[Federal Register Volume 76, Number 235 (Wednesday, December 7, 2011)]
[Rules and Regulations]
[Pages 76574-76594]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-31289]
[[Page 76573]]
Vol. 76
Wednesday,
No. 235
December 7, 2011
Part IV
Department of Health and Human Services
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45 CFR Part 158
Medical Loss Ratio Requirements Under the Patient Protection and
Affordable Care Act; Final Rule
Federal Register / Vol. 76, No. 235 / Wednesday, December 7, 2011 /
Rules and Regulations
[[Page 76574]]
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DEPARTMENT OF HEALTH AND HUMAN SERVICES
45 CFR Part 158
[CMS-9998-FC]
RIN 0938-AQ71
Medical Loss Ratio Requirements Under the Patient Protection and
Affordable Care Act
AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.
ACTION: Final rule with comment period.
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SUMMARY: This final rule with comment period revises the regulations
implementing medical loss ratio (MLR) requirements for health insurance
issuers under the Public Health Service Act in order to address the
treatment of ``mini-med'' and expatriate policies under these
regulations for years after 2011; modify the way the regulations treat
ICD-10 conversion costs; change the rules on deducting community
benefit expenditures; and revise the rules governing the distribution
of rebates by issuers in group markets.
DATES: Effective date. This rule is effective on January 3, 2012.
Comment date. We will consider comments on Sec.
158.150(b)(2)(i)(A)(6) and (c)(5) regarding the treatment of ICD-10
conversion costs, and Sec. 158.242(b) and Sec. 158.260 regarding the
process for providing rebates to group enrollees and reporting of
rebates that are received at one of the addresses provided in the
ADDRESSES section of this rule no later than 5 p.m. EST on January 6,
2012.
Applicability Date. The amendments to Part 158 generally apply
beginning January 1, 2012, to health insurance issuers offering group
or individual health insurance coverage.
ADDRESSES: In commenting please refer to file code CMS-9998-FC. Because
of staff and resource limitations, we cannot accept comments by email
or facsimile (Fax) transmission.
You may submit comments in one of four ways (please choose only one
of the ways listed):
1. Electronically. You may submit electronic comments on this
regulation to http://www.regulations.gov. Follow the instructions under
the ``More Search Options'' tab.
2. By regular mail. You may mail written comments to the following
address ONLY: Centers for Medicare & Medicaid Services, Department of
Health and Human Services, Attention: CMS-9998-FC, P.O. Box 8010,
Baltimore, MD 21244-8010.
Please allow sufficient time for mailed comments to be received
before the close of the comment period.
3. By express or overnight mail. You may send written comments to
the following address only: Centers for Medicare & Medicaid Services,
Department of Health and Human Services, Attention: CMS-9998-FC, Mail
Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.
4. By hand or courier. Alternatively, you may deliver (by hand or
courier) your written comments only to the following addresses prior to
the close of comment period:
a. For delivery in Washington, DC--Centers for Medicare & Medicaid
Services, Department of Health and Human Services, Room 445-G, Hubert
H. Humphrey Building, 200 Independence Avenue SW., Washington, DC
20201.
(Because access to the interior of the Hubert H. Humphrey Building
is not readily available to persons without Federal government
identification, commenters are encouraged to leave their comments in
the CMS drop slots located in the main lobby of the building. A stamp-
in clock is available for persons wishing to retain a proof of filing
by stamping in and retaining an extra copy of the comments being
filed.)
b. For delivery in Baltimore, MD--Centers for Medicare & Medicaid
Services, Department of Health and Human Services, 7500 Security
Boulevard, Baltimore, MD 21244-1850.
If you intend to deliver your comments to the Baltimore address,
please call telephone number (410) 786-9994 in advance to schedule your
arrival with one of our staff members.
Comments erroneously mailed to the addresses indicated as
appropriate for hand or courier delivery may be delayed and received
after the comment period.
Inspection of Public Comments: All comments received before the
close of the comment period are available for viewing by the public,
including any personally identifiable or confidential business
information that is included in a comment. We post all comments
received before the close of the comment period on the following Web
site as soon as possible after they have been received: http://regulations.gov. Follow the search instructions on that Web site to
view public comments.
Comments received timely will be also available for public
inspection as they are received, generally beginning approximately 3
weeks after publication of a document, at the headquarters of the
Centers for Medicare & Medicaid Services, 7500 Security Boulevard,
Baltimore, Maryland 21244, Monday through Friday of each week from 8:30
a.m. to 4 p.m. To schedule an appointment to view public comments,
phone (800) 743-3591.
FOR FURTHER INFORMATION CONTACT: Carol Jimenez, (301) 492-4457.
SUPPLEMENTARY INFORMATION:
Comment Subject Areas: We will consider comments on the treatment
of ICD-10 conversion costs, and the process for providing rebates to
group enrollees, as discussed in this final rule with comment period
that are received by the date and time indicated in the DATES section
of this final rule with comment period.
I. Background
The Patient Protection and Affordable Care Act (Pub. L. 111-148)
was enacted on March 23, 2010; the Health Care and Education
Reconciliation Act (Pub. L. 111-152) was enacted on March 30, 2010. In
this preamble, we refer to the two statutes collectively as the
Affordable Care Act. The Affordable Care Act reorganizes, amends, and
adds to the provisions of Part A of title XXVII of the Public Health
Service Act (PHS Act) relating to group health plans and health
insurance issuers in the group and individual markets.
A request for information relating to the medical loss ratio (MLR)
provisions of PHS Act section 2718 was published in the Federal
Register on April 14, 2010 (75 FR 19297). On December 1, 2010, HHS
published an interim final rule (75 FR 74864) with 60 day public
comment period, entitled ``Health Insurance Issuers Implementing
Medical Loss Ratio (MLR) Requirements Under the Patient Protection and
Affordable Care Act,'' that added a new 45 CFR Part 158. A technical
correction to the interim final rule was issued on December 30, 2010
(75 FR 82277).
II. Provisions of the Interim Final Rule and Responses to Comments
We received approximately 90 public comments on the December 1,
2010 interim final rule with comment period. Commenters included
consumer and patient organizations, insurance regulators, health
insurance issuers, provider groups, actuarial professional group, and
others. In this final rule, we do not address all of the comments we
received on the interim final rule, but only those comments that
pertain to the provisions in this final rule: (1) Rules regarding the
treatment of ``mini-med'' and expatriate policies; (2) rules governing
how ICD-10 conversion costs, fraud reduction expenses, and community
benefit expenditures are accounted for; and (3) rules regarding
[[Page 76575]]
the distribution of rebates in group markets. In this section of the
preamble, we summarize the provisions of the interim final rule and
respond to the public comments received on these subjects.
A. ``Mini-med'' Policies (45 CFR 158.110(b)(2), 158.120(d)(3), and
158.221(b)(3))
For purposes of the MLR requirements, the interim final rule
provided separate treatment for mini-med policies with total annual
benefit limits of $250,000 or less by requiring issuers to report mini-
med experience separately from other experience, by State and by
market, for the 2011 MLR reporting year. Issuers of mini-med policies
with total annual benefit limits of $250,000 or less were also directed
to use a special methodology for calculating the MLR numerator for
calendar year 2011 reporting and rebate purposes. Specifically,
incurred claims and activities that improve health care quality are
multiplied by 2.00 in calculating the MLR for mini-med policies.
Issuers of mini-med policies were directed to submit a report for each
of the first three quarters of the 2011 MLR reporting year as provided
under Sec. 158.110(b), in addition to the annual report required of
all issuers subject to MLR standards. The authority for this treatment
of special circumstances is provided under section 2718(c) of the PHS
Act, which directs HHS to ``take into account the special circumstances
of smaller plans, different types of plans, and newer plans.''
The preamble to the interim final rule notes that, after reviewing
the quarterly filings of the mini-med policies' 2011 experience, CMS
would make a determination as to whether this treatment of special
circumstances should continue and, if so, whether it should be modified
beyond the 2011 MLR reporting year.
Comment: We received comments that both support and oppose an
adjustment for issuers of mini-med policies. Commenters that supported
a special methodology for mini-med experience generally claimed that
the unique cost structure of mini-med policies make issuers unable to
meet the statutory MLR without an adjustment to the reporting
methodology. Specifically, issuers of mini-med policies asserted that
such plans have higher administrative costs relative to benefits paid,
as compared to other more comprehensive coverage, as a result of--(1)
Higher enrollee turnover; (2) shorter enrollment periods; and (3) lower
incurred claims due to high deductibles and limited coverage. Two
commenters asserted that an adjustment is necessary to preserve access
to mini-med policies for employers and participants.
Three commenters requested that HHS extend until 2014 the 2011
special circumstances methodology of a multiplier of 2.00 for mini-med
policies. These commenters stated that the unique structure of these
plans would remain consistent between 2011 and 2014, after which a
total prohibition on annual dollar limits under PHS Act section 2711
will be in effect, other than for grandfathered plans in the individual
market. These commenters asserted that without this MLR treatment for
the interim years, before new coverage options and premium tax credits
are available through the Affordable Insurance Exchanges, issuers may
withdraw from the market. This withdrawal could leave employers unable
to afford other health care coverage for their employees, leaving some
consumers without affordable health care coverage that will be
available to them in 2014.
Many commenters, however, opposed any continuation of this
methodology for issuers of mini-med policies. Consumer advocates,
healthcare organizations, and a labor organization asserted that mini-
med policies do not need a special circumstances adjustment. They noted
that issuers did not request such an adjustment during the public
comment period of the National Association of Insurance Commissioners
(NAIC) model rule making process and that the NAIC did not recommend
such an adjustment. They also asserted that issuers of mini-med
policies should be required to operate with the same efficiency as more
robust policies and to meet the statutory MLR standard. Two commenters
did not support extending the adjustment for mini-med policies any
longer than 2014.
Response: In determining the appropriate treatment for mini-med
policies with total annual benefit limits of $250,000 or less with
respect to MLR, we considered commenters' concerns about loss of
coverage if issuers of mini-med policies exit the market absent
separate MLR treatment. We also considered commenters' concerns about
the need for issuers to operate efficiently and provide valuable
coverage.
In the interim final rule, we requested three quarters of data,
including amount of premium spent on claims, quality improving
activities, non-claims costs, and taxes. This final rule is being
issued after receiving and analyzing two quarters of this data. We
believe it is necessary to determine the final MLR policy as to the
treatment of mini-med policies, despite the fact that we have not yet
analyzed the third quarter data, because otherwise we could not issue
rules in time for the special circumstances adjustment to be effective
for 2012 and to minimize the chance that issuers may withdraw these
policies due to uncertainty about MLR requirements. After analyzing the
first and second quarter data, seeking to strike a balance that ensures
continued access for consumers while ensuring that they receive value
for their premium dollar, we have determined that in 2012, the
appropriate multiplier for mini-med policy experience is 1.75, in 2013,
the appropriate multiplier is 1.50, and in 2014, the appropriate
multiplier is 1.25.
The Department only addresses mini-med policy experience for the
2012, 2013, and 2014 MLR reporting years. Section 2711 of the PHS Act
provides that for policy years beginning on and after January 1, 2014,
when the Affordable Insurance Exchanges will be in place to provide
consumers with better, more affordable coverage options, non-
grandfathered plans in all markets and grandfathered plans in the large
and small group markets will no longer be permitted to have annual
dollar limits. Thus, policies with annual limits under Sec.
158.110(d)(3) will no longer exist in those markets. We have applied a
multiplier through the 2014 MLR reporting year to account for mini-med
policies with a plan year that begins after January 1, 2013 and ends
sometime in 2014.
Based upon the data we received from the first and second quarterly
reports of 2011, without any multiplier, in 2011, seven of the 12
issuers in the individual market, and six of the 15 issuers in the
large group market would not meet the MLR of 80 and 85 percent,
respectively. With the multiplier of 2.00, three of the 12 issuers in
the individual market would not meet the MLR standard \1\, and all
issuers in the small group or large group market would meet the MLR
standard.
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\1\ This analysis takes into consideration issuers that operate
in States which have been granted an adjustment to the MLR standard
for the individual market, pursuant to Sec. 158.301.
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A graduated allowance for an adjustment of 1.75 in 2012, 1.50 in
2013 and 1.25 in 2014 will incentivize issuers to reduce their
administrative expenses and operate more efficiently to ensure that
they meet the MLR standard while minimizing issuer market withdrawal,
maintaining access to coverage for consumers and ensuring that they
receive greater value from these policies
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until 2014. We plan on publishing the data used in this analysis in the
spring of 2012.
B. ``Expatriate'' Policies (45 CFR 158.110(b)(2), 158.120(d)(4), and
158.221(b)(4))
The interim final rule defines expatriate policies as ``group
policies that provide coverage for employees working outside their
country of citizenship, employees working outside of their country of
citizenship and outside the employer's country of domicile, and non-
U.S. citizens working in their home country * * *'' (45 CFR
158.120(d)(4)). Several public comments were received regarding the
definition of expatriate policies. In this final rule, we are amending
the definition of expatriate policies to read ``group policies that
provide coverage to employees, substantially all of whom are: Working
outside their country of citizenship; working outside of their country
of citizenship and outside the employer's country of domicile; or non-
U.S. citizens working in their home country * * *.'' We add the phrase
``substantially all of whom are'' to ensure that issuers do not
classify a policy as an expatriate policy when expatriates account for
only a limited proportion of the covered population.
The preamble to the interim final rule states that expatriate
policies issued by non-U.S. issuers for services rendered outside the
United States are not subject to the MLR regulation, nor are expatriate
policies written on a form not filed with and approved by a State
insurance department. Issuers must report expatriate policy experience
separately from other experience for the 2011 MLR reporting year and
must aggregate that experience on a national level for the large group
market and the small group market. The definition of expatriate
policies does not include policies issued in the individual market.
Section 158.221(b)(4) directs issuers of expatriate policies to use
a separate methodology for calculating the MLR numerator for reporting
and rebate purposes for the 2011 MLR reporting year. Specifically,
incurred claims and activities that improve health care quality are to
be multiplied by a factor of 2.00 in calculating the MLR. The interim
final rule directs issuers to submit a report for each of the first
three quarters of the 2011 MLR reporting year. The preamble to the
interim final rule notes that, after reviewing the quarterly filings of
the expatriate policies based on 2011 experience, we will make a
determination as to whether this treatment should continue or be
modified beyond the 2011 MLR reporting year.
Comment: CMS received six comments regarding the treatment of
expatriate policies in the interim final rule. The majority of the
commenters supported the interim final rule's treatment of expatriate
policies for the 2011 MLR reporting year. Specifically, issuers and
trade associations supported the special methodology for calculating
the MLR numerator for expatriate policies, noting that these policies
have higher administrative costs as a result of (1) Providing
international access to providers; (2) maintaining emergency evacuation
services; and (3) navigating health care and legal systems in different
countries. These policies may also have unpredictable experience
depending on the location of the enrollees. One issuer stated that a
large portion of international policies are sold through brokers, and
high broker fees contribute to the increased administrative cost. We
received no comments opposing a special circumstances adjustment for
expatriate policies.
Other issuers and commenters suggested that the interim final
rule's adjustment to the MLR numerator does not do enough to relieve
expatriate issuers from the MLR standards provided in the Affordable
Care Act. One issuer claimed that the MLR reporting requirement creates
an unlevel playing field because U.S. issuers must disclose proprietary
cost structure information under the MLR reporting requirements, while
foreign issuers would not be required to do so. Two commenters
specifically suggested that the adjustment for expatriate policies
should extend beyond the 2011 MLR reporting year, either temporarily or
permanently.
Response: We recognize the unique administrative costs associated
with expatriate policies as evidenced from the public comments and the
first two quarterly reports of 2011.\2\ Commenters asserted that the
costs of: (1) Identifying and credentialing providers worldwide in
countries with different licensing and other requirements; (2)
processing claims submitted in various languages; (3) standardizing
billing procedures; (4) providing translation and other services to
enrollees; and (5) helping subscribers locate qualified providers
internationally justify a separate methodology that takes into account
these special circumstances. After reviewing the first and second
quarter data, we have determined that continuing a special
circumstances adjustment of a multiplier of 2.00 to the numerator of
the MLR is appropriate for expatriate policies.
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\2\ CMS is basing its determination on two quarters of data for
the same reasons set forth above with respect to mini-med policies.
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According to the year-to-date second quarter data provided by
issuers of expatriate policies, without applying the special
circumstances adjustment provided in the interim final rule, the
majority of issuers in the large group market \3\ reported credibility-
adjusted MLRs significantly below 85 percent MLR standard. However,
with the multiplier of 2.00, we estimate that issuers' credibility-
adjusted MLRs will meet the MLR standards, thus ensuring that Americans
working abroad will still have access to U.S.-based coverage.
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\3\ No issuers of expatriate policies in the small group market
had credible experience in 2011. However, they may become credible
in 2012, when issuers' MLRs will generally be calculated based on
multiple years of experience and data.
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Based on the reported data and on information from stakeholders
concerning this unique market, we believe that a multiplier of two is
appropriate to ensure that issuers remain in the expatriate market. As
discussed previously, expatriate policies have significantly different
and additional administrative costs than do policies that provide
primarily domestic coverage. In addition, the experience of expatriate
policies is subject to more variability than other types of policies,
due to the fact that they primarily cover care in all parts of the
world in a wide variety of health care systems, which also makes
pricing to a particular MLR standard much more difficult. Due to this
inherent uncertainty in pricing and their unique administrative costs,
we have determined that it is appropriate to provide this special
circumstances multiplier to expatriate policies. We understand that the
experience of expatriate policies is significantly more variable than
the experience of other types of policies, warranting a larger
adjustment to account for this. This multiplier of two applies to
expatriate policies beginning in the 2012 MLR reporting year, and
applies indefinitely.
We believe that the MLR standards do not materially affect U.S.
issuers' ability to compete with foreign issuers, in part because U.S.
employers want to provide their employees who are working abroad and
their dependents with comprehensive health insurance that meets the
unique needs of expatriates and provides benefits that are comparable
to the coverage of their U.S.-based employees. Also, U.S.-based issuers
generally will not be required to disclose any proprietary financial
structure information that is not already
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being provided to the States through the NAIC's Supplemental Health
Care Exhibit (SHCE).
C. Fraud Reduction Expenses (45 CFR 158.140(b)(2)(iv) and
158.150(c)(8))
The interim final rule describes the types of expenses that are
adjustments to claims under the MLR disclosure and reporting
requirements. Specifically, under Sec. 158.140(b)(2)(iv), the amount
of claim payments recovered through fraud reduction efforts, not to
exceed the amount of fraud reduction expenses, can be included in
incurred claims. Fraud reduction efforts include fraud prevention as
well as fraud recovery. In addition, the interim final rule provides
that fraud prevention activities are excluded from quality improvement
activities (QIA).
Comment: We received 12 comments on the treatment of fraud
prevention activities in the interim final rule. Eleven of the
commenters supported the inclusion of fraud prevention activities as
QIA. Specifically on this point, issuers argued that fraud prevention
activities improve patient safety, and deter the use of medically
unnecessary services, thus providing a higher level of health care
quality. Commenters asserted that, by not including all fraud reduction
efforts as QIA, issuers would reduce their fraud reduction efforts,
which would decrease patient safety and quality of care. Two commenters
added that by prohibiting plans from including the costs they incur for
fraud prevention activities as QIA, the rule likens the costs to wages,
overhead, and advertising expenses. Two trade associations asserted
that HHS should be consistent with the Administration's efforts to
prevent fraud in government programs, stating that excluding fraud
prevention as QIA undermines the federal government's efforts to
prevent, detect, and prosecute fraud. Two commenters provided
information regarding the savings that fraud prevention programs can
provide issuers. This information suggested that among large issuers
surveyed, the net savings from anti-fraud operations were more than $3
per enrollee in 2008, that medium sized issuers reported $1 savings per
enrollee, and that small issuers estimated $2.70 savings per enrollee.
Not all commenters supported characterizing fraud prevention
activities as QIA. A provider association expressed concerns that
Pharmacy Benefit Managers may improperly try to categorize certain
activities as fraud detection due to the lack of a clear definition for
fraud detection and recovery. This commenter asserted that excluding
fraud prevention activities from QIA is an appropriate way to apportion
medical costs versus administrative costs, and urged HHS to allow only
those efforts to reduce fraud, as defined by Medicare, to be allowed to
be deducted from an issuer's administrative costs.
Response: We considered the comments regarding fraud reduction
expenses, and are maintaining the MLR treatment of fraud reduction
expenses provided in the interim final rule. We will continue to
exclude fraud prevention activities from QIA. The current treatment of
fraud reduction efforts under the MLR rule is consistent with the
NAIC's position and adequately addresses the concerns of issuers, while
still recognizing that many fraud prevention efforts are not directly
targeted towards quality improvement. We recognize the importance of
fraud reduction expenses and the disincentive it could create if these
expenses were treated solely as non-claims and non-quality improving
expenses. Thus, allowing payments recovered through fraud reduction
efforts as adjustments to incurred claims gives issuers the opportunity
to recoup monies invested to deter fraud. Modifying the interim final
rule to allow an unlimited adjustment would undermine the purpose of
requiring issuers to meet the MLR standard in the Affordable Care Act.
We believe that issuers will continue to invest in fraud reduction,
including fraud prevention, regardless of the MLR treatment and
encourage issuers to do so. Issuers have incentives to reduce fraud
regardless of how this expense is classified within the MLR, as
demonstrated from the comments and data provided by issuers. By
allowing fraud reduction expenses as an adjustment to incurred claims,
up to the amount of fraudulent claims recovered, the interim final rule
mitigates any disincentive issuers may have to invest in these
programs. We appreciate the comments from the industry regarding the
savings that result from fraud reduction efforts, which support the MLR
policy in the interim final rule that the amount of claims payments
recovered through fraud reduction efforts, not to exceed the amount of
fraud reduction expenses, should be included in incurred claims.
D. ICD-10 Conversion Expenses (45 CFR 158.150(b)(2)(i)(A)(6) and
(c)(5))
Under Sec. 158.150(a), health insurance issuers are required to
submit an annual report to the Secretary documenting their expenditures
for activities that improve health care quality. As provided by Sec.
158.150(b), in order for an activity to be considered a QIA, it must be
designed, among other things, to improve health quality and increase
the likelihood of desired health outcomes in ways that are capable of
being objectively measured and of producing verifiable results and
achievements. In addition, the activity must be primarily designed to--
(1) Improve health outcomes; (2) prevent hospital readmissions; (3)
improve patient safety; or (4) implement, promote and increase wellness
and health activities. Health Information Technology (HIT) expenditures
that meet the requirements under Sec. 158.150 are considered QIA. The
list of activities excluded as QIA includes--(1) Those activities
designed primarily to control or contain costs; and (2) those that
establish or maintain a claims adjudication system, including costs
directly related to upgrades in HIT that are designed primarily or
solely to improve claims payment capabilities or to meet regulatory
requirements for processing claims (for example, costs of implementing
new administrative simplification standards and code sets adopted
pursuant to the Health Insurance Portability and Accountability Act
(HIPAA), 42 U.S.C. 1320d-2, as amended, including ICD-10 requirements).
The preamble to the interim final rule stated that CMS would examine
the reported conversion costs of ICD-10 to determine whether the policy
to exclude these costs from QIA should be revisited. In addition, the
interim final rule specifically requested comments on whether ICD-10
should be included as a QIA.
Comment: Provider associations and advocacy groups supported the
interim final rule's treatment of ICD-10. Specifically, provider
associations contended that ICD-10 does not have any bearing on the
treatment that an enrollee receives, and that there is no direct impact
on patient outcomes, even if it benefits the medical community as a
whole. Commenters also noted that issuers will achieve greater
administrative efficiency with ICD-10's more detailed coding, allowing
claims to be paid more efficiently. For these reasons, such commenters
asserted that these costs are administrative in nature and should be
excluded from QIA. A consumer advocate further suggested that excluding
ICD-10 costs from QIA would prevent issuers from reclassifying
administrative tasks as QIAs.
Issuers opposed the interim final rule's treatment of ICD-10
conversion costs, asserting that ICD-10 costs are a QIA because they
are meant to improve data collection for diagnoses and medical
procedure coordination, patient
[[Page 76578]]
safety, health outcomes, and medical research. They also stated that
ICD-10 conversion allows for alignment of quality and wellness
programs, which are QIA. In support of classifying ICD-10 expenses as
QIA, a health insurance issuer stated that ICD-10 coding can improve
health plans' ability to share data among clinicians for the purpose of
quality improvement and care coordination activities, thereby allowing
for a better understanding of diagnoses and better treatment. An issuer
and an industry association asserted that because ICD-10 implementation
is a legal requirement, the burden of cost should not be on the
issuers.
Finally, issuers acknowledged that conversion costs can be tracked
and separated from maintenance costs through current accounting
processes, and most supported excluding ICD-10 maintenance costs
occurring after October 1, 2013 from QIA.
Response: In response to the comments highlighting the dual nature
of ICD-10, we considered the impact of ICD-10 on improving data
collection for diagnoses and medical procedure coordination, patient
safety, health outcomes, and medical research. In addition, we
consulted with the Office of E-Health Standards and Services (OESS)
within CMS. OESS oversees ICD-10 and considers some of the impact of
ICD-10 to be QIA, and supports the treatment of ICD-10 set forth in
this final rule.
We also recognize that ICD-10 has some claims processing functions
as well. This final rule recognizes the dual nature of ICD-10 and
includes as QIA ICD-10 conversion costs incurred in 2012 and 2013 up to
0.3 percent of an issuer's earned premium in the relevant State market
in each of those years. Analysis of the 2010 SHCE filings reveals that
ICD-10 expenses, as a percent of earned premium, account for less than
0.02 percent of issuer spending in each market (individual, small group
and large group). However, significant ICD-10 conversion efforts will
be made in 2012 and 2013, as issuers cannot convert to ICD-10 until
after January 1, 2012, when the new version 5010 standards for
electronic health care transactions will be upgraded. Federal HIPAA
regulations direct that the ICD-10 transition must be completed by
October 2013. The industry provided a range of percentages using their
projected expenditures of ICD-10 conversion costs on their MLRs, if
allowed as a QIA. After reviewing the data provided by issuers and 2010
SHCE filings, we chose a cap that allows as QIA amounts that issuers
projected spending on ICD-10 conversion, without permitting issuers to
include claims adjudication systems costs in QIA.
In addition, ICD-10 maintenance costs are excluded from QIA in this
final rule, based on the industry's collective comments stating that
separating conversion costs from maintenance costs is feasible, and
based on their support for excluding ICD-10 maintenance costs from QIA.
We request further comment on the treatment of ICD-10 conversion
costs adopted in this final rule. Specifically, we are soliciting
comments on whether including as QIA ICD-10 conversion costs as a QIA
is appropriate, and if the cap set at up to 0.3 percent of an issuer's
earned premium is an appropriate amount based on past and future ICD-10
conversion expenses.
E. Community Benefit Expenditures (45 CFR 158.160(b)(2)(vi) and
158.162(b)(1)(vii), (c)(1))
In the interim final rule, we requested comment on the treatment of
community benefit expenditures. The interim final rule allows a not-
for-profit, tax-exempt issuer to deduct from earned premium the amount
of its community benefit expenditures, limited to the State premium tax
rate applicable to for-profit issuers. The interim final rule also
requires a not-for-profit issuer to report community benefit
expenditures ``in lieu of taxes * * * but not to exceed the amount of
taxes [it] would otherwise be required to pay.'' (45 CFR
158.162(c)(1)).
Comment: CMS received nine comments on the treatment of community
benefit expenditures, including from six issuers, a labor union, a law
firm, and an issuer coalition organization. Seven commenters agreed
that the MLR rule should not discourage not-for-profit issuers from
providing services and financial support to the community. Three
commenters expressed concern that limiting community benefit
expenditures deductibility would discourage community benefit
expenditures and community investment. Two commenters suggested that
the definition of community benefit expenditures be expanded to include
expenses not specifically targeted at increasing access to health care.
Another commenter suggested that community benefit expenditures be
considered QIA.
Some commenters expressed concern that the treatment of community
benefit expenditures in the interim final rule would result in unequal
treatment among not-for-profit issuers, and between not-for-profit and
for-profit issuers, for several reasons. Five commenters noted that the
community benefit expenditures deduction would not be uniformly
available to a not-for-profit issuer because State premium tax rates
vary by State, and within some States, vary by issuer type (for
example, PPO or HMO). They also suggested that the varying premium tax
rates by type of issuer within a State would result in confusion when
determining which premium tax rate to apply to the community benefit
expenditures limit. The commenters asserted that in States without a
premium tax, a not-for-profit issuer's community benefit expenditures
would not be deductible and therefore its MLR would be relatively lower
than an issuer in a State with a premium tax.
Six commenters suggested that a flat national community benefit
expenditures deduction limit would result in a more even playing field,
as well as simplify the administrative burden in determining community
benefit expenditures deduction limits. Five commenters proposed a flat
deduction limit ranging from three to five percent of earned premium.
Another commenter proposed allowing not-for-profit issuers to deduct
all community benefit expenditures from earned premium.
Four commenters asserted that because of the different corporate
structures, business plans, missions, and tax liabilities of not-for-
profit and for-profit issuers, it would be speculative and burdensome
to determine what a not-for-profit issuer's hypothetical tax liability
would be if it were a for-profit issuer. Finally, issuers expressed
concern that not-for-profit issuers have fundamentally different
missions than for-profit issuers, that tax liability is determined
based on a series of credits and adjustments built into a taxable
issuer's business plan, and that it would be too burdensome and
speculative for a tax-exempt or not-for-profit issuer to estimate its
``but for'' tax liability.
Response: Although we share the concern that the MLR standard
should not discourage a not-for-profit issuer from spending on
community benefit expenditures, we are not persuaded that the
definition of community benefit expenditures should generally be
expanded and maintain the definition currently in Sec. 158.160(c)(2).
We note that existing laws pertaining to not-for-profit issuer status
and the benefits associated with this status continue to apply.
However, based on the comments regarding the variance of State premium
tax rates by type of issuer, in this final rule the community benefit
expenditures deduction is revised to
[[Page 76579]]
help ameliorate such disparate effects. Currently, 48 States have
premium taxes, but tax rates in many States differ for different kinds
of plans and in some States they differ for not-for-profit and for-
profit issuers. Several States do not tax HMOs or not-for-profit
issuers at all. In this final rule, we modify Sec. 158.162(b)(1)(vii)
to allow an issuer to deduct either the amount it paid in State premium
taxes, or the amount of its community benefit expenditures up to a
maximum of the highest State premium tax rate in the State, whichever
is greater. This treatment does not create a disincentive against
community benefit expenditures, while equalizing some of the
disparities that were identified in comments to the interim final rule.
We also considered the comments regarding a hypothetical tax
reporting requirement in Sec. 158.162(c)(1) and agree that it is not
necessary. Because of the modification to the community benefit
expenditures deduction limit, it is no longer necessary for an issuer
to report community benefit expenditures limited by its hypothetical
tax liability, and thus this final rule removes that requirement. By
removing Sec. 158.162(c)(1) of the interim final rule, this final rule
simplifies the reporting requirement.
Section 158.160(b)(2)(vi) of the interim final rule directs issuers
to report non-claims costs by type, including all community benefit
expenditures. This reporting standard applies regardless of whether an
issuer elects to adjust earned premium for community benefit
expenditures, as permitted by Sec. 158.162(b)(1)(vii) in this final
rule.
F. Rebates to Enrollees in Group Markets (45 CFR 158.241(b),
158.242(b), 158.243(a)(1), 158.250, and 158.260(c))
In Sec. 158.242(b), the interim final rule directs issuers in the
large and small group markets that have not met the applicable MLR
standard to provide any owed rebate to the policyholder and each
subscriber, ``in amounts proportionate to the amount of premium each
paid.'' The interim final rule also allows an issuer to enter into an
agreement with the group policyholder to distribute the rebates on
behalf of the issuer if the policyholder agrees to distribute it
proportionately as directed and provide detailed documentation
regarding the distribution to each subscriber. However, under the
interim final rule, the issuer remains liable for complying with all of
its obligations under the statute and for maintaining records that
demonstrate rebates were provided accurately to individual enrollees.
Comment: CMS received several comments regarding rebate
distribution in the group market. Generally, commenters supported the
pro rata distribution of rebates to the policyholder and each
subscriber. Many commenters, however, expressed significant concern
about the logistical and tax problems inherent in the interim final
rule's mechanism for providing rebates in the group markets. For
example, several issuers expressed concern that the issuer lacks access
to the information needed to distribute rebates to individual enrollees
covered under a group policy, asserting that the policyholder (and not
the issuer) has information regarding the premium contribution amount
from the employer and the employee. A few commenters expressed their
concern that it is unfair for issuers to remain liable under the
interim final rule, even when the issuer enters into an agreement with
a policyholder, since issuers are unable to monitor or control the
actions of the policyholder.
Issuers, trade associations, and a State regulator recommended that
issuers be allowed to distribute rebates to policyholders, and that the
policyholder should become responsible for distributing rebates to
enrollees. Two commenters noted that the proposed distribution
treatment should be governed by the Employee Retirement Income Security
Act of 1974, as amended (ERISA). However, one commenter asserted that
rebates should not be considered plan assets under ERISA for which plan
administrators owe a fiduciary duty.
A few commenters also recommended allowing issuers to rely on the
representations made by policyholders that they calculated and
disbursed rebates as required and that making a good faith effort to
obtain the information from policyholders should fulfill issuers'
reporting obligations under the interim final rule.
Subsequent to the closing of the public comment period on the
interim final rule, CMS received several inquiries to our public email
address asking about the tax implications to issuers, employers, and
consumers, as a result of the mechanism for providing rebates
established in the interim final rule.
Response: In response to the comments we received and the inquiries
to our public email address, we examined the issue in consultation with
the Departments of Labor and Treasury. Requiring issuers to apportion
and pay rebates directly to policyholders and each of their subscribers
(who are generally employees) in the group health plan context, as
provided by the interim final rule, has unintended administrative
consequences as well as potential tax consequences for issuers,
employers, and consumers. For the portion of the premiums that were
paid with pre-tax dollars (that is, through an Internal Revenue Code
section 125 cafeteria plan), which is the case for a significant
proportion of group enrollees, rebates paid to enrollees may be treated
as wages, raising issues as to the application of employment taxes and
the potential that an issuer may have to administer any applicable
withholding obligations.
While the above burdens and logistical problems could be avoided by
simply providing for rebates to be paid to the policyholder (for
example, employer), the statute directs that enrollees receive the
benefit of rebates and we are committed to ensuring that this is the
case. Having considered the tax and other logistical implications of
providing rebates to enrollees in a group health plan, the effect on
consumers, and the burden on issuers and employers, this final rule
directs issuers in the group markets to provide rebates to the group
policyholder but, as discussed below, includes protections designed to
satisfy, in a practical way, the objective of benefitting subscribers
and their related enrollees. In providing rebates to the group
policyholder, the final rule maintains the definition of enrollee for
purposes of the rebate provisions, found in Sec. 158.240(b), which
states that ``enrollee'' means the subscriber, policyholder, and/or
government entity that paid the premium for health care coverage
received by an individual during the relevant MLR reporting year.
Issuers must provide rebates, if any, to policyholders covered during
the MLR reporting year on which the rebate is based.
The final rule establishes separate standards for ERISA-covered
group health plans and plans that are neither covered by ERISA nor are
governmental plans (for example, church plans). The handling of rebates
by ERISA-covered plans and church plans are not subject to direct CMS
regulation. Thus, the separate standards for such plans in the final
rule are designed to acknowledge the different legal and regulatory
frameworks that apply to those plans while still establishing, either
directly or through reliance on other applicable legal standards, such
as ERISA, a requirement that is consistent with the statutory directive
that MLR rebates benefit enrollees. Non-Federal governmental plans are
subject to direct regulation by CMS and we are issuing
[[Page 76580]]
an interim final rule contemporaneous with this final rule that
addresses rebates to such plans.
Many group health plans are employee benefit plans that are subject
to ERISA. Through consultation regarding this final rule, the
Department of Labor has advised CMS that, in the context of ERISA-
covered group health plan coverage, rebates paid to the policyholder in
accordance with Sec. 158.242(b) of this final rule may have plan
asset, fiduciary responsibility, and prohibited transaction
implications under Title I of ERISA. Distributions from insurance
companies to their policyholders, including employee benefit plans,
take a variety of forms, including refunds, dividends, demutualization
payments and excess surplus distributions. ERISA, Department of Labor
rulings, and other authority currently provide guidance on the proper
handling of such distributions to employee benefit plans covered under
Title I of ERISA. To the extent MLR rebates constitute plan assets of
an ERISA-covered group health plan, decisions regarding the handling
and allocation of the rebate would have to be made by a plan fiduciary
consistent with ERISA. The Department of Labor has also advised that it
is publishing guidance on its Web site at http://www.dol.gov/ebsa/healthreform, contemporaneously with this final rule, regarding the
duties of employers/plan sponsors and other fiduciaries responsible
under sections 403, 404 and 406 of ERISA for decisions relating to MLR
rebates. Accordingly, rebates paid in connection with policies for
ERISA-covered employee benefit plans may constitute plan assets that
are required to be handled in accordance with the requirements of
ERISA.
With respect to non-Federal governmental plans, there currently is
no similar legal framework set forth in Federal law governing
distributions from issuers to their plan policyholders. Accordingly,
under the authority in section 2792 of the PHS Act to promulgate
regulations determined ``appropriate'' to ``carry out'' the provisions
of part A of title XXVII of the PHS Act, which include PHS Act section
2718, we are, in a separate interim final rule being published
contemporaneously with this final rule, directing that the portion of
rebates attributable to the amount of premium paid by subscribers of
non-Federal governmental plans be used for the benefit of subscribers,
which ensures that enrollees in such plans similarly receive the
benefit of rebates.
With respect to rebates paid to a policyholder that is a group
health plan but is not a governmental plan and not subject to ERISA,
for example a church plan, this final rule provides that an issuer may
make rebate payment to the policyholder if the issuer receives written
assurance from the policyholder that the rebate will be used for the
benefit of current subscribers using one of the options prescribed for
non-Federal governmental plans. Without such written assurance, the
issuer must pay directly the policyholder's subscribers covered by the
policy during the MLR reporting year on which the rebate is based.
The purpose of the MLR is to provide enrollees value for their
premium dollar, and issuers must meet the applicable MLR standard or
pay rebates based upon aggregated market data in each State. The law
does not provide for a group health plan MLR or an individual enrollee
MLR. Thus, rebates are not based upon a particular group health plan's
experience or a particular subscriber's experience. We believe that
distributing rebates to subscribers in the manner prescribed by this
final rule and the interim final rule published contemporaneously with
this final rule accomplishes the purpose of the MLR requirement, while
streamlining the rebate process for consumers, employers, and issuers.
Because the final rule and the interim final rule published
contemporaneously with this final rule provide that rebates are to be
distributed to the policyholder for subscribers of group health plans,
the final rule modifies Sec. 158.241(b) regarding rebates to former
enrollees, so that Sec. 158.241(b) now applies only to former
enrollees in the individual market.
The final rule also provides that issuers must provide notice of
rebates, if any, to current group health plan subscribers as well as
group policyholders, and to subscribers in the individual market. The
notice of rebates to policyholders and subscribers of group health
plans will be prescribed by the Secretary of Health and Human Services,
in consultation with the Secretary of Labor.
The notice must include information about the MLR and its purpose,
the MLR standard, the issuer's MLR, and the rebate being provided. In
addition, the notice to policyholders and current subscribers in plans
that are not subject to ERISA must contain an explanation as to how the
rebate will be handled. If the plan is subject to ERISA, the notice to
policyholders and subscribers must contain an explanation that the
policyholder may have obligations under ERISA's fiduciary
responsibility provisions with respect to the handling and allocation
of the rebate and contact information for questions concerning the
handling and allocation of the rebate under their plan. As noted above,
the Department of Labor is publishing guidance on its Web site
contemporaneously with the publication of this final rule that provides
guidance on the duties of policyholders under ERISA with respect to the
handling and allocation of rebates in the case of policies that cover
an employee benefit plan subject to ERISA.
If the policyholder is a non-Federal governmental plan, the notice
to the policyholder and subscribers must contain an explanation that
the policyholder must use the portion of the rebate attributable to
subscribers' contribution to premium in certain ways for the benefit of
current subscribers. If the policyholder is not a governmental plan and
not subject to ERISA, the notice must contain an explanation that the
policyholder must agree to use the portion of the rebate attributable
to subscribers' contribution to premium for the benefit of current
subscribers or the issuer will pay the rebate directly to the
policyholder's subscribers.
We believe that the above notice requirement will not only provide
policyholders and subscribers with information on rebates to be paid,
and how they will benefit from them, but greater transparency on how
premium dollars are used by issuers, and how the issuer's MLR compares
to the standard set by Congress. We believe that these latter two
purposes would also be served by a notice to policyholders and
subscribers with MLR information from issuers that do not owe rebates.
In addition to providing policyholders and subscribers with material
information on how their premium dollars are used, the provision of
such a notice would create an incentive to spend as high a percentage
of premium dollars on care and quality improvement as possible, rather
than just enough to avoid paying rebates.
Because the interim final rule did not discuss the possibility of a
notice requirement for issuers that do not owe rebates, and the public
has not had an opportunity to comment on such a requirement, we have
not included it in this final rule but intend to amend this rule
pursuant to comments. We invite comment on the fact that the current
notice requirement only applies to issuers that owe rebates, and that
as a result, policyholders and subscribers of issuers not owing rebates
would not receive MLR information. We also invite comment on the idea
of the provision of notices to subscribers and policyholders not
receiving rebates at the same time
[[Page 76581]]
that subscribers and policyholders receiving notices of rebates get
theirs in 2012 and beyond.
We also are considering whether it would be useful to include
information in notices about the issuer's prior year MLR, so that
enrollees could see whether the issuer is doing a better or worse job
than the year before of efficiently using premium revenue. Information
showing a less favorable MLR in the current year than that from the
year before could be useful to policyholders and subscribers in
predicting what might be expected to happen the next year, and thus in
making plan choices. Again, because we did not discuss or seek comment
on such a requirement in the interim final rule, we invite public
comment on whether we should impose a requirement that it be included
for all MLR notices in 2012 and/or subsequent years.
Under Sec. 158.242(b)(4) of the final rule, if a group health
plan, regardless of whether it is subject to ERISA, has been terminated
at the time of rebate payment and the issuer cannot, despite reasonable
efforts, locate the policyholder or employer whose employees were
enrolled in the group health plan, the issuer must distribute the
entire rebate (both the policyholder and subscriber's portions of the
rebate) to the subscribers of the group health plan enrolled during the
MLR reporting year on which the rebate was calculated by dividing the
rebate equally among all subscribers entitled to a rebate. Since
issuers do not know how much of a group health plan premium was paid by
the policyholder and how much each subscriber contributed, issuers
would not be able to divide rebates based upon each subscriber's
contribution.
The final rule also modifies the minimum threshold for issuer
payments of rebates in the group market from $5.00 per subscriber to a
total of $20.00 for the policyholder portion and subscriber portion of
the rebate combined when the rebate is paid directly to the
policyholder. When an issuer pays the rebate directly to each
subscriber in a group health plan, as provided in Sec. 158.242(b)(3)
and (4), or pays rebates in the individual market, the minimum rebate
threshold remains at $5.00 per subscriber. Finally, in Sec.
158.260(c), the final rule modifies issuers' rebate reporting
requirements to conform to changes in how rebates are provided in group
markets, which we believe also simplifies the reporting requirements.
We request comment on the treatment of rebates in group markets. We
request comments specifically on whether the mechanism provided in this
final rule solves or meaningfully reduces the logistical challenges of
providing rebates to group health plans and their subscribers and on
other potential solutions to these challenges while ensuring that
enrollees benefit when rebates are paid.
III. Provisions of the Final Rule
Those provisions of this final rule that differ from the interim
final rule are:
Mini-med Plans. Issuers of policies with total annual
benefit limits of $250,000 or less must continue for 2012, 2013 and
2014 to report mini-med experience separately from other experience and
must continue to aggregate it by State and by (individual, small group,
or large group) market. Issuers of mini-med policies must apply a
special circumstances adjustment to the numerator of their MLR by
multiplying the total of the incurred claims plus expenditures for
activities that improve health care quality by a factor of 1.75 for the
2012 MLR reporting year, 1.50 for the 2013 MLR reporting year and 1.25
for the 2014 MLR reporting year. For the 2012, 2013 and 2014 MLR
reporting years, mini-med experience will be reported annually, but not
quarterly.
Expatriate Plans. Issuers of expatriate plans must
continue to aggregate and report the experience from these policies on
a national basis, separately for the large group market and small group
market, and separately from other policies. Issuers of expatriate
policies must apply a special circumstances adjustment to the numerator
of their MLR by multiplying the total of the incurred claims plus
expenditures for activities that improve health care quality by a
factor of 2.0 beginning with the 2012 MLR reporting year. This applies
indefinitely. Expatriate experience will be reported annually, but not
quarterly. The definition of expatriate policies is amended to read
``group policies that provide coverage to employees, substantially all
of whom are: Working outside their country of citizenship; working
outside of their country of citizenship and outside the employer's
country of domicile; or non-U.S. citizens working in their home
country.''
ICD-10 Conversion Expenses. Activities that are considered
quality improvement activities (QIA) include, for each of the 2012 and
2013 MLR reporting years, ICD-10 conversion costs up to 0.3 percent of
an issuer's earned premium in the relevant State market. Comments are
solicited on this issue.
Community Benefit Expenditures. The amount an issuer may
deduct from earned premium is the higher of either the total amount
paid in State premium tax, or actual community benefit expenditures up
to the highest premium tax rate in the State. In addition, not-for-
profit issuers are no longer required to estimate the amount of taxes
they would have paid if they were for-profit.
Recipients of Rebates. The rebate distribution process for
group markets provides that issuers generally distribute rebates to
group policyholders. Comments are solicited on this issue. With respect
to policyholders that are a group health plan but not a governmental
plan or subject to ERISA, issuers must obtain written assurance from
the policyholder that rebates will be used for the benefit of current
subscribers or otherwise must pay the rebates directly to subscribers
covered by the policy during the MLR reporting year on which the rebate
is based. Issuers must distribute the entire rebate directly to
subscribers if the group health plan has been terminated. In addition,
the amount for a de minimis rebate in the group market is less than
$20.00 per group health plan for rebates that are distributed to the
policyholder. There are conforming changes made to the reporting
requirements. Enrollees are required to receive a rebate notification.
IV. Collection of Information Requirements
Under the Paperwork Reduction Act of 1995, we are required to
provide 60-day notice in the Federal Register and solicit public
comment before a collection of information requirement is submitted to
the Office of Management and Budget (OMB) for review and approval. In
order to fairly evaluate whether an information collection should be
approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act
of 1995 requires that we solicit comment on the following issues:
The need for the information collection and its usefulness
in carrying out the proper functions of our agency;
The accuracy of our estimate of the information collection
burden;
The quality, utility, and clarity of the information to be
collected; and
Recommendations to minimize the information collection
burden on the affected public, including automated collection
techniques.
We are soliciting public comment on each of these issues for the
following sections of this document that contain information collection
requirements (ICRs):
[[Page 76582]]
ICRs Regarding MLR and Rebate Reporting and Notice Requirement (Sec.
158.101 Through Sec. 158.170, and Sec. 158.250)
For purposes of MLR and rebate reporting under Part 158, this final
rule does not impose any new reporting requirements and generally
conforms to the requirements under the interim final regulation.
However, CMS plans to publish for public comment, in accordance with
the Paperwork Reduction Act of 1995 (44 U.S.C. chapter 35), the annual
MLR reporting form that issuers will be required to submit to CMS
starting in June 2012 for the 2011 reporting year as well as the notice
of rebates that issuers will be required to send to policyholders and
subscribers starting in August 2012 for the 2011 report year, in the
near future.
One exception is that mini-med and expatriate issuers are no longer
required to submit quarterly reports, beginning in MLR reporting year
2012. The quarterly report information collection requirements are
currently approved under OMB control number 0938-1132. Due to the
elimination of the quarterly reporting requirement for mini-med and
expatriate issuers, it is estimated that annual reporting costs for
such issuers will be reduced by a total of approximately $2.8 million.
CMS has submitted a copy of these final regulations to OMB in
accordance with 44 U.S.C. 3507(d) for review of the information
collections. If you comment on this information collection and
recordkeeping requirements, please do either of the following:
1. Submit your comments electronically as specified in the
ADDRESSES section of this final rule with comment period; or
2. Submit your comments to the Office of Information and Regulatory
Affairs, Office of Management and Budget, Attention: CMS Desk Officer,
9998-FC, Fax: (202) 395-6974; or Email: [email protected].
V. Response to Comments
Because of the large number of public comments CMS receives on
Federal Register documents, CMS is not able to acknowledge or respond
to them individually. A discussion of the comments CMS received is
included in the preamble of this document.
VI. Regulatory Impact Statement
A. Summary
This final rule is designed to address several specific issues that
have arisen regarding section 2718 of the PHS Act, which sets forth
standards for reporting of certain medical loss ratio (MLR) related
data to the Secretary on an annual basis by issuers offering coverage
in the individual and group markets, and calculating and providing
rebates to policyholders in the event that an issuer's MLR fails to
meet or exceed the statutory standard. This final rule establishes
standardized methodologies designed to take into account the special
circumstances of mini-med policies and expatriate policies in the
methodologies for calculating measures of the activities that are used
to calculate an issuer's MLR. This final rule also addresses ICD-10
conversion costs, expenses related to fraud reduction activities,
community benefit expenditures and the distribution of rebates in the
group market. These provisions are generally effective beginning
January 1, 2012.
CMS is publishing this final rule to implement the protections
intended by Congress in the most economically efficient manner
possible. CMS has examined the effects of this rule as required by
Executive Order 12866 (58 FR 51735, September 1993, Regulatory Planning
and Review), the Regulatory Flexibility Act (RFA) (September 19, 1980,
Pub. L. 96-354), section 1102(b) of the Social Security Act, the
Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4), Executive Order
13132 on Federalism, and the Congressional Review Act (5 U.S.C.
804(2)). In accordance with OMB Circular A-4, CMS has quantified the
benefits, costs and transfers where possible, and has also provided a
qualitative discussion of some of the benefits, costs and transfers
that may stem from this final rule.
B. Executive Orders 12866 and 13563
Executive Order 12866 (58 FR 51735) directs agencies to assess all
costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects; distributive impacts; and equity). Executive
Order 13563 (76 FR 3821, January 21, 2011) is supplemental to and
reaffirms the principles, structures, and definitions governing
regulatory review as established in Executive Order 12866.
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
one year, or adversely and materially affecting a sector of the
economy, productivity, competition, jobs, the environment, public
health or safety, or State, local or Tribal governments or communities
(also referred to as ``economically significant''); (2) creating a
serious inconsistency or otherwise interfering with an action taken or
planned by another agency; (3) materially altering the budgetary
impacts of entitlement grants, user fees, or loan programs or the
rights and obligations of recipients thereof; or (4) raising novel
legal or policy issues arising out of legal mandates, the President's
priorities, or the principles set forth in the Executive Order.
A regulatory impact analysis (RIA) must be prepared for major rules
with economically significant effects ($100 million or more in any one
year); and a ``significant'' regulatory action is subject to review by
the Office of Management and Budget (OMB). As discussed below, CMS has
concluded that this rule is not likely to have economic impacts of $100
million or more in any one year, and therefore does not meet the
definition of ``economically significant rule'' under Executive Order
12866. Nevertheless, CMS has provided an assessment of the potential
costs, benefits, and transfers associated with this final regulation.
1. Need for Regulatory Action
Consistent with the provisions in Section 2718 of the PHS Act, this
final rule establishes methodologies for calculating the MLR to
accommodate the special circumstances of two different types of plans,
mini-med policies and expatriate policies, and a mechanism for
providing rebates to enrollees in group health plans when the MLR
standard is not met by an issuer. This final rule also addresses ICD-10
conversion costs, expenses related to fraud reduction activities and
community benefit expenditures. Section 2718(b) of the PHS Act
(captioned ``ensuring that consumers receive value for their premium
payments'') requires issuers to provide an annual rebate to each
enrollee if the ratio of the amount of premium revenue expended on
reimbursement for clinical services and activities that improve quality
is less than the applicable minimum standard and specifies how the
rebate is to be calculated.
2. Summary of Impacts
In accordance with OMB Circular A-4, Table VI.1 below depicts an
accounting statement summarizing CMS's assessment of the benefits,
costs, and transfers associated with this regulatory action. Tables
VI.1.1-VI.1.5 list benefits, costs and transfers for each individual
provision. For purposes of this regulatory impact analysis, CMS has
updated relevant information that
[[Page 76583]]
was presented in the December 1, 2010 MLR interim final rule (75 FR
74892) based on the provisions of this final rule. CMS has limited the
period covered by this regulatory impact analysis (RIA) to 2012-2013.
Estimates are not provided for subsequent years because there will be
significant changes in the marketplace in 2014 related to the offering
of new individual and small group plans through the Affordable
Insurance Exchanges. In addition, this RIA focuses only on the
modifications to the provisions in the interim final rule and estimates
the effects of those modifications relative to a baseline of no
modifications. As discussed earlier, CMS anticipates that the
adjustments to the MLR methodology in this final regulation will help
ensure that consumers receive value for their premium dollars, have
continued access to insurance coverage options, and encourage
efficiency in the disbursement of rebates to group health plan
enrollees. Additionally, CMS believes that allowing issuers of group
health plans to distribute all rebates to the policyholder for the
benefit of subscribers will avoid any increase in tax and
administrative burdens for consumers and issuers. Elimination of
quarterly reporting requirements for mini-med and expatriate policies
will reduce related reporting costs for issuers of those policies.
Allowing for inclusion of community benefit expenditures in the MLR
calculation for issuers without requiring not-for-profit issuers to
calculate hypothetical tax liability will also reduce reporting costs
for issuers. Executive Order 12866 also requires consideration of the
``distributive impacts'' and ``equity'' of a regulation. As described
in this RIA, the adjustment in the MLR methodology for mini-med
policies will result in an increase in rebate payments to enrollees in
those policies, while the adjustments in MLR methodology to account for
costs related to ICD-10 conversion and community benefit expenditures
in some States will result in reduced rebate payments to affected
enrollees. Distributing group health plan rebates to the policyholders
for the benefit of subscribers will also transfer the benefits of those
rebates from enrollees who leave the plan to new enrollees in the plan.
In accordance with Executive Order 12866, CMS believes that the
benefits of this regulatory action justify the costs. The regulatory
impact analysis does not include estimates related to fraud reduction
activities since this final rule does not change the policy or
treatment of fraud reduction expenses.
Table VI.1--Accounting Table: Summary
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Benefits:
----------------------------------------------------------------------------------------------------------------
Qualitative:
* Increase in quality of medical care as a result of increased spending on quality improving activities by
issuers of mini-med policies.
* Improved health as a result of increased spending on medical care by issuers of mini-med policies.
* Continued access to mini-med and expatriate health policies for consumers.
* Benefits to consumers by encouraging issuers to undertake community benefit expenditures.
----------------------------------------------------------------------------------------------------------------
Costs: Estimate Year dollar Discount rate Period covered
percent
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($millions/ ($4.2 million)....... 2011 7 2012-2013
year).
($4.4 million)....... 2011 3 2012-2013
----------------------------------------------------------------------------------------------------------------
Annual reduction in costs for issuers of mini-med and expatriate policies due to elimination of requirement to
file quarterly reports and change in method of disbursement of rebates for group health plans.
----------------------------------------------------------------------------------------------------------------
Qualitative:
* Increased spending on quality-improving activities by issuers of mini-med policies.
* Increased spending on medical care by issuers of mini-med policies.
* Reduced administrative burden for not-for-profit issuers since they will no longer need to calculate and
report hypothetical tax liabilities.
* Reduced tax burden for group health plan enrollees relating to the change in the method of disbursement of
rebate payments.
* Increased administrative costs for policyholders that disburse rebates to group health plan subscribers.
----------------------------------------------------------------------------------------------------------------
Transfers: Estimate Year dollar Discount rate Period covered
percent
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($millions/ $2.4 million......... 2011 7 2012-2013
year).
$2.6 million......... 2011 3 2012-2013
----------------------------------------------------------------------------------------------------------------
Annual transfer of rebate dollars to enrollees from shareholders or nonprofit stakeholders of mini-med policies,
resulting from adjustment in MLR methodology for mini-med policies.
----------------------------------------------------------------------------------------------------------------
Qualitative:
* Savings for consumers and reduced profit for issuers of mini-med policies.
* Transfer from enrollees to shareholders or nonprofit stakeholders in individual, small and large group
markets, resulting from adjustment in MLR methodology to account for community benefit expenditures and ICD-
10 conversion costs.
* Transfer of benefits of rebate dollars disbursed to the group health plan from enrollees who leave the
group health plan to enrollees new to the group health plan.
----------------------------------------------------------------------------------------------------------------
Table VI.1.1--Accounting Table: Mini-Med Policies
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Benefits:
----------------------------------------------------------------------------------------------------------------
Qualitative:
* Increase in quality of medical care as a result of increased spending on quality improving activities by
issuers of mini-med policies.
* Improved health as a result of increased spending on medical care by issuers of mini-med policies.
[[Page 76584]]
* Continued access to mini-med health policies for consumers.
----------------------------------------------------------------------------------------------------------------
Costs: Estimate Year dollar Discount rate Period covered
percent
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($millions/ ($2.5 million)....... 2011 7 2012-2013
year).
($2.6 million)....... 2011 3 2012-2013
----------------------------------------------------------------------------------------------------------------
Annual reduction in costs for issuers of mini-med policies due to elimination of requirement to file quarterly
reports.
----------------------------------------------------------------------------------------------------------------
Qualitative:
* Increased spending on quality-improving activities by issuers of mini-med policies.
* Increased spending on medical care by issuers of mini-med policies.
----------------------------------------------------------------------------------------------------------------
Transfers: Estimate Year dollar Discount rate Period covered
percent
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($millions/ $2.4 million......... 2011 7 2012-2013
year).
$2.6 million......... 2011 3 2012-2013
----------------------------------------------------------------------------------------------------------------
Annual transfer of rebate dollars to enrollees from shareholders or nonprofit stakeholders of mini-med policies,
resulting from adjustment in MLR methodology for mini-med policies.
----------------------------------------------------------------------------------------------------------------
Qualitative:
* Savings for consumers and reduced profit for issuers of mini-med policies.
----------------------------------------------------------------------------------------------------------------
Table VI.1.2--Accounting Table: Expatriate Policies
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Benefits:
----------------------------------------------------------------------------------------------------------------
Qualitative:
* Continued access to expatriate health policies for consumers.
----------------------------------------------------------------------------------------------------------------
Costs: Estimate Year dollar Discount rate Period covered
percent
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($millions/ ($80,000)............ 2011 7 2012-2013
year).
($85,000)............ 2011 3 2012-2013
----------------------------------------------------------------------------------------------------------------
Annual reduction in costs for issuers of expatriate policies due to elimination of requirement to file quarterly
reports.
----------------------------------------------------------------------------------------------------------------
Table VI.1.3--Accounting Table: ICD-10 Costs
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Transfers:
----------------------------------------------------------------------------------------------------------------
Qualitative:
* Transfer from enrollees to shareholders or nonprofit stakeholders in individual, small and large group
markets, resulting from adjustment in MLR methodology to account for ICD-10 conversion costs.
----------------------------------------------------------------------------------------------------------------
Table VI.1.4--Accounting Table: Community Benefit Expenditures
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Benefits:
----------------------------------------------------------------------------------------------------------------
Qualitative:
* Benefits to consumers by encouraging issuers to undertake community benefit expenditures.
----------------------------------------------------------------------------------------------------------------
Costs:
----------------------------------------------------------------------------------------------------------------
* Reduced administrative burden for not-for-profit issuers since they will no longer need to calculate and
report hypothetical tax liabilities.
----------------------------------------------------------------------------------------------------------------
Transfers:
----------------------------------------------------------------------------------------------------------------
Qualitative:
* Transfer from enrollees to shareholders or nonprofit stakeholders in individual, small and large group
markets resulting from adjustment in MLR methodology to account for community benefit expenditures.
----------------------------------------------------------------------------------------------------------------
[[Page 76585]]
Table VI.1.5--Accounting Table: Distribution of Rebates in Group Markets
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Costs: Estimate Year dollar Discount rate Period covered
percent
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($millions/year)... ($1.6 million) 2011 7 2012-2013
($1.7 million) 2011 3 2012-2013
----------------------------------------------------------------------------------------------------------------
Annual reduction in costs due to change in method of disbursement of rebates for group health plans.
----------------------------------------------------------------------------------------------------------------
Qualitative:
* Reduced tax burden for group health plan subscribers relating to the change in the method of disbursement
of rebate payments.
* Increased administrative costs for policyholders that disburse rebates to group health plan enrollees.
----------------------------------------------------------------------------------------------------------------
Transfers:
----------------------------------------------------------------------------------------------------------------
Qualitative:
* Transfer of benefits of rebate dollars disbursed to the group health plan from subscribers who leave the
group health plan to subscribers new to the group health plan.
----------------------------------------------------------------------------------------------------------------
3. Qualitative Discussion of Anticipated Benefits, Costs and Transfers
The medical loss ratio (MLR) is a measurement that, stated simply,
measures the percentage of total premiums that insurance companies
spend on health care and quality initiatives, versus what they spend on
administration, marketing and profit. The MLR interim final rule (75 FR
74892) provided an overall discussion of the anticipated benefits,
costs and transfers associated with the MLR provisions. In the
following sections, we discuss some of the anticipated benefits, costs
and transfers associated with the adjustment of the MLR methodology for
mini-med and expatriate policies, accounting of ICD-10 conversion costs
and community benefit expenditures in the MLR, and change in the
process for disbursement of rebates for enrollees in group health
plans.
a. Benefits
In developing this final rule, CMS carefully considered its
potential effects including both costs and benefits. Because of data
limitations, CMS did not attempt to quantify all of the benefits of
this rule. Nonetheless, CMS was able to identify several potential
qualitative benefits which are discussed below.
Mini-med and expatriate policies tend to have relatively higher
administrative costs compared to other types of policies due to their
special circumstances. As discussed earlier in the preamble, commenters
claimed that mini-med issuers have a unique cost structure--low
premiums, high administrative costs (for example, as a result of high
turnover) and low incurred claims (because of high deductibles and
limited coverage)--that make some issuers unable to meet the statutory
MLR without any adjustment to the claim reporting methodology. Under
the interim final rule, for the MLR reporting year 2011, the total of
the incurred claims and expenditures for activities that improve
healthcare quality for mini-med issuers with total annual benefit
limits of $250,000 or less is multiplied by a factor of 2.00. The level
of the adjustment is changed from a multiplier of 2.00 under the
interim final rule to a multiplier of 1.75 for the 2012 MLR reporting
year, 1.50 for the 2013 MLR reporting year and 1.25 for the 2014 MLR
reporting year under the final rule. We have applied a multiplier
through the 2014 MLR reporting year to account for mini-med policies
with a plan year that begins after January 1, 2013 and ends sometime in
2014. Based on analysis of 2011 quarterly data submitted by mini-med
issuers, CMS anticipates that with the adjustment to MLR methodology
provided in this final rule, a majority of issuers in this market would
reach the applicable MLR standard, and that all issuers who would be
subject to rebates will remain profitable in the markets in which they
would be paying rebates. The adjustment minimizes potential market
withdrawal by issuers and preserves access to benefits for individuals
served by these policies. Issuers that do not otherwise meet the MLR
standard may attempt to do so by increasing quality promoting
activities, expanding covered benefits or reducing cost sharing, and
reducing administrative costs. Increased spending on quality improving
activities and medical care would result in better quality of medical
care and better health for enrollees in these plans. There are 25
issuers of mini-med policies with approximately 932,000 enrollees
collectively and we expect that this rule should not have an effect on
mini-med issuers' participation in the market.
As discussed earlier in the preamble, expatriate policies have
unique administrative costs, as evidenced from public comments and the
first two quarterly reports submitted by issuers of expatriate
policies. These unique costs arise from factors such as identifying and
credentialing international providers, processing claims in different
languages, standardizing billing procedures and providing translation
and other services to enrollees. Under the interim final rule, for the
MLR reporting year 2011, the total of the incurred claims and
expenditures for activities that improve healthcare quality for
expatriate experience is multiplied by a factor of 2.00. The level of
the adjustment remains at a multiplier of 2.00 under this final rule.
The reasons for this level of adjustment are discussed earlier in
Section II.B., which include the volatility of the expatriate
experience. Based on analysis of 2011 quarterly data submitted by
issuers of expatriate policies, CMS anticipates that with the
adjustments to MLR methodology provided in this final rule, all issuers
in this market would reach the applicable MLR standard. Maintaining the
multiplier of 2.00 would not result in any change in rebates being paid
to enrollees, but should help ensure that issuers of expatriate
policies generally are able to meet the requirements of section 2718 as
well as help ensure that the MLR standard does not cause issuers to
leave the market. There are eight issuers of expatriate policies that
submitted quarterly reports, with approximately 288,000 enrollees.
Under the interim final rule, a not-for-profit issuer could deduct
from earned premium community benefit expenditures, limited to the
amount of State premium taxes the issuer would otherwise pay if it were
a for-profit issuer. A not-for-profit issuer was also required to
report community benefit expenditures up to the amount of taxes it
would have paid if it were a for-profit
[[Page 76586]]
issuer. As discussed earlier in the preamble, commenters expressed
concern that variations in State premium tax rates, by State and by
type of issuer and the fact that some States do not have a premium tax,
created an uneven playing field. Commenters also expressed concern
about the difficulties and burden in calculating hypothetical tax
liability. The final rule provides that an issuer will be able to
deduct from earned premium the greater of the amount actually spent on
community benefit expenditures limited to the State's highest premium
tax rate, or the amount it pays in State premium tax. Issuers that
otherwise do not meet the MLR standard may increase community benefit
expenditures if their current expenditure levels or premium taxes are
lower than the maximum amount they would be able to deduct under the
final rule. CMS anticipates that this may encourage community benefit
expenditures and allow for more equitable treatment of issuers and
eliminate the reporting burden inherent in not-for-profit issuers
calculating a hypothetical tax liability.
b. Costs
Under the final rule, the multiplier for the numerator of the MLR
for mini-med policies has been lowered from 2.00 to 1.75 for the 2012
MLR reporting year, 1.50 for the 2013 MLR reporting year and 1.25 for
the 2014 MLR reporting year. Based on analysis of 2011 quarterly data
submitted by mini-med issuers, CMS anticipates that most issuers in
this market would reach the applicable MLR standard. Issuers that do
not otherwise meet the MLR standard may attempt to do so by increasing
spending on quality improving activities and by increasing covered
benefits or lowering consumers' cost-sharing, which would increase
issuer spending on medical care.
There are some cost savings as a result of this final rule.
Issuers of mini-med and expatriate policies were directed to submit
a report for each of the first three quarters of the 2011 MLR reporting
year as provided under Sec. 158.110(b), in addition to the annual
report required of all issuers. Beginning in MLR reporting year 2012,
these issuers will no longer submit quarterly reports. The elimination
of this requirement will reduce these issuers' administrative burden
related to reporting, approximately $2.8 million dollars annually.
This final rule also provides standardized ways to account for
community benefit expenditures in the MLR methodology. Not-for-profit
issuers will no longer need to calculate and report hypothetical tax
liability and this will reduce administrative burdens related to
reporting for these issuers.
Finally, this rule provides for a more efficient and cost effective
way for issuers in group markets to disburse rebate payments to
enrollees by allowing issuers in group markets to provide rebates to
the policyholders for distribution. This provision will lower
administrative costs related to rebate disbursement for issuers of
group health plans by approximately $1.8 million annually, and will
largely eliminate the tax burden on employers and consumers inherent in
the prior rebate mechanism. Policyholders will experience an increase
in administrative costs related to the disbursement of rebates,
although these administrative costs will be offset by eliminating the
administrative burden and tax consequences inherent in the prior rebate
mechanism.
c. Transfers
To the extent that issuers' MLR experience falls short of the
minimum MLR standard, they must provide rebates to enrollees. These
rebates would reflect transfer of income from the issuers or their
shareholders to the policyholders.
Under the interim final rule, for the 2011 MLR reporting year, the
total of the incurred claims and expenditures for activities that
improve healthcare quality for mini-med experience is multiplied by a
factor of 2.00. The level of the adjustment is changed from a
multiplier of 2.00 under the interim final rule to a multiplier of 1.75
for the 2012 MLR reporting year, 1.50 for the 2013 MLR reporting year
and 1.25 for the 2014 MLR reporting year under the final rule. The
adjustment of the MLR methodology for mini-med policies will result in
higher rebate payments to enrollees, estimated to be approximately $1.3
million in 2012 and $4.1 million in 2013, assuming the spending
patterns included in the 2011 quarterly data do not change. However,
the final rule also allows issuers to account for ICD-10 conversion
costs and community benefit expenditures in the MLR, both up to a
specified cap, which will lower rebate payments. In addition, issuers
of mini-med policies that do not otherwise meet the MLR standard may
attempt to do so by increasing spending on quality promoting activities
and medical care, which would result in savings for consumers and
reduced profits for issuers.
In addition, this final rule allows issuers in group markets to
disburse rebate payments to enrollees by allowing issuers to provide
rebates to the policyholder for distribution. This change in the
process for disbursement of rebate payments for enrollees in group
health plans may result in a transfer of benefits from enrollees who
have left the group health plan to enrollees new to the group health
plan.
4. Overview of Data Sources, Methods, and Limitations
As discussed in the MLR interim final regulation, the most complete
source of data on the number of licensed entities offering fully
insured, private comprehensive major medical coverage in the individual
and group markets is the National Association of Insurance
Commissioners' (NAIC) Annual Financial Statements and Policy Experience
Exhibits database. These data contain multiple years of information on
issuers' revenues, expenses, and enrollment, collected on various NAIC
financial exhibits (commonly referred to as ``Blanks'') including
Supplemental Health Care Exhibits (SHCEs) that issuers submit to State
insurance regulators through the NAIC. The NAIC has four different
Blanks for different types of issuers: Health; Life; Property &
Casualty; and Fraternal issuers.\4\
---------------------------------------------------------------------------
\4\ If a company's premiums and reserve ratios for its health
insurance products equals 95 percent or more of their total business
for both the current and prior reporting years, a company files its
annual statement using the Health Blank. Otherwise, a company files
the annual statement associated with the type of license held in its
domiciliary State, for example, the Life, Property & Casualty, or
Fraternal Blank.
---------------------------------------------------------------------------
In the interim final rule, our analysis relied on 2009 data from
the NAIC database. A total of 618 issuers offering comprehensive major
medical coverage filed annual financial statements in 2009, with the
Health and Life Blank filers accounting for approximately 99 percent of
all comprehensive major medical premiums earned. For this reason we
restricted our analysis to Health and Life Blank companies.
Comprehensive major medical coverage \5\--including coverage offered in
the individual and group markets that is subject to this final
regulation--accounted for approximately 47.8 percent of all Accident
and Health (A&H) premiums in 2009. Although the NAIC data represent the
best available data source with which to estimate impacts of the MLR
regulation, the data
[[Page 76587]]
contain certain limitations; we developed imputation methods to account
for these limitations and we made several additional data edits that
led us to exclude 176 companies from the analysis. We used the
remaining 442 companies to estimate the regulatory impacts that were
discussed in the interim final rule, as well as the regulatory impacts
that are discussed below. Please see the regulatory impact analysis of
the interim final rule (75 FR 74892) for additional methodological
information.
---------------------------------------------------------------------------
\5\ Comprehensive major medical coverage sold to associations
and trusts has been included in individual comprehensive major
medical coverage for purposes of the RIA. CMS's estimates exclude
Medigap coverage, which in the NAIC data is reported separately from
comprehensive major medical coverage offered in the individual and
group markets. The 2009 NAIC data does not allow us to identify
mini-med policies or expatriate policies separately.
---------------------------------------------------------------------------
Although the 2009 NAIC data do not allow us to identify mini-med
policies or expatriate policies separately, under the interim final
rule, for the 2011 MLR reporting year issuers of mini-med and
expatriate policies were required to report MLR data on a quarterly
schedule under Sec. 158.110(b). CMS has received, to date, two
quarterly reports from these issuers. These quarterly reports are the
best source of data for the experience of these policies.
In addition, data from NAIC's 2010 SHCE has recently become
available, and we are in the process of reviewing this information.\6\
We have reported some preliminary estimates from this data in this
impact analysis.
---------------------------------------------------------------------------
\6\ The 2010 SHCE data includes data for each issuer by market
(individual, small and large group) and by State. It also includes
data such as QIA expenses, ICD-10 implementation costs, underwriting
gain/loss and taxes and fees.
---------------------------------------------------------------------------
5. MLR and Rebate Estimation Methodology
Consistent with the methodology that was used in the RIA for the
interim final rule, the following formula has been used for estimating
companies' adjusted MLRs for the mini-med, expatriate markets, rounded
to the nearest thousandth decimal place as dictated in the regulation:
Adjusted MLR = (i + q/p-t-f) + c + u
Where i = incurred claims
q = expenditures on quality improving activities
p = earned premiums
t = Federal and State taxes
f = licensing and regulatory fees
c = credibility adjustment, if any
u = low, medium, or high assumptions to account for quality
improving activities, unknown behavioral changes and data
measurement error.
We then calculate rebates for a company whose adjusted MLR value in
a State (or on a national basis for expatriate policies) falls below
the minimum MLR standard in a given market using the following
formulas:
Rebates = [(m-a) * (p - t - f)]
Where m = the applicable minimum MLR standard for a particular
market
a = an issuer's adjusted MLR for a particular State and market.
Finally, to estimate impacts under the final rule, for each year,
we assume that the number of issuers, enrollment, and experience are
stable over time.
6. ``Mini-med'' Policies
The term ``mini-med'' policy is used here to generally refer to
policies that often cover the same types of medical services as
comprehensive medical policies, but have annual benefit limits at or
below $250,000. We therefore have been using this figure as a proxy for
capturing this type of policy. Under the interim final rule, for the
2011 MLR reporting year, HHS allowed a methodological change to address
the special circumstances of mini-med policies. Mini-med policy issuers
applied an adjustment to their reported experience to address the
unusual expense and premium structure of these policies. Specifically,
in the case of a policy with a total of $250,000 or less in annual
limits, the total of the incurred claims and expenditures for
activities that improve health care quality reported was multiplied by
a factor of 2.00. Under this final rule, this factor will be 1.75 for
the 2012 MLR reporting year, 1.50 for the 2013 MLR reporting year and
1.25 for the 2014 MLR reporting year. A graduated allowance for the
adjustment of 1.75 in 2012, 1.50 in 2013 and 1.25 in 2014 will
incentivize issuers to reduce their administrative expenses and operate
more efficiently to ensure that they meet the MLR standard while
minimizing issuer market withdrawal, maintaining access to coverage for
consumers and ensuring that they receive greater value from these
policies until 2014. We have applied a multiplier through the 2014 MLR
reporting year to account for mini-med policies with a plan year that
begins after January 1, 2013 and ends sometime in 2014.
Under the interim final rule, for the 2011 MLR reporting year,
issuers of mini-med policies were required to report three quarters of
MLR data on a schedule specified under Sec. 158.110(b), in addition to
the annual report required of all issuers. Issuers of mini-med policies
have submitted two quarterly reports thus far based on 2011 data. Table
VI.2 shows the estimated distribution of issuers offering coverage in
the mini-med market. Based on the reports that have been submitted,
there are 25 issuers offering mini-med policies in 2011, including 12
issuers in the individual market, four issuers in the small group
market and 15 issuers in the large group market, which cover more than
300 life-years each in a given State.\7\ Only five mini-med issuers
offer policies in multiple markets, and of those five only one issuer
offers such policies in all three markets. In addition, 11 issuers
offer mini-med policies in only one State, while 14 offer policies in
multiple States. There are 277 issuer/State/market combinations.
---------------------------------------------------------------------------
\7\ Not all issuers have 1,000 or more life-years and thus are
not credible in each State in which they have mini-med business, but
may become partially credible in the 2012 or 2013 reporting year
when issuers combine two or three years of experience, respectively.
Table VI.2--Estimated Number of Mini-Med Policy Issuers Subject to Medical Loss Ratios by Market
----------------------------------------------------------------------------------------------------------------
Number of issuers Enrollment
-------------------------------------------------
Description Percentage Percent of
Number of total Number total
----------------------------------------------------------------------------------------------------------------
Total of Issuers.................................... 25 100 931,866 100
By Market:
Individual................................................ 12 48 234,859 25
Small Group............................................... 4 16 18,770 2
Large Group............................................... 15 60 678,237 73
----------------------------------------------------------------------------------------------------------------
Notes: (1) Source: CMS analysis of annualized 2011 quarterly data submitted by issuers of mini-med policies,
each with more than 300 life-years of experience. (2) Enrollment represents ``life-years'' (life-years are the
total number of months of enrollees' coverage during the MLR reporting year, divided by 12 if based upon a
full year of reporting).
[[Page 76588]]
Analysis of data shows that in the absence of any recognition of
special circumstances, the 2011 credibility-adjusted MLRs for issuers
of mini-med policies range from six \8\ percent to 134 percent in the
individual market, with a mean of 67 percent and a median of 66
percent; 62 percent to 96 percent in the small group market, with a
mean of 70 percent and a median of 73 percent; and 62 percent to 105
percent in the large group market, with a mean of 75 percent and a
median of 71 percent. The large variations in the MLRs may be explained
by variations in products, deductibles and premiums. For example, a
plan with a low premium but a very high deductible will have very few
claims, resulting in a very low MLR, while a plan with a higher premium
but lower deductible would have more claims and would have a higher
MLR. For the 2011 MLR reporting year, based on multiplying total
incurred claims and expenditures for activities that improve health
care quality by a factor of 2.00 (consistent with the provisions in the
interim final rule), it is estimated that three issuers of mini-med
policies will pay rebates of approximately $1.1 million in the
individual market while no mini-med issuers will pay rebates in the
small or large group markets.\9\
---------------------------------------------------------------------------
\8\ This six percent MLR is for an issuer that sells a policy
with a $50,000 deductible and thus has very low claims.
\9\ In the absence of any recognition of any special
circumstances adjustment, CMS estimates that seven mini-med issuers
would have paid rebates of approximately $53 million in the
individual market and six mini-med issuers would have paid rebates
of approximately $120 million in the large group market.
---------------------------------------------------------------------------
We use 2011 data to estimate the effects of the change in MLR
methodology and assume no changes in issuers' behavior or quality
improvement activities beyond what was reported in the quarterly
filing. As shown in Table VI.3, it is estimated that with a multiplier
of 1.75, four of the 25 issuers will pay rebates of $2.4 million to
45,838 enrollees. With a multiplier of 1.50, six of the 25 issuers
would pay rebates of $5.2 million to 73,427 enrollees. Therefore, a
reduction in the multiplier from 2.00 to 1.75 in the 2012 MLR reporting
year and a further reduction to 1.50 in the 2013 MLR reporting year
will result in higher rebates being paid to enrollees, with more
issuers affected and more enrollees receiving rebates. It is important
to note, however, that issuers can change their spending targets to
adjust to meet MLR targets moving forward.
Table VI.3--Estimated Annual Rebate Payments by Mini-Med Policy Issuers by Market, 2011
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Multiplier = 1 (no adjustment) Multiplier = 2 Multiplier = 1.75 Multiplier = 1.50
-----------------------------------------------------------------------------------------------------------------------------------
Number of Number of Number of Number of
Market Number of enrollees Estimated Number of enrollees Estimated Number of enrollees Estimated Number of enrollees Estimated
affected rebate ($ affected rebate ($ affected rebate ($ affected rebate ($
issuers receiving million) issuers receiving million) issuers receiving million) issuers receiving million)
rebates rebates rebates rebates
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Individual Market........................................... 7 176,204 $53.0 3 43,463 $1.1 4 45,838 $2.4 5 62,699 $5.0
Small Group Market.......................................... 0 0 0.0 0 0 0 0 0 0.0 0 0 0.0
Large Group Market.......................................... 6 575,786 120.4 0 0 0.0 0 0 0.0 1 10,728 0.2
-----------------------------------------------------------------------------------------------------------------------------------
Total................................................... 13 751,990 173.4 3 43,463 1.1 4 45,838 2.4 6 73,427 5.2
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Source: CMS analysis of annualized 2011 quarterly data submitted by issuers of mini-med policies with more than 300 life-years of experience in at least one State.
Beginning in MLR reporting year 2012, issuers of mini-med policies
will only submit an annual report and will no longer be required to
submit quarterly reports. Therefore, this will significantly reduce the
annual costs related to MLR reporting for issuers. Issuers of mini-med
policies were required to submit a report for each of the first three
quarters of the 2011 MLR reporting year as provided under Sec.
158.110(b) for each large group market, small group market, and
individual market within each State in which the issuer conducts
business. Therefore, in addition to the annual report which is required
of all issuers, mini-med issuers were required to submit a total of 277
reports three times a year. The burden estimates included in the
information collection requirement for the quarterly reports estimated
that each quarterly report would require 62.4 hours with an hourly
labor cost of $52.46; therefore the estimated total annual
administrative cost for all mini-med issuers for all quarterly reports
would be approximately $2.7 million. Each year, the cost reduction
associated with eliminating the quarterly reporting requirement will be
approximately $2.7 million for all issuers of mini-med policies. CMS
anticipates that the adjustment in MLR methodology and reduction in
reporting costs will allow issuers to remain profitable and ensure
continued access to coverage for enrollees in this market, while
bringing increased value to consumers.
7. Expatriate Policies
Expatriate policies provide coverage for employees, substantially
all of whom are: working outside of their country of citizenship;
working outside of their country of citizenship and outside the
employer's country of domicile; or non-U.S. citizens working in their
home country. As discussed earlier in the preamble, based on public
comments and review of data submitted by expatriate policy issuers, the
unique nature of these policies results in a higher percentage of
administrative costs in relation to premiums than policies that provide
coverage primarily within the United States. Under the interim final
rule, for the 2011 MLR reporting year, issuers were required to report
the experience of these expatriate policies separately from other
coverage, as provided in Sec. 158.120(d)(4), and the calculation of
claims and quality improving activities for these policies was to be
multiplied by a factor of 2.00, as provided in Sec. 158.221(b). Under
this final rule, beginning in MLR reporting year 2012, this factor will
remain 2.00.
Issuers of expatriate policies were required in 2011 to report
three quarters of MLR data on a quarterly schedule specified under
Sec. 158.110(b), in addition to the annual report required of all
issuers. Issuers of expatriate policies have submitted two quarterly
reports thus far based on 2011 data. Table VI.4 shows the estimated
distribution of issuers offering coverage in the
[[Page 76589]]
expatriate market. Based on the reports that have been submitted, there
are eight issuers in offering expatriate coverage in 2011--two issuers
in the small group market and seven issuers in the large group market.
Only one issuer offers policies in both markets. There are nine issuer/
market combinations.
Table: VI.4--Estimated Number of Expatriate Policy Issuers Subject to Medical Loss Ratios by Market
----------------------------------------------------------------------------------------------------------------
Number of issuers Enrollment
---------------------------------------------------
Description Percentage Percent of
Number of total Number total
----------------------------------------------------------------------------------------------------------------
Total of Issuers.................................. 8 100 287,789 100
By Market:
Small Group............................................. 2 25 903 0.3
Large Group............................................. 7 87.5 286,887 99.7
----------------------------------------------------------------------------------------------------------------
Notes: (1) Source: CMS analysis of annualized 2011 quarterly data submitted by issuers of expatriate policies,
each with more than 300 life-years of experience. (2) Enrollment represents ``life-years''.
Analysis of data shows that in the 2011 MLR reporting year, in the
absence of any recognition of special circumstances, issuers of
expatriate policies had adjusted MLRs that range from 32 percent to 61
percent in the small group market and from 49 percent to 85 percent,
with a mean of 69 percent and median of 72 percent, in the large group
market. For 2011, based on multiplying total incurred claims and
expenditures for activities that improve health care quality by a
factor of 2.00 (consistent with the provisions in the interim final
rule), it is estimated that no issuer of expatriate policies will pay
any rebates.\10\
---------------------------------------------------------------------------
\10\ In the absence of any recognition of any special
circumstances adjustment, CMS estimates that four issuers in the
large group market would have paid rebates of approximately $145
million, while no issuer would have paid rebates in the small group
market.
---------------------------------------------------------------------------
We use 2011 data to estimate the effects of maintaining the
multiplier of 2.00 and assume no changes in issuers' behavior and
quality improvement activities beyond what was reported in the
quarterly filing. It is estimated that with a multiplier of 2.00, no
issuer will likely have an MLR below the threshold in 2012 and 2013,
consistent with the policy in the first year. This should help ensure
that the MLR standard does not cause issuers to leave the market.
Beginning in MLR reporting year 2012, expatriate policy issuers
will submit only an annual report and will no longer be required to
submit quarterly reports. The interim final rule required issuers of
mini-med policies to submit a report for each of the first three
quarters of the 2011 MLR reporting year as provided under Sec.
158.110(b) for each large group market, small group market, and
individual market, combining data from all states in which the issuer
conducts business. Therefore, in addition to the annual report required
of all issuers, expatriate issuers were required to submit a total of
nine reports three times a year. The burden estimates included in the
information collection requirement for the quarterly reports estimated
that each quarterly report would require 62.4 hours with an hourly
labor cost of $52.46. Therefore, estimated total annual cost for all
expatriate policy issuers for all quarterly reports would be
approximately $88,000. The provisions in this final rule will reduce
the annual costs related to MLR reporting for issuers. This cost
reduction will be approximately $88,000 for all expatriate policy
issuers per year. CMS anticipates that the adjustment in MLR
methodology and reduction in reporting costs will allow issuers to
remain viable and ensure continued access to coverage for enrollees in
this market.
8. ICD-10 Conversion Costs
In the interim final rule, HHS adopted the NAIC's recommendation to
exclude the conversion of International Classification of Disease (ICD)
code sets from ICD-9 to ICD-10 as a quality improvement activity.
However, there is general recognition that the conversion to ICD-10
will enhance the provision of quality care through the collection of
better and more refined data. As discussed earlier in the preamble,
some believe that ICD-10 coding can improve health plans' ability to
share data among clinicians for quality improvement and care
coordination activities, thereby allowing for a better understanding of
diagnoses and better treatment. This final rule provides that for each
of the MLR reporting years 2012 and 2013, issuers may account for ICD-
10 conversion costs of up to 0.3 percent of earned premiums in the
relevant State market as a quality improving activity in their MLR
calculation. In addition, ICD-10 maintenance costs will continue to be
excluded from QIA in the final rule, based on the industry's comments
that separating conversion costs from maintenance costs is feasible.
The industry provided a range of percentages using their projected
expenditures of ICD-10 conversion costs on their MLRs, if allowed as a
QIA. After reviewing the data provided by issuers and 2010 SHCE
filings, CMS chose a cap that allows as QIA amounts that issuers
projected spending on ICD-10 conversion, without permitting issuers to
include claims adjudication systems costs in QIA.
Preliminary analysis of 2010 SHCE data indicates that issuers
reported ICD-10 conversion costs as representing less than 0.02 percent
of earned premiums for individual, small group and large group
comprehensive major medical coverage. However, ICD-10 conversion costs
are expected to be higher for 2011 through 2013 since implementation
efforts had only begun in 2010 but conversion to ICD-10 must be
completed by October 2013. As stated earlier in the preamble, one
issuer estimated that ICD-10 implementation will cost the entire
industry between $50-70 million each year for 2011 through 2013.
Another issuer anticipated spending $9.4 million in 2011 on ICD-10
implementation. An industry association commented that a study of 20
health insurance plans found that the costs averaged about $12 per
member, with small health plans paying around $38 per member and large
health plans paying around $11 per member. However, none of these
comments indicate whether these estimates apply to issuers subject to
the MLR requirements, Medicare, Medicaid, self-insured, or other types
of plans or the time frame spanned by these estimates. In the absence
of data on actual costs related to ICD-10 conversion that will be
included in the 2012 and 2013 MLR calculations, it is difficult to
estimate the effect of this provision on issuers and rebates. Even so,
we expect that accounting for these costs in MLR calculation will only
have a small effect on MLRs and rebates.
[[Page 76590]]
9. Community Benefit Expenditures
In the interim final rule, HHS adopted the NAIC's recommendation to
allow community benefit expenditures (as defined in Sec.
158.162(c)(2)) by not-for-profit plans to be excluded from premium
revenue up to the State premium tax rate, and requiring that not-for-
profit issuers report their actual community benefit expenditures up to
the amount they would have paid in Federal and State taxes if they had
been for-profit. As discussed elsewhere in the preamble, this final
rule provides that issuers will be able to deduct either the amount it
paid in State premium taxes or the amount of its community benefit
expenditures up to a maximum of the highest State premium tax rate in
the State, whichever is greater. This creates a level playing field
among issuers in States that have different premium tax rates for
different types of plans, for example, PPOs and HMOs.
In the absence of reliable data on the total number of not-for-
profit issuers offering major medical coverage and on community benefit
expenditures, we are unable to quantify the effect of this provision.
Five commenters proposed a flat deduction limit ranging between 3 to 5
percent of earned premium. Currently, 48 States have premium taxes, but
tax rates in many States differ for different kinds of plans and in
some States they differ for not-for-profit and for-profit issuers.
Several States do not tax HMOs or not-for-profit issuers at all. State
premium taxes range between 0.4 percent and 4.265 percent, according to
data provided by the NAIC, and these taxes have been accounted for in
the MLR and rebate calculations in the interim final rule. It is not
known how many issuers will include community benefit expenditures or
State premium tax liability in their MLR calculation, or how much
community benefit expenditures will be included in the MLR calculation.
Rebates may be reduced for issuers in States with a higher maximum
premium tax rate than they are required to pay (for example, an issuer
is an HMO and the State has a higher premium tax rate for PPOs) and who
have higher community benefit expenditures than the applicable premium
tax rate.
As discussed earlier in the preamble, CMS anticipates that this
treatment will encourage community benefit expenditures. Issuers that
otherwise do not meet the MLR standard may increase community benefit
expenditures if their current expenditure levels or premium taxes are
lower than the maximum amount they would be able to deduct under the
final rule. This provision will also allow more equitable treatment of
issuers, and reduce significantly the reporting burden related to
community benefit expenditures, as not-for-profit issuers no longer
need to calculate and report hypothetical tax liabilities.
10. Distribution of Rebates to Enrollees in Group Markets
Section 2718(b)(1)(A) of the PHS Act requires an issuer to provide
``an annual rebate to each enrollee'' if the issuer does not meet the
applicable MLR standard. The interim final rule directs issuers of
group coverage to provide rebates to the policyholder and each
subscriber in amounts proportionate to the amount of premium each paid.
The interim final rule also allows an issuer to delegate its rebate
disbursement obligation to group policyholders, though the issuer
remains liable for complying with all its obligations under the statute
and for maintaining records that demonstrated rebates were provided
accurately. As discussed elsewhere in this preamble, commenters
expressed concern that the issuer lacks access to the information
needed to distribute rebates, asserting that the policyholder, and not
the issuer, has information regarding the premium contribution amount
from the employer and the employee.
This final rule provides that issuers will distribute rebates to
the policyholder to be used for the benefit of subscribers. For
policyholders that are a group health plan but are not a governmental
plan or subject to ERISA, an issuer must obtain written assurance from
the policyholder that rebates will be used for the benefit of current
subscribers using one of the options permitted for non-Federal
governmental plans as described in the interim final rule issued
contemporaneously with this final rule; otherwise, the issuer must
evenly distribute the rebate directly to the policyholder's subscribers
covered by the policy during the MLR reporting year on which the rebate
is based.
Disbursing rebates directly to subscribers would result in a tax
burden for consumers and also a tax-administration burden for the
issuers making the payment, as most premiums are paid with pre-tax
dollars and thus the rebates may be wages subject to withholding
obligations. Because issuers would not otherwise be paying wages to
these individuals, the administrative burden of administering any
applicable withholding obligations could be significant in total. If
the rebates are disbursed to the policyholder (generally the employer)
for the benefit of subscribers (generally the employees), they must be
used in a way that benefits subscribers (in the case of ERISA plans,
consistent with their fiduciary obligations) but minimizes any tax
administration issues for employers and enrollees, while consumers
would still receive the benefit of the rebates. Subscribers who no
longer are covered under the group health plan, however, generally
would not receive the benefits from the rebates distributed through the
policyholder. Therefore, there would be a transfer of benefits from
enrollees who leave the plan to new enrollees in the same plan. We
expect this transfer to be small since persistence rates in group
health plans tend to be high.
Group health plan issuers will also experience savings due to the
fact that rebate payments will no longer be required to be sent to a
large number of individuals. In the interim final rule, the average
cost of sending rebate payments was estimated to be $1 per check. For
the years 2012 and 2013, it was estimated that each year 0.8 million
enrollees in the small group market and 1 million enrollees in the
large group market would receive rebates and 50 percent of these
enrollees would receive rebate checks. Assuming that all issuers of
group coverage distribute rebates to policyholders, we estimate that
this will lead to an annual reduction in administrative costs of
approximately $1.8 million for these issuers. However, policyholders
will experience an increase in administrative costs related to the
disbursement of rebates. The actual cost would depend on whether the
policyholders send rebate checks or whether the rebates are disbursed
through future premium reductions or through payroll. These costs will
also be offset by eliminating the administrative burden and tax
consequences inherent in the prior rebate mechanism.
C. Regulatory Alternatives
Under the Executive Order, CMS is required to consider alternatives
to issuing regulations and alternative regulatory approaches. CMS
considers a variety of regulatory alternatives below.
1. Mini-Med and Expatriate Policies
One alternative to the MLR methodology set forth in this final rule
is to provide no adjustments in the MLR calculation for the experience
of these policies. Without any adjustments to the MLR methodology for
issuers of mini-med policies with total annual benefit limits of
$250,000 or less, CMS estimates that in 2011, seven issuers would have
paid rebates of approximately $53 million in the
[[Page 76591]]
individual market and six issuers would pay approximately $120 million
in the large group market. Without any adjustments to MLR methodology
for issuers of expatriate policies, CMS estimates that in 2011, four
issuers in the large group market would have paid rebates of
approximately $145 million.
Another alternative was to maintain the multiplier of 2.00 provided
in the interim final rule, for mini-med policies with total annual
benefit limits of $250,000 or less. Based on 2011 data, with a
multiplier of 2.00, three issuers of mini-med policies in the
individual market would have paid an estimated $1.1 million in rebates
while no issuers in the small or large group markets would have paid
rebates. As described elsewhere in this preamble, CMS has concluded
that the MLR methodology set forth in the final rule will best balance
the goals of providing value to consumers and ensuring that consumers
have continued access to coverage in these markets.
2. Distribution of Rebates in the Group Market
One alternative to the MLR methodology set forth in this final rule
is to require issuers to send rebate payments directly to subscribers
in group health plans. As described previously, this would result in
increased tax burden for consumers with group coverage and for their
employers, as well as increased administrative costs for issuers
associated with rebate payments. As discussed earlier, the average
annual cost per issuer of sending rebate checks was estimated to be
between $43,962 and $71,467 in the interim final rule.
3. ICD-10 Conversion Expenses and Community Benefit Expenditures
With respect to ICD-10 conversion costs, one alternative to the MLR
methodology set forth in this final rule was to exclude these costs
from QIA. As discussed previously, this would result in slightly lower
MLRs for issuers and therefore higher rebate payments for issuers that
fail to meet the MLR standard.
With respect to community benefit expenditures, one alternative to
the MLR methodology set forth in this final rule was to allow only a
not-for-profit, tax-exempt issuer to deduct from earned premium the
amount of its community benefit expenditures, limited to the State
premium tax rate applicable to for-profit issuers and also require a
not-for-profit issuer to report community benefit expenditures ``in
lieu of taxes * * * but not to exceed the amount of taxes [it] would
otherwise be required to pay.'' As discussed previously, this would
result in lower MLRs for some issuers and therefore higher rebate
payments for issuers that fail to meet the MLR standard.
D. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires agencies that issue a
regulation to analyze options for regulatory relief of small businesses
if a rule has a significant impact on a substantial number of small
entities. The RFA generally defines a ``small entity'' as: (1) A
proprietary firm meeting the size standards of the Small Business
Administration (SBA); (2) a nonprofit organization that is not dominant
in its field; or (3) a small government jurisdiction with a population
of less than 50,000 (States and individuals are not included in the
definition of ``small entity''). HHS uses as its measure of significant
economic impact on a substantial number of small entities a change in
revenues of more than 3 to 5 percent.
The Regulatory Flexibility Act only requires an analysis to be
conducted for those final rules for which a Notice of Proposed Rule
Making was required. Accordingly, we have determined that a regulatory
flexibility analysis is not required for this final rule. However, CMS
has considered the likely impact of this final rule on small entities.
As discussed in the Web Portal final rule published on May 5, 2010
(75 FR 24481), HHS examined the health insurance industry in depth in
the Regulatory Impact Analysis we prepared for the proposed rule on
establishment of the Medicare Advantage program (69 FR 46866, August 3,
2004). In that analysis the Department determined that there were few
if any insurance firms underwriting comprehensive health insurance
policies (in contrast, for example, to travel insurance policies or
dental discount policies) that fell below the size thresholds for
``small'' business established by the SBA (currently $7 million in
annual receipts for health issuers).\11\
---------------------------------------------------------------------------
\11\ ``Table of Size Standards Matched to North American
Industry Classification System Codes,'' effective November 5, 2010,
U.S. Small Business Administration, available at http://www.sba.gov.
---------------------------------------------------------------------------
For the MLR interim final rule, the Department used the data set
created from 2009 NAIC Health and Life Blank annual financial statement
data to develop an updated estimate of the number of small entities
that offer comprehensive major medical coverage in the individual and
small group markets, and are therefore subject to the MLR reporting
requirements. For purposes of this analysis, the Department used total
Accident and Health (A&H) earned premiums as a proxy for annual
receipts. These estimates may overstate the actual number of small
health insurance issuers that would be affected, since they do not
include receipts from these companies' other lines of business.
In the MLR interim final rule (75 FR 74892), the Department
estimated that there are 28 small entities with less than $7 million in
A&H earned premiums that offer individual or group comprehensive major
medical coverage, and would therefore be subject to the requirements of
this final regulation. These small entities accounted for 6 percent of
the estimated 442 total issuers that the Department estimated would be
affected by the MLR requirements. The Department estimated that 86
percent of these small issuers are subsidiaries of larger carriers, 75
percent only offer coverage in a single State, 68 percent only offer
individual or group comprehensive coverage in a single market, 46
percent also offer other types of A&H coverage, and 29 percent are Life
Blank filers.
CMS has estimated that the provisions of the final rule do not
impose any additional costs on small entities. There are, however, some
cost savings as a result of this final rule. There will be an increase
in rebates for some issuers of mini-med policies with total annual
benefit limits of $250,000 or less, though no small entities are
affected. The changes in MLR methodology to account for inclusion of
ICD-10 costs and community benefit expenditures will also lead to
reduction in rebates and will therefore, not affect any small entities
adversely.
CMS believes that these estimates overstate the number of small
entities that will be affected by the requirements in this final
regulation, as well as the relative impact of these requirements on
these entities because the Department has based its analysis on
issuers' total A&H earned premiums (rather than their total annual
receipts). Therefore, the Secretary certifies that these final
regulations will not have significant impact on a substantial number of
small entities. In addition, section 1102(b) of the Social Security Act
requires us to prepare a regulatory impact analysis if a rule may have
a significant economic impact on the operations of a substantial number
of small rural hospitals. This analysis must conform to the provisions
of section 604 of the RFA. This final rule would not affect small rural
hospitals. Therefore, the Secretary has determined that this rule would
not have a significant impact on the
[[Page 76592]]
operations of a substantial number of small rural hospitals.
E. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA)
requires that agencies assess anticipated costs and benefits before
issuing any rule that includes a Federal mandate that could result in
expenditure in any one year by State, local or Tribal governments, in
the aggregate, or by the private sector, of $100 million in 1995
dollars, updated annually for inflation. In 2011, that threshold level
is approximately $136 million.
UMRA does not address the total cost of a rule. Rather, it focuses
on certain categories of cost, mainly those ``Federal mandate'' costs
resulting from: (1) Imposing enforceable duties on State, local, or
Tribal governments, or on the private sector; or (2) increasing the
stringency of conditions in, or decreasing the funding of, State,
local, or Tribal governments under entitlement programs.
Consistent with policy embodied in UMRA, this final regulation has
been designed to be the least burdensome alternative for State, local
and Tribal governments, and the private sector while achieving the
objectives of the Affordable Care Act.
This final regulation contains MLR methodology adjustments and
rebate payment requirements for private sector firms (for example,
health insurance issuers offering coverage in the mini-med, expatriate,
individual and group markets). CMS estimates that none of these
provisions impose additional costs on consumers or private sector
firms, and will lead to reduced administrative costs to issuers. There
will be a reduction in rebates paid by issuers in individual, small and
group markets due to inclusion of ICD-10 conversion costs and community
benefit expenditures. Rebates paid by issuers of mini-med policies will
increase by an estimated $59 million annually. It includes no mandates
on State, local, or Tribal governments.
F. Federalism
Executive Order 13132 establishes certain requirements that an
agency must meet when it promulgates a proposed rule (and subsequent
final rule) that imposes substantial direct requirement costs on State
and local governments, preempts State law, or otherwise has Federalism
implications. In CMS's view, while this final rule does not impose
substantial direct requirement costs on State and local governments,
this final regulation has Federalism implications due to direct effects
on the distribution of power and responsibilities among the State and
Federal governments relating to determining and enforcing minimum MLR
standards and rebate requirements relating to coverage that State-
licensed health insurance issuers offer in the individual and group
markets.
However, CMS anticipates that the Federalism implications (if any)
are substantially mitigated because the Affordable Care Act does not
provide any role for the States in terms of receiving or analyzing the
data or enforcing the requirements of Section 2718 of the PHS Act.
As discussed in the MLR interim final rule, States may continue to
apply State law requirements except to the extent that such
requirements prevent the application of the Affordable Care Act
requirements that are the subject of this rulemaking. State insurance
laws that are more stringent than the Federal requirements are unlikely
to ``prevent the application of'' the Affordable Care Act and to be
preempted.
In compliance with the requirement of Executive Order 13132 that
agencies examine closely any policies that may have Federalism
implications or limit the policy making discretion of the States, the
Department has engaged in efforts to consult with and work
cooperatively with affected States, including participating in
conference calls with and attending conferences of the National
Association of Insurance Commissioners, and consulting with State
insurance officials on an individual basis.
Throughout the process of developing this final regulation, to the
extent feasible within the specific preemption provisions of HIPAA as
it applies to the Affordable Care Act, the Department has attempted to
balance the States' interests in regulating health insurance issuers,
and Congress' intent to provide uniform minimum protections to
consumers in every State. By doing so, it is the Department's view that
we have complied with the requirements of Executive Order 13132.
Pursuant to the requirements set forth in section 8(a) of Executive
Order 13132, and by the signatures affixed to this regulation, the
Department certifies that the Centers for Medicare & Medicaid Services
has complied with the requirements of Executive Order 13132 for the
attached final regulation in a meaningful and timely manner.
G. Congressional Review Act
This final regulation is not subject to the Congressional Review
Act provisions of the Small Business Regulatory Enforcement Fairness
Act of 1996 (5 U.S.C. 801 et seq.).
List of Subjects in 45 CFR Part 158
Administrative practice and procedure, Claims, Health care, Health
insurance, Health plans, Penalties, Reporting and recordkeeping
requirements.
Accordingly, the interim final rule amending 45 CFR part 158, which
was published at 75 FR 74864 on December 1, 2010, and further amended
by a correction on December 30, 2010, is adopted as final with the
following changes:
PART 158--ISSUER USE OF PREMIUM REVENUE: REPORTING AND REBATE
REQUIREMENTS
0
1. The authority citation for part 158 continues to read as follows:
Authority: Section 2718 of the Public Health Service Act (42
U.S.C. 300gg-18), as amended.
Sec. 158.110 [Amended]
0
2. Section 158.110 is amended by--
0
a. Removing in paragraph (b)(1) the phrase ``Except as provided in
paragraph (b)(2) of this section, the'' and adding ``The'' in its
place.
0
b. Removing paragraph (b)(2).
0
c. Removing the paragraph designation for paragraph (b)(1).
0
3. Section 158.120 is amended by revising paragraphs (d)(3) and (4) to
read as follows:
Sec. 158.120 Aggregate reporting.
* * * * *
(d) * * *
(3) An issuer with policies that have a total annual limit of
$250,000 or less must report the experience from such policies
separately from other policies.
(4) An issuer with group policies that provide coverage to
employees, substantially all of whom are: Working outside their country
of citizenship; working outside of their country of citizenship and
outside the employer's country of domicile; or non-U.S. citizens
working in their home country, must aggregate and report the experience
from these policies on a national basis, separately for the large group
market and small group market, and separately from other policies.
0
4. Section 158.150 is amended by--
0
a. Adding paragraph (b)(2)(i)(A)(6).
0
b. Revising paragraph (c)(5).
The addition and revision read as follows:
Sec. 158.150 Activities that improve health care quality.
* * * * *
[[Page 76593]]
(b) * * *
(2) * * *
(i) * * *
(A) * * *
(6) For each of the 2012 and 2013 MLR reporting years, implementing
ICD-10 code sets that are designed to improve quality and are adopted
pursuant to the Health Insurance Portability and Accountability Act
(HIPAA), 42 U.S.C. 1320d-2, as amended, limited to 0.3 percent of an
issuer's earned premium as defined in Sec. 158.130 of this subpart.
* * * * *
(c) * * *
(5) Establishing or maintaining a claims adjudication system,
including costs directly related to upgrades in health information
technology that are designed primarily or solely to improve claims
payment capabilities or to meet regulatory requirements for processing
claims, including maintenance of ICD-10 code sets adopted pursuant to
the Health Insurance Portability and Accountability Act (HIPAA), 42
U.S.C. 1320d-2, as amended.
* * * * *
0
5. Section 158.162 is amended by--
0
a. Revising paragraph (b)(1)(vii).
0
b. Revising paragraph (c).
The revisions read as follows:
Sec. 158.162 Reporting of Federal and State taxes.
* * * * *
(b) * * *
(1) * * *
(vii) In lieu of reporting amounts described in paragraph
(b)(1)(vi) of this section, an issuer may choose to report payment for
community benefit expenditures as described in paragraph (c) of this
section, limited to the highest premium tax rate in the State for which
the report is being submitted.
* * * * *
(c) Community benefit expenditures. Community benefit expenditures
means expenditures for activities or programs that seek to achieve the
objectives of improving access to health services, enhancing public
health and relief of government burden. This includes any of the
following activities that:
(1) Are available broadly to the public and serve low-income
consumers;
(2) Reduce geographic, financial, or cultural barriers to accessing
health services, and if ceased to exist would result in access problems
(for example, longer wait times or increased travel distances);
(3) Address Federal, State or local public health priorities such
as advancing health care knowledge through education or research that
benefits the public;
(4) Leverage or enhance public health department activities such as
childhood immunization efforts; and
(5) Otherwise would become the responsibility of government or
another tax-exempt organization.
0
6. Section 158.221 is amended by revising paragraphs (b)(3) and (4) to
read as follows:
Sec. 158.221 Formula for calculating an issuer's medical loss ratio.
* * * * *
(b) * * *
(3) The numerator of the MLR for policies that are reported
separately under Sec. 158.120(d)(3) of this part must be the amount
specified in paragraph (b) of this section, except that for the 2012
MLR reporting year, the total of the incurred claims and expenditures
for activities that improve health care quality are then multiplied by
a factor of 1.75, for the 2013 MLR reporting year, the total of the
incurred claims and expenditures for activities that improve health
care quality are then multiplied by a factor of 1.50, and for the 2014
MLR reporting year, the total of the incurred claims and expenditures
for activities that improve health care quality are then multiplied by
a factor of 1.25.
(4) The numerator of the MLR for policies that are reported
separately under Sec. 158.120(d)(4) of this part must be the amount
specified in paragraph (b) of this section, except that the total of
the incurred claims and expenditures for activities that improve health
care quality are then multiplied by a factor of 2.00.
* * * * *
0
7. Section 158.241 is amended by revising paragraph (b) to read as
follows:
Sec. 158.241 Form of rebate.
* * * * *
(b) Former enrollees in the individual market. Rebates owing to
former enrollees in the individual market must be paid in the form of
lump-sum check or lump-sum reimbursement using the same method that was
used for payment, such as credit card or direct debit.
0
8. Section 158.242 is amended by revising paragraph (b) to read as
follows:
Sec. 158.242 Recipients of rebates.
* * * * *
(b) Large group and small group markets. Except as provided in
paragraphs (b)(3) and (4) of this section, an issuer must meet its
obligation to provide any rebate to persons covered under a group
health plan by providing it to the policyholder.
(1) [Reserved.]
(2) [Reserved.]
(3) If the policyholder is a group health plan that is not a
governmental plan and not subject to the Employee Retirement Income
Security Act of 1974, as amended (29 U.S.C. 1001 et seq.) (ERISA),
rebates may only be paid to the policyholder if the issuer receives a
written assurance from the policyholder that the rebates will be used
to benefit enrollees; otherwise, the issuer must distribute the rebate
directly to the subscribers of the group health plan covered by the
policy during the MLR reporting year on which the rebate is based by
dividing the entire rebate, including the amount proportionate to the
amount of premium paid by the policyholder, in equal amounts to all
subscribers entitled to a rebate without regard to how much each
subscriber actually paid toward premiums.
(4) If the group health plan has been terminated at the time of
rebate payment and the issuer cannot, despite reasonable efforts,
locate the policyholder whose plan participants or employees were
enrolled in the group health plan, the issuer must distribute the
rebate directly to the subscribers of the terminated group health plan
by dividing the entire rebate, including the amount proportionate to
the amount of premium paid by the policyholder, in equal amounts to all
subscribers entitled to a rebate without regard to how much each
subscriber actually paid toward premiums.
0
9. Section 158.243 is amended by revising paragraph (a)(1) to read as
follows:
Sec. 158.243 De minimis rebates.
(a) * * *
(1) For a group policy for which the issuer distributes the rebate
to the policyholder, if the total rebate owed to the policyholder and
the subscribers combined is less than $20 for a given MLR reporting
year; or for a group policy for which the issuer distributes the rebate
directly to the subscribers, as provided in Sec. 158.242(a)(3) and (4)
of this subpart, if the total rebate owed to each subscriber is less
than $5.
* * * * *
0
10. Section 158.250 is revised to read as follows:
Sec. 158.250 Notice of rebates.
(a) Notice of rebates to policyholders and subscribers of group
health plans. For each MLR reporting year, at the time any rebate of
premium is provided to a policyholder of a group health plan in
accordance with this part, an issuer must provide each policyholder who
receives a rebate and subscribers whose
[[Page 76594]]
policyholder receives a rebate, or each subscriber who receives a
rebate directly from an issuer, the following information in a form
prescribed by the Secretary:
(1) A general description of the concept of an MLR;
(2) The purpose of setting an MLR standard;
(3) The applicable MLR standard;
(4) The issuer's MLR, adjusted in accordance with the provisions of
this subpart;
(5) The issuer's aggregate premium revenue as reported in
accordance with Sec. 158.130 of this part, minus any Federal and State
taxes and licensing and regulatory fees that may be excluded from
premium revenue as described in Sec. 158.162(a)(1) and (b)(1) of this
part;
(6) The rebate percentage and the amount owed to enrollees, as
defined in section 158.240(b), based upon the difference between the
issuer's MLR and the applicable MLR standard; and
(7) The fact that, as provided by this subpart, the total
aggregated rebate for the group health plan is being provided to the
policyholder:
(i) If the policy provides benefits for a plan subject to ERISA, a
statement that the policyholder may have additional obligations under
ERISA's fiduciary responsibility provisions with respect to the
handling of rebates and contact information for questions regarding the
rebate;
(ii) If the policyholder is a non-Federal governmental plan, the
proportion of the rebate attributable to subscribers' contribution to
premium must be used for the benefit of subscribers, using one of the
methods set forth in Sec. 158.242(b)(1) of this subpart; and
(iii) If the policyholder is a group health plan that is not a
governmental plan and is not subject to ERISA,
(A) The policyholder has provided written assurance that the
proportion of the rebate attributable to subscribers' contribution to
premium will be used for the benefit of current subscribers, using one
of the methods set forth in Sec. 158.242(b)(1) of this subpart, or
(B) If the policyholder did not provide such written assurance, the
issuer must distribute the rebate evenly among the policyholder's
subscribers covered by the policy during the MLR reporting year on
which the rebate is based.
(b) Notice of rebates to subscribers in the individual market. For
each MLR reporting year, at the time any rebate of premium is provided
to a subscriber in the individual market in accordance with this part,
an issuer must provide each subscriber that is receiving the rebate the
following information in a form prescribed by the Secretary:
(1) A general description of the concept of an MLR;
(2) The purpose of setting an MLR standard;
(3) The applicable MLR standard;
(4) The issuer's MLR, adjusted in accordance with the provisions of
this subpart;
(5) The issuer's aggregate premium revenue as reported in
accordance with Sec. 158.130 of this part, minus any Federal and State
taxes and licensing and regulatory fees that may be excluded from
premium revenue as described in Sec. 158.162(a)(1) and (b)(1) of this
part; and
(6) The rebate percentage and amount owed to enrollees based upon
the difference between the issuer's MLR and the applicable MLR
standard.
0
11. Section 158.260 is amended by revising paragraphs (c)(1) through
(5) to read as follows:
Sec. 158.260 Reporting of rebates.
* * * * *
(c) * * *
(1) Number of subscribers in the individual, small group and large
group markets to whom the issuer paid a rebate directly, and number of
small group and large group policyholders receiving a rebate on behalf
of enrollees;
(2) Amount of rebates provided as premium credit;
(3) Amount of rebates provided as lump sum payment regardless of
whether in cash, reimbursement to an enrollee's credit card, or direct
payment to an enrollee's bank account;
(4) Amount of rebates that were de minimis as provided in Sec.
158.243 of this subpart and the number of enrollees who did not receive
a rebate because it was de minimis; and
(5) Amount of unclaimed rebates, a description of the methods used
to locate the applicable enrollees, and a description of how the
unclaimed rebates were disbursed.
Dated: November 2, 2011.
Donald M. Berwick,
Administrator, Centers for Medicare & Medicaid Services.
Approved: November 29, 2011.
Kathleen Sebelius,
Secretary, Department of Health and Human Services.
[FR Doc. 2011-31289 Filed 12-2-11; 11:15 am]
BILLING CODE 4120-01-P