[Federal Register Volume 83, Number 236 (Monday, December 10, 2018)]
[Rules and Regulations]
[Pages 63419-63428]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-26591]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

45 CFR Part 153

[CMS-9919-F]
RIN 0938-AT66


Patient Protection and Affordable Care Act; Adoption of the 
Methodology for the HHS-Operated Permanent Risk Adjustment Program for 
the 2018 Benefit Year Final Rule

AGENCY: Centers for Medicare & Medicaid Services (CMS), Department of 
Health and Human Services (HHS).

ACTION: Final rule.

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SUMMARY: This final rule adopts the HHS-operated risk adjustment 
methodology for the 2018 benefit year. In February 2018, a district 
court vacated the use of statewide average premium in the HHS-operated 
risk adjustment methodology for the 2014 through 2018 benefit years. 
Following review of all submitted comments to the proposed rule, HHS is 
adopting for the 2018 benefit year an HHS-operated risk adjustment 
methodology that utilizes the statewide average premium and is operated 
in a budget-neutral manner, as established in the final rules published 
in the March 23, 2012 and the December 22, 2016 editions of the Federal 
Register.

DATES: The provisions of this final rule are effective on February 8, 
2019.

FOR FURTHER INFORMATION CONTACT: Abigail Walker, (410) 786-1725; Adam 
Shaw, (410) 786-1091; Jaya Ghildiyal, (301) 492-5149; or Adrianne 
Patterson, (410) 786-0686.

SUPPLEMENTARY INFORMATION: 

I. Background

A. Legislative and Regulatory Overview

    The Patient Protection and Affordable Care Act (Pub. L. 111-148) 
was enacted on March 23, 2010; the Health Care and Education 
Reconciliation Act of 2010 (Pub. L. 111-152) was enacted on March 30, 
2010. These statutes are collectively referred to as ``PPACA'' in this 
final rule. Section 1343 of the PPACA established an annual permanent 
risk adjustment program under which payments are collected from health 
insurance issuers that enroll relatively low-risk populations, and 
payments are made to health insurance issuers that enroll relatively 
higher-risk populations. Consistent with section 1321(c)(1) of the 
PPACA, the Secretary is responsible for operating the risk adjustment 
program on behalf of any state that elects not to do so. For the 2018 
benefit year, HHS is responsible for operation of the risk adjustment 
program in all 50 states and the District of Columbia.
    HHS sets the risk adjustment methodology that it uses in states 
that elect not to operate risk adjustment in advance of each benefit 
year through a notice-and-comment rulemaking process with the intention 
that issuers will be able to rely on the methodology to price their 
plans appropriately (see 45 CFR 153.320; 76 FR 41930, 41932 through 
41933; 81 FR 94058, 94702 (explaining the importance of setting rules 
ahead of time and describing comments supporting that practice)).
    In the July 15, 2011 Federal Register (76 FR 41929), we published a 
proposed rule outlining the framework for the risk adjustment program. 
We implemented the risk adjustment program in a final rule, published 
in the March 23, 2012 Federal Register (77 FR 17219) (Premium 
Stabilization Rule). In the December 7, 2012 Federal Register (77 FR 
73117), we published a proposed rule outlining the proposed Federally 
certified risk adjustment methodologies for the 2014 benefit year and 
other parameters related to the risk adjustment program (proposed 2014 
Payment Notice). We published the 2014 Payment Notice final rule in the 
March 11, 2013 Federal Register (78 FR 15409). In the June 19, 2013 
Federal Register (78 FR 37032), we proposed a modification to the HHS-
operated risk adjustment methodology related to community rating 
states. In the October 30, 2013 Federal Register (78 FR 65046), we 
finalized this proposed modification related to community rating 
states. We published a correcting amendment to the 2014 Payment Notice 
final rule in the November 6, 2013 Federal Register (78 FR 66653) to 
address how an enrollee's age for the risk score calculation would be 
determined under the HHS-operated risk adjustment methodology.
    In the December 2, 2013 Federal Register (78 FR 72321), we 
published a proposed rule outlining the Federally certified risk 
adjustment methodologies for the 2015 benefit year and other parameters 
related to the risk adjustment program (proposed 2015 Payment Notice). 
We published the 2015 Payment Notice final rule in the March 11, 2014 
Federal Register (79 FR 13743). In the May 27, 2014 Federal Register 
(79 FR 30240), the 2015 fiscal year sequestration rate for the risk 
adjustment program was announced.
    In the November 26, 2014 Federal Register (79 FR 70673), we 
published a proposed rule outlining the proposed Federally certified 
risk adjustment methodologies for the 2016 benefit year and other 
parameters related to the risk adjustment program (proposed 2016 
Payment Notice). We published the 2016 Payment Notice final rule in the 
February 27, 2015 Federal Register (80 FR 10749).
    In the December 2, 2015 Federal Register (80 FR 75487), we 
published a proposed rule outlining the Federally certified risk 
adjustment methodology for the 2017 benefit year and other parameters 
related to the risk adjustment program (proposed 2017 Payment Notice). 
We published the 2017 Payment Notice final rule in the March 8, 2016 
Federal Register (81 FR 12204).
    In the September 6, 2016 Federal Register (81 FR 61455), we 
published a proposed rule outlining the Federally certified risk 
adjustment methodology for the 2018 benefit year and other parameters 
related to the risk adjustment program (proposed 2018 Payment Notice). 
We published the 2018 Payment Notice final rule in the December 22, 
2016 Federal Register (81 FR 94058).
    In the November 2, 2017 Federal Register (82 FR 51042), we 
published a proposed rule outlining the federally certified risk 
adjustment methodology for the 2019 benefit year. In that proposed 
rule, we proposed updates to the risk adjustment methodology and 
amendments to the risk adjustment data validation process (proposed 
2019 Payment Notice). We published the 2019 Payment Notice final rule 
in the April 17, 2018 Federal Register (83 FR 16930). We published a 
correction to the 2019 risk adjustment coefficients in the 2019 Payment 
Notice final rule in the May 11, 2018 Federal Register (83 FR 21925). 
On July 27, 2018, consistent with Sec.  153.320(b)(1)(i), we updated 
the 2019 benefit year final risk adjustment model coefficients to 
reflect an additional recalibration related to an

[[Page 63420]]

update to the 2016 enrollee-level EDGE dataset.\1\
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    \1\ See Updated 2019 Benefit Year Final HHS Risk Adjustment 
Model Coefficients. July 27, 2018. Available at https://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/2019-Updtd-Final-HHS-RA-Model-Coefficients.pdf.
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    In the July 30, 2018 Federal Register (83 FR 36456), we published a 
final rule that adopted the 2017 benefit year HHS-operated risk 
adjustment methodology set forth in the March 23, 2012 Federal Register 
(77 FR 17220 through 17252) and in the March 8, 2016 Federal Register 
(81 FR 12204 through 12352). The final rule provided an additional 
explanation of the rationale for use of statewide average premium in 
the HHS-operated risk adjustment state payment transfer formula for the 
2017 benefit year, including why the program is operated in a budget-
neutral manner. That final rule permitted HHS to resume 2017 benefit 
year program operations, including collection of risk adjustment 
charges and distribution of risk adjustment payments. HHS also provided 
guidance as to the operation of the HHS-operated risk adjustment 
program for the 2017 benefit year in light of publication of the final 
rule.\2\
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    \2\ See https://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/2017-RA-Final-Rule-Resumption-RAOps.pdf.
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    In the August 10, 2018 Federal Register (83 FR 39644), we published 
the proposed rule concerning the adoption of the 2018 benefit year HHS-
operated risk adjustment methodology set forth in the March 23, 2012 
Federal Register (77 FR 17220 through 17252) and in the December 22, 
2016 Federal Register (81 FR 94058 through 94183).

B. The New Mexico Health Connections Court's Order

    On February 28, 2018, in a suit brought by the health insurance 
issuer New Mexico Health Connections, the United States District Court 
for the District of New Mexico (the district court) vacated the use of 
statewide average premium in the HHS-operated risk adjustment 
methodology for the 2014, 2015, 2016, 2017, and 2018 benefit years. The 
district court reasoned that HHS had not adequately explained its 
decision to adopt a methodology that used statewide average premium as 
the cost-scaling factor to ensure that the amount collected from 
issuers equals the amount of payments made to issuers for the 
applicable benefit year, that is, a methodology that maintains the 
budget neutrality of the HHS-operated risk adjustment program for the 
applicable benefit year.\3\ The district court otherwise rejected New 
Mexico Health Connections' arguments.
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    \3\ New Mexico Health Connections v. United States Department of 
Health and Human Services et al., No. CIV 16-0878 JB/JHR (D.N.M. 
Feb. 28, 2018). On March 28, 2018, HHS filed a motion requesting 
that the district court reconsider its decision. A hearing on the 
motion for reconsideration was held on June 21, 2018. On October 19, 
2018, the court denied HHS's motion for reconsideration. See New 
Mexico Health Connections v. United States Department of Health and 
Human Services et al., No. CIV 16-0878 JB/JHR (D.N.M. Oct. 19, 
2018).
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C. The PPACA Risk Adjustment Program

    The risk adjustment program provides payments to health insurance 
plans that enroll populations with higher-than-average risk and 
collects charges from plans that enroll populations with lower-than-
average risk. The program is intended to reduce incentives for issuers 
to structure their plan benefit designs or marketing strategies to 
avoid higher-risk enrollees and lessen the potential influence of risk 
selection on the premiums that plans charge. Instead, issuers are 
expected to set rates based on average risk and compete based on plan 
features rather than selection of healthier enrollees. The program 
applies to any health insurance issuer offering plans in the 
individual, small group and merged markets, with the exception of 
grandfathered health plans, group health insurance coverage described 
in 45 CFR 146.145(c), individual health insurance coverage described in 
45 CFR 148.220, and any plan determined not to be a risk adjustment 
covered plan in the applicable Federally certified risk adjustment 
methodology.\4\ In 45 CFR part 153, subparts A, B, D, G, and H, HHS 
established standards for the administration of the permanent risk 
adjustment program. In accordance with Sec.  153.320, any risk 
adjustment methodology used by a state, or by HHS on behalf of the 
state, must be a federally certified risk adjustment methodology.
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    \4\ See the definition for ``risk adjustment covered plan'' at 
Sec.  153.20.
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    As stated in the 2014 Payment Notice final rule, the federally 
certified risk adjustment methodology developed and used by HHS in 
states that elect not to operate a risk adjustment program is based on 
the premise that premiums for that state market should reflect the 
differences in plan benefits and efficiency--not the health status of 
the enrolled population.\5\ HHS developed the risk adjustment state 
payment transfer formula that calculates the difference between the 
revenues required by a plan based on the projected health risk of the 
plan's enrollees and the revenues that the plan can generate for those 
enrollees. These differences are then compared across plans in the 
state market risk pool and converted to a dollar amount based on the 
statewide average premium. HHS chose to use statewide average premium 
and normalize the risk adjustment state payment transfer formula to 
reflect state average factors so that each plan's enrollment 
characteristics are compared to the state average and the total 
calculated payment amounts equal total calculated charges in each state 
market risk pool. Thus, each plan in the state market risk pool 
receives a risk adjustment payment or charge designed to compensate for 
risk for a plan with average risk in a budget-neutral manner. This 
approach supports the overall goal of the risk adjustment program to 
encourage issuers to rate for the average risk in the applicable state 
market risk pool, and mitigates incentives for issuers to operate less 
efficiently, set higher prices, or develop benefit designs or create 
marketing strategies to avoid high-risk enrollees. Such incentives 
could arise if HHS used each issuer's plan's own premium in the state 
payment transfer formula, instead of statewide average premium.
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    \5\ See 78 FR at 15417.
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II. Provisions of the Proposed Rule and Analysis of and Responses to 
Public Comments

    In the August 10, 2018 Federal Register (83 FR 39644), we published 
a proposed rule that proposed to adopt the HHS-operated risk adjustment 
methodology as previously established in the March 23, 2012 Federal 
Register (77 FR 17220 through 17252) and the December 22, 2016 Federal 
Register (81 FR 94058 through 94183) for the 2018 benefit year, with an 
additional explanation regarding the use of statewide average premium 
and the budget-neutral nature of the HHS-operated risk adjustment 
program. We did not propose to make any changes to the previously 
published HHS-operated risk adjustment methodology for the 2018 benefit 
year.
    As explained above, the district court vacated the use of statewide 
average premium in the HHS-operated risk adjustment methodology for the 
2014 through 2018 benefit years on the grounds that HHS did not 
adequately explain its decision to adopt that aspect of the risk 
adjustment methodology. The district court recognized that use of 
statewide average premium maintained the budget neutrality of the 
program, but concluded that HHS had not adequately explained the 
underlying decision to adopt a methodology that kept the program budget 
neutral, that is, a methodology that ensured that amounts

[[Page 63421]]

collected from issuers would equal payments made to issuers for the 
applicable benefit year. Accordingly, HHS provided the additional 
explanation in the proposed rule.
    As explained in the proposed rule, Congress designed the risk 
adjustment program to be implemented and operated by states if they 
chose to do so. Nothing in section 1343 of the PPACA requires a state 
to spend its own funds on risk adjustment payments, or allows HHS to 
impose such a requirement. Thus, while section 1343 may have provided 
leeway for states to spend additional funds on their programs if they 
voluntarily chose to do so, HHS could not have required such additional 
funding.
    We also explained that while the PPACA did not include an explicit 
requirement that the risk adjustment program be operated in a budget-
neutral manner, HHS was constrained by appropriations law to devise a 
risk adjustment methodology that could be implemented in a budget-
neutral fashion. In fact, although the statutory provisions for many 
other PPACA programs appropriated or authorized amounts to be 
appropriated from the U.S. Treasury, or provided budget authority in 
advance of appropriations,\6\ the PPACA neither authorized nor 
appropriated additional funding for risk adjustment payments beyond the 
amount of charges paid in, and did not authorize HHS to obligate itself 
for risk adjustment payments in excess of charges collected.\7\ Indeed, 
unlike the Medicare Part D statute, which expressly authorized the 
appropriation of funds and provided budget authority in advance of 
appropriations to make Part D risk-adjusted payments, the PPACA's risk 
adjustment statute made no reference to additional appropriations.\8\ 
Because Congress omitted from the PPACA any provision appropriating 
independent funding or creating budget authority in advance of an 
appropriation for the risk adjustment program, we explained that HHS 
could not--absent another source of appropriations--have designed the 
program in a way that required payments in excess of collections 
consistent with binding appropriations law. Thus, Congress did not give 
HHS discretion to implement a risk adjustment program that was not 
budget neutral.
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    \6\ For examples of PPACA provisions appropriating funds, see 
PPACA secs. 1101(g)(1), 1311(a)(1), 1322(g), and 1323(c). For 
examples of PPACA provisions authorizing the appropriation of funds, 
see PPACA secs. 1002, 2705(f), 2706(e), 3013(c), 3015, 3504(b), 
3505(a)(5), 3505(b), 3506, 3509(a)(1), 3509(b), 3509(e), 3509(f), 
3509(g), 3511, 4003(a), 4003(b), 4004(j), 4101(b), 4102(a), 4102(c), 
4102(d)(1)(C), 4102(d)(4), 4201(f), 4202(a)(5), 4204(b), 4206, 
4302(a), 4304, 4305(a), 4305(c), 5101(h), 5102(e), 5103(a)(3), 5203, 
5204, 5206(b), 5207, 5208(b), 5210, 5301, 5302, 5303, 5304, 5305(a), 
5306(a), 5307(a), and 5309(b).
    \7\ See 42 U.S.C. 18063.
    \8\ Compare 42 U.S.C. 18063 (failing to specify source of 
funding other than risk adjustment charges), with 42 U.S.C. 1395w-
116(c)(3) (authorizing appropriations for Medicare Part D risk 
adjusted payments); 42 U.S.C. 1395w-115(a) (establishing ``budget 
authority in advance of appropriations Acts'' for Medicare Part D 
risk adjusted payments).
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    Furthermore, the proposed rule explained that if HHS elected to 
adopt a risk adjustment methodology that was contingent on 
appropriations from Congress through the annual appropriations process, 
that would have created uncertainty for issuers regarding the amount of 
risk adjustment payments they could expect for a given benefit year. 
That uncertainty would have undermined one of the central objectives of 
the risk adjustment program, which is to stabilize premiums by assuring 
issuers in advance that they will receive risk adjustment payments if, 
for the applicable benefit year, they enroll a higher-risk population 
compared to other issuers in the state market risk pool. The budget-
neutral framework spreads the costs of covering higher-risk enrollees 
across issuers throughout a given state market risk pool, thereby 
reducing incentives for issuers to engage in risk-avoidance techniques 
such as designing or marketing their plans in ways that tend to attract 
healthier individuals, who cost less to insure.
    Moreover, the proposed rule noted that relying on each year's 
budget process for appropriation of additional funds to HHS that could 
be used to supplement risk adjustment transfers would have required HHS 
to delay setting the parameters for any risk adjustment payment 
proration rates until well after the plans were in effect for the 
applicable benefit year. The proposed rule also explained that any 
later-authorized program management appropriations made to CMS were not 
intended to be used for supplementing risk adjustment payments, and 
were allocated by the agency for other, primarily administrative, 
purposes. Specifically, it has been suggested that the annual lump sum 
appropriation to CMS for program management (CMS Program Management 
account) was potentially available for risk adjustment payments. The 
lump sum appropriation for each year was not enacted until after the 
applicable rule announcing the HHS-operated methodology for the 
applicable benefit year, and therefore could not have been relied upon 
in promulgating that rule. Additionally, as the underlying budget 
requests reflect, the CMS Program Management account was intended for 
program management expenses, such as administrative costs for various 
CMS programs such as Medicaid, Medicare, the Children's Health 
Insurance Program, and the PPACA's insurance market reforms--not for 
the program payments under those programs. CMS would have elected to 
use the CMS Program Management account for these important program 
management expenses, rather than program payments for risk adjustment, 
even if CMS had discretion to use all or part of the lump sum for such 
program payments. Without the adoption of a budget-neutral framework, 
we explained that HHS would have needed to assess a charge or otherwise 
collect additional funds, or prorate risk adjustment payments to 
balance the calculated risk adjustment transfer amounts. The resulting 
uncertainty would have conflicted with the overall goals of the risk 
adjustment program--to stabilize premiums and to reduce incentives for 
issuers to avoid enrolling individuals with higher-than-average 
actuarial risk.
    In light of the budget-neutral framework discussed above, the 
proposed rule explained that we also chose not to use a different 
parameter for the state payment transfer formula under the HHS-operated 
methodology, such as each plan's own premium, that would not have 
automatically achieved equality between risk adjustment payments and 
charges in each benefit year. As set forth in prior discussions,\9\ use 
of the plan's own premium or a similar parameter would have required 
the application of a balancing adjustment in light of the program's 
budget neutrality--either reducing payments to issuers owed a payment, 
increasing charges on issuers due a charge, or splitting the difference 
in some fashion between issuers owed payments and issuers assessed 
charges. Using a plan's own premium would have frustrated the risk 
adjustment program's goals, as discussed above, of encouraging issuers 
to rate for the average risk in the applicable state market risk pool, 
and avoiding the creation of incentives for issuers to operate less 
efficiently, set higher prices, or develop benefit designs or create 
marketing strategies to avoid high-risk enrollees. Use of an after-the-
fact balancing adjustment is also less predictable for issuers than a

[[Page 63422]]

methodology that is established before the benefit year. We explained 
that such predictability is important to serving the risk adjustment 
program's goals of premium stabilization and reducing issuer incentives 
to avoid enrolling higher-risk populations.
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    \9\ See for example, September 12, 2011, Risk Adjustment 
Implementation Issues White Paper, available at https://www.cms.gov/CCIIO/Resources/Files/Downloads/riskadjustment_whitepaper_web.pdf.
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    Additionally, the proposed rule noted that using a plan's own 
premium to scale transfers may provide additional incentives for plans 
with high-risk enrollees to increase premiums in order to receive 
higher risk adjustment payments. As noted by commenters to the 2014 
Payment Notice proposed rule, transfers also may be more volatile from 
year to year and sensitive to anomalous premiums if they were scaled to 
a plan's own premium instead of the statewide average premium. In the 
2014 Payment Notice final rule, we noted that we received a number of 
comments in support of our proposal to use statewide average premium as 
the basis for risk adjustment transfers, while some commenters 
expressed a desire for HHS to use a plan's own premium.\10\ HHS 
addressed those comments by reiterating that we had considered the use 
of a plan's own premium, but chose to use statewide average premium, as 
this approach supports the overall goals of the risk adjustment program 
to encourage issuers to rate for the average risk in the applicable 
state market risk pool, and avoids the creation of incentives for 
issuers to employ risk-avoidance techniques.\11\
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    \10\ 78 FR 15410, 15432.
    \11\ Id.
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    The proposed rule also explained that although HHS has not yet 
calculated risk adjustment payments and charges for the 2018 benefit 
year, immediate administrative action was imperative to maintain 
stability and predictability in the individual, small group and merged 
insurance markets. Without administrative action, the uncertainty 
related to the HHS-operated risk adjustment methodology for the 2018 
benefit year could add uncertainty to the individual, small group and 
merged markets, as issuers determine the extent of their market 
participation and the rates and benefit designs for plans they will 
offer in future benefit years. Without certainty regarding the 2018 
benefit year HHS-operated risk adjustment methodology, there was a 
serious risk that issuers would substantially increase future premiums 
to account for the potential of uncompensated risk associated with 
high-risk enrollees. Consumers enrolled in certain plans with benefit 
and network structures that appeal to higher risk enrollees could see a 
significant premium increase, which could make coverage in those plans 
particularly unaffordable for unsubsidized enrollees. In states with 
limited Exchange options, a qualified health plan issuer exit would 
restrict consumer choice, and could put additional upward pressure on 
premiums, thereby increasing the cost of coverage for unsubsidized 
individuals and federal spending for premium tax credits. The 
combination of these effects could lead to involuntary coverage losses 
in certain state market risk pools.
    Additionally, the proposed rule explained that HHS's failure to 
make timely risk adjustment payments could impact the solvency of 
issuers providing coverage to sicker (and costlier) than average 
enrollees that require the influx of risk adjustment payments to 
continue operations. When state regulators evaluate issuer solvency, 
any uncertainty surrounding risk adjustment transfers hampers their 
ability to make decisions that protect consumers and support the long-
term health of insurance markets.
    In response to the district court's February 2018 decision that 
vacated the use of statewide average premium in the risk adjustment 
methodology on the grounds that HHS did not adequately explain its 
decision to adopt that aspect of the methodology, we offered the 
additional explanation outlined above in the proposed rule, and 
proposed to maintain the use of statewide average premium in the 
applicable state market risk pool for the state payment transfer 
formula under the HHS-operated risk adjustment methodology for the 2018 
benefit year. HHS proposed to adopt the methodology previously 
established for the 2018 benefit year in the Federal Register 
publications cited above that apply to the calculation, collection, and 
payment of risk adjustment transfers under the HHS-operated methodology 
for the 2018 benefit year. This included the adjustment to the 
statewide average premium, reducing it by 14 percent, to account for an 
estimated proportion of administrative costs that do not vary with 
claims.\12\ We sought comment on the proposal to use statewide average 
premium. However, in order to protect the settled expectations of 
issuers that structured their pricing, offering, and market 
participation decisions in reliance on the previously issued 2018 
benefit year methodology, all other aspects of the risk adjustment 
methodology were outside of the scope of the proposed rule, and HHS did 
not seek comment on those finalized aspects.
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    \12\ See 81 FR 94058 at 94099.
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    We summarize and respond to the comments received to the proposed 
rule below. Given the volume of exhibits, court filings, white papers 
(including all corresponding exhibits), and comments on other 
rulemakings incorporated by reference in one commenter's letter, we are 
not able to separately address each of those documents. Instead, we 
summarize and respond to the significant comments and issues raised by 
the commenter that are within the scope of this rulemaking.
    Comment: One commenter expressed general concerns about 
policymaking and implementation of the PPACA related to enrollment 
activity changes, cost-sharing reductions, and short-term, limited-
duration plans.
    Response: The use of statewide average premium in the HHS-operated 
risk adjustment methodology, including the operation of the program in 
a budget-neutral manner, which was the limited subject of the proposed 
rulemaking, was not addressed by this commenter. In fact, the commenter 
did not specifically address the risk adjustment program at all. 
Therefore, the concerns raised by this commenter are outside the scope 
of the proposed rule, and are not addressed in this final rule.
    Comment: Commenters were overwhelmingly in favor of HHS finalizing 
the rule as proposed, and many encouraged HHS to do so as soon as 
possible. Many commenters stated that by finalizing this rule as 
proposed, HHS is providing an additional explanation regarding the 
operation of the program in a budget-neutral manner and the use of 
statewide average premium for the 2018 benefit year consistent with the 
decision of the district court, and is reducing the risk of substantial 
instability to the Exchanges and individual and small group and merged 
market risk pools. Many commenters stated that no changes should be 
made to the risk adjustment methodology for the 2018 benefit year 
because issuers' rates for the 2018 benefit year were set based on the 
previously finalized methodology.
    Response: We agree that a prompt finalization of this rule is 
important to ensure the ongoing stability of the individual and small 
group and merged markets, and the ability of HHS to continue operations 
of the risk adjustment program normally for the 2018 benefit year. We 
also agree that finalizing the rule as proposed would maintain 
stability and ensure predictability of pricing in a budget-neutral 
framework because issuers relied on the 2018 HHS-operated risk 
adjustment methodology that used

[[Page 63423]]

statewide average premium during rate setting and when deciding in 
calendar year 2017 whether to participate in the market(s) during the 
2018 benefit year.
    Comment: Several commenters agreed with HHS's interpretation of the 
statute as requiring the operation of the risk adjustment program in a 
budget-neutral manner; several cited the absence of additional funding 
which would cover any possible shortfall between risk adjustment 
transfers as supporting the operation of the program in a budget-
neutral manner. One commenter highlighted that appropriations can vary 
from year to year, adding uncertainty and instability to the market(s) 
if the program relied on additional funding to cover potential 
shortfalls and was not operated in a budget-neutral manner, which in 
turn would affect issuer pricing decisions. These commenters noted that 
any uncertainty about whether Congress would fund risk adjustment 
payments would deprive issuers of the ability to make pricing and 
market participation decisions based on a legitimate expectation that 
risk adjustment transfers would occur as required in HHS regulations. 
Other commenters noted that without certainty of risk adjustment 
transfers, issuers would likely seek rate increases to account for this 
further uncertainty and the risk of enrolling a greater share of high-
cost individuals. Alternatively, issuers seeking to avoid significant 
premium increases would be compelled to develop alternative coverage 
arrangements that fail to provide adequate coverage to people with 
chronic conditions or high health care costs (for example, narrow 
networks or formulary design changes). Another commenter pointed to the 
fact that risk adjustment was envisioned by Congress as being run by 
the states, and that if HHS were to require those states that run their 
own program to cover any shortfall between what they collect and what 
they must pay out, HHS would effectively be imposing an unfunded 
mandate on states. The commenter noted there is no indication that 
Congress intended risk adjustment to impose such an unfunded mandate. 
Another commenter expressed that a budget-neutral framework was the 
most natural reading of the PPACA, with a different commenter stating 
this framework is implied in the statute.
    However, one commenter stated that risk adjustment does not need to 
operate as budget neutral, as section 1343 of the PPACA does not 
require that the program be budget neutral, and funds are available to 
HHS for the risk adjustment program from the CMS Program Management 
account to offset any potential shortfalls. The commenter also stated 
that the rationale for using statewide average premium to achieve 
budget neutrality is incorrect, and that even if budget neutrality is 
required, any risk adjustment payment shortfalls that may result from 
using a plan's own premium in the risk adjustment transfer formula 
could be addressed through pro rata adjustments to risk adjustment 
transfers. This commenter also stated that the use of statewide average 
premium is not predictable for issuers trying to set rates, especially 
for small issuers which do not have a large market share, as they do 
not have information about other issuers' rates at the time of rate 
setting. Conversely, many commenters noted that, absent an 
appropriation for risk adjustment payments, the prorated payments that 
would result from the use of a plan's own premium in the risk 
adjustment methodology would add an unnecessary layer of complexity for 
issuers when pricing and would reduce predictability, resulting in 
uncertainty and instability in the market(s).
    Response: We acknowledged in the proposed rule that the PPACA did 
not include a provision that explicitly required the risk adjustment 
program be operated in a budget-neutral manner; however, HHS was 
constrained by appropriations law to devise a risk adjustment 
methodology that could be implemented in a budget-neutral fashion. In 
fact, Congress did not authorize or appropriate additional funding for 
risk adjustment beyond the amount of charges paid in, and did not 
authorize HHS to obligate itself for risk adjustment payments in excess 
of charges collected. In the absence of additional, independent funding 
or the creation of budget authority in advance of an appropriation, HHS 
could not make payments in excess of charges collected consistent with 
binding appropriations law. Furthermore, we agree with commenters that 
the creation of a methodology that was contingent on Congress agreeing 
to appropriate supplemental funding of unknown amounts through the 
annual appropriations process would create uncertainty. It would also 
delay the process for setting the parameters for any potential risk 
adjustment proration until well after rates were set and the plans were 
in effect for the applicable benefit year. In addition to proration of 
risk adjustment payments to balance risk adjustment transfer amounts, 
we considered the impact of assessing additional charges or otherwise 
collecting additional funds from issuers of risk adjustment covered 
plans as alternatives to the establishment of a budget-neutral 
framework. All of these after-the-fact balancing adjustments were 
ultimately rejected because they are less predictable for issuers than 
a budget-neutral methodology which does not require after-the-fact 
balancing adjustments, a conclusion supported by the vast majority of 
comments received. As detailed in the proposed rule, HHS determined it 
would not be appropriate to rely on the CMS Program Management account 
because those amounts are designated for administration and operational 
expenses, not program payments, nor would the CMS Program Management 
account be sufficient to fund both the payments under the risk 
adjustment program and those administrative and operational expenses. 
Furthermore, use of such funds would create the same uncertainty and 
other challenges described above, as it would require reliance on the 
annual appropriations process and would require after-the-fact 
balancing adjustments to address shortfalls. After extensive analysis 
and evaluation of alternatives, we determined that the best method 
consistent with legal requirements is to operate the risk adjustment 
program in a budget-neutral manner, using statewide average premium as 
the cost scaling factor and normalizing the risk adjustment payment 
transfer formula to reflect state average factors.
    We agree with the commenters that calculating transfers based on a 
plan's own premium without an additional funding source to ensure full 
payment of risk adjustment payment amounts would create premium 
instability. If HHS implemented an approach based on a plan's own 
premium without an additional funding source, after-the-fact payment 
adjustments would be required. As explained above, the amount of these 
payment adjustments would vary from year to year, would delay the 
publication of final risk adjustment amounts, and would compel issuers 
with risk that is higher than the state average to speculate on the 
premium increase that would be necessary to cover an unknown risk 
adjustment payment shortfall amount. We considered and ultimately 
declined to adopt a methodology that required an after-the-fact 
balancing adjustment because such an approach is less predictable for 
issuers than a budget-neutral methodology that can be calculated in 
advance of a benefit year. This included consideration of a non-budget 
neutral HHS-operated risk adjustment methodology that used a plan's own 
premiums as the cost-scaling

[[Page 63424]]

factor, which we discuss in detail later in this preamble. Modifying 
the 2018 benefit year risk adjustment methodology to use a plan's own 
premium would reduce the predictability of risk adjustment payments and 
charges significantly. As commenters stated, the use of a plan's own 
premium would add an extra layer of complexity in estimating risk 
adjustment transfers because payments and charges would need to be 
prorated retrospectively based on the outcome of risk adjustment 
transfer calculations, but would need to be anticipated in advance of 
the applicable benefit year for use in issuers' pricing calculations. 
We do not agree with the commenter that statewide average premium is 
less predictable than a plan's own premium, as the use of statewide 
average premium under a budget-neutral framework makes risk adjustment 
transfers self-balancing, and provides payment certainty for issuers 
with higher-than-average risk.
    After considering the comments submitted, we are finalizing a 
methodology that operates risk adjustment in a budget-neutral manner 
using statewide average premium as the cost scaling factor and 
normalizing the risk adjustment payment transfer formula to reflect 
state average factors for the 2018 benefit year.
    Comment: The majority of the comments supported the use of 
statewide average premium in the HHS-operated risk adjustment 
methodology for the 2018 benefit year. Some commenters stated that the 
risk adjustment program is working as intended, by compensating issuers 
based on their enrollees' health status, that is, transferring funds 
from issuers with predominately low-risk enrollees to those with a 
higher-than-average share of high-risk enrollees. One commenter stated 
that the program has been highly effective at reducing loss-ratios and 
ensuring that issuers can operate efficiently, without concern for 
significant swings in risk from year to year. Although some commenters 
requested refinements to ensure that the methodology does not 
unintentionally harm smaller, newer, or innovative issuers, a different 
commenter noted that the results for all prior benefit years of the 
risk adjustment program do not support the assertion that the risk 
adjustment methodology undermines small health plans. This commenter 
noted that the July 9, 2018 ``Summary Report on Permanent Risk 
Adjustment Transfers for the 2017 Benefit Year'' found a very strong 
correlation between the amount of paid claims and the direction and 
scale of risk adjustment transfers.\13\ It also pointed to the American 
Academy of Actuaries' analysis of 2014 benefit year risk adjustment 
results, in which 103 of 163 small health plans (those with less than 
10 percent of market share) received risk adjustment payments and the 
average payment was 27 percent of premium.\14\ This commenter cited 
these points as evidence that risk adjustment is working as intended 
for small issuers. This commenter also cited an Oliver Wyman study that 
analyzed risk adjustment receipts by health plan member months (that 
is, issuer size) and found no systematic bias in the 2014 risk 
adjustment model.\15\
---------------------------------------------------------------------------

    \13\ Available at https://downloads.cms.gov/cciio/Summary-Report-Risk-Adjustment-2017.pdf.
    \14\ American Academy of Actuaries, ``Insights on the ACA Risk 
Adjustment Program,'' April 2016. Available at http://actuary.org/files/imce/Insights_on_the_ACA_Risk_Adjustment_Program.pdf.
    \15\ Oliver Wyman, ``A Story in 4 Charts, Risk Adjustment in the 
Non-Group Market in 2014,'' February 24, 2016. Available at https://health.oliverwyman.com/2016/02/a_story_in_four_char.html.
---------------------------------------------------------------------------

    A few commenters stated that use of statewide average premium to 
scale risk adjustment transfers tends to penalize issuers with 
efficient care management and lower premiums and rewards issuers for 
raising rates. One of the commenters also stated that the HHS-operated 
risk adjustment methodology does not reflect relative actuarial risk, 
that statewide average premium harms issuers that price below the 
statewide average, and that the program does not differentiate between 
an issuer that has lower premiums because of medical cost savings from 
better care coordination and an issuer that has lower premiums because 
of healthier-than-average enrollees. The commenter suggested that HHS 
add a Care Management Effectiveness index into the risk adjustment 
formula. This commenter also stated that use of a plan's own premium 
rather than statewide average premium could improve the risk adjustment 
formula, stating that issuers would not be able to inflate their 
premiums to ``game'' the risk adjustment system due to other PPACA 
requirements such as medical loss ratio, rate review, and essential 
health benefits, as well as state insurance regulations, including 
oversight of marketing practices intended to avoid sicker enrollees.
    However, other commenters opposed the use of a plan's own premium 
in the risk adjustment formula based on a concern that it would 
undermine the risk adjustment program and create incentives for issuers 
to avoid enrolling high-cost individuals. Some commenters noted the 
difficulty of determining whether an issuer's low premium was the 
result of efficiency, mispricing, or a strategy to gain market share, 
and that the advantages of using statewide average premium outweigh the 
possibility that use of a plan's own premium could result in better 
reflection of cost management. One commenter noted that encouraging 
issuers to set premiums based on market averages in a state (that is, 
using statewide average premium) promotes market competition based on 
value, quality of care provided, and effective care management, not on 
the basis of risk selection. Other commenters strongly opposed the use 
of a plan's own premium, as doing so would introduce incentives for 
issuers to attract lower-risk enrollees because they would no longer 
have to pay their fair share, or because issuers that traditionally 
attract high-risk enrollees would be incentivized to increase premiums 
in order to receive larger risk adjustment payments. Others stated that 
the use of a plan's own premium would add an extra layer of complexity 
in estimating risk adjustment transfers, and therefore in premium rate 
setting, because payments and charges would need to be prorated 
retrospectively based on the outcome of risk adjustment transfer 
calculations, but would need to be anticipated prospectively as part of 
issuers' pricing calculations.
    One commenter expressed concern that the risk adjustment payment 
transfer formula exaggerates plan differences in risk because it does 
not address plan coding differences.
    Response: We agree with the majority of commenters that use of 
statewide average premium will maintain the integrity of the risk 
adjustment program by discouraging the creation of benefit designs and 
marketing strategies to avoid high-risk enrollees and promoting market 
stability and predictability. The benefits of using statewide average 
premium as the cost scaling factor in the risk adjustment state payment 
transfer formula extend beyond its role in maintaining the budget 
neutrality of the program. Consistent with the statute, under the HHS-
operated risk adjustment program, each plan in the risk pool receives a 
risk adjustment payment or charge designed to take into account the 
plan's risk compared to a plan with average risk. The statewide average 
premium reflects the statewide average cost and efficiency level and 
acts as the cost scaling factor in the state payment transfer formula 
under the HHS-operated risk adjustment methodology. HHS chose to use 
statewide average premium to encourage issuers to rate for the average 
risk, to automatically

[[Page 63425]]

achieve equality between risk adjustment payments and charges in each 
benefit year, and to avoid the creation of incentives for issuers to 
operate less efficiently, set higher prices, or develop benefits 
designs or create marketing strategies to avoid high-risk enrollees.
    HHS considered and again declined in the 2018 Payment Notice to 
adopt the use of each plan's own premium in the state payment transfer 
formula.\16\ As we noted in the 2018 Payment Notice, use of a plan's 
own premium would likely lead to substantial volatility in transfer 
results and could result in even higher transfer charges for low-risk, 
low-premium plans because of the program's budget neutrality. Under 
such an approach, high-risk, high-premium plans would require even 
greater transfer payments. If HHS applied a balancing adjustment in 
favor of these plans to maintain the budget-neutral nature of the 
program after transfers have been calculated using a plan's own 
premium, low-risk, low-premium plans would be required to pay in an 
even higher percentage of their plan-specific premiums in risk 
adjustment transfer charges due to the need to maintain budget 
neutrality. Furthermore, payments to high-risk, low-premium plans that 
are presumably more efficient than high-risk, high-premium plans would 
be reduced, incentivizing such plans to inflate premiums. In other 
words, the use of a plan's own premium in this scenario would neither 
reduce risk adjustment charges for low-cost and low-risk issuers, nor 
would it incentivize issuers to operate at the average efficiency. 
Alternatively, application of a balancing adjustment in favor of low-
risk, low-premium plans could have the effect of under-compensating 
high-risk plans, increasing the likelihood that such plans would raise 
premiums. In addition, if the application of a balancing adjustment was 
split equally between high-risk and low-risk plans, such an after-the-
fact adjustment, would create uncertainty and instability in the 
market(s), and would incentivize issuers to increase premiums to 
receive additional risk adjustment payments or to employ risk-avoidance 
techniques. As such, we agree with the commenters that challenges 
associated with pricing for transfers based on a plan's own premium 
would create pricing instability in the market, and introduce 
incentives for issuers to attract lower-risk enrollees to avoid paying 
their fair share. We also agree that it is very difficult to determine 
the reason an issuer has lower premiums than the average, since an 
issuer's low premium could be the result of efficiency, mispricing, or 
a strategy to gain market share. In all, the advantages of using 
statewide average premium outweigh the possibility that the use of a 
plan's own premium could result in better reflection of care or cost 
management, given the overall disadvantages, outlined above, of using a 
plan's own premium. HHS does not agree that use of statewide average 
premium penalizes efficient issuers or that it rewards issuers for 
raising rates.
---------------------------------------------------------------------------

    \16\ 81 FR 94100.
---------------------------------------------------------------------------

    Consistent with the 2018 Payment Notice,\17\ beginning with the 
2018 benefit year, this final rule adopts the 14 percent reduction to 
the statewide average premium to account for administrative costs that 
are unrelated to the claims risk of the enrollee population. While low 
cost plans are not necessarily efficient plans,\18\ we believe this 
adjustment differentiates between premiums that reflect savings 
resulting from administrative efficiency from premiums that reflect 
healthier-than-average enrollees. As detailed in the 2018 Payment 
Notice,\19\ to derive this parameter, we analyzed administrative and 
other non-claims expenses in the Medical Loss Ratio (MLR) Annual 
Reporting Form and estimated, by category, the extent to which the 
expenses varied with claims. We compared those expenses to the total 
costs that issuers finance through premiums, including claims, 
administrative expenses, and taxes, and determined that the mean 
administrative cost percentage in the individual, small group and 
merged markets is approximately 14 percent. We believe this amount 
represents a reasonable percentage of administrative costs on which 
risk adjustment should not be calculated.
---------------------------------------------------------------------------

    \17\ 81 FR 94099.
    \18\ If a plan is a low-cost plan with low claims costs, it 
could be an indication of mispricing, as the issuer should be 
pricing for average risk.
    \19\ 81 FR 94100.
---------------------------------------------------------------------------

    We disagree that the HHS-operated risk adjustment methodology does 
not reflect relative actuarial risk or that the use of statewide 
average premium indicates otherwise. In fact, the risk adjustment 
models estimate a plan's relative actuarial risk across actuarial value 
metal levels, also referred to as ``simulated plan liability,'' by 
estimating the total costs a plan is expected to be liable for based on 
its enrollees' age, sex, hierarchical condition categories (HCCs), 
actuarial value, and cost-sharing structure. Therefore, this 
``simulated plan liability'' reflects the actuarial risk relative to 
the average that can be assigned to each enrollee. We then use an 
enrollee's plan selection and diagnoses during the benefit year to 
assign a risk score. Although the HHS risk adjustment models are 
calibrated on national data, and average costs can vary between 
geographic areas, relative actuarial risk differences are generally 
similar nationally. The solved coefficients from the risk adjustment 
models are then used to evaluate actuarial risk differences between 
plans. The risk adjustment state payment transfer formula then further 
evaluates the plan's actuarial risk based on enrollees' health risk, 
after accounting for factors a plan could have rated for, including 
metal level, the prevailing level of expenditures in the geographic 
areas in which the enrollees live, the effect of coverage on 
utilization (induced demand), and the age and family structure of the 
subscribers. This relative plan actuarial risk difference compared to 
the state market risk pool average is then scaled to the statewide 
average premium. The use of statewide average premium as a cost-scaling 
factor requires plans to assess actuarial risk, and therefore scales 
transfers to actuarial differences between plans in state market risk 
pool(s), rather than differences in premium.
    We have been continuously evaluating whether improvements are 
needed to the risk adjustment methodology, and will continue to do so 
as additional years' data become available. We decline to amend the 
risk adjustment methodology to include the Care Management 
Effectiveness index or a similar adjustment at this time. Doing so 
would be beyond the scope of this rulemaking, which addresses the use 
of statewide average premium and the operation of the risk adjustment 
program in a budget-neutral manner. A change of this magnitude would 
require significant study and evaluation. Although this type of change 
is not feasible at present, we will examine the feasibility, 
specificity, and sensitivity of measuring care management effectiveness 
through enrollee-level EDGE data for the individual, small group and 
merged markets, and the benefits of incorporating such measures in the 
risk adjustment methodology in future benefit years, either through 
rulemaking or other opportunities in which the public can submit 
comments. We believe that a robust risk adjustment program encourages 
issuers to adopt incentives to improve care management effectiveness, 
as doing so would reduce plans' medical costs. As we stated above, use 
of statewide average

[[Page 63426]]

premium in the risk adjustment state payment transfer formula 
incentivizes plans to apply effective care management techniques to 
reduce losses, whereas use of a plan's own premium could be 
inflationary as it benefits plans with higher-than-average costs and 
higher-than-average premiums.
    We are sympathetic to commenters' concerns about plan coding 
differences, and recognize that there is substantial variation in 
provider coding practices. We are continuing to strengthen the risk 
adjustment data validation program to ensure that conditions reported 
for risk adjustment are accurately coded and supported by medical 
records, and will adjust risk scores (and subsequently, risk adjustment 
transfers) beginning with 2017 benefit year data validation results to 
encourage issuers to continue to improve the accuracy of data used to 
compile risk scores and preserve confidence in the HHS-operated risk 
adjustment program.
    Comment: Some commenters provided suggestions to improve the risk 
adjustment methodology, such as different weights for metal tiers, 
multiple mandatory data submission deadlines, reducing the magnitude of 
risk scores across the board, and fully removing administrative 
expenses from the statewide average premium. One commenter stated that, 
while it did not conceptually take issue with the use of statewide 
average premium, the payment transfer formula under the HHS-operated 
risk adjustment methodology creates market distortions and causes 
overstatement of relative risk differences among issuers. This 
commenter cited concerns with the use of the Truven MarketScan[supreg] 
data to calculate plan risk scores under the HHS risk adjustment 
models, and suggested incorporating an adjustment to the calculation of 
plan risk scores until the MarketScan[supreg] data is no longer used.
    A few commenters stressed the importance of making changes 
thoughtfully and over time, and one encouraged HHS to actively seek 
improvements to avoid unnecessary litigation. Several commenters, while 
supportive of the proposed rule and its use for the 2018 benefit year, 
generally stated that the risk adjustment methodology should continue 
to be improved prospectively. Another commenter stated that the 
proposed rule did not do enough to improve the risk adjustment program, 
and encouraged HHS to review and consider suggestions to improve the 
risk adjustment methodology in order to promote stability and address 
the concerns raised in lawsuits other than the New Mexico case. One 
commenter further requested that HHS reopen rulemaking proceedings, 
reconsider, and revise the Payment Notices for the 2017 and 2019 
benefit years under section 553(e) of the Administrative Procedure Act.
    Response: We appreciate the feedback on potential improvements to 
the risk adjustment program, and will continue to consider the 
suggestions, analysis, and comments received from commenters for 
potential changes to future benefit years. This rulemaking is intended 
to provide additional explanation regarding the operation of the 
program in a budget-neutral manner and the use of statewide average 
premium for the 2018 benefit year, consistent with the February 2018 
decision of the district court. It also requires an expedited timeframe 
to maintain stability in the health insurance markets following the 
district court's vacatur of the use of statewide average premium in the 
HHS-operated risk adjustment methodology for the 2018 benefit year. We 
intend to continue to evaluate approaches to improve the risk 
adjustment models' calibration to reflect the individual, small group 
and merged markets actuarial risk and review additional years' data as 
they become available to evaluate all aspects of the HHS-operated risk 
adjustment methodology. We also continue to encourage issuers to submit 
EDGE server data earlier and more completely for future benefit years. 
However, the scope of the proposed rule was limited to the use of 
statewide average premium and the budget-neutral nature of the risk 
adjustment program for the 2018 benefit year, and consequently, we 
decline to adopt the various suggestions offered by commenters 
regarding potential improvements to the 2018 benefit year HHS-operated 
risk adjustment methodology as to other issues because they are outside 
the scope of this rule.
    We reiterate that HHS is always considering possible ways to 
improve the risk adjustment methodology for future benefit years. For 
example, in the 2018 Payment Notice, based on comments received for the 
2017 Payment Notice and the March 31, 2016, HHS-Operated Risk 
Adjustment Methodology Meeting Discussion Paper,\20\ HHS made multiple 
adjustments to the risk adjustment models and state payment transfer 
formula, including reducing the statewide average premium by 14 percent 
to account for the proportion of administrative costs that do not vary 
with claims, beginning with the 2018 benefit year.\21\ HHS also 
modified the risk adjustment methodology by incorporating a high-cost 
risk pool calculation to mitigate residual incentive for risk selection 
to avoid high-cost enrollees, to better account for the average risk 
associated with the factors used in the HHS risk adjustment models, and 
to ensure that the actuarial risk of a plan with high-cost enrollees is 
better reflected in risk adjustment transfers to issuers with high 
actuarial risk.\22\ Other recent changes made to the HHS-operated risk 
adjustment methodology include the incorporation of a partial year 
adjustment factor and prescription drug utilization factors.\23\ 
Furthermore, as outlined above, HHS stated in the 2019 Payment Notice 
that it would recalibrate the risk adjustment model using 2016 
enrollee-level EDGE data to better reflect individual, small group and 
merged market populations.\24\ We also consistently seek methods to 
support states' authority and provide states with flexible options, 
while ensuring the success of the risk adjustment program.\25\ We 
respond to comments regarding options available to states with respect 
to the risk adjustment program below. We appreciate the commenters' 
input and will continue to examine options for potential changes to the 
HHS-operated risk adjustment methodology in future notice with comment 
rulemaking.
---------------------------------------------------------------------------

    \20\ https://www.cms.gov/CCIIO/Resources/Forms-Reports-and-Other-Resources/Downloads/RA-March-31-White-Paper-032416.pdf.
    \21\ See 81 FR 94100.
    \22\ See 81 FR 94080.
    \23\ See 81 FR at 94071 and 94074.
    \24\ See 83 FR 16940.
    \25\ Id. and 81 FR 29146.
---------------------------------------------------------------------------

    The requests related to the 2017 and 2019 benefit year rulemakings 
are outside the scope of the proposed rule and this final rule, which 
is limited to the 2018 benefit year.
    Comment: One commenter suggested that states should have broad 
authority to cap and limit risk adjustment transfers and charges as 
necessary, stating that the requirements associated with the 
flexibility HHS granted to states to request a reduction to risk 
adjustment transfers beginning in 2020 are too onerous and unclear. The 
commenter noted that state regulators know their markets best and 
should have the discretion and authority to implement their own 
remedial measures without seeking HHS's permission. Conversely, one 
commenter specifically supported the state flexibility policy set forth 
in Sec.  153.320(d). A few commenters requested that states be allowed 
to establish alternatives to statewide

[[Page 63427]]

average premium, with one suggesting that this change begin with the 
2020 benefit year, and providing as an example the idea that HHS could 
permit states to aggregate the average premiums of two or more distinct 
geographic markets within a state.
    Response: HHS continually seeks to provide states with flexibility 
to determine what is best for their state markets. Section 1343 of the 
PPACA provides states authority to operate their own state risk 
adjustment programs. Under this authority, a state remains free to 
elect to operate the risk adjustment program and tailor it to its 
markets, which could include establishing alternatives to the statewide 
average premium methodology or aggregating the average premiums of two 
or more distinct geographic markets within a state. If a state does not 
elect to operate the risk adjustment program, HHS is required to do 
so.\26\ No state elected to operate the risk adjustment program for the 
2018 benefit year; therefore, HHS is responsible for operating the 
program in all 50 states and the District of Columbia.
---------------------------------------------------------------------------

    \26\ See section 1321(c) of the PPACA.
---------------------------------------------------------------------------

    In the 2019 Payment Notice, HHS adopted Sec.  153.320(d) to provide 
states the flexibility, when HHS is operating the risk adjustment 
program, to request a reduction to the otherwise applicable risk 
adjustment transfers in the individual, small group, or merged markets 
by up to 50 percent.\27\ This flexibility was established to provide 
states the opportunity to seek state-specific adjustments to the HHS-
operated risk adjustment methodology without the necessity of operating 
their own risk adjustment programs. It is offered beginning with the 
2020 benefit year risk adjustment transfers and, since it involves an 
adjustment to the transfers calculated by HHS, it will require review 
and approval by HHS. States requesting such reductions must 
substantiate the transfer reduction requested and demonstrate that the 
actuarial risk differences in plans in the applicable state market risk 
pool are attributable to factors other than systematic risk 
selection.\28\ The process will give HHS the necessary information to 
evaluate the flexibility requests. We appreciate the comments offered 
on this flexibility, but note that they are outside the scope of the 
proposed rule, which was limited to the 2018 benefit year and did not 
propose any changes to the process established in Sec.  153.320(d). 
However, we will continue to consider commenter feedback on the 
process, along with any lessons learned from 2020 benefit year 
requests.
---------------------------------------------------------------------------

    \27\ See 83 FR 16955.
    \28\ See Sec.  153.320(d) and 83 FR 16960.
---------------------------------------------------------------------------

    HHS has consistently acknowledged the role of states as primary 
regulators \29\ of their insurance markets, and we continue to 
encourage states to examine local approaches under state legal 
authority as they deem appropriate.
---------------------------------------------------------------------------

    \29\ See 83 FR 16955. Also see 81 FR 29146 at 29152 (May 11, 
2016), available at https://www.gpo.gov/fdsys/pkg/FR-2016-05-11/pdf/2016-11017.pdf.
---------------------------------------------------------------------------

    Comment: One commenter detailed the impact of the HHS-operated risk 
adjustment methodology on the commenter, the CO-OP program's general 
struggles, and the challenges faced by some non-CO-OP issuers, stating 
that this is evidence that the HHS-operated risk adjustment methodology 
is flawed. The commenter urged HHS to make changes discussed above to 
the methodology to address what it maintains are unintended financial 
impacts on small issuers that are required to pay large risk adjustment 
charges, and also challenged the assertion that the current risk 
adjustment methodology is predictable.
    Response: HHS previously recognized and acknowledged that certain 
issuers, including a limited number of newer, rapidly growing, or 
smaller issuers, owed substantial risk adjustment charges that they did 
not anticipate in the initial years of the program. HHS has regularly 
discussed with issuers and state regulators ways to encourage new 
participation in the health insurance markets and to mitigate the 
effects of substantial risk adjustment charges. Program results 
discussed earlier have shown that the risk adjustment methodology has 
worked as intended, that risk adjustment transfers correlate with the 
amount of paid claims rather than issuer size, and that no systemic 
bias is found when risk adjustment receipts are analyzed by health plan 
member months. We created an interim risk adjustment reporting process, 
beginning with the 2015 benefit year, to provide issuers and states 
with preliminary information about the applicable benefit year's 
geographic cost factor, billable member months, and state averages such 
as monthly premiums, plan liability risk score, allowable rating 
factor, actuarial value, and induced demand factors by market. States 
may pursue local approaches under state legal authority to address 
concerns related to insolvencies and competition, including in 
instances where certain state laws or regulations differentially affect 
smaller or newer issuers. In addition, as detailed above, beginning 
with the 2020 benefit year, states may request a reduction in the 
transfer amounts calculated under the HHS-operated methodology to 
address state-specific rules or market dynamics to more precisely 
account for the expected cost of relative risk differences in the 
state's market risk pool(s).
    Finally, HHS has consistently sought to increase the predictability 
and certainty of transfer amounts in order to promote the premium 
stabilization goal of the risk adjustment program. Statewide average 
premium provides greater predictability of an issuer's final risk 
adjustment receivables than use of a plan's own premium, and we 
disagree with comments stating that the use of a plan's own premium in 
the risk adjustment transfer formula would result in greater 
predictability in pricing. As discussed previously, if a plan's own 
premium is used as a scaling factor, risk adjustment transfers would 
not be budget neutral. After-the-fact adjustments would be necessary in 
order for issuers to receive the full amount of calculated payments, 
creating uncertainty and lack of predictability.

III. Provisions of the Final Regulations

    After consideration of the comments received, this final rule 
adopts the HHS-operated risk adjustment methodology for the 2018 
benefit year which utilizes statewide average premium and operates the 
program in a budget-neutral manner, as established in the final rules 
published in the March 23, 2012 and the December 22, 2016 editions of 
the Federal Register.

IV. Collection of Information Requirements

    This document does not impose information collection requirements, 
that is, reporting, recordkeeping, or third-party disclosure 
requirements. Consequently, there is no need for review by the Office 
of Management and Budget under the authority of the Paperwork Reduction 
Act of 1995 (44 U.S.C. 3501, et seq.).

V. Regulatory Impact Analysis

A. Statement of Need

    The proposed rule and this final rule were published in light of 
the February 2018 district court decision described above that vacated 
the use of statewide average premium in the HHS-operated risk 
adjustment methodology for the 2014-2018 benefit years. This final rule 
adopts the HHS-operated risk adjustment methodology for the 2018 
benefit year, maintaining the use of statewide average premium as the 
cost-scaling factor in the HHS-operated risk adjustment methodology and 
the

[[Page 63428]]

continued operation of the program in a budget-neutral manner, to 
protect consumers from the effects of adverse selection and premium 
increases that would result from issuer uncertainty. The Premium 
Stabilization Rule, previous Payment Notices, and other rulemakings 
noted above provided detail on the implementation of the risk 
adjustment program, including the specific parameters applicable for 
the 2018 benefit year.

B. Overall Impact

    We have examined the impact of this rule as required by Executive 
Order 12866 on Regulatory Planning and Review (September 30, 1993), 
Executive Order 13563 on Improving Regulation and Regulatory Review 
(January 18, 2011), the Regulatory Flexibility Act (RFA) (September 19, 
1980, Pub. L. 96-354), section 1102(b) of the 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), the Congressional Review Act (5 U.S.C. 804(2)), and Executive 
Order 13771 on Reducing Regulation and Controlling Regulatory Costs. 
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). A regulatory impact 
analysis (RIA) must be prepared for major rules with economically 
significant effects ($100 million or more in any one year).
    OMB has determined that this final rule is ``economically 
significant'' within the meaning of section 3(f)(1) of Executive Order 
12866, because it is likely to have an annual effect of $100 million in 
any 1 year. In addition, for the reasons noted above, OMB has 
determined that this final rule is a major rule under the Congressional 
Review Act.
    This final rule offers further explanation of budget neutrality and 
the use of statewide average premium in the risk adjustment state 
payment transfer formula when HHS is operating the permanent risk 
adjustment program established by section 1343 of the PPACA on behalf 
of a state for the 2018 benefit year. We note that we previously 
estimated transfers associated with the risk adjustment program in the 
Premium Stabilization Rule and the 2018 Payment Notice, and that the 
provisions of this final rule do not change the risk adjustment 
transfers previously estimated under the HHS-operated risk adjustment 
methodology established in those final rules. The approximate estimated 
risk adjustment transfers for the 2018 benefit year are $4.8 billion. 
As such, we also incorporate into this final rule the RIA in the 2018 
Payment Notice proposed and final rules.\30\ This final rule is not 
subject to the requirements of Executive Order 13771 (82 FR 9339, 
February 3, 2017) because it is expected to result in no more than de 
minimis costs.
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    \30\ 81 FR 61455 and 81 FR 94058.

    Dated: November 16, 2018.
Seema Verma,
Administrator, Centers for Medicare & Medicaid Services.
    Dated: November 19, 2018.
Alex M. Azar II,
Secretary, Department of Health and Human Services.
[FR Doc. 2018-26591 Filed 12-7-18; 8:45 am]
 BILLING CODE 4120-01-P