    Comment: One commenter requested that CMS permit states operating 
SBEs to submit data after the January 20, 2014 deadline on a technical 
assistance basis.
    Response: We will review 2014 premium data that is submitted on a 
technical assistance basis after the January 20, 2014 deadline to help

[[Page 13892]]

provide interested states determine preliminary 2015 federal BHP 
payment rates. Because final 2015 federal BHP payment rates will be 
determined using actual 2015 premium data, states do not need to submit 
2014 premium data unless they are interested in working with CMS to 
develop preliminary estimates of the federal BHP payments using the 
2014 data. Finally, we are also available to provide technical 
assistance to states as they collect the information needed to complete 
the premium collection tool.

E. Discussion of Specific Variables Used in Payment Equations

    In this section, we proposed 11 specific variables to use in the 
payment equations that comprise the overall BHP funding methodology. 
For each proposed variable, we include a discussion on the assumptions 
and data sources used in developing the variables. For specific 
discussions, please refer to the December 23, 2013 proposed methodology 
(78 FR 77404).
    We received the following comments on the specific variables used 
in the payment equations:
1. Variable 1--Reference Premium
    Comment: Several commenters supported the assumptions used in 
developing the funding methodology, including the use of the second 
lowest cost silver plan premium and lowest cost bronze premium.
    Response: We thank the commenters for their support and are 
finalizing the proposed assumptions.
    Comment: While one commenter expressed support for using the second 
lowest cost silver plan as the methodology's reference premium, the 
commenter recommended that CMS permit the value of the second lowest 
cost silver plan change in the event that the QHP leaves the Exchange, 
or enrollment in the QHP closes.
    Response: While we appreciate the commenter's interest in ensuring 
that the reference premium is reflective of the actual second lowest 
cost silver plan at a given point, we are not revising the final 
methodology to incorporate the commenter's recommendation. We believe 
that such a recommendation would prove inconsistent with the policy set 
forth in 26 CFR 1.36B-3(f)(6) to update the payment methodology, and 
subsequently the federal BHP payment rates, in the event that the 
second lowest cost silver plan used as the reference premium changes 
(that is terminates or closes enrollment during the year).
    Comment: Several commenters requested that CMS consider using a 
national average premium as the reference premium in the methodology in 
the event that CMS does not adjust the methodology to use actual 
premiums rather than use a reference premium trended forward by the 
premium trend factor.
    Response: While we appreciate the commenters' recommendation, we 
are not adopting the use of a national average premium as the 
methodology's reference premium as we believe this would be 
inconsistent with the requirements in statute. Unless otherwise 
notified by a state, we intend to use the actual 2015 second lowest 
cost silver plan premiums to determine the final 2015 federal BHP 
payment rates, which we believe addresses the commenters' concerns.
    Comment: Several commenters requested that, when calculating the 
CSR component of the federal BHP payment, CMS account for the 
likelihood that American Indians and Alaska Natives will elect to 
enroll in a bronze-level QHP that would utilize the entire PTC that 
would have otherwise been available to the enrollees rather than 
assuming the enrollees will select the lowest cost bronze level QHP. 
The commenter noted that while American Indians and Alaska Natives 
purchasing coverage in the Exchange will likely select a bronze level 
QHP, they may not always select the lowest cost bronze plan.
    Response: We appreciate the commenters' concerns about the level of 
funding related to American Indians and Alaska Natives enrolled in BHP. 
With regard to comments that the methodology assume that American 
Indians and Alaska Natives who enroll through the Exchange would choose 
a QHP with a premium that is at least equal to the value of the PTC, 
the payment methodology is consistent with this assumption.
    With regard to the comments that American Indians and Alaska 
Natives who would enroll through the Exchange may select other bronze 
level QHPs than the lowest cost plan, we acknowledge the likelihood of 
the selection of different bronze level QHPs, but we believe it is not 
possible to project how these enrollees would select different plans 
for 2015 (similar to the limitations regarding the assumption of how 
enrollees would select plans other than the second lowest cost silver 
plan). In addition, while there may be instances where the value of PTC 
would exceed the value of some bronze QHP premiums, this may vary by 
age, household size, household income, and other factors; we believe 
this further limits the ability to project how enrollees would select 
different plans. Thus, we have selected what we believe to be an 
assumption that is reasonable and results in the correct level of 
funding for BHP.
2. Variable 2--Premium Trend Factor
    Comment: Several commenters requested that CMS reconsider removing 
the premium trend factor from the methodology and simply reconcile the 
BHP federal payment rates using actual 2015 second lowest cost silver 
premiums. In the event that CMS will not use actual premiums, the 
commenters recommended, as an alternative, that CMS not use the 
proposed premium trend factor, but rather develop a factor that 
sufficiently offsets the artificially low 2014 Exchange premiums, or 
provide the state with the option to submit a state-specific trend 
factor that is based on other reliable cost and experience data. 
Commenters also expressed interest in using actual Exchange premium 
data to develop the premium trend factor in future program years.
    Response: As noted in an earlier response, and discussed further in 
section III.D.1 of this final methodology, we will determine final 2015 
federal BHP payment rates using actual 2015 premiums unless notified by 
a state to calculate its payment rates with 2014 premium data. We 
believe that this approach is appropriate in the first year of BHP 
implementation given the uncertainties in market conditions in the 
Exchanges.
    Given that we are using actual 2015 premiums, we are not adopting 
the commenters' recommendation to apply a different premium trend 
factor other than the National Health Expenditure projection with an 
adjustment for the impact of the reinsurance pool on QHP premiums 
between 2014 and 2015. With respect to commenters' interest in the 
premium trend factor that will be used in future BHP program years, we 
will use actual Exchange and BHP experience to develop this factor for 
future funding methodologies, which will follow the Payment document 
process specified in the BHP final regulation. Publishing an annual 
proposed and final Payment document will help refine the BHP funding 
methodology as we gain more experience from the Exchanges as well as 
better data that is based on actual market conditions.
    Comment: One commenter requested that CMS provide additional 
clarification on the transitional reinsurance adjustment. The commenter 
believes that the adjustment would include a component that would be

[[Page 13893]]

equal to the percentage of costs not covered by reinsurance recoveries 
in 2015 over the percentage of costs not covered by reinsurance 
recoveries in 2014.
    Response: We provide additional clarification on the reinsurance 
adjustment in section III.F of this final methodology.
3. Variable 3--Population Health Factor
    Comment: Several commenters disagreed with our proposed value for 
the population health factor. Specifically, commenters believe that the 
1.00 value did not accurately reflect the health status of potential 
BHP eligible individuals in certain states. As such, commenters 
requested that CMS retrospectively adjust this factor using either a 
state-specific methodology, or the same methodology that is used to 
risk adjust in the individual market.
    Response: We understand the commenters' interest in ensuring that 
the population health factor accurately reflects the health status of 
BHP individuals relative to consumers in the Exchange. In light of the 
comments we received on this issue, and, in particular, because of the 
lack of currently available data, we are providing states with an 
option to propose a methodology, as discussed further in section III.G 
of this final methodology, for CMS approval that would retrospectively 
adjust for risk. We understand that such an assessment may be necessary 
to determine whether the difference in health status between the 
state's BHP population and consumers in the Exchange would affect PTC, 
CSRs, risk adjustment and reinsurance payments that would have been 
made had BHP enrollees been enrolled in coverage through the Exchange.
    While we are finalizing the proposed value of the population health 
factor, we would note that as additional experience is gained in the 
Exchange and more data becomes available, we believe that this factor 
will be reviewed to ensure it accurately reflects the health status of 
BHP enrollees relative to consumers in the Exchange.
    Comment: While we received several comments in support of the 
proposed provision to exclude BHP from the individual market's risk 
pool, other commenters requested that CMS consider providing states 
with the option to include BHP in its individual market's risk pool. 
Commenters also requested that CMS permit states to have the ability to 
apply aspects of the reinsurance, risk adjustment, and risk corridor 
program to BHP. Several commenters noted that the existence of the 
reinsurance program has likely reduced individual market premiums, and 
further emphasized the importance of making a reinsurance payment in 
BHP using the same mechanism and conditions in the individual market.
    Response: We have carefully considered this issue and have 
determined that BHP should be excluded from the individual market 
because the market reform rules under the Public Health Service Act 
that were added by Title I, Subtitles A and B of the Affordable Care 
Act, such as the requirements for guaranteed issue, and premium rating 
do not apply to standard health plans participating in BHP. Moreover, 
in accordance with 45 CFR 153.234 and 45 CFR 153.20, standard health 
plans operating under a BHP are not eligible to participate in the 
reinsurance program and the federally-operated risk adjustment program. 
With respect to the risk corridor program, the statute, under section 
1342 of the Affordable Care Act, precludes standard health plans from 
participation. To the extent that a state operating a BHP determines 
that, because of the risk-profile of its BHP population, standard 
health plans should be included in mechanisms that share risk, the 
state would need to use other methods for achieving this goal, such as 
electing to submit a proposed methodology to retrospectively risk 
adjust.
    Comment: One commenter requested that CMS consider, when developing 
risk formulas, to adequately capture risk associated with chronic and 
behavioral health conditions.
    Response: We appreciate the comment, but as we are not developing a 
risk adjustment between the BHP and individual market populations for 
2015, the issue of risk associated with chronic and behavioral health 
conditions does not affect the federal BHP payment. In the event that a 
state elects to propose a risk adjustment reconciliation methodology, 
we encourage the commenter to engage with the state as it develops such 
a methodology.
    Comment: One commenter requested clarification on whether the 
population health factor will be based on a certain region, or if it 
will be a statewide adjustment.
    Response: The population health factor will be a state-wide 
adjustment unless a state utilizes a different approach approved by CMS 
in its risk adjustment reconciliation methodology.
4. Variable 6--Income Reconciliation Factor
    Comment: Several commenters recommended that CMS explicitly state 
that the PTC repayment caps specified in the Affordable Care Act will 
be applied to income reconciliation process in BHP.
    Response: We appreciate the commenters' interest in ensuring that 
BHP enrollees are not subject to PTC repayments in excess of what would 
have otherwise occurred had they enrolled in the Exchange, but want to 
assure the commenters that BHP enrollees are not subject to PTC 
repayments. Repayments were considered as we developed the income 
reconciliation factor. While the repayment caps were included in the 
development of this factor, they do not apply to BHP enrollees as there 
is no individual income reconciliation process in BHP. BHP enrollees 
are not eligible to receive an advance payment of the PTC (APTC), and 
as such, they are not subject to the same income reconciliation process 
as Exchange consumers.
    Comment: One commenter requested that CMS consider the differences 
in the income distribution of state BHP populations in estimating the 
reconciliation effect.
    Response: We appreciate the comment, but we believe that a national 
factor is appropriate and we are maintaining it for this year's payment 
notice. We note that there is a relatively narrow range of incomes for 
BHP-eligible consumers, and thus state-specific income distributions 
are unlikely to have a significant impact on the BHP payment.
    Comment: Several commenters recommended that CMS adjust the income 
reconciliation factor to account for certain eligibility and enrollment 
processes. For example, the commenters noted that if a state reviews 
databases and/or requires reporting of changes in enrollees' income and 
household composition, it would be unfair to apply a full 
reconciliation factor to this state since the income reconciliation 
factor assumes no income changes in the course of the payment year will 
affect eligibility. Commenters did note that a full reconciliation 
factor could be applied if a state elected to implement a 12-month 
continuous eligibility policy.
    Response: The income reconciliation factor has been developed 
consistent with the assumption that states will adopt a continuous 
eligibility policy. We do not have a basis to develop a prospective 
factor if a state does not do so, because state review and 
redetermination processes will vary. We will consider revisiting this 
assumption in future years for such states, based on available data on 
the effectiveness of

[[Page 13894]]

state review and redetermination processes.
5. Variable 7--Tobacco Rating Adjustment Factor
    Comment: Based on available state data, one commenter expressed 
concern that the BHP population may have higher rates of smoking 
relative to the state average. As such, the commenter requested that 
CMS apply an adjustment based on state average smoking rates.
    Response: We appreciate the comment, and intend to use state-
specific tobacco usage rates by age, based on data available from the 
Center for Disease Control and Prevention, which is described in more 
detail in section III.D.6 of this final methodology. We do not intend 
to make an adjustment based on different rates of tobacco usage by 
income level.
    Comment: One commenter requested that CMS provide additional detail 
on how it will calculate the estimated adjustment when calculating the 
CSR and whether the tobacco adjustment factor will be the same factor 
statewide, or vary by region.
    Response: The tobacco usage rates that are a component of the 
tobacco rating adjustment factor are statewide. To the extent that the 
difference between the non-tobacco and tobacco premiums varies by 
geographic rating area within the state, the tobacco rating adjustment 
factor may also vary as well.
6. Variable 8--Factor to Remove Administrative Costs
    Comment: Several commenters requested that CMS either provide 
states the option to provide a state-specific factor, or to 
retrospectively reconcile using the actual medical loss ratio in the 
Exchange in a given BHP program year.
    Response: We appreciate the comments, but we believe that using the 
factor that we proposed to remove administrative costs is the most 
appropriate and consistent methodology to calculate the federal BHP 
payment. We would clarify that the factor to remove administrative 
costs is not precisely the same as the medical loss ratio; the factor 
to remove administrative costs also excludes certain plan costs (such 
as taxes, fees, and quality improvement activities) that are not 
counted towards the total plan revenue when calculating the medical 
loss ratio. Thus, the factor to remove administrative costs would 
likely be less than the actual or target medical loss ratios.
    Comment: Several commenters expressed concern that because states 
cannot expend BHP trust funds to cover administrative costs associated 
with BHP operations, including this factor in the methodology would 
only further reduce the state resources needed to support the operation 
of BHP.
    Response: While we understand the commenters' concerns regarding 
the availability of funding for administrative costs, the statute does 
not permit states to use BHP trust funds for any activity beyond the 
expenditures related to the provision of the standard health plan 
except for lowering premiums and cost sharing and/or providing 
additional benefits. We believe that it is appropriate to include this 
factor in the funding methodology as it is necessary to remove costs 
such as taxes, fees and administrative expenses from the reference 
premium in order to determine the costs associated with allowed health 
benefits.
7. Variable 10--Induced Utilization Factor
    Comment: Several commenters requested that CMS provide a state with 
the option to use a different induced utilization factor if it can 
demonstrate that utilization is more or less than 12 percent as a 
result of the CSRs.
    Response: While we appreciate the commenters' interest in ensuring 
that the methodology is developed using the most accurate data 
available, we are not adopting the commenters' recommendation to permit 
such an option to states as we believe that using the factors developed 
for the 2015 HHS Payment Notice is the most appropriate methodology for 
calculating the federal BHP payment until more experience in BHP and 
the Exchange is gained and more data become available.
8. Variable 11--Changes in Actuarial Value
    Comment: One commenter requested that CMS allow states to adjust 
for the actuarial value difference based on empirical evidence of the 
utilization for a typical BHP eligible population in that state.
    Response: While we appreciate the commenter's interest in ensuring 
that the methodology is developed using the most accurate data 
available that is based on market experience, we are not adopting the 
commenter's recommendation to permit such an option to states as it is 
not consistent with statute. The change in actuarial value, which 
determines the value of the CSR, is specified in statute. As such, 
there is no basis to make such an adjustment based on state experience.

F. Adjustments for American Indians and Alaska Natives

    We proposed to make several adjustments for American Indians and 
Alaska Natives when calculating the CSR portion of the federal BHP 
payment rate to be consistent with the Exchange rules. For specific 
discussions, please refer to the December 23, 2013 proposed methodology 
(78 FR 77409).
    We received the following comments on the proposed adjustments when 
calculating the CSR component for American Indians and Alaska Natives:
    Comment: Several commenters supported our proposal to make several 
adjustments for American Indians and Alaska Natives when calculating 
the CSR portion of the federal BHP payment rate.
    Response: We thank the commenters for their support and are 
finalizing the proposed provision.
    Comment: Consistent with their comments regarding the reference 
premium, many commenters requested that CMS provide states with the 
option to retrospectively reconcile their federal BHP payments using 
actual premiums for the lowest cost bronze plans in the CSR calculation 
for American Indians and Alaska Natives.
    Response: As discussed further in section III.D.1 of this final 
methodology, and elsewhere, we believe that it is appropriate for the 
first year of BHP implementation to determine final 2015 federal BHP 
payments using actual 2015 premiums, unless otherwise notified by the 
state, given the market uncertainties and the infancy of the Exchanges. 
Given this, we will also use actual 2015 lowest cost bronze plan 
premiums to calculate the CSR component for American Indians and Alaska 
Natives.

G. Example Application of the BHP Funding Methodology

    In this section, we included an example of the proposed approach 
described in the proposed methodology. For specific discussions, please 
refer to the December 23, 2013 proposed methodology (78 FR 77410).
    We received the following comment on the example application of the 
BHP funding methodology:
    Comment: One commenter requested clarification with respect to 
column 2 in Table 2 of the proposed methodology (78 FR 77411). 
Specifically, the commenter believes that the percentages included in 
the column were incorrect and requested that the correct values be 
included in the final methodology.
    Response: We thank the commenter for identifying the incorrect 
percentages in Table 2 of the proposed methodology.

[[Page 13895]]

Because the table was simply illustrative, we are not republishing the 
table in this final methodology. The incorrect percentages did not 
affect the illustrative purpose of the Table, but the correct values 
should have ranged from 3.29 to 4.00 percent, instead of 2.29 to 3.00 
percent.

H. General/Miscellaneous Comments

    We received the following general comments on the proposed federal 
BHP funding methodology, as well as comments related to the BHP 
proposed rule:
    Comment: One commenter expressed support for the proposed 
methodology stating that CMS had struck the right balance without 
making the methodology unduly complex.
    Response: We thank the commenter for their support.
    Comment: Several commenters expressed concern that the proposed BHP 
funding methodology will not provide sufficient funding to sustain 
existing state coverage programs that provide affordable coverage to 
individuals enrolled in such programs.
    Response: We appreciate the commenters' concerns with respect to 
ensuring the availability of affordable coverage and continuing 
existing programs to prevent disruptions in care; however, the statute 
specifies that the Secretary will determine the BHP funding amount such 
that it equals 95 percent of the PTC and CSRs that would have otherwise 
been available had BHP enrollees received QHP coverage in an Exchange.
    Comment: Several commenters requested that CMS consider offering 
states the option of implementing risk corridors as a means of sharing 
risk.
    Response: We appreciate the commenters' interest in the 
implementation of risk corridors in BHP; to the extent that a state 
operating a BHP determines that, because of the risk-profile of its BHP 
population, standard health plans should be included in mechanisms that 
share risk, the state would need to establish state-specific methods 
for achieving this goal, such as proposing a risk adjustment 
reconciliation methodology. Because section 1342 of the Affordable Care 
Act specifically limits the risk corridor program to QHPs, standard 
health plans operating under BHP are not eligible to participate. As 
such, we are not revising the final methodology to adopt the 
commenters' recommendation as the document provides state flexibility 
in using other methods to implement mechanisms that share risk.
    Comment: Several commenters urged CMS to permit states to use BHP 
trust funds to cover the administrative costs associated with 
implementing BHP.
    Response: This comment is outside the scope of this final 
methodology; however, we received an identical comment on the BHP 
proposed rule. The statute only permits the expenditure of BHP trust 
funds to further reduce premiums and cost sharing and provide 
additional benefits to individuals eligible for BHP; more detail is 
provided in the BHP final rule.
    Comment: One commenter requested that CMS clarify whether BHP trust 
funds can be used to provide benefits beyond Essential Health Benefits 
(EHBs) and to make supplemental payments to FQHCs if such payments are 
not equal to the PPS rate. The commenter also recommended that CMS 
require states to use excess funds to lower premiums and cost sharing.
    Response: This comment is outside the scope of this final 
methodology; however, we received an identical comment on the BHP 
proposed rule. The statute does provide states with the flexibility to 
expend BHP trust funds to further reduce premiums and cost sharing and 
provide additional benefits to individuals eligible for BHP; more 
detail is provided in the BHP final rule.
    Comment: One commenter requested that CMS require states to align 
their BHPs with existing Medicaid regulations and program requirements 
to prevent ``churn'' (that is, the temporary shifting of low-income 
individuals from one insurance affordability program to another).
    Response: This comment is outside the scope of this final 
methodology; however, please refer to specific discussions in the BHP 
final rule regarding the insurance affordability program coordination 
requirements.
    Comment: One commenter requested specific guidance on the premiums 
and cost sharing imposed on BHP enrollees, including whether these 
amounts can vary by income consistent with the premiums and cost 
sharing imposed in the Exchange.
    Response: This comment is outside the scope of this final 
methodology; however, we received an identical comment on the BHP 
proposed rule, which is addressed further in the BHP final rule.
    Comment: One commenter requested that CMS require states, as a 
condition of payment, assure that the BHP cost-sharing protections 
applicable to American Indians and Alaska Natives are equivalent to 
those these individuals would receive through the Exchange.
    Response: This comment is outside the scope of this final 
methodology; however, we received an identical comment on the BHP 
proposed rule, which is addressed further in the BHP final rule.
    Comment: One commenter expressed concern that the federal 
regulations and informal guidance implementing the Exchange's network 
adequacy standards do not sufficiently acknowledge FQHC's importance as 
safety-net providers, and recommended that CMS require the availability 
of FQHC services to each enrollee.
    Response: This comment is outside the scope of this final 
methodology; however, we received an identical comment on the BHP 
proposed rule, which is addressed further in the BHP final rule.
    Comment: Several commenters recommended that CMS require states to 
include FQHCs in their standard health plan contracts and ensure that 
FQHCs receive the PPS rate for services rendered.
    Response: This comment is outside the scope of this final 
methodology; however, we received an identical comment on the BHP 
proposed rule, which is addressed further in the BHP final rule.

III. Provisions of the Final Methodology

A. Overview of the Funding Methodology and Calculation of the Payment 
Amount

    Section 1331(d)(3) of the Affordable Care Act directs the Secretary 
to consider several factors when determining the federal BHP payment 
amount, which, as specified in the statute, must equal 95 percent of 
the value of the PTC and CSRs that BHP enrollees would have been 
provided had they enrolled in a QHP through an Exchange. Thus, the BHP 
funding methodology is designed to calculate the PTC and CSRs as 
consistently as possible and in general alignment with the methodology 
used by Exchanges to calculate the advance payments of the PTC and 
CSRs, and by the IRS to calculate final PTCs. In general, we rely on 
values for factors in the payment methodology specified in statute or 
other regulations as available, and we have developed values for other 
factors not otherwise specified in statute, or previously calculated in 
other regulations, to simulate the values of the PTC and CSRs that BHP 
enrollees would have received if they had enrolled in QHPs offered 
through an Exchange. In accordance with section 1331(d)(3)(A)(iii) of 
the Affordable Care Act, the final funding methodology must be 
certified by the Chief Actuary of CMS, in consultation with the Office 
of Tax Analysis of the Department of the

[[Page 13896]]

Treasury, as having met the requirements of section 1331(d)(3)(A)(ii) 
of the Affordable Care Act.
    Section 1331(d)(3)(A)(ii) of the Affordable Care Act specifies that 
the payment determination ``shall take into account all relevant 
factors necessary to determine the value of the premium tax credits and 
cost-sharing reductions that would have been provided to eligible 
individuals . . . including the age and income of the enrollee, whether 
the enrollment is for self-only or family coverage, geographic 
differences in average spending for health care across rating areas, 
the health status of the enrollee for purposes of determining risk 
adjustment payments and reinsurance payments that would have been made 
if the enrollee had enrolled in a qualified health plan through an 
Exchange, and whether any reconciliation of the credit or cost-sharing 
reductions would have occurred if the enrollee had been so enrolled.'' 
The payment methodology takes each of these factors into account.
    We have developed a methodology such that the total federal BHP 
payment amount will be based on multiple ``rate cells'' in each state. 
Each ``rate cell'' represents a unique combination of age range, 
geographic rating area, coverage category (for example, self-only or 
two-adult coverage through BHP), household size, and income range as a 
percentage of FPL. Thus, there are distinct rate cells for individuals 
in each coverage category within a particular age range who reside in a 
specific geographic rating area and are in households of the same size 
and income range. We note that for states that do not use age as a 
rating factor in the individual market, we will develop BHP payment 
rates to be consistent with those states' rating rules. Thus, in the 
case of a state that does not use age as a rating factor, the BHP 
payment rates would not vary by age.
    The federal BHP payment rate for each rate cell will be calculated 
in two parts. The first part will equal 95 percent of the estimated PTC 
that would have been paid if a BHP enrollee in that rate cell had 
instead enrolled in a QHP in the Exchange. The second part will equal 
95 percent of the estimated CSR payment that would have been made if a 
BHP enrollee in that rate cell had instead enrolled in a QHP in the 
Exchange. These two parts will be added together and the total rate for 
that rate cell will equal the sum of the PTC and CSR rates.
    To calculate the total federal BHP payment, Equation (1) will be 
used to calculate the estimated PTC for individuals in each rate cell 
and Equation (2) will be used to calculate the estimated CSR payments 
for individuals in each rate cell. By applying the equations separately 
to rate cells based on age, income and other factors, we will have 
taken those factors into account in the calculation. In addition, the 
equations incorporate the estimated experience of individuals in each 
rate cell if enrolled in coverage through the Exchange, taking into 
account additional relevant variables. Each of the variables in the 
equations is defined in the following sections, and further detail is 
provided later in this section of the payment methodology.
    In addition, we describe how we will calculate the adjusted 
reference premium (described later in this section of the payment 
methodology) that is used in Equations (1) and (2). This is defined in 
Equation (3a) and Equation (3b).
1. Equation 1: Estimated PTC by Rate Cell
    The estimated PTC, on a per enrollee basis, will be calculated for 
each rate cell for each state based on age range, geographic rating 
area, coverage category, household size, and income range. The PTC 
portion of the rate will be calculated in a manner consistent with the 
methodology used to calculate the PTC for persons enrolled in a QHP, 
with three adjustments. First, the PTC portion of the rate for each 
rate cell will represent the mean, or average, expected PTC that all 
persons in the rate cell would receive, rather than being calculated 
for each individual enrollee. Second, the reference premium used to 
calculate the PTC (described in more detail later in the section) will 
be adjusted for BHP population health status (and, in the case of a 
state that elects to use 2014 premiums for the basis of the BHP federal 
payment, for the projected change in the premium from the current year 
(that is, the year of the final payment methodology) to the following 
year, to which the rates announced in the final payment methodology 
would apply.) These adjustments are described in Equation (3a) and 
Equation (3b). Third, the PTC will be adjusted prospectively to reflect 
the mean, or average, net expected impact of income reconciliation on 
the combination of all persons enrolled in BHP; this adjustment, as 
described further below, will account for the estimated impact on the 
PTC that would have occurred had such reconciliation been performed. 
Finally, the rate will be multiplied by 95 percent, consistent with 
section 1331(d)(3)(A)(i) of the Affordable Care Act. We note that in 
the situation where the average income contribution of an enrollee 
would exceed the adjusted reference premium, we will calculate the PTC 
to be equal to 0 and not let the PTC be negative. Equation (1) is 
defined as:
[GRAPHIC] [TIFF OMITTED] TR12MR14.005

PTCa,g,c,h,i = Premium tax credit portion of BHP payment rate
a = Age range
g = Geographic rating area
c = Coverage status (self-only or applicable category of family 
coverage) obtained through BHP
h = Household size
i = Income range (as percentage of FPL)
ARPa,g,c = Adjusted reference premium
Ih,i,j = Income (in dollars per month) at each 1 percentage-point 
increment of FPL
j = jth percentage-point increment FPL
n = Number of income increments used to calculate the mean PTC
PTCFh,i,j = Premium Tax Credit Formula percentage
IRF = Income reconciliation factor
2. Equation 2: Estimated CSR Payment by Rate Cell
    The CSR portion of the rate will be calculated for each rate cell 
for each state based on age range, geographic rating area, coverage 
category, household size, and income range defined as a percentage of 
FPL. The CSR portion of the rate will be calculated in a manner 
consistent with the methodology used to calculate the CSR advance 
payments for persons enrolled in a QHP, as described in the HHS Notice 
of Benefit and Payment Parameters for 2015 proposed rule, with three 
principal adjustments. (We will make separate calculations that include 
different adjustments for American Indian Alaska Native BHP enrollees, 
as described in section III.E of this final

[[Page 13897]]

methodology.) For the first adjustment, the CSR rate, like the PTC 
rate, will represent the mean, or average, expected CSR subsidy that 
would be paid on behalf of all persons in the rate cell, instead of the 
CSR subsidy being calculated for each individual enrollee. Second, this 
calculation will be based on the adjusted reference premium, as 
described below. Third, as explained earlier, this equation uses an 
adjusted reference premium that reflects premiums charged to non-
tobacco users, rather than the actual premium that is charged to 
tobacco users to calculate CSR advance payments for tobacco users 
enrolled in a QHP. Accordingly, the equation includes a tobacco rating 
adjustment factor that will account for BHP enrollees' estimated 
tobacco-related health costs that are outside the premium charged to 
non-tobacco-users. Finally, the rate will be multiplied by 95 percent, 
as provided in section 1331(d)(3)(A)(i) of the Affordable Care Act.
    Equation (2) is defined as:
    [GRAPHIC] [TIFF OMITTED] TR12MR14.006
    
CSRa,g,c,h,i = Cost-sharing reduction subsidy portion of BHP payment 
rate
a = Age range
g = Geographic rating area
c = Coverage status (self-only or applicable category of family 
coverage) obtained through BHP
h = Household size
i = Income range (as percentage of FPL)
ARPa,g,c = Adjusted reference premium
TRAF = Tobacco rating adjustment factor
FRAC = Factor removing administrative costs
AV = Actuarial value of plan (as percentage of allowed benefits 
covered by the applicable QHP without a cost-sharing reduction 
subsidy)
IUFh,i = Induced utilization factor
[Delta]AVh,i = Change in actuarial value (as percentage of allowed 
benefits)
3. Equation 3a and Equation 3b: Adjusted Reference Premium Variable 
(Used in Equations 1 and 2)
    As part of these calculations for both the PTC and CSR components, 
the value of the adjusted reference premium is described, as specified 
in Equation (3a) (except in the case of a state that elects to use the 
2014 premiums as the basis for the federal BHP payment, as described in 
section III.F of this final methodology, and in which case Equation 
(3b) will be used). The adjusted reference premium will be equal to the 
reference premium, which will be based on the second lowest cost silver 
plan premium in 2015, multiplied by the BHP population health factor 
(described in section III.D of this final methodology), which will 
reflect the projected impact that enrolling BHP-eligible individuals in 
QHPs on an Exchange would have had on the average QHP premium.
[GRAPHIC] [TIFF OMITTED] TR12MR14.007

ARPa,g,c = Adjusted reference premium
a = Age range
g = Geographic rating area
c = Coverage status (self-only or applicable category of family 
coverage) obtained through BHP
RPa,g,c = Reference premium
PHF = Population health factor

    In the case of a state that elects to use the reference premium 
based off of the 2014 premiums (as described in section III.F of this 
final methodology), the value of the adjusted reference premium will be 
calculated using Equation (3b). The adjusted reference premium will be 
equal to the reference premium, which would be based on the second 
lowest cost silver plan premium in 2014, multiplied by the BHP 
population health factor (described in section III.D of this final 
methodology), which will reflect the projected impact that enrolling 
BHP-eligible individuals in QHPs on an Exchange would have had on the 
average QHP premium, and by the premium trend factor, which will 
reflect the projected change in the premium level between 2014 and 2015 
(including the estimated impact of changes resulting from the 
transitional reinsurance program established in section 1341 of the 
Affordable Care Act).
[GRAPHIC] [TIFF OMITTED] TR12MR14.008

ARPa,g,c = Adjusted reference premium
a = Age range
g = Geographic rating area
c = Coverage status (self-only or applicable category of family 
coverage) obtained through BHP
RPa,g,c = Reference premium
PHF = Population health factor
PTF = Premium trend factor
4. Equation 4: Determination of Total Monthly Payment for BHP Enrollees 
in Each Rate Cell
    In general, the rate for each rate cell will be multiplied by the 
number of BHP enrollees in that cell (that is, the number of enrollees 
that meet the criteria for each rate cell) to calculate the total 
monthly BHP payment. This calculation is shown in Equation 4.
[GRAPHIC] [TIFF OMITTED] TR12MR14.009

PMT = Total monthly BHP payment
PTCa,g,c,h,i = Premium tax credit portion of BHP payment rate
CSRa,g,c,h,i = Cost-sharing reduction subsidy portion of BHP payment 
rate
Ea,g,c,h,i = Number of BHP enrollees
a = Age range
g = Geographic rating area
c = Coverage status (self-only or applicable category of family 
coverage) obtained through BHP
h = Household size
i = Income range (as percentage of FPL)

[[Page 13898]]

B. Federal BHP Payment Rate Cells

    We will require that a state implementing BHP provide us an 
estimate of the number of BHP enrollees it projects will enroll in the 
upcoming BHP program year, by applicable rate cell, prior to the first 
quarter of program operations. Upon our approval of such estimates as 
reasonable, the estimates will be used to calculate the prospective 
payment for the first and subsequent quarters of program operation 
until the state has provided us actual enrollment data. These data will 
be required to calculate the final BHP payment amount, and make any 
necessary reconciliation adjustments to the prior quarters' prospective 
payment amounts due to differences between projected and actual 
enrollment. Subsequent quarterly deposits to the state's trust fund 
will be based on the most recent actual enrollment data submitted to 
us. Procedures will ensure that federal payments to a state reflect 
actual BHP enrollment during a year, within each applicable category, 
and prospectively determined federal payment rates for each category of 
BHP enrollment, with such categories defined in terms of age range, 
geographic rating area, coverage status, household size, and income 
range, as explained above.
    We will require the use of certain rate cells as part of the 
federal BHP payment methodology. For each state, we will use rate cells 
that separate the BHP population into separate cells based on the 
following five factors:
    Factor 1--Age: We will separate enrollees into rate cells by age, 
using the following age ranges that capture the widest variations in 
premiums under HHS's Default Age Curve: \1\
---------------------------------------------------------------------------

    \1\ This curve is used to implement the Affordable Care Act's 
3:1 limit on age-rating in states that do not create an alternative 
rate structure to comply with that limit. The curve applies to all 
individual market plans, both within and outside the Exchange. The 
age bands capture the principal allowed age-based variations in 
premiums as permitted by this curve. More information can be found 
at http://www.cms.gov/CCIIO/Resources/Files/Downloads/market-reforms-guidance-2-25-2013.pdf. Both children and adults under age 
21 are charged the same premium. For adults age 21-64, the age bands 
in this methodology divide the total age-based premium variation 
into the three most equally-sized ranges (defining size by the ratio 
between the highest and lowest premiums within the band) that are 
consistent with the age-bands used for risk-adjustment purposes in 
the HHS-Developed Risk Adjustment Model. For such age bands, see 
Table 5, ``Age-Sex Variables,'' in HHS-Developed Risk Adjustment 
Model Algorithm Software, May 7, 2013, http://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/ra_tables_04_16_2013xlsx.xlsx.
---------------------------------------------------------------------------

     Ages 0-20.
     Ages 21-34.
     Ages 35-44.
     Ages 45-54.
     Ages 55-64.
    Factor 2--Geographic rating area: For each state, we will separate 
enrollees into rate cells by geographic rating areas within which a 
single reference premium is charged by QHPs offered through the state's 
Exchange. Multiple, non-contiguous geographic rating areas may be 
incorporated within a single cell, so long as those areas share a 
common reference premium.\2\
---------------------------------------------------------------------------

    \2\ For example, a cell within a particular state might refer to 
``County Group 1,'' ``County Group 2,'' etc., and a table for the 
state would list all the counties included in each such group. These 
geographic areas are consistent with the geographic rating areas 
established under the 2014 Market Reform Rules. They also reflect 
the service area requirements applicable to qualified health plans, 
as described in 45 CFR Sec.  155.1055, except that service areas 
smaller than counties are addressed as explained below.
---------------------------------------------------------------------------

    Factor 3--Coverage status: We will separate enrollees into rate 
cells by coverage status, reflecting whether an individual is enrolled 
in self-only coverage or persons are enrolled in family coverage 
through BHP, as provided in section 1331(d)(3)(A)(ii) of the Affordable 
Care Act. Among recipients of family coverage through BHP, separate 
rate cells, as explained below, will apply based on whether such 
coverage involves two adults alone or whether it involves children.
    Factor 4--Household size: We will separate enrollees into rate 
cells by household size that states use to determine BHP enrollees' 
income as a percentage of the FPL under proposed 42 CFR 600.320. We 
will require separate rate cells for several specific household sizes. 
For each additional member above the largest specified size, we will 
publish instructions on how we will calculate the appropriate payment 
rate based on data for the rate cell with the closest specified 
household size. We will publish rates for separate rate cells for 
household sizes 1, 2, 3, 4, and 5, as unpublished analyses of American 
Community Survey data conducted by the Urban Institute (which take into 
account unaccepted offers of employer-sponsored insurance, as well as 
income, Medicaid and CHIP eligibility, citizenship and immigration 
status, and current health coverage status) find that less than 1 
percent of all BHP-eligible persons live in households of size 5 or 
greater.
    Factor 5--Income: For households of each applicable size, we will 
create separate rate cells by income range, as a percentage of FPL. The 
PTC that a person would receive if enrolled in a QHP varies by income, 
both in level and as a ratio to the FPL, and the CSR varies by income 
as a percentage of FPL. Thus, separate rate cells will be used to 
calculate federal BHP payment rates to reflect different bands of 
income measured as a percentage of FPL. We will use the following 
income ranges, measured as a ratio to the FPL:
     0 to 50 percent of the FPL.
     51 to 100 percent of the FPL.
     101 to 138 percent of the FPL.\3\
---------------------------------------------------------------------------

    \3\ The three lowest income ranges would be limited to lawfully 
present immigrants who are ineligible for Medicaid because of 
immigration status.
---------------------------------------------------------------------------

     139 to 150 percent of the FPL.
     151 to 175 percent of the FPL.
     176 to 200 percent of the FPL.
    These rate cells will only be used to calculate the federal BHP 
payment amount. A state implementing BHP is not be required to use 
these rate cells or any of the factors in these rate cells as part of 
the state payment to the standard health plans participating in BHP or 
to help define BHP enrollees' covered benefits, premium costs, or out-
of-pocket cost-sharing levels.
    We will use the calculated rate for each rate cell to determine the 
federal BHP payment, rather than varying such rates to correspond to 
each individual BHP enrollee's age and income level. We believe that 
the proposed approach will increase the administrative feasibility of 
making federal BHP payments and provide an accurate and reasonable 
methodology for calculating the total federal BHP payment. We believe 
that this approach should not significantly change federal payment 
amounts, as within applicable ranges, the BHP-eligible population is 
distributed relatively evenly.

C. Sources and State Data Considerations

    To the extent possible, we will use data submitted to the federal 
government by QHP issuers seeking to offer coverage through an Exchange 
to perform the calculations that determine federal BHP payment cell 
rates.
    States operating a State Based Exchange (SBE) in the individual 
market, however, must provide certain data, including premiums for 
second lowest cost silver plans, by geographic rating area, in order 
for CMS to calculate the federal BHP payment rates in those states. An 
SBE state interested in obtaining the applicable federal BHP payment 
rates for its state must submit such data accurately, completely, and 
as specified by CMS, by no later than November 1, 2014, in order for 
CMS to calculate the applicable rates for 2015. If additional state 
data (that is, in addition to the second lowest cost silver plan 
premium data) are needed to determine the federal BHP payment

[[Page 13899]]

rate, such data must be submitted in a timely manner, and in a format 
specified by CMS to support the development and timely release of 
annual BHP payment notices. The specifications for data collection to 
support the development of BHP payment rates for 2015 will be published 
in a separate CMS notice.
    If a state operating a SBE provides the necessary data accurately, 
completely, and as specified by CMS, but after the date specified 
above, we anticipate publishing federal payment rates for such a state 
in a subsequent Payment Notice. As noted in the BHP proposed rule, a 
state may elect to implement its BHP after a program year has begun. In 
such an instance, we propose that the state, if operating a SBE, submit 
its data no later than 30 days after the Blueprint submission for CMS 
to calculate the applicable federal payment rates. We further propose 
that the BHP Blueprint itself must be submitted for Secretarial 
certification with an effective date of no sooner than 120 days after 
submission of the BHP Blueprint. In addition, the state must ensure 
that its Blueprint include a detailed description of how the state will 
coordinate with other insurance affordability programs to transition 
and transfer BHP-eligible individuals out of their existing QHP 
coverage, consistent with the requirements set forth in proposed in 42 
CFR 600.330 and 600.425. We believe that this 120-day period is 
necessary to establish the requisite administrative structures and 
ensure that all statutory and regulatory requirements are satisfied.

D. Discussion of Specific Variables Used in Payment Equations

1. Reference Premium (RP)
    To calculate the estimated PTC that would be paid if individuals 
enrolled in QHPs through the Exchange, we must calculate a reference 
premium (RP) because the PTC is based, in part, on the premiums for the 
second lowest cost silver plan as explained in section II.C.5 of this 
final methodology regarding the Premium Tax Credit Formula (PTCF). 
Accordingly, for the purposes of calculating the BHP payment rates, the 
reference premium, in accordance with 26 U.S.C. 36B(b)(3)(C), is 
defined as the adjusted monthly premium for an applicable second lowest 
cost silver plan. The applicable second lowest cost silver plan is 
defined in 26 U.S.C. 36B(b)(3)(B) as the second lowest cost silver plan 
of the individual market in the rating area in which the taxpayer 
resides, which is offered through the same Exchange. We will use the 
adjusted monthly premium for an applicable second lowest cost silver 
plan in 2015 as the reference premium (except in the case of a state 
that elects to use the 2014 premium as the basis for the federal BHP 
payment, as described in section III.F of this final methodology).
    The reference premium will be the premium applicable to non-tobacco 
users. This is consistent with the provision in 26 U.S.C. 36B(b)(3)(C) 
that bases the PTC on premiums that are adjusted for age alone, without 
regard to tobacco use, even for states that allow insurers to vary 
premiums based on tobacco use pursuant to 42 U.S.C. 300gg(a)(1)(A)(iv).
    Consistent with the policy set forth in 26 CFR 1.36B-3(f)(6) to 
calculate the PTC for those enrolled in a QHP through an Exchange, we 
will not update the payment methodology, and subsequently the federal 
BHP payment rates, in the event that the second lowest cost silver plan 
used as the reference premium changes (that is, terminates or closes 
enrollment during the year).
    The applicable second lowest cost silver plan premium will be 
included in the BHP payment methodology by age range, geographic area, 
and self-only or applicable category of family coverage obtained 
through BHP.
    American Indians and Alaska Natives are eligible for a full cost 
sharing subsidy regardless of the plan they select. We assume that 
American Indians and Alaska Natives would be more likely to enroll in 
bronze plans as a result; thus, for American Indian/Alaska Native BHP 
enrollees, we will use the lowest cost bronze plan as the basis for the 
reference premium for the purposes of calculating the CSR portion of 
the federal BHP payment as described further in section III.E of this 
final methodology.
    The applicable age bracket will be one dimension of each rate cell. 
We have assumed a uniform distribution of ages and will estimate the 
average premium amount within each rate cell. We believe that assuming 
a uniform distribution of ages within these ranges is a reasonable 
approach and would produce a reliable determination of the PTC and CSR 
components. We also believe this approach would avoid potential 
inaccuracies that could otherwise occur in relatively small payment 
cells if age distribution were measured by the number of persons 
eligible or enrolled. We will also use the same geographic rating areas 
as specified for the Exchanges in each state within which the same 
second lowest cost silver level premium is charged. Although plans are 
allowed to serve geographic rating areas smaller than counties after 
obtaining our approval, for purposes of defining BHP payment rate 
cells, no geographic area will be smaller than a county. We do not 
believe that this assumption will have a significant impact on federal 
payment levels and it would likely simplify both the calculation of BHP 
payment rates and the operation of BHP.
    Finally, in terms of the coverage category, federal payment rates 
will only recognize self-only and two-adult coverage, with exceptions 
that account for children who are potentially eligible for BHP. First, 
in states that set the upper income threshold for children's Medicaid 
and CHIP eligibility below 200 percent of FPL (based on modified 
adjusted gross income), children in households with incomes between 
that threshold and 200 percent of FPL would be potentially eligible for 
BHP. Currently, the only states in this category are Arizona, Idaho, 
and North Dakota.\4\ Second, BHP would include lawfully present 
immigrant children with incomes at or below 200 percent of FPL in 
states that have not exercised the option under the sections 
1903(v)(4)(A)(ii) and 2107(e)(1)(E) of the Social Security Act (the 
Act) to qualify all otherwise eligible, lawfully present immigrant 
children for Medicaid and CHIP. States that fall within these 
exceptions would be identified based on their Medicaid and CHIP State 
Plans, and the rate cells would include appropriate categories of BHP 
family coverage for children. In other states, BHP eligibility will 
generally be restricted to adults, since children who are citizens or 
lawfully present immigrants and who live in households with incomes at 
or below 200 percent of FPL will qualify for Medicaid or CHIP and thus 
be ineligible for BHP under section 1331 (e)(1)(C) of the Affordable 
Care Act, which limits BHP to individuals who are ineligible for 
minimum essential coverage (as defined in section 5000A(f) of the 
Internal Revenue Code of 1986).
---------------------------------------------------------------------------

    \4\ CMCS. ``State Medicaid and CHIP Income Eligibility Standards 
Effective January 1, 2014.''
---------------------------------------------------------------------------

2. Population Health Factor (PHF)
    We considered including an explicit population health factor in 
each rate cell that varies based on the characteristics of BHP 
enrollees within that cell, but we are not proposing such a variable, 
for several reasons. We believe that because BHP-eligible consumers' 
are eligible to enroll in QHPs in 2014, the 2014 QHP premiums already 
account for the health status of BHP-eligible consumers, as

[[Page 13900]]

explained in further detail below. Also, the function of this factor is 
to provide a reference premium amount that reflects the premiums that 
QHPs would have charged without the implementation of BHP, taking into 
account both the risk profile of BHP-eligible consumers in the state 
and the operation of risk-adjustment and reinsurance mechanisms in the 
Exchanges. Our proposed approach to the population health factor seeks 
to achieve this goal based on the characteristics of the state's BHP-
eligible consumers as a whole.
    In the BHP proposed rule, we described in preamble what we believe 
to be the most appropriate approach to account for potential 
differences in health status between BHP enrollees and consumers in the 
individual market, including those obtaining coverage through the 
Exchange--that is, including a risk adjustment factor in the BHP 
funding methodology. We believe that it is appropriate to consider 
whether or not to develop a population health adjustment to account for 
potential differences in health status between persons eligible for BHP 
and those enrolled in the individual market, as the two populations may 
not have the same average health status.
    Accordingly, we have considered applying a population-wide 
adjustment for health status in the BHP payment calculation to account 
for the impact on a state's Exchange premiums, hence the PTC and the 
value of CSRs, of changes to average risk levels in the state's 
individual market that result from BHP implementation. Our proposed 
approach to the adjustment for population health status seeks to have 
the federal BHP payment reflect the premium that would have been 
charged if BHP-eligible consumers were allowed to purchase QHPs in 
their state's Exchange, rather than the premium that is being charged 
in the Exchange without the inclusion of BHP consumers. This factor 
would be greater than 1.00 if BHP enrollees in a state are, on average, 
in poorer health status than those covered through the state's 
individual market, and thus Exchange premiums would have been higher 
had the state not implemented BHP. This factor would be less than 1.00 
if BHP enrollees in a state are, on average, in better health status 
than those covered through the state's individual market, and thus 
Exchange premiums would have been lower if the state had not 
implemented BHP.
    We proposed that the population health adjustment for the 2015 BHP 
program year would equal 1.00. Most BHP-eligible consumers will be able 
to purchase coverage in the individual market during 2014, or the 
``measurement year''--that is, the year that precedes implementation of 
BHP and that provides the basis for estimating unadjusted reference 
premiums; thus, making no adjustment to the premiums for differences in 
BHP-eligible enrollees' health would be appropriate. As a result, BHP-
eligible consumers' health status is already included in the premiums 
that would be used to calculate the federal BHP payment rates.
    In states where significant numbers of BHP-eligible persons are 
covered outside of the individual market in 2014, it may be possible to 
estimate differences in expected health status between persons who are 
eligible for BHP and persons otherwise eligible for coverage in the 
individual market. However, we believe that the different levels of 
federal subsidies based on household income for coverage for persons 
enrolled in a QHP through an Exchange may have a substantial influence 
on the participation rate of enrollees. This may result in relatively 
healthier persons with higher levels of subsidies enrolling in 
coverage, and this effect may partially or entirely offset some other 
differences in the health status between BHP-eligible persons and those 
otherwise covered in the individual market.
    On the Exchanges, premiums in most states will vary based on age, 
which research has shown is directly correlated to average health cost. 
Because the reference premium used to calculate BHP federal payment 
rates will vary by age, some of the difference in average health costs 
would be addressed by this approach to calculating the BHP payment. 
However, this does not further simplify the task of estimating the 
remaining adjustment needed to compensate for any impact of BHP 
implementation on average risk levels in the state's individual market. 
Given these analytic challenges, the existing role played by age-rated 
premiums in compensating for risk, and the limited data about Exchange 
coverage and the characteristics of BHP-eligible consumers that will 
available by the time we establish federal payment rates for 2015, we 
believe that the most appropriate adjustment for 2015 would be 1.00, 
including in states that cover BHP-eligible persons outside the 
individual market in 2014. In the event that states believe this 
adjustment is not reflective of the health status of their BHP 
populations, we are providing states with the option, as described 
further in section III.G, to include a retrospective population health 
status adjustment in the certified methodology, which is subject to CMS 
review and approval. Regardless of whether a state elects to include a 
retrospective population health status adjustment, we anticipate that, 
in future years, when additional data become available about Exchange 
coverage and the characteristics of BHP enrollees, we may estimate this 
factor differently.
    Finally, while the statute requires consideration of risk 
adjustment payments and reinsurance payments insofar as they would have 
affected the PTC and CSRs that would have been provided to BHP-eligible 
individuals had they enrolled in QHPs, this does not mean that a BHP 
program's standard health plans receive such payments. As explained in 
the BHP final rule, BHP standard health plans are not included in the 
risk adjustment program operated by HHS on behalf of states. Further, 
standard health plans do not qualify for payments from the transitional 
reinsurance program established under section 1341 of the Affordable 
Care Act.\5\ To the extent that a state operating a BHP determines 
that, because of the distinctive risk profile of BHP-eligible 
consumers, BHP standard health plans should be included in mechanisms 
that share risk with other plans in the state's individual market, the 
state would need to use other methods for achieving this goal.
---------------------------------------------------------------------------

    \5\ See 45 CFR 153.400(a)(2)(iv) (BHP standard health plans are 
not required to submit reinsurance contributions), 153.20 
(definition of ``Reinsurance-eligible plan'' as not including 
``health insurance coverage not required to submit reinsurance 
contributions''), Sec.  153.230(a) (reinsurance payments under the 
national reinsurance parameters are available only for 
``Reinsurance-eligible plans'').
---------------------------------------------------------------------------

3. Income (I)
    Household income is a significant determinant of the amount of the 
PTC and CSRs that are provided for persons enrolled in a QHP through 
the Exchange. Accordingly, the BHP payment methodology incorporates 
income into the calculations of the payment rates through the use of 
income-based rate cells. We are defining income in accordance with the 
definition of modified adjusted gross income in 26 U.S.C. 36B(d)(2)(B) 
and consistent with the definition in 45 CFR 155.300. Income will be 
measured relative to the FPL, which is updated periodically in the 
Federal Register by the Secretary of Health and Human Services under 
the authority of 42 U.S.C. 9902(2), based on annual changes in the 
consumer price index for all urban consumers (CPI-U). In this 
methodology, household size and income as a percentage of FPL would be

[[Page 13901]]

used as factors in developing the rate cells. We will use the following 
income ranges measured as a percentage of FPL: \6\
---------------------------------------------------------------------------

    \6\ These income ranges and this analysis of income apply to the 
calculation of the PTC. Many fewer income ranges and a much simpler 
analysis apply in determining the value of CSRs, as specified below.
---------------------------------------------------------------------------

     0-50 percent.
     51-100 percent.
     101-138 percent.
     139-150 percent.
     151-175 percent.
     176-200 percent.
    We will assume a uniform income distribution for each federal BHP 
payment cell. We believe that assuming a uniform income distribution 
for the income ranges proposed would be reasonably accurate for the 
purposes of calculating the PTC and CSR components of the BHP payment 
and would avoid potential errors that could result if other sources of 
data were used to estimate the specific income distribution of persons 
who are eligible for or enrolled in BHP within rate cells that may be 
relatively small. Thus, when calculating the mean, or average, PTC for 
a rate cell, we will calculate the value of the PTC at each one 
percentage point interval of the income range for each federal BHP 
payment cell and then calculate the average of the PTC across all 
intervals. This calculation will rely on the PTC formula described 
below.
    As the PTC for persons enrolled in QHPs would be calculated based 
on their income during the open enrollment period, and that income 
would be measured against the FPL at that time, we will adjust the FPL 
by multiplying the FPL by a projected increase in the CPI-U between the 
time that the BHP payment rates are published and the QHP open 
enrollment period, if the FPL is expected to be updated during that 
time. In that case, the projected increase in the CPI-U would be based 
on the intermediate inflation forecasts from the most recent OASDI and 
Medicare Trustees Reports.\7\
---------------------------------------------------------------------------

    \7\ See Table IV A1 from the 2013 reports in http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/Downloads/TR2013.pdf.
---------------------------------------------------------------------------

4. Premium Tax Credit Formula (PTCF)
    In Equation 1, we will use the formula described in 26 U.S.C. 
36B(b) to calculate the estimated PTC that would be paid on behalf of a 
person enrolled in a QHP on an Exchange as part of the BHP payment 
methodology. This formula is used to determine the amount of premium 
that an individual or household would be required to pay if they had 
enrolled in the SLCSP on an Exchange, which is based on (A) the 
household income; (B) the household income measured as a percentage of 
FPL; and (C) the schedule specified in 26 U.S.C. 36B(b)(3)(A) and shown 
below. The difference between the amount of premium a person or a 
household is required to pay and the adjusted monthly premium for the 
applicable second lowest cost silver plan is the amount of the PTC that 
would be allowed to the enrollee.
    The PTC amount provided for a person enrolled in a QHP through an 
Exchange is calculated in accordance with the methodology described in 
26 U.S.C. 36B(b)(2) as the amount equal to the lesser of: (A) The 
monthly premiums for such month of one or more QHPs offered in the 
individual market within a state that cover the taxpayer, the 
taxpayer's spouse, or any dependent (as defined in 26 U.S.C. 152) of 
the taxpayer and that the taxpayer and spouse or dependents were 
enrolled in through an Exchange; or (B) the excess (if any) of (i) the 
adjusted monthly premium for such month for the applicable second 
lowest cost silver plan for the taxpayer over (ii) an amount equal to 
\1/12\ of the product of the applicable percentage (described below) 
and the taxpayer's household income for the taxable year.
    The applicable percentage is defined in 26 U.S.C. 36B(b)(3)(A) and 
26 CFR 1.36B-3(g) as the percentage that applies to a taxpayer's 
household income that is within an income tier specified in the table, 
increasing on a sliding scale in a linear manner from an initial 
premium percentage to a final premium percentage specified in the table 
(see Table 1):

   Table 1--Household's Contribution to Health Insurance Premium as a
                          Percentage of Income
------------------------------------------------------------------------
  In the case of household income
(expressed as a percent of poverty     The initial     The final premium
 line) within the following income       premium        percentage is--
               tier:                 percentage is--
------------------------------------------------------------------------
Up to 133%........................               2.0                2.0
133% but less than 150%...........               3.0                4.0
150% but less than 200%...........               4.0                6.3
200% but less than 250%...........               6.3                8.05
250% but less than 300%...........               8.05               9.5
300% but not more than 400%.......               9.5                9.5
------------------------------------------------------------------------

    These are the applicable percentages for CY 2015. The applicable 
percentages will be updated in future years in accordance with 26 
U.S.C. 36B(b)(3)(A)(ii).
5. Income Reconciliation Factor (IRF)
    For persons enrolled in a QHP through an Exchange who receive APTC, 
there will be an annual reconciliation following the end of the year to 
compare such payment to the correct amount of PTC based on household 
circumstances shown on the federal income tax return. Any difference 
between the latter amounts and the credit received during the year 
would either be paid to the taxpayer (if the taxpayer received less in 
APTC than her or she was entitled to receive) or charged to the 
taxpayer as additional tax (if the taxpayer received more in APTC than 
he or she was entitled to receive, subject to any limitations in 
statute or regulation), as provided in 26 U.S.C. 36B(f).
    Section 1331(e)(2) of the Affordable Care Act specifies that 
individuals enrolled in BHP may not be treated as a qualified 
individual under section 1312 eligible for enrollment in a QHP offered 
through an Exchange. Therefore, BHP enrollees are not eligible to 
receive an APTC to purchase coverage in the Exchange. Because they do 
not receive APTC, BHP enrollees are not subject to the same income 
reconciliation as Exchange consumers. Nonetheless, there may still be 
differences between a BHP enrollee's household income reported at the 
beginning of the year and the actual income over the year. These may 
include small changes (reflecting changes in hourly wage rates, hours 
worked per week, and other fluctuations in income during the year) and 
large

[[Page 13902]]

changes (reflecting significant changes in employment status, hourly 
wage rates, or substantial fluctuations in income). There may also be 
changes in household composition. Thus, we believe that using 
unadjusted income as reported prior to the BHP program year may result 
in calculations of estimated PTC that are inconsistent with the actual 
incomes of BHP enrollees during the year. Even if the BHP program 
adjusts household income determinations and corresponding claims of 
federal payment amounts based on household reports during the year or 
data from third-party sources, such adjustments may not fully capture 
the effects of tax reconciliation that BHP enrollees would have 
experienced had they been enrolled in a QHP through an Exchange and 
received APTC.
    Therefore, we are including an income adjustment factor in Equation 
1 that would account for the difference between calculating estimated 
PTC using: (a) Income relative to FPL as determined at initial 
application and potentially revised mid-year, under proposed 42 CFR 
600.320, for purposes of determining BHP eligibility and claiming 
federal BHP payments; and (b) actual income relative to FPL received 
during the plan year, as it would be reflected on individual federal 
income tax returns. This adjustment will prospectively estimate the 
average effect of income reconciliation aggregated across the BHP 
population had those BHP enrollees been subject to tax reconciliation 
after receiving APTC for coverage provided through QHPs. For 2015, the 
reconciliation effects are based on tax data for 2 years, reflecting 
income and tax unit composition changes over time among BHP-eligible 
individuals. This estimate has been developed by the Office of Tax 
Analysis (OTA) at the Department of the Treasury.
    The OTA maintains a model that combines detailed tax and other 
data, including Exchange enrollment and PTC claimed, to project 
Exchange premiums, enrollment, and tax credits. For each enrollee, this 
model compares the APTC estimated at the point of enrollment with the 
PTC based on household income and family size reported at the end of 
the tax year. The former reflects the determination using enrollee 
information furnished by the applicant. The latter would reflect the 
PTC eligibility based on information on the tax return, which would 
have been determined if the individual had not enrolled in BHP. The 
ratio of the reconciled PTC to the initial determination of PTC will be 
used as the income reconciliation factor in Equation (1) for estimating 
the PTC portion of the BHP payment rate.
    For 2015, OTA has estimated that the income reconciliation factor 
for states that have implemented the Medicaid eligibility expansion to 
cover adults up to 133 percent of the FPL will be 94.52 percent, and 
for states that have not implemented the Medicaid eligibility expansion 
and do not cover adults up to 133 percent of the FPL will be 95.32 
percent. Given that a state may implement the Medicaid eligibility 
expansion at any time during the year, and potentially after BHP 
payment rates have been developed, we will use the average of these two 
factors (94.92 percent) for 2015.
6. Tobacco Rating Adjustment Factor (TRAF)
    As described above, the reference premium is estimated, for 
purposes of determining both the PTC and related federal BHP payments, 
based on premiums charged for non-tobacco users, including in states 
that allow premium variations based on tobacco use, as provided in 42 
U.S.C. 300gg(a)(1)(A)(iv). In contrast, as proposed in the HHS Notice 
of Benefit and Payment Parameters for 2015, the CSR advance payments 
are based on the total premium for a policy, including any adjustment 
for tobacco use. Accordingly, we will incorporate a tobacco rating 
adjustment factor into Equation 2 that reflects the average percentage 
increase in health care costs that results from tobacco use among the 
BHP-eligible population and that would not be reflected in the premium 
charged to non-users, subject to the tobacco rating factor adjustments 
allowed by each state. This factor will also take into account the 
estimated proportion of tobacco users among BHP-eligible consumers.
    To estimate the average effect of tobacco use on health care costs 
(not reflected in the premium charged to non-users), we will calculate 
the ratio between premiums that silver level QHPs charge for tobacco 
users to the premiums they charge for non-tobacco users at selected 
ages. To calculate estimated proportions of tobacco users, we will use 
data from the Centers for Disease Control and Prevention (CDC) to 
estimate tobacco utilization rates by state and relevant population 
characteristic.\8\ For BHP program year 2015, we will compare these 
tobacco utilization rates to the characteristics of BHP-eligible 
consumers, as shown by national and state survey data. Specifically, 
for each state, we will calculate the tobacco usage rate based on the 
percentage of persons by age who use cigarettes and the percentage of 
persons by age that use smokeless tobacco, and calculate the 
utilization rate by adding the two rates together. The data is 
available for 3 age intervals: 18-24; 25-44; and 45-64. For the BHP 
payment rate cell for persons ages 21-34, we would calculate the factor 
as (4/14 * the utilization rate of 18-24 year olds) plus (10/14 * the 
utilization rate of 25-44 year olds), which would be the weighted 
average of tobacco usage for persons 21-34 assuming a uniform 
distribution of ages; for all other age ranges used for the rate cells, 
we would use the age range in the CDC data in which the BHP payment 
rate cell age range is contained.
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    \8\ See http://www.cdc.gov/nchs/nhis/tobacco.htm; http://apps.nccd.cdc.gov/statesystem/default/DataSource.aspx.
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    We will provide tobacco rating factors that may vary by age and by 
geographic area within each state. To the extent that the second lowest 
cost silver plans have a different ratio of tobacco user rates to non 
tobacco user rates in different geographic areas, the tobacco rating 
adjustment factor may differ across geographic areas within a state. In 
addition, to the extent that the second lowest cost silver plan has a 
different ratio of tobacco user rates to non tobacco user rates by age, 
or that there is a different prevalence of tobacco use by age, the 
tobacco rating adjustment factor may differ by age.
7. Factor for Removing Administrative Costs (FRAC)
    The Factor for Removing Administrative Costs (FRAC) represents the 
average proportion of the total premium that covers allowed health 
benefits, and we include this factor in our calculation of estimated 
CSRs in Equation 2. The product of the reference premium and the FRAC 
would approximate the estimated amount of EHB claims that would be 
expected to be paid by the plan. This step is needed because the 
premium also covers such costs as taxes, fees, and QHP administrative 
expenses. We have set this factor equal to 0.80, which is proposed for 
calculating CSR advance payments for 2015 in the HHS Notice of Benefit 
and Payment Parameters for 2015.
8. Actuarial Value (AV)
    The actuarial value is defined as the percentage paid by a health 
plan of the total allowed costs of benefits, as defined under 45 CFR 
Sec.  156.20. (For example, if the average health care costs for 
enrollees in a health insurance plan were $1,000 and that plan has an

[[Page 13903]]

actuarial value of 70 percent, the plan would be expected to pay $700 
($1,000 x 0.70) for health care costs per enrollee, on average.) By 
dividing such estimated costs by the actuarial value in the proposed 
methodology, we would calculate the estimated amount of total EHB-
allowed claims, including both the portion of such claims paid by the 
plan and the portion paid by the consumer for in-network care. (To 
continue with that same example, we would divide the plan's expected 
$700 payment of the person's EHB-allowed claims by the plan's 70 
percent actuarial value to ascertain that the total amount of EHB-
allowed claims, including amounts paid by the consumer, is $1,000.)
    For the purposes of calculating the CSR rate in Equation 2, we will 
use the standard actuarial value of the silver level plans in the 
individual market, which is equal to 70 percent.
9. Induced Utilization Factor (IUF)
    The induced utilization factor is proposed as a factor in 
calculating estimated CSRs in Equation 2 to account for the increase in 
health care service utilization associated with a reduction in the 
level of cost sharing a QHP enrollee would have to pay, based on the 
cost-sharing reduction subsidies provided to enrollees.
    In the HHS Notice of Benefit and Payment Parameters for 2015 
proposed rule, we proposed induced utilization factors for the purposes 
of calculating cost-sharing reduction advance payments for 2015. The 
induced utilization factor for all persons who would enroll in a silver 
plan and qualify for BHP based on their household income as a 
percentage of FPL is 1.12; this would include persons with household 
income between 100 percent and 200 percent of FPL, lawfully present 
non-citizens below 100 percent of FPL who are ineligible for Medicaid 
because of immigration status, and persons with household income under 
300 percent of FPL, not subject to any cost-sharing. Thus, we will use 
the induced utilization factor equal to 1.12 for the BHP payment 
methodology.
10. Change in Actuarial Value ([Delta]AV)
    The increase in actuarial value would account for the impact of the 
cost-sharing reduction subsidies on the relative amount of EHB claims 
that would be covered for or paid by eligible persons, and we include 
it as a factor in calculating estimated CSRs in Equation 2.
    The actuarial values of QHPs for persons eligible for cost-sharing 
reduction subsidies are defined in 45 CFR 156.420(a), and eligibility 
for such subsidies is defined in 45 CFR 155.305(g)(2)(i) through (iii). 
For QHP enrollees with household incomes between 100 percent and 150 
percent of FPL, and those below 100 percent of FPL who are ineligible 
for Medicaid because of their immigration status, CSRs increase the 
actuarial value of a QHP silver plan from 70 percent to 94 percent. For 
QHP enrollees with household incomes between 150 percent and 200 
percent of FPL, CSRs increase the actuarial value of a QHP silver plan 
from 70 percent to 87 percent.
    We will apply this factor by subtracting the standard AV from the 
higher AV allowed by the applicable cost-sharing reduction. For BHP 
enrollees with household incomes at or below 150 percent of FPL, this 
factor is 0.24 (94 percent minus 70 percent); for BHP enrollees with 
household incomes more than 150 percent but not more than 200 percent 
of FPL, this factor is 0.17 (87 percent minus 70 percent).

E. Adjustments for American Indians and Alaska Natives

    There are several exceptions made for American Indians and Alaska 
Natives enrolled in QHPs through an Exchange to calculate the PTC and 
CSRs. Thus, we will make adjustments to the payment methodology 
described above to be consistent with the Exchange rules.
    We will make the following adjustments:
    1. The adjusted reference premium for use in the CSR portion of the 
rate will be the lowest cost bronze plan instead of the second lowest 
cost silver plan, with the same adjustment for the population health 
factor (and in the case of a state that elects to use the 2014 premiums 
as the basis of the federal BHP payment, the same adjustment for the 
premium trend factor). American Indians and Alaska Natives are eligible 
for CSRs with any metal level plan, and thus we believe that eligible 
persons would be more likely to select a bronze level plan instead of a 
silver level plan. (It is important to note that this would not change 
the PTC, as that is the maximum possible PTC payment, which is always 
based on the second lowest cost silver plan.)
    2. The actuarial value for use in the CSR portion of the rate is 
0.60 instead of 0.70, which is consistent with the actuarial value of a 
bronze level plan.
    3. The induced utilization factor for use in the CSR portion of the 
rate is 1.15, which is consistent with the proposed HHS Notice of 
Benefit and Payment Parameters for 2015 induced utilization factor for 
calculating advance CSR payments for persons enrolled in bronze level 
plans and eligible for CSRs up to 100 percent of actuarial value.
    4. The change in the actuarial value for use in the CSR portion of 
the rate is 0.40. This reflects the increase from 60 percent actuarial 
value of the bronze plan to 100 percent actuarial value, as American 
Indians and Alaska Natives are eligible to receive CSRs up to 100 
percent of actuarial value.

F. State Option To Use 2014 QHP Premiums for BHP Payments

    In the interest of allowing states greater certainty in the total 
BHP federal payments for 2015, we will provide states the option to 
have their final 2015 federal BHP payment rates to be calculated using 
the projected 2015 adjusted reference premium (that is, using 2014 
premium data multiplied by the premium trend factor defined below), as 
described in Equation (3b).
    For a state that elects to use the 2014 premium as the basis for 
the 2015 BHP federal payment, the state must inform CMS no later than 
May 15, 2014.
    For Equation (3b), we define the premium trend factor as follows: 
Premium Trend Factor (PTF)
    In Equation (3b), we calculate an adjusted reference premium (ARP) 
based on the application of certain relevant variables to the reference 
premium (RP), including a premium trend factor (PTF). In the case of a 
state that elects to use the 2014 premiums as the basis for determining 
the BHP payment, it is appropriate to apply a factor that would account 
for the change in health care costs between the year of the premium 
data and the BHP plan year. We are defining this as the premium trend 
factor in the BHP payment methodology. This factor approximates the 
change in health care costs per enrollee, which would include, but is 
not limited to, changes in the price of health care services and 
changes in the utilization of health care services. This provides an 
estimate of the adjusted monthly premium for the applicable second 
lowest cost silver plan that would be more accurate and reflective of 
health care costs in the BHP program year, which will be the year 
following issuance of the final federal payment notice. In addition, we 
believe that it is appropriate to adjust the trend factor for the 
estimated impact of changes to the transitional reinsurance program on 
the average QHP premium.
    We will use the annual growth rate in private health insurance 
expenditures per enrollee from the National Health Expenditure 
projections, developed by the Office of the Actuary in CMS (citation, 
http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-

[[Page 13904]]

Trends-and-Reports/NationalHealthExpendData/Downloads/Proj2012.pdf). 
For 2015, the projected increase in private health insurance premiums 
per enrollee is 3.55 percent.
    The adjustment for changes in the transitional reinsurance program 
is developed from analysis by CMS' Center for Consumer Information and 
Insurance Oversight (CCIIO). In the 2014 notice (78 FR 15519), CCIIO 
estimated that the transitional reinsurance program reduced QHP 
premiums on average by 10 to 15 percent. In unpublished analysis, CCIIO 
estimated that the transitional reinsurance program would reduce QHP 
premiums in 2015 on average by 6 percent, as the amount of funding in 
the reinsurance program decreases. Based on these analyses, we estimate 
that the changes in the transitional reinsurance program would lead to 
an increase of 4.44 percent in average QHP premiums between 2014 and 
2015; assuming that the 2014 QHP premiums are reduced by 10 percent due 
to the reinsurance program, we calculate the adjustment as (1-0.06)/(1-
0.10)-1 = 0.0444.
    Combining these two factors together, we calculate that the premium 
trend factor for 2015 would be 8.15 percent: (1+0.0355) * (1+0.0444)-1 
= 0.0815.

G. State Option To Include Retrospective State-specific Health Risk 
Adjustment in Certified Methodology

    In order to determine whether the potential difference in health 
status between BHP enrollees and consumers in the Exchange would affect 
the PTC, CSRs, risk adjustment and reinsurance payments that would have 
otherwise been made had BHP enrollees been enrolled in coverage on the 
Exchange, we will provide states implementing the BHP the option to 
propose and to implement, as part of the certified methodology, a 
retrospective adjustment to the federal BHP payments to reflect the 
actual value that would be assigned to the population health factor (or 
risk adjustment) based on data accumulated during program year 2015 for 
each rate cell.
    We acknowledge that there is notable uncertainty with respect to 
this factor due to the lack of experience of QHPs on the Exchange and 
other payments related to the Exchange, which is why, absent a state 
election, we will use a value for the population health factor to 
determine a prospective payment rate which assumes no difference in the 
health status of BHP enrollees and QHP enrollees. There is considerable 
uncertainty regarding whether the BHP enrollees will pose a greater 
risk or a lesser risk compared to the QHP enrollees, how to best 
measure such risk, and the potential effect such risk would have had on 
PTC, CSRs, risk adjustment and reinsurance payments that would have 
otherwise been made had BHP enrollees been enrolled in coverage on the 
Exchange. To the extent, however, that a state develops an approved 
protocol to collect data and effectively measure the relative risk and 
the effect on federal payments, we would permit a retrospective 
adjustment that measured the actual difference in risk between the two 
populations to be incorporated into the certified BHP payment 
methodology and used to adjust payments in the previous year.
    In order for a state electing the option to implement a 
retrospective population health status adjustment, the state would be 
required to submit a proposed protocol to CMS, which would be subject 
to approval by CMS and would be required to be certified by the Chief 
Actuary of CMS, in consultation with the Office of Tax Analysis, as 
part of the BHP payment methodology. We anticipate issuing future 
guidance shortly that will provide the basic framework in which a state 
must include in its proposed protocol and instructions for submission 
to CMS for approval; a state must submit its proposed protocol by 
August 1, 2014 for CMS approval. This submission must also include how 
the state will collect the necessary data to determine the adjustment, 
including any contracting contingences that may be in place with 
participating standard health plan offerors. CMS will provide technical 
assistance to states as they develop their protocol. In order to 
implement the population health status, CMS must approve the state's 
protocol no later than December 31, 2014. Finally, the state must 
complete the population health status adjustment at the end of 2015 
based on the approved protocol. After the end of the 2015 program year, 
and once data is made available, CMS will review the state's findings, 
consistent with the approved protocol, and make any necessary 
adjustments to the state's federal BHP payment amount. If CMS 
determines that the federal BHP payments were less than they would have 
been using the final adjustment factor, CMS would apply the difference 
to the state's quarterly BHP trust fund deposit. If CMS determines that 
the federal BHP payments were more than they would have been using the 
final reconciled factor, CMS would subtract the difference from the 
next quarterly BHP payment to the state.

IV. Collection of Information Requirements

    The information collection requirements and burden estimates 
associated with this final methodology have been approved by OMB 
through July 31, 2014 under OCN 0938-1218 (CMS-10510). CMS will be 
seeking to extend OMB's approval period at a later time.
    This final methodology would not impose any new or revised 
reporting or recordkeeping requirements and, therefore, does not 
require additional OMB review under the authority of the Paperwork 
Reduction Act of 1995 (44 U.S.C. 3501 et seq.).

V. Regulatory Impact Statement

A. Overall Impact

    We have examined the impacts of this final methodology 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 Social 
Security 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 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). 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

[[Page 13905]]

the principles set forth in the Executive Order.
    A regulatory impact analysis (RIA) must be prepared for major rules 
with economically significant effects ($100 million or more in any 1 
year). As noted in the BHP rule, BHP provides states the flexibility to 
establish an alternative coverage program for low-income individuals 
who would otherwise be eligible to purchase coverage through the 
Exchange. We are uncertain, as described further below, as to whether 
the effects of the rulemaking, and subsequently, this final 
methodology, will be ``economically significant'' as measured by the 
$100 million threshold, and hence a major rule under the Congressional 
Review Act. In accordance with the provisions of Executive Order 12866, 
this final methodology was reviewed by the Office of Management and 
Budget.
1. Need for the Notice
    Section 1331 of the Affordable Care Act (codified at 42 U.S.C. 
18051) requires the Secretary to establish a BHP, and subsection (d)(1) 
specifically provides that if the Secretary finds that a state ``meets 
the requirements of the program established under subsection (a) [of 
section 1331], the Secretary shall transfer to the State'' federal BHP 
payments described in subsection (d)(3). This final methodology 
provides for the funding methodology to determine the federal BHP 
payment amounts required to implement these provisions.
2. Alternative Approaches
    Many of the factors in this final methodology are specified in 
statute; therefore, we are limited in the alternative approaches we 
could consider. One area in which we had a choice was in selecting the 
data sources used to determine the factors included in the methodology. 
Except for state-specific reference premiums and enrollment data, we 
are using national rather than state-specific data. This is due to the 
lack of currently available state-specific data needed to develop the 
majority of the factors included in the methodology. We believe the 
national data will produce sufficiently accurate determinations of 
payment rates. In addition, we believe that this approach will be less 
burdensome on states. With respect to reference premiums and enrollment 
data, using state-specific data rather than national data will produce 
more accurate determinations than national averages.
3. Transfers
    The provisions of this final methodology are designed to determine 
the amount of funds that will be transferred to states offering 
coverage through a BHP rather than to individuals eligible for premium 
and cost-sharing reductions for coverage purchased on the Exchange. We 
are uncertain what the total federal BHP payment amounts to states will 
be as these amounts will vary from state to state due to the varying 
nature of state composition. For example, total federal BHP payment 
amounts may be greater in more populous states simply by virtue of the 
fact that they have a larger BHP-eligible population and total payment 
amounts are based on actual enrollment. Alternatively, total federal 
BHP payment amounts may be lower in states with a younger BHP-eligible 
population as the reference premium used to calculate the federal BHP 
payment will be lower relative to older BHP enrollees. While state 
composition will cause total federal BHP payment amounts to vary from 
state to state, the methodology accounts for these variations to ensure 
accurate BHP payment transfers are made to each state.

B. 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 whose mandates require spending in any 1 year of $100 
million in 1995 dollars, updated annually for inflation, by state, 
local, or tribal governments, in the aggregate, or by the private 
sector. In 2014, that threshold is approximately $141 million. States 
have the option, but are not required, to establish a BHP. Further, the 
methodology will establish federal payment rates without requiring 
states to provide the Secretary with any data not already required by 
other provisions of the Affordable Care Act or its implementing 
regulations. Thus, this final methodology does not mandate expenditures 
by state governments, local governments, or tribal governments.

C. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) 
requires agencies to prepare an initial regulatory flexibility analysis 
to describe the impact of the final rule on small entities, unless the 
head of the agency can certify that the rule will not have a 
significant economic impact on a substantial number of small entities. 
The Act generally defines a ``small entity'' as (1) a proprietary firm 
meeting the size standards of the Small Business Administration (SBA); 
(2) a not-for-profit organization that is not dominant in its field; or 
(3) a small government jurisdiction with a population of less than 
50,000. Individuals and states are not included in the definition of a 
small entity. Few of the entities that meet the definition of a small 
entity as that term is used in the RFA would be impacted directly by 
this final methodology.
    Because this final document is focused on the funding methodology 
that will be used to determine federal BHP payment rates, it does not 
contain provisions that would have a significant direct impact on 
hospitals and other health care providers that are designated as small 
entities under the RFA. However, the provisions in this final 
methodology may have a substantial, positive indirect effect on 
hospitals and other health care providers due to the substantial 
increase in the prevalence of health coverage among populations who are 
currently unable to pay for needed health care, leading to lower rates 
of uncompensated care at hospitals. As such, the Department cannot 
determine whether this final methodology would have a significant 
economic impact on a substantial number of small entities.
    Section 1102(b) of the Act requires us to prepare a regulatory 
impact analysis if a proposed notice may have a significant economic 
impact on the operations of a substantial number of small rural 
hospitals. For purposes of section 1102(b) of the Act, we define a 
small rural hospital as a hospital that is located outside of a 
metropolitan statistical area and has fewer than 100 beds. As indicated 
in the preceding discussion, there may be indirect positive effects 
from reductions in uncompensated care. Again, the Department cannot 
determine whether this final methodology would have a significant 
economic impact on a substantial number of small rural hospitals.

D. 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 effects on states, preempts 
state law, or otherwise has federalism implications. The BHP is 
entirely optional for states, and if implemented in a state, provides 
access to a pool of funding that would not otherwise be available to 
the state.
    We have consulted with states to receive input on how the 
Affordable Care Act provisions codified in this final methodology would 
affect states. We have participated in a number of conference calls and 
in person meetings with state officials.

[[Page 13906]]

    We continue to engage in ongoing consultations with states that 
have expressed interest in implementing a BHP through the BHP Learning 
Collaborative, which serves as a staff level policy and technical 
exchange of information between CMS and the states. Through 
consultations with this Learning Collaborative, we have been able to 
get input from states on many of the specific issues addressed in this 
methodology.

    Authority:  Section 1331(d)(3) of the Affordable Care Act.

    Dated: February 19, 2014.
Marilyn Tavenner,
Administrator, Centers for Medicare & Medicaid Services.
    Approved: February 21, 2014.
Kathleen Sebelius,
Secretary, Department of Health and Human Services.
[FR Doc. 2014-05257 Filed 3-7-14; 4:15 pm]
BILLING CODE 4120-01-P