[Federal Register Volume 77, Number 227 (Monday, November 26, 2012)]
[Proposed Rules]
[Pages 70583-70617]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-28428]



[[Page 70583]]

Vol. 77

Monday,

No. 227

November 26, 2012

Part III





Department of Health and Human Services





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45 CFR Parts 144, 147, 150, et al.





Patient Protection and Affordable Care Act; Health Insurance Market 
Rules; Rate Review; Proposed Rule

Federal Register / Vol. 77 , No. 227 / Monday, November 26, 2012 / 
Proposed Rules

[[Page 70584]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

45 CFR Parts 144, 147, 150, 154 and 156

[CMS-9972-P]
RIN 0938-AR40


Patient Protection and Affordable Care Act; Health Insurance 
Market Rules; Rate Review

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would implement the Affordable Care Act's 
policies related to fair health insurance premiums, guaranteed 
availability, guaranteed renewability, risk pools, and catastrophic 
plans. The proposed rule would clarify the approach used to enforce the 
applicable requirements of the Affordable Care Act with respect to 
health insurance issuers and group health plans that are non-federal 
governmental plans. This proposed rule would also amend the standards 
for health insurance issuers and states regarding reporting, 
utilization, and collection of data under section 2794 of the Public 
Health Service Act (PHS Act). It also revises the timeline for states 
to propose state-specific thresholds for review and approval by CMS.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on December 26, 
2012.

ADDRESSES: In commenting, please refer to file code CMS-9972-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (please choose only one 
of the ways listed):
    1. Electronically. You may submit electronic comments on this 
regulation to http://www.regulations.gov. Follow the ``Submit a 
comment'' instructions.
    2. By Regular Mail. You may mail written comments to the following 
address ONLY: Centers for Medicare & Medicaid Services, Department of 
Health and Human Services, Attention: CMS-9972-P, P.O. Box 8012, 
Baltimore, MD 21244-1850.
    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-9972-P, Mail 
Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.
    4. By Hand or Courier. Alternatively, you may deliver (by hand or 
courier) your written comments only to the following addresses prior to 
the close of the comment period:
    a. For delivery in Washington, DC--
    Centers for Medicare & Medicaid Services, Department of Health and 
Human Services, Room 445-G, Hubert H. Humphrey Building, 200 
Independence Avenue SW., Washington, DC 20201.
    (Because access to the interior of the Hubert H. Humphrey Building 
is not readily available to persons without federal government 
identification, commenters are encouraged to leave their comments in 
the CMS drop slots located in the main lobby of the building. A stamp-
in clock is available for persons wishing to retain a proof of filing 
by stamping in and retaining an extra copy of the comments being 
filed.)
    b. For delivery in Baltimore, MD--
    Centers for Medicare & Medicaid Services,
    Department of Health and Human Services, 7500 Security Boulevard, 
Baltimore, MD 21244-1850.
    If you intend to deliver your comments to the Baltimore address, 
call telephone number (410) 786-9994 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.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Jacob Ackerman, (410) 786-1565, 
concerning the health insurance market rules; Douglas Pennington, (410) 
786-1553 (or by email: ratereview@hhs.gov), concerning rate review.

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

I. Executive Summary

A. Purpose of the Proposed Regulatory Action

1. Need for the Proposed Regulatory Action
    Today, consumers with current or past medical problems can be 
denied health insurance coverage in the vast majority of individual 
(nongroup) markets (45 states). Similarly, individuals and small 
employers often find that they have few protections in terms of the 
premiums that issuers can charge them. For example, in the individual 
market, 43 states allow health status rating and 48 states allow age 
rating (often unlimited). While 37 states explicitly allow gender 
rating, three states that prohibit gender rating do not require 
maternity coverage in all individual market policies, meaning that, 
since maternity coverage requires additional premium in those states, a 
total of 40 states allow some form of gender rating in practice. In the 
small group market, 38 states allow health status rating, 48 states 
allow age rating (often unlimited), 35 states allow gender rating, and 
37 states allow industry rating.\1\
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    \1\ Ctr. on Health Ins. Reforms, Georgetown Univ. Health Policy 
Inst., Individual Market Guaranteed Issue, Individual Health 
Insurance Market Rate Restrictions, and Small Group Health Insurance 
Market Rate Restrictions, available at http://statehealthfacts.org; 
Nat'l Women's Law Center, Turning to Fairness: Insurance 
Discrimination Against Women Today and the Affordable Care Act 
(2012).
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    Sections 2701, 2702, and 2703 of the Public Health Service Act (PHS 
Act), as added and amended by the Patient Protection and Affordable 
Care Act (Affordable Care Act), and section 1312(c) of the Affordable 
Care Act address these problems by extending guaranteed availability 
(also known as guaranteed issue) protections so that individuals and 
employers will be able to obtain coverage when it currently can be 
denied, by continuing current guaranteed renewability protections, by 
prohibiting the use of factors such as health status, medical history, 
gender, and industry of employment to set premium rates, by limiting 
age rating, and by prohibiting issuers from dividing up their insurance 
pools. These reforms are effective for plan years (group

[[Page 70585]]

market) and policy years (individual market) starting on or after 
January 1, 2014.
    The implementation of these proposed rules will ensure that every 
American, for the first time, will have access to affordable health 
insurance coverage notwithstanding any health problems they may have. 
In addition, also for the first time throughout the nation, health 
insurance issuers will be prevented from charging individuals and small 
employers higher premiums due to enrollees' health status or gender. 
CMS is issuing these proposed regulations to provide the necessary 
guidance to implement these important consumer protections included in 
sections 2701, 2702, and 2703 of the PHS Act and section 1312(c) of the 
Affordable Care Act.
    In addition, PHS Act section 2723 provides CMS with enforcement 
authority with respect to health insurance issuers (in certain 
instances) and group health plans that are non-federal governmental 
plans in connection with the various health insurance and group health 
plan standards added by the Affordable Care Act. The proposed rules 
would make non-substantive changes that clarify the processes that CMS 
currently uses to enforce such standards. These technical changes seek 
to eliminate confusion among states, issuers, non-federal governmental 
group health plans, consumers, and others concerning CMS's enforcement 
processes.
    The proposed rule would also include proposed policy for enrollment 
in catastrophic plans that are available for young adults and people 
who would otherwise find health insurance unaffordable.
    The proposed rule would also revise the timing of the submission of 
requests for state-specific thresholds and the effective dates of such 
thresholds; require that health insurance issuers submit data on 
proposed rate increases in a form and manner to be determined by CMS, 
and amend the requirements for a state to have an Effective Rate Review 
Program. We are proposing these changes to align with the timing of 
rate submissions of qualified health plans (QHPs), as defined under 
section 1301 of the Affordable Care Act, in the Exchanges, and to 
adjust rate review to meet its additional purpose of helping to promote 
fair market competition beginning in 2014. The law requires that, 
beginning in 2014, the Secretary of the Department of Health and Human 
Services (the Secretary), in conjunction with states, monitor premium 
increases of health insurance coverage offered through an Exchange and 
outside of an Exchange. The Secretary will monitor these increases to 
identify patterns that could signal market disruption and assist in 
oversight of the new market-wide rating reforms created by the 
Affordable Care Act, which are effective on January 1, 2014.
2. Legal Authority
    The substantive authority for these proposed rules is generally 
sections 2701, 2702, 2703, 2723 and 2794 of the PHS Act and sections 
1302(e), 1312(c), and 1560(c) of the Affordable Care Act. PHS Act 
section 2792 authorizes us to promulgate regulations that are necessary 
or appropriate to carry out sections 2701, 2702, 2703, 2723, and 2794. 
Section 1321(a) of the Affordable Care Act authorizes rulemaking with 
respect to sections 1302(e), 1312(c), and 1560(c).

B. Summary of the Major Provisions of This Proposed Regulatory Action

    Proposed 45 CFR 147.102 would require issuers offering non-
grandfathered health insurance coverage in the individual and small 
group markets starting in 2014, and the large group market if such 
coverage is available through an Affordable Insurance Exchange 
(Exchange) starting in 2017, to limit any variation in premiums with 
respect to a particular plan or coverage to age and tobacco use within 
limits, family size, and geography.
    Proposed Sec.  147.104 would require issuers offering non-
grandfathered health insurance coverage to accept every individual or 
employer who applies for coverage in the individual or group market, as 
applicable, subject to certain exceptions (for example, limits on 
network capacity).
    Proposed Sec.  147.106 would require issuers to renew all coverage 
in the individual and group markets, subject to certain exceptions (for 
example, non-payment of premiums or fraud).
    The proposed revisions in 45 CFR part 154 would make three changes 
to the existing rate review program. Proposed revisions in Sec.  
154.200 would require states seeking state-specific thresholds to 
submit proposals for such thresholds by August 1 of each year and 
require CMS to review the proposals by September 1 of each year. If 
approved, a state-specific threshold would be effective January 1 of 
the following year. Proposed revisions in Sec.  154.215 and Sec.  
154.220 would require health insurance issuers to submit, in a 
standardized format to be specified by the Secretary, data relating to 
proposed rate increases that are filed in a state on or after April 1, 
2013, or effective on or after January 1, 2014 in a state that does not 
require the rate increases to be filed. Proposed revisions in Sec.  
154.301 would add criteria and factors for a state to have an Effective 
Rate Review Program, including that the state receives from all issuers 
proposing rate increases data and documentation about the rate 
increases in the standardized form specified by the Secretary; reviews 
the information for proposed rate increases greater than or equal to 
the review threshold; and makes information publicly available through 
its Web site.
    Proposed Sec.  156.80 generally would require health insurance 
issuers to treat all of their non-grandfathered business in the 
individual market and small group market, respectively, as a single 
risk pool. A state would have the authority to choose to direct issuers 
to merge their non-grandfathered individual and small group pools into 
a combined pool.
    Proposed Sec.  156.155 generally would codify section 1302(e) of 
the Affordable Care Act regarding catastrophic plans.
    The proposed revisions in 45 CFR part 150 would clarify that CMS 
uses the same enforcement processes with respect to the requirements of 
45 CFR part 147, which implements provisions added by the Affordable 
Care Act, as it does with respect to the requirements of 45 CFR parts 
146 and 148, which pre-date the Affordable Care Act. Additional 
revisions would conform certain sections in 45 CFR part 144 to the 
clarification concerning the scope of 45 CFR part 150.

C. Costs and Benefits

    The provisions of this proposed rule, combined with other 
provisions in the Affordable Care Act, will improve the individual 
health insurance market by making insurance affordable and accessible 
to millions of Americans who currently do not have affordable options 
available to them. The shortcomings of the individual market today have 
been widely documented.\2\ Between 50 and 129 million Americans, if 
they tried to purchase coverage in the individual market, would be 
denied coverage entirely or would have their premiums ``rated up,'' and 
would likely have coverage for certain medical conditions

[[Page 70586]]

excluded.\3\ In addition, people previously enrolled in individual 
insurance with high health risks or costs are often further blocked 
from access to the market as they are put into ``closed blocks'' of 
business that are not open to new enrollees, and subject to large 
premium increases each year. Relatively healthy subscribers can switch 
into lower-priced, open blocks of coverage, while those who are sick 
only have the choice of paying the large premium increases or dropping 
coverage altogether.
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    \2\ Michelle M. Doty et al., Failure to Protect: Why the 
Individual Insurance Market Is Not a Viable Option for Most U.S. 
Families: Findings from the Commonwealth Fund Biennial Health 
Insurance Survey, 2007, The Commonwealth Fund, July 2009; Sara R. 
Collins, Invited Testimony: Premium Tax Credits Under The Affordable 
Care Act: How They Will Help Millions Of Uninsured And Underinsured 
Americans Gain Affordable, Comprehensive Health Insurance, The 
Commonwealth Fund, October 27, 2011.
    \3\ ASPE, At Risk: Preexisting Conditions Could Affect 1 in 2 
Americans: 129 Million People Could Be Denied Affordable Coverage 
Without Health Reform, November 2011.
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    These limitations of the individual market are made evident by how 
few people actually purchase coverage in the individual market. In 
2011, approximately 48.6 million people were uninsured in the United 
States,\4\ while only around 10.8 million were enrolled in the 
individual market.\5\ The relatively small fraction of the target 
market that actually purchases coverage in the individual market in 
part reflects how expensive the product is relative to its value, 
people's resources, and how difficult it is for many people to access 
coverage.
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    \4\ Source: U.S. Census Bureau, Current Population Survey, 2012 
Annual Social and Economic Supplement, Table HI01. Health Insurance 
Coverage Status and Type of Coverage by Selected Characteristics: 
2011.
    \5\ Source: CMS analysis of June 2012 Medical Loss Ratio Annual 
Reporting data for 2011 MLR reporting year, available at http://cciio.cms.gov/resources/data/mlr.html.
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    The provisions of this proposed rule, combined with other 
provisions in the Affordable Care Act, will improve the functioning of 
both the individual and the small group markets. The provision for 
guaranteed availability will ensure that individuals with health 
problems who were previously unable to obtain coverage in the 
individual market will have access to coverage. The provision requiring 
that age, tobacco use, family size, and geography are the only 
permissible rating factors, within limits, will ensure that people with 
greater than average health needs are not priced out of the market. The 
provision requiring a single risk pool in each market will ensure that 
rate increases for healthy and less healthy people will be equal over 
time. Elimination of rating based on gender will mean lower premium 
rates for women, and the 3:1 limit on the rates charged to older 
subscribers will result in lower premium rates for older subscribers 
without shifting significant risk to younger subscribers as would 
happen under pure community rating. While eliminating gender rating and 
the limitations on age ratios could affect premium rates for some in 
some markets, this will be largely mitigated for most people by the 
availability of premium tax credits, by increased efficiencies and 
greater competition in the individual market, by measures such as the 
transitional reinsurance program and temporary risk corridors program 
to stabilize premiums, and by expected improvements in the overall 
health status of the risk pool. The availability of premium tax credits 
through Exchanges starting in 2014 will result in lower net premium 
rates for most people currently purchasing coverage in the individual 
market, and will encourage younger and healthier enrollees to enter the 
market, improving the risk pool and leading to reductions in premium 
rates for current policyholders.\6\ Additionally, young adults and 
people for whom coverage would otherwise be unaffordable will have 
access to a catastrophic plan that will have a lower premium, protect 
against high out-of-pocket costs, and cover recommended preventive 
services without cost sharing. Similarly, the minimum coverage 
provision will lead to expansion in the number of purchasers and 
improvements in the health of the risk pool. Further, premium rates are 
expected to decline as a result of the administrative efficiencies from 
eliminating underwriting, and, more importantly, due to the effects of 
greater competition in the individual market created by Exchanges. 
Lower premium rates are expected to lead to further increases in 
purchase, and a further improvement in the risk pool.
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    \6\ Congressional Budget Office, Letter to Honorable Evan Bayh, 
providing an Analysis of Health Insurance Premiums Under the Patient 
Protection and Affordable Care Act, November 30, 2009; Sara R. 
Collins, Invited Testimony: Premium Tax Credits Under The Affordable 
Care Act: How They Will Help Millions Of Uninsured And Underinsured 
Americans Gain Affordable, Comprehensive Health Insurance, The 
Commonwealth Fund, October 27, 2011; Fredric Blavin et al., The 
Coverage and Cost Effects of Implementation of the Affordable Care 
Act in New York State, Urban Institute, March 2012.
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    We solicit comments on additional strategies consistent with the 
Affordable Care Act that CMS or states might deploy to avoid or 
minimize disruption of rates in the current market and encourage timely 
enrollment in coverage in 2014. For example, these strategies could 
include instituting the same enrollment periods inside and outside of 
Exchanges (as proposed in this rule) or a phase-in or transition period 
for certain policies. Additionally, we are examining ways in which 
states could continue their high risk pools beyond 2014 as a means of 
easing the transition. Ensuring premiums are affordable is a priority 
for the Administration as well as states, consumers, and insurers, so 
we welcome suggestions for the final rule on ways to achieve this goal 
while implementing these essential consumer protections.
    Issuers may incur some one-time fixed costs in order to comply with 
the provisions of the final rule, including administrative and 
marketing costs. Administrative costs are, however, expected to 
decrease as a result of the elimination of medical underwriting to 
determine premium amounts. Issuer revenues and expenditures are also 
expected to increase substantially as a result of the expected increase 
in the number of people purchasing individual market coverage, which is 
projected to exceed 50 percent of current enrollment.\7\ We are 
soliciting information on the nature and magnitude of these costs and 
benefits to issuers, and the potential effect of the provisions of this 
rule on premium rates and financial performance.
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    \7\ Congressional Budget Office, http://www.cbo.gov/sites/default/files/cbofiles/attachments/03-13-Coverage%20Estimates.pdf 
(Table 3).
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    In addition, states may incur costs if they choose to establish 
their own, new geographic rating areas and age rating curves. We are 
also requesting information on such costs.
    The proposed amendments to the rate review program would help 
issuers to avoid significant duplication of effort for filings subject 
to review by using the same standardized template for both non-QHPs and 
QHPs. Additionally, the collection of rate information below the rate 
review threshold and use of a standardized data template would provide 
the Department of Health and Human Services (HHS) and state departments 
of insurance with the ability to conduct the review and approval of 
products sold inside and outside an Exchange and ensure market 
stability. Health insurance issuers would incur administrative costs to 
prepare and submit the data.
    In accordance with Executive Orders 12866 and 13563, we believe 
that the benefits of this regulatory action would justify the costs.

II. Background

    The Patient Protection and Affordable Care Act, Public Law 111-148, 
was enacted on March 23, 2010. The Health Care and Education 
Reconciliation Act, Public Law 111-152, was enacted on March 30, 2010. 
These laws are

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collectively referred to as the Affordable Care Act.

A. Legislative Overview Prior to the Affordable Care Act

    The current individual and small group health insurance markets 
generally are viewed as dysfunctional, placing consumers at a 
disadvantage due to the high cost of health insurance coverage, 
resulting from factors such as lack of competition, adverse selection, 
and limited transparency. In the past ten years, average total premiums 
for group and individual health insurance coverage have increased 
substantially.\8\ Similarly, the share of premium paid by employees in 
the group market has increased, as well as the amounts that employees 
pay in out-of-pocket costs.\9\
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    \8\ Schoen, C., et al., State Trends in Premiums and 
Deductibles, 2003-2010: The Need for Action to Address Rising Costs, 
Realizing Health Reform's Potential, p. 5 (Nov. 2011).
    \9\ Claxton,G., et al., Health Benefits in 2010: Premiums Rise 
Modestly, Workers Pay More Toward Coverage, Health Affairs, 29, 
no.10 (2010):1942-1950.
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    In 2007, 62 percent of personal bankruptcies were attributable to 
medical expenses. Many of these individuals and families either had 
health insurance that did not provide adequate coverage for their 
medical expenses or lost medical coverage due to illness.\10\
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    \10\ Himmelstein, D., et al., Medical Bankruptcy in the United 
States, 2007: Results of a National Study, The American Journal of 
Medicine, Vol. 122, No. 8, 741-746.
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    In addition to affordability concerns, many people have difficulty 
finding and enrolling in coverage options. If employer-based coverage 
is not available, a person may find that affordable individual market 
coverage is not available due to medical underwriting. Research has 
shown that individuals could be denied coverage based even on common 
medical conditions such as asthma, depression, hypertension, and knee 
injuries.\11\ Even if a person is accepted for coverage in the 
individual market, that coverage may be conditioned on paying higher 
premiums, preexisting condition exclusion waiting periods, and even 
permanent exclusions of coverage for certain medical conditions. One 
study found that 38 percent of persons seeking individual market 
coverage reported it very difficult or impossible to find the coverage 
they needed.\12\ Uninsured individuals are more likely to report not 
having routine medical check-ups, not receiving recommended medical 
treatments, and not refilling prescriptions.\13\
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    \11\ Pollitz, K., How Accessible is Individual Health Insurance 
for Consumers in Less-Than-Perfect Health (2001).
    \12\ Collins, S., et al., Gaps in Health Insurance: Why So Many 
Americans Experience Breaks in Coverage and How the Affordable Care 
Act Will Help (April 2011).
    \13\ Doty, M., et al., When Unemployed Means Uninsured: The Toll 
of Job Loss on Health Coverage, and How the Affordable Care Act Will 
Help, Realizing Health Reform's Potential, p. 3 (Aug. 2011).
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    Among other policies, the Affordable Care Act expands affordable 
coverage to uninsured Americans through the private health insurance 
market. When fully implemented, its reforms will make health insurance 
coverage more affordable and accessible for individuals and families, 
many of whom could not previously get or afford coverage. The insurance 
market reforms will help ensure that no individual or small employer is 
denied insurance coverage, and that, once issued, coverage cannot be 
non-renewed due to health factors. Premiums charged by health insurance 
issuers may only vary by certain factors. Further, each issuer will 
have a single risk pool for its business in the individual market and a 
single risk pool for its business in the small group market (unless a 
state decides to merge the markets). This risk pool provision will 
spread risk more evenly among consumers, which will help keep premiums 
more affordable.
    Prior to the Affordable Care Act, title XXVII of the PHS Act 
included certain insurance market protections for individuals and 
employers that were added by the Health Insurance Portability and 
Accountability Act of 1996 (HIPAA). HIPAA provided guaranteed 
renewability of coverage to individuals and employers, broad guaranteed 
availability rights to small employers, and narrower guaranteed 
availability rights in the individual market for certain individuals 
leaving group coverage. In practice, relatively few individuals 
exercise their HIPAA rights to individual market guaranteed 
availability due to the high costs of such coverage in many states and 
the requirement that they first exhaust any available continuation 
coverage, such as COBRA, which is often unaffordable.\14\ HIPAA did not 
include any protections to ensure that all persons could obtain 
affordable coverage in the individual market. Thus, most individuals 
could be medically underwritten and denied coverage by issuers in the 
vast majority of states. HIPAA also did not include any limits on 
premium variation or requirements regarding risk pooling that would 
have made health insurance coverage more affordable for individuals and 
small employers. HIPAA included enforcement provisions allowing CMS to 
enforce these and other requirements of title XXVII of the PHS Act with 
respect to health insurance issuers (in some instances) and group 
health plans that are non-federal governmental plans.
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    \14\ COBRA continuation coverage permits some employees and 
their dependents, in some circumstances, to remain temporarily 
covered under an employer's group health plan after coverage would 
otherwise end. But because a former employee must usually pay the 
entire premium amount (including both the amount paid as an active 
employee and the amount previously contributed by the employer), 
plus a 2-percent administrative fee, COBRA coverage may be 
unaffordable for many people.
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    Both before and after HIPAA, a number of states enacted limited, 
incremental reforms to improve access and increase affordability in 
their individual and group insurance markets. HIPAA explicitly 
recognized the role of the states as the primary insurance regulators 
where their standards were at least as protective as HIPAA. Although 
the level of activity varies by state, most states have adopted 
guaranteed availability and renewability reforms consistent with HIPAA, 
and several states have adopted rating standards. For example, one 
recent survey of state insurance market rules found that all states 
require guaranteed availability in the small employer market.\15\ The 
same survey found that 41 states had implemented ``alternative 
mechanisms'' for guaranteed availability for HIPAA-eligible 
individuals, while the remaining states used the federal fallback 
mechanism.\16\ However, only five states (Maine, Massachusetts, New 
Jersey, New York, and Vermont) went beyond HIPAA to require that all 
issuers accept all applicants in the individual market, with limited 
exceptions.\17\ With respect to guaranteed renewability, one survey 
reported that 48 states require it in the small group market \18\ and 
another survey reported that all 50 states require it in the individual 
market.\19\ While HIPAA did not include any provisions addressing 
rating or pooling, 47 states have one or more requirements in the small 
group market and 18 states have

[[Page 70588]]

one or more requirements in the individual market.\20\
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    \15\ Ctr. on Health Ins. Reforms, Georgetown Univ. Health Policy 
Inst., Small Group Health Insurance Market Guaranteed Issue and 
Individual Market Guarantee Issue, available at http://statehealthfacts.org.
    \16\ Ctr. on Health Ins. Reforms, Georgetown Univ. Health Policy 
Inst., Small Group Health Insurance Market Guaranteed Issue and 
Individual Market Guarantee Issue, available at http://statehealthfacts.org.
    \17\ Ctr. on Health Ins. Reforms, Georgetown Univ. Health Policy 
Inst., HIPAA Rules, available at http://statehealthfacts.org.
    \18\ Pollitz, K., et al., Early Experience with the ``New 
Federalism'' in Health Insurance Regulation, Health Affairs, 19, 
no.4 (2000):7-22.
    \19\ Fuchs, B., Expanding the Individual Health Insurance 
Market: Lessons from the State Reforms of the 1990s (2004) at p. 7.
    \20\ Ctr. on Health Ins. Reforms, Georgetown Univ. Health Policy 
Inst., Small Group Health Insurance Market Rate Restrictions and 
Individual Market Rate Restrictions, available at http://statehealthfacts.org.
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    Despite the advances in some states, only five states (Maine, 
Massachusetts, New Jersey, New York, and Vermont) have adopted a 
comprehensive set of guaranteed availability and community rating 
reforms in both their individual and small group markets that meet or 
exceed those in the Affordable Care Act. Only Massachusetts, which 
enacted a landmark health reform law in 2006 that coupled insurance 
market reforms with an insurance exchange, premium subsidies, and a 
minimum coverage provision, has succeeded in covering nearly all 
residents of the state. In 2011, only 3.4 percent of Massachusetts 
residents were uninsured, compared to 15.7 percent nationally.\21\ In 
contrast, individuals with medical conditions in the 45 states without 
guaranteed availability and rating reforms often find themselves with 
few--or even no--coverage options at affordable prices.
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    \21\ Source: U.S. Census Bureau, Current Population Survey, 2012 
Annual Social and Economic Supplement, Table HI06. Health Insurance 
Coverage Status by State for All People: 2011.
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B. Overview of the Changes in the Affordable Care Act

    Subtitles A and C of title I of the Affordable Care Act 
reorganized, amended, and added provisions to part A of title XXVII of 
the PHS Act relating to health insurance issuers in the group and 
individual markets and group health plans that are non-federal 
governmental plans.\22\ As relevant here, these provisions include PHS 
Act sections 2701 (fair health insurance premiums), 2702 (guaranteed 
availability of coverage), and 2703 (guaranteed renewability of 
coverage), which apply to health insurance coverage offered by health 
insurance issuers.\23\ These provisions will establish a federal floor 
that ensures all individuals and employers have certain basic 
protections with respect to the availability of the health insurance 
coverage in all states.
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    \22\ The Affordable Care Act also added section 715(a)(1) to the 
Employee Retirement Income Security Act (ERISA) and section 
9815(a)(1) to the Internal Revenue Code (the Code) to incorporate 
the provisions of part A of title XXVII of the PHS Act into ERISA 
and the Code, and to make them applicable to group health plans 
other than non-federal governmental group health plans. The market 
requirements discussed in this proposed rule apply to health 
insurance issuers offering health insurance coverage.
    \23\ Under the HIPAA enforcement structure, the states (or, if 
they lack authority or fail to substantially enforce, CMS) take 
enforcement actions against health insurance issuers that fail to 
comply with the requirements of PHS Act sections 2701-2703. See Code 
Sec.  4980D(d); ERISA Sec.  502(b)(3); PHS Act Sec.  2723.
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    Section 2701 regarding fair premiums applies to the individual and 
small group markets generally, and to the large group market if a state 
permits large employers to purchase coverage through an Exchange.\24\ 
Pursuant to section 1312(f)(2)(B) of the Affordable Care Act, a state 
may permit large employers to purchase through an Exchange starting in 
2017. Sections 2702 and 2703 apply to the individual and group (small 
and large) markets. These provisions apply to health insurance coverage 
in the respective markets regardless of whether such coverage is a QHP 
offered on Exchanges. Section 1255 of the Affordable Care Act provides 
that PHS Act sections 2701, 2702, and 2703 are effective for plan years 
(in the individual market, policy years) beginning on or after January 
1, 2014.\25\ Section 1251(a)(2) of the Affordable Care Act specifies 
that grandfathered health insurance coverage is not subject to sections 
2701, 2702, and 2703 of the PHS Act. In addition, the Affordable Care 
Act amended the HIPAA enforcement provision that previously was 
applicable to group health insurance coverage and non-federal 
governmental group health plans by expanding its scope to include 
individual health insurance coverage and by renumbering the provision 
as PHS Act section 2723.
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    \24\ The applicable definitions for individual market, small 
group market, and large group market are found in PHS Act section 
2791(e) and section 1304(a) of the Affordable Care Act.
    \25\ ``Plan year'' and ``policy year,'' for purposes of these 
proposed rules, are defined at 45 CFR 144.103. These terms are 
defined differently than ``plan year'' and ``benefit year'' as used 
in connection with QHPs (45 CFR 155.20).
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    The preemption provisions of PHS Act section 2724(a)(1) apply so 
that the requirements of the Affordable Care Act are not to be 
``construed to supersede any provision of state law which establishes, 
implements, or continues in effect any standard or requirement solely 
relating to health insurance issuers in connection with individual or 
group health insurance coverage except to the extent that such standard 
or requirement prevents the application of a requirement'' of the 
Affordable Care Act. Section 1321(d) of the Affordable Care Act applies 
the same preemption principle to requirements of title I of the 
Affordable Care Act. As mentioned, state laws that impose stricter 
requirements on health insurance issuers than those imposed by the 
Affordable Care Act will not be superseded by the Affordable Care 
Act.\26\
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    \26\ In addition, although not the subject of this proposed 
rule, section 1252 of the Affordable Care Act generally provides 
that any standard or requirement adopted by a state pursuant to 
title I of the Affordable Care Act (or an amendment made by title I) 
shall be applied uniformly to all health plans in each insurance 
market to which the standard and requirements apply. Sections 
1302(e) and 1312(c) of the Affordable Care Act and the amendments to 
PHS Act sections 2701, 2702, and 2703 are all found in title I of 
the Affordable Care Act.
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    Section 1312(c) of the Affordable Care Act creates a single risk 
pool standard, applicable to both QHPs and non-QHPs, in the individual 
and small group markets; in addition, states may choose to have a 
merged individual and small group market pool. Although the Affordable 
Care Act does not provide an explicit effective date for section 
1312(c), we interpret it to be effective for plan years (in the 
individual market, policy years) beginning on or after January 1, 2014, 
given its dependence on and interaction with the new market reforms, as 
well as its explicit reference to the establishment of the Exchanges in 
2014. Section 1312(c) does not apply to grandfathered health plans.
    Lastly, section 1302 of the Affordable Care Act specifies levels of 
cost-sharing protections that health plans will offer, including in 
subsection (e) a catastrophic plan for young adults and people who 
cannot otherwise afford health insurance.

C. Rate Increase Disclosure and Review

    Section 1003 of the Affordable Care Act adds a new section 2794 of 
the PHS Act, which directs the Secretary, in conjunction with the 
states, to establish a process for the annual review of ``unreasonable 
increases in premiums for health insurance coverage.'' The statute 
provides that health insurance issuers must submit to the Secretary and 
the applicable state justifications for unreasonable premium increases 
prior to the implementation of the increases. Section 2794 also 
specifies that beginning with plan years beginning in 2014, the 
Secretary, in conjunction with the states, shall monitor premium 
increases of health insurance coverage offered through an Exchange and 
outside of an Exchange. Section 2794 of the PHS Act does not apply to 
grandfathered health insurance coverage, nor does it apply to self-
funded plans.\27\
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    \27\ In addition, through regulation, section 2794 does not 
apply to health insurance issuers offering health insurance coverage 
in the large group market.
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    On May 23, 2011, CMS published a final rule with comment period (76 
FR 29964), to implement the annual review

[[Page 70589]]

of unreasonable increases in premiums for health insurance coverage 
called for by section 2794. Among other things, CMS established a 
process by which all proposed rate increases above a defined threshold 
in the individual and small group markets would be reviewed by a state 
or by CMS to determine whether or not the rate increases are 
unreasonable. These rates would be reviewed by the state in states with 
Effective Rate Review Programs and by CMS in states without Effective 
Rate Review Programs. For 2011, the review threshold was a rate 
increase of 10 percent or more. CMS also established a process for a 
state to set a state-specific threshold for future calendar years.
    We are proposing revisions to the rate review program that would 
standardize and streamline data submission, fulfill the new requirement 
beginning in 2014 that the Secretary monitor premium increases of 
health insurance coverage offered through an Exchange and outside of an 
Exchange, and establish new standards that incorporate the effect of 
the market reform provisions that take effect in 2014.

III. Provisions of the Proposed Regulations

    Collectively, the proposed regulations regarding modified community 
rating, guaranteed availability, guaranteed renewability, and risk 
pooling create the foundation for a competitive and accessible health 
insurance market starting in 2014. The Affordable Care Act allows 
individuals and employers to obtain and renew health insurance coverage 
without regard to enrollees' health status. Health insurance premiums 
will no longer be based on enrollees' pre-existing conditions or 
gender, and health insurance issuers no longer will be able to divide 
up their risk pools (also known as blocks of business) in order to 
discriminate against less healthy individuals. These proposed rules 
would clarify health insurance issuers' obligations under these 
reforms.
    These proposed rules regarding insurance market reforms are 
inextricably linked to several other reforms in the Affordable Care Act 
that function to expand access to and affordability of coverage. For 
example, subtitle D of title I of the Affordable Care Act authorizes 
the establishment of Exchanges where individuals and small employers 
can enroll in QHPs and creates certain premium stabilization programs 
for the reformed marketplace. Further, Code section 36B provides for 
premium tax credits for eligible individuals who enroll in QHPs through 
Exchanges. Similarly, Code section 45R provides for small business tax 
credits for eligible employers who enroll in health insurance coverage 
through the Small Business Health Options Program (SHOP). Although 
these other reforms are not the subjects of this proposed rule, they do 
influence the options available for implementing this proposed rule.
    As noted, the proposed rule would make technical changes to clarify 
the processes that CMS uses to enforce Affordable Care Act reforms with 
respect to issuers and non-federal governmental group health plans. The 
proposed rule also would codify the policies related to catastrophic 
plans.

A. Fair Health Insurance Premiums (Proposed Sec.  147.102)

    PHS Act section 2701 provides that health insurance issuers may 
vary premium rates for health insurance coverage in the individual and 
small group markets \28\ based on a limited set of specified factors. 
The factors are, with respect to a particular plan or coverage: (1) 
Whether the plan or coverage applies to an individual or family; (2) 
rating area; (3) age, limited to a variation of 3:1 for adults; and (4) 
tobacco use, limited to a variation of 1.5:1.\29\ All other rating 
factors are prohibited. Thus, PHS Act section 2701 effectively 
prohibits several factors currently in use today, such as health 
status, claims experience, gender, industry, occupation, and duration 
of coverage, among others. Other factors that might be considered for 
rating purposes, such as eligibility for tax credits, prior source of 
coverage, and credit worthiness, also are prohibited. The practice of 
``re-underwriting'' also is prohibited. Re-underwriting refers to 
issuers increasing premiums at renewal for existing customers because 
they incurred claims or experienced worsening health during a policy 
year.\30\
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    \28\ Consistent with our later discussion of the single risk 
pool provision, all non-grandfathered health insurance coverage 
offered through associations and multiple employer welfare 
arrangements (MEWAs) is subject to the modified community rating 
rules applicable to the appropriate market, as defined by PHS Act 
section 2791(e)(1), (3), and (5) (definitions of individual market, 
large group market, and small group market, respectively).
    \29\ The age, tobacco use, and geographic factors are 
multiplicative. For example, the maximum variation for both age (for 
adults) and tobacco use is 4.5:1 (3 times 1.5:1), putting aside the 
issue of wellness discounts, which are discussed later in this 
preamble. The family rate calculation could be additive or 
multiplicative, depending on whether a per-member or family tier 
rating methodology is used, as explained later in this preamble.
    \30\ In addition, health insurance issuers currently are 
prohibited from requiring any individual to pay a premium greater 
than that for another similarly situated individual enrolled in 
group health insurance coverage on the basis of a health factor. 
Further, issuers currently are prohibited from charging persons 
enrolled in group or individual health insurance coverage higher 
premiums due to genetic information. PHS Act sections 2702, as in 
effect when the Affordable Care Act was enacted (group market), and 
2753 (individual market). In addition to these requirements, 
starting in policy years beginning on or after January 1, 2014, 
issuers will be prohibited from requiring any individual enrolled in 
non-grandfathered individual market coverage to pay a premium 
greater than that for another similarly situated individual on the 
basis of a health factor. PHS Act section 2705.
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    For purposes of family coverage, any premium variation for age and 
tobacco use must be applied to the portion of premium attributable to 
each family member. PHS Act section 2701(a)(2)(A) specifies that states 
can establish one or more rating areas. PHS Act section 2702(a)(2)(B) 
provides that CMS may establish rating areas if a state does not 
establish them. CMS, in consultation with the NAIC, will define 
permissible age bands. All non-grandfathered health insurance coverage 
in the individual and small group markets is subject to the 
requirements in this section.\31\ In addition, health insurance 
coverage in the large group market is subject to these requirements, 
inside and outside an Exchange, if a state permits such coverage to be 
offered through an Exchange starting in 2017.\32\ As discussed earlier, 
we welcome comments on whether and how this proposed rule could be 
modified to simultaneously secure the protections required by law and 
keep premiums affordable for individuals and small employers purchasing 
non-grandfathered health insurance coverage in these markets.
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    \31\ By law, issuers must transition all non-grandfathered small 
group and individual market coverage issued prior to January 1, 
2014, to these adjusted community rating rules in the first plan 
year (small group market) or the first policy year (individual 
market) beginning on or after January 1, 2014, even if the issuers 
previously used other rating rules for products in these markets.
    \32\ These requirements apply to health insurance coverage and 
therefore are not applicable to self-insured plans.
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1. State and Issuer Flexibility Related to Rating Methodologies
    While PHS Act section 2701 limits how issuers may vary premiums, 
the statute does not specify detailed rating methodologies. By rating 
methodology, we refer to the array of choices made in setting prices--
for example, the age curves an issuer would use to distribute rates 
within the 3:1 limit on adult rates as enrollees grow older. The rating 
methodology also could include the method for computing rates in the 
small group market and the methods for computing family premiums. In 
current practice, most aspects of rating

[[Page 70590]]

methodology are left to the discretion of health insurance issuers, 
subject to oversight by the states. As discussed later, greater 
standardization in rating methodologies starting in 2014 is 
advantageous for a number of reasons, including consumer protection, 
improved transparency, improved competition, and administrative 
simplification. We discuss various types of choices in rating 
methodology in more detail in the succeeding sections of this preamble, 
and welcome comment on them.
    This proposed rule implements our authority under PHS Act section 
2701 and would apply to all non-grandfathered health insurance coverage 
in the individual and small group markets starting in 2014. This rule 
proposes to standardize rating methodologies, particularly with respect 
to age rating and certain aspects of family rating, for health 
insurance coverage in the individual and small group markets when the 
market reforms go into effect in 2014. This proposed rule allows 
flexibility for states and issuers in rating methodology when it comes 
to certain aspects of family, tobacco, age, geography, and small group 
rating.
    More standardization with respect to rating methodologies is 
advantageous in many respects. First, the risk adjustment methodology 
under section 1343 of the Affordable Care Act will need to accommodate 
permissible rating factors under PHS Act section 2701.\33\ A 
standardized rating methodology for all plans within a state would 
enhance the transparency, predictability, and accuracy of risk 
adjustment because the risk adjustment methodology would account for 
rating as it is applied by issuers. For example, without a specified 
age curve, the risk adjustment methodology would have to rely upon an 
estimate of a state-level average age curve. This estimate, when 
applied to specific issuers, could lead to a loss of accuracy in the 
calculation of a plan's average actuarial risk to the extent the 
issuer's rating curve varies from the estimated average curve. To the 
extent there is decreased accuracy in the risk adjustment methodology 
as a result of such an approximation, its goals of promoting 
competition based on service and effective care, rather than risk 
selection, may be undermined and consumers and issuers would be 
negatively affected.
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    \33\ For additional background, see CCIIO, Risk Adjustment 
Implementation Issues (2011), pp. 17-23, available at: http://cciio.cms.gov/resources/files/riskadjustment_whitepaper_web.pdf.
---------------------------------------------------------------------------

    Furthermore, some core functions of the Exchange, such as 
calculating rates for QHPs and determining the benchmark plan for 
purposes of the premium tax credit under Code section 36B, would be 
simplified if issuers used the same age curves, age bands, and family 
rating methods. The second lowest cost silver plan is the benchmark 
plan that will be used to determine the maximum amount an applicant can 
receive for premium tax credits. If issuers choose their own age 
curves, age bands, and family rating methods, the definition of the 
second lowest cost silver plan would likely vary by applicant. In 
contrast, standardizing rating methodologies will result in all 
applicants having the same plan from the same issuer as the second 
lowest cost silver plan, regardless of the applicant's age and family 
composition, in a given rating area. This will improve price 
transparency for consumers by facilitating their ability to identify 
the second lowest cost silver plan. Lastly, allowing differences in 
rating methodologies between issuers in the same market in a state 
could provide an avenue for adverse selection.
    The following sections discuss the proposed rating methodology. We 
welcome comments on the areas where and the extent to which state and 
issuer flexibility in rating methodologies versus a more standardized 
approach is desirable.
2. Small Group Market Rating
    Two rating methods are used currently in the marketplace to 
generate small group market rates. The first method, known as composite 
rating, uses the rating characteristics of an entire small group, such 
as the average employee health risk,\34\ average employee age, 
geography, group size, and industrial code, to determine an average 
per-employee rate (along with corresponding average family tier rates) 
for the small group. We understand that a few states require this 
approach. In states without such requirements, issuers generally use 
this approach for groups with, for example, more than ten employees. In 
contrast, under the second method, the issuer calculates a separate 
rate for each employee's coverage based on the allowable rating factors 
for that employee and then sums each individual rate to determine the 
total group premium. This approach is often used for very small groups 
(for example, those with ten or fewer employees).
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    \34\ The HIPAA non-discrimination provisions currently prohibit 
individual employees enrolled in a group health plan from being 
required to pay higher premiums or make higher contributions based 
on their health status (26 CFR 54.9802-1; 29 CFR 2590.702; 45 CFR 
146.121).
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    Given that PHS Act section 2701 does not distinguish between 
individual and small group market rating, we propose that issuers would 
calculate rates for employee and dependent coverage in the small group 
market on a per-member basis, in the same manner that they would 
calculate rates for persons in the individual market, as discussed 
below, and then calculate the group premium by totaling the premiums 
attributable to each covered individual. Per-member rating is required 
by PHS Act section 2701(a)(4), which specifies that the age and tobacco 
use factors be apportioned to each family member. However, as discussed 
below, this proposed rule does not preclude the possibility that 
employees and their dependents would be charged amounts based on their 
group's average, rather than amounts based on their own specific 
factors, notwithstanding that issuers must base the total premium for a 
group on its actual current enrollment. We propose that states which 
anticipate requiring premiums to be based on average enrollee amounts 
submit information to CMS not later than 30 days after the publication 
of the final rule to support the accuracy of the risk adjustment 
methodology.
    In the group context, the allowable rating factors, including 
tobacco use, would be appropriately associated with specific employees 
and dependents. Additionally, with per-member rating, premium changes 
for new hires and departures during the year would be priced more 
accurately, an issue of particular importance in smaller groups. And in 
the SHOP, when employees are offered choices among plans and issuers, 
the additional cost or savings resulting from an employee's plan choice 
would also be priced more accurately, ensuring that each issuer 
receives appropriate premiums for the individuals choosing its health 
plans.
    The use of per-member rating would give employers flexibility to 
choose how to allocate their contributions to employees' coverage. PHS 
Act section 2701 governs the basis upon which an issuer may permissibly 
charge different groups or individuals different rates for the same 
insurance product, but it does not specify how an employer will 
allocate the premium contributions among employees.\35\ Although many

[[Page 70591]]

variations may be consistent with applicable state and federal law, we 
anticipate that there are two primary ways employee contributions may 
be determined.
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    \35\ Employer/employee contribution levels are subject to other 
laws. PHS Act section 2705(b) prohibits group health plans from 
discriminating based on health status against similarly situated 
individuals in terms of contribution amounts. This nondiscrimination 
requirement generally was carried over to the Affordable Care Act 
from HIPAA. The relevant HIPAA authorities currently in effect for 
group health plans and group health insurance coverage are Code 
section 9802, ERISA section 702, and PHS Act section 2702 (prior to 
being renumbered and amended by the Affordable Care Act), as well as 
26 CFR 54.9802-1, 29 CFR 2590.702, and 45 CFR 146.121. Guidance 
concerning employer/employee contributions has been provided by the 
Equal Employment Opportunity Commission in connection with the age 
discrimination requirements (29 CFR 1625.10(d)(4)(ii)).
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    An employer may choose to set the employee contribution as a 
percentage of the underlying cost of the employee's coverage. Under 
this option, older employees and smokers would make higher 
contributions toward coverage, reflecting their higher risk and 
permissible rate variation based on age and tobacco use. Younger 
employees would make lower contributions, which may improve the 
perceived value of insurance for these employees and increase take-up 
rates, making it easier for the employer to meet any minimum 
participation rate requirement that may apply.
    Alternatively, after the issuer develops rates using the per-member 
methodology, an employer may elect to generate a composite rate in 
which each employee's contribution for a given family composition is 
the same, as most employers offering coverage do today, by adding the 
per-member rates and dividing the total by the number of employees to 
arrive at the group's average rate and determine employer and employee 
contributions based on that composite rate. This flexibility for small 
employers would take into account that many employers, states, and 
issuers are already accustomed to composite rating, it is relatively 
simple, and this method may be beneficial to older employees. However, 
this composite method may differ from how composite rates often are 
developed today. This decision will be up to employers.
    We seek comment on the alignment of the method for calculating each 
employee's rate in the small group market with that used to calculate 
an individual's rate in the individual market. In particular, we seek 
comment on the implications of this approach for employers and 
employees, whether it is more compatible with employee choice in the 
SHOP, and whether it leads to more accurate pricing of employee 
choices.
3. Family Rating
    PHS Act section 2701(a)(1)(A)(i) provides that issuers may vary 
rates based on whether a plan covers an individual or a family. PHS Act 
section 2701(a)(4) provides that, with respect to family coverage, the 
rating variation permitted for age and tobacco use must be applied 
based on the portion of the premium attributable to each family member 
covered under a plan.
    The rule proposes that issuers add up the rate of each family 
member to arrive at a family premium.\36\ However, we propose that the 
rates of no more than the three oldest family members who are under age 
21 would be taken into account in computing the family premium. This 
policy is intended to mitigate the premium disruption for larger 
families accustomed to family tier structures, which typically cap the 
number of children taken into consideration in setting premiums. We 
propose a cut-off age of 21 for this cap so that it is consistent with 
the cut-off age used in the proposed rule on age rating, as well as the 
requirement that child-only policies be available to those under age 
21. We do not propose a similar cap on the number of family members age 
21 and older whose per-member rates would be added into the family 
premium.
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    \36\ Under this approach, the issuer would charge the same per-
member premium for all family members of the same age and tobacco 
use status. The issuer could not charge different rates for family 
members of the same age and tobacco use status based on their 
status, for example, as the policyholder, spouse, or dependent.
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    Consistent with PHS Act section 2701(a)(4), the proposed per-member 
approach to family rating ensures that any variation in premium by age 
or tobacco use is applied to the appropriate family member. Per-member 
rating also simplifies the administration of risk adjustment because 
the risk associated with each family member would be easily identified. 
We solicit comments on the use of the per-member build-up methodology 
for individual and small group market coverage. In addition, we request 
comments on the appropriate cap, if any, on the number of child and 
adult family members whose premiums should be taken into account in 
determining the family premium and the appropriate cut-off age for a 
per-child cap (for example, whether this should be aligned with the 
extension of dependent coverage to age 26 instead).
    Currently, some issuers apply specified family tier or family 
composition multipliers to a base premium to arrive at a family rate. 
Other issuers may determine a family premium rate based upon the 
policyholder or oldest adult's age. These current practices are 
impermissible under PHS Act section 2701(a)(4) to the extent that the 
multipliers or the base premium vary based on age or tobacco use, since 
some family members would be rated using factors that do not apply to 
them individually. However, this conflict does not exist in a state 
that does not permit variation based on age or tobacco use.
    Accordingly, the proposed rule would permit a state to require 
issuers to use a standard family tier methodology (with corresponding 
multipliers) if the state requires pure community rating, without any 
adjustments for age or tobacco use. The multipliers for the tiers would 
need to be actuarially justified to ensure that health insurance 
issuers could not charge excessively high premiums to individuals or 
families that would render meaningless their guaranteed availability 
rights under PHS Act section 2702. PHS Act section 2701 does not 
require that issuers use a two-tier structure (that is, individual and 
family). For example, a state would be able to specify a four-tier 
structure (that is, individual; individual and spouse; individual and 
child/children; and all other families). If a state anticipates 
adopting such a policy in the event this proposed approach is 
finalized, we propose such states submit relevant information on their 
proposed family tiers to CMS no later than 30 days after the 
publication of the final rule to support the accuracy of the risk 
adjustment methodology.
    We propose that if a state has pure community rating in place, but 
does not adopt a uniform family tier methodology (with corresponding 
multipliers), the per-member rating methodology would apply as the 
default. In a state that does not require community rating, an issuer 
that voluntarily uses pure community rating would need to use per-
member rating, given the absence of a uniform family tier methodology 
in that state. We solicit comment on whether, instead of permitting 
flexibility in the final rule, states with pure community rating should 
also use the per-member approach that would be used in states that 
allow age and tobacco use adjustments.
4. Persons Included Under Family Coverage
    Currently, issuers have considerable flexibility in determining how 
to set rates for family policies and in defining which family members 
may be on the same policy, subject to federal and state laws requiring 
coverage of certain individuals (for example, dependent

[[Page 70592]]

children under age 26 pursuant to PHS Act section 2714, if a plan or 
issuer otherwise offers dependent child coverage). Our research 
indicates that covered family members typically include the employee or 
individual market policyholder; a spouse or partner, as defined by 
state law; biological children; adopted children; and children placed 
for adoption. Sometimes other classes of people are covered, such as 
stepchildren, grandchildren, other children related by blood, foster 
children, and children under guardianship.
    We request comments on whether the final rule should specify the 
minimum categories of family members that health insurance issuers must 
include in setting rates for family policies, or whether we should 
defer to the states and health insurance issuers to make this 
determination. We also request comments on the types of individuals who 
typically are included under family coverage currently, including types 
of covered individuals who would not meet the classification of tax 
dependents. We note that any family member not covered under a family 
policy would be eligible for an individual policy pursuant to 
guaranteed availability of coverage under PHS Act section 2702.
5. Rating for Geography
    PHS Act section 2701(a)(1)(A)(ii) provides that rates may vary by 
rating areas. PHS Act section 2701(a)(2) provides that a state must 
establish one or more rating areas within that state. CMS is charged 
with reviewing the adequacy of the rating areas established by a state. 
If the state's rating areas are inadequate (for example, they do not 
cover a sufficient number of individuals) or a state does not act, CMS 
may establish such rating areas. Although section 2701 does not specify 
the maximum variation for a rating area factor, in contrast to its 
specifying the maximum age factor (3:1 for adults) and the maximum 
tobacco factor (1.5:1), a rating area factor should be actuarially 
justified to ensure that issuers do not charge excessively high 
premiums that would render meaningless the guaranteed availability 
rights of individuals and employers under PHS Act section 2702.
    Currently, in most states, issuers have considerable flexibility in 
establishing their rating areas. The rule proposes that a state could 
establish no more than seven rating areas within the state along 
geographic divisions, generally consistent with the maximum number in 
states today. The proposed rule makes no distinction between health 
insurance coverage offered inside or outside an Exchange, so these 
rating areas would apply equally to all non-grandfathered coverage in 
the individual or small group market.
    The choice of a maximum of seven areas in the proposed rule is 
based on the higher-end of the number of rating areas that states 
currently have established in the individual and small group markets 
(for example, Massachusetts, New Jersey, and Oregon). We believe that 
setting an upper limit on the number of rating areas provides states 
with the flexibility needed to designate rating areas that are 
adequately sized and accommodate local market conditions, while 
avoiding an excessive number of rating areas that would be confusing to 
consumers and not reflect significant market differences. We solicit 
comments on the maximum number of rating areas that may be established 
within a state and the potential standards for determining an 
appropriate maximum number.
    Taking into account the spectrum of current rating rules regarding 
geography and the need for state flexibility to account for local 
market conditions, the proposed rule includes three standards for the 
geographic divisions based on standards that we understand states and 
issuers currently use for rating areas. A state could select one of the 
approved standards that we would presume ``adequate'' or submit its own 
standard, which would be subject to approval. These are: (1) One rating 
area for the entire state; (2) rating areas based on counties or three-
digit zip codes (that is, areas in which all zip codes share the same 
first three digits); or (3) rating areas based on metropolitan 
statistical areas (MSAs) and non-MSAs. The proposed rule would not 
require that all the sections of a rating area be geographically 
adjacent. For example, a state could create a rating area comprised of 
all non-MSA portions of a state that have similar health care costs.
    Under the first standard, there would be one rating area for the 
entire state. While this approach would make it easier to establish and 
monitor rating areas, it may be most practical in states where there is 
not significant variation in health care costs among the different 
regions of the state.
    Under the second standard, the rating areas would be based on 
counties or three-digit zip codes. A state using this method would be 
expected to use either counties or three-digit zip codes, but not both. 
In the United States, there are 3,068 counties, varying greatly in size 
and population. There are approximately 455 three-digit zip codes in 
the United States. Three-digit zip codes generally cover larger areas 
than a county. Current NAIC rating guidance notes that many small group 
plans currently use rating areas based on three-digit zip codes or 
counties.\37\
---------------------------------------------------------------------------

    \37\ NAIC, Guidance Manual in the Evaluation of Rating Manuals 
and Filings Concerning Small Employer and Individual Health 
Insurance (2003), p. 33.
---------------------------------------------------------------------------

    Under the third standard, rating areas could be based on the 
state's MSAs and non-MSAs. MSAs encompass at least one urban core with 
a population of at least 50,000 people, plus adjacent territory that 
has a high degree of social and economic integration with the core. 
MSAs are always established along county boundaries, but may include 
counties from more than one state. The 367 MSAs in the United States 
include approximately one-third of the counties and 83 percent of the 
population of the United States. MSAs could provide a convenient and 
established method of grouping counties into larger areas. Further, 
current NAIC rating guidance suggests that MSAs be considered as one 
possible standard for rating areas. For MSAs that cross state 
boundaries, we propose that these should be divided between the 
respective states if the MSA option is adopted. States with counties 
not encompassed by an MSA could create one or more non-MSA rating areas 
for those counties. For states with more than seven MSAs and non-MSA 
areas, we propose that these states combine some of the areas into no 
more than seven rating areas based on a reasonable methodology, such as 
cost similarity.
    We request comments regarding the use of these proposed standards 
for rating areas, as well as comments regarding other options for 
standards for geographic divisions and other relevant factors that 
could be used for developing rating areas. We request comments from 
states that already have standard rating areas regarding what changes, 
if any, would be necessary to meet one or more of the proposed 
standards and the proposed limit of having no more than seven rating 
areas. We also request comments on whether the final rule should 
establish minimum geographic size and minimum population requirements 
for rating areas and whether state rating areas currently in existence 
should be deemed in compliance with this provision.
    To the extent a state establishes rating areas using the proposed 
standards, that is one rating area for the entire state, or no more 
than seven rating areas if counties, three-digit zip codes, or MSAs/
non-MSAs are used, we propose that the state's rating areas would be

[[Page 70593]]

presumed adequate. We propose that CMS would take a more active role in 
assessing the adequacy of the state's rating areas when a state 
designates rating areas based on geographic divisions other than those 
identified in the proposed rule.
    In the event that a state does not establish rating areas 
consistent with the proposed standards, the one-area-per-state standard 
would apply, unless we applied one of the other standards to designate 
rating areas in a particular state. In that case, we likely would be 
inclined to use the MSA/non-MSA standard. To the extent that we 
establish a state's rating areas, we would work with the state, local 
issuers, and others to determine how best to establish rating areas 
responsive to local market conditions.
    We recognize that states and issuers need lead time to update 
pricing models and make related system changes to accommodate 
potentially new rating areas in 2014. To support the accuracy of the 
risk adjustment methodology, we propose that states needing such lead 
time submit relevant information on their rating areas to CMS within 30 
days after the publication of the final rule. Lastly, we recognize that 
states may wish to establish or modify their rating areas after 2014. 
For example, states might wish to modify rating areas in light of local 
utilization and cost patterns, issuer service areas, or changes in MSA 
designations. We request comments on appropriate schedules and 
procedural considerations related to rating area designations for plan 
years after 2014.
6. Rating for Age
    PHS Act section 2701(a)(1)(A)(iii) provides that the premium rate 
charged by an issuer for non-grandfathered health insurance coverage in 
the individual or small group market may vary by age, but may not vary 
by more than 3:1 for adults. The statute does not specify a premium 
rating limitation for children, but it provides that the 3:1 adult 
ratio must be ``consistent with section 2707(c)'' of the PHS Act. 
Section 2707(c), in turn, requires that child-only plans be made 
available to individuals under age 21.
    We believe the statutory language supports an interpretation that 
the 3:1 age rating limitation was intended to apply only to adults age 
21 and older. Further, we believe that PHS Act section 2702 supports a 
requirement that issuers set actuarially justifiable child rates using 
a standard population, to prevent the charging of unjustified premiums 
that would, in effect, prevent individuals under age 21 from exercising 
their guaranteed availability rights. Accordingly, we propose to allow 
rates to vary within a ratio of 3:1 for adults (defined for purposes of 
this requirement as individuals age 21 and older), and that rates must 
be actuarially justified based on a standard population for individuals 
under age 21, consistent with the proposed uniform age curve discussed 
later in this section. We request comment on this approach.
    We propose that enrollees' age factors and bands should be 
determined based on an enrollee's age at policy issuance and renewal, 
so that age rating factors are applied on a consistent basis by all 
issuers and that consumers (including those purchasing policies 
covering multiple family members) do not receive multiple premium 
increases each year. This is the same measurement point as the first 
day of a plan or policy year, which is the age determination point for 
catastrophic plans. We request comments on whether other measurement 
points (for example, birthdays) might be more appropriate.
    PHS Act section 2701(a)(3) directs CMS, in consultation with the 
NAIC, to define ``permissible age bands'' for purposes of age rating. 
Age bands are simply ranges of sequential ages. In the context of 
health insurance, they are often used to segregate where the slope of 
premium rate variation by age changes, the most common being that the 
slope is zero within the band (that is, does not change), and non-zero 
from one band to the next band in the sequence (for example, persons 
aged 30 to 34 pay the same premium, but lower than those age 35 to 39, 
who pay the same premium to each other, and similarly for age 40 to 44, 
etc.).
    In accordance with section 2701(a)(3), we consulted with the NAIC, 
through its Health Care Reform Actuarial (B) Working Group, concerning 
the permissible age bands to be defined by CMS. The NAIC Working Group 
did not make specific recommendations, but provided valuable feedback 
regarding state regulation of age bands, issuer practices, and 
important policy considerations related to possible age band standards. 
Although state standards vary, and issuers that set their own age bands 
do so using a variety of different methods, our discussions with the 
industry indicate that bands smaller than five years are common in the 
individual market. Taking into consideration the feedback we received 
from NAIC, we propose the following standard age bands for use in all 
states and markets subject to the rating rules of PHS Act section 2701:
     Children: A single age band covering children 0 to 20 
years of age, where all premium rates are the same.
     Adults: One-year age bands starting at age 21 and ending 
at age 63.
     Older adults: A single age band covering individuals 64 
years of age and older, where all premium rates are the same.
    We propose these age bands for a number of reasons. First, with 
respect to children, we are proposing a single age band for child ages 
0-20 to reflect the generally small differences in costs between 
children of various ages (other than newborns and very young children). 
We believe that a single age band for children will simplify and make 
risk adjustment methodologies more efficient, and allow consumers to 
more easily compare and predict costs as children age, particularly if 
the consumer has children that are several years apart in age. We 
solicit comments on whether multiple age bands or a single age band for 
children are appropriate.
    Second, with respect to adults ages 21 to 63, we propose one-year 
age bands so that consumers would experience steady, relatively small 
premium increases each year due to age. If broader age bands are 
adopted (for example, five-year bands), consumers would experience 
larger premium increases when they reach the end of one age band and 
move into the next. Although five-year bands are currently common in 
the small group market, we are also proposing to apply the same age-
band structure to the small group market to align with our proposal 
that the per-member rating buildup approach be used in both the 
individual and the small group markets. We request comment on this 
approach.
    Finally, we propose a single age band for adults age 64 and older 
largely to facilitate compliance with the Medicare Secondary Payer 
requirements when per-member rating is used for older individuals in 
the small group market. Medicare Secondary Payer requirements generally 
prohibit an employer with 20 or more employees from charging Medicare-
eligible employees a premium that is higher than the premium charged to 
non-Medicare-eligible employees (section 1862(b)(1)(A) of the Social 
Security Act, 42 U.S.C. 1395y(b)(1)(A); 42 CFR 411.102(b), 
411.108(a)(6)). Consequently, we believe that the highest age band used 
to generate individually rated premiums must begin before age 65, when 
individuals generally are not eligible for Medicare based on age. We 
believe this proposed age band is reasonable because individuals age 64 
and older represent

[[Page 70594]]

only a small proportion of enrollees in the individual and small group 
markets, and are likely to have similar claims costs despite their age 
differences. We seek comment on this approach.
    This proposed rule would direct health insurance issuers within a 
market in a state to use a uniform age rating curve. An age curve is a 
specified distribution of relative rates across all age bands. 
Reflecting statutory requirements, our proposed age curve anchors the 
premium amount to age 21, and is expressed as a ratio, for all ages 
between ages 0 and 64, inclusive. We believe that using uniform age 
bands and rating curves will simplify identification of the second 
lowest cost silver plan used to determine premium tax credits, and will 
provide an incentive for issuers to compete to offer plans that provide 
the best value across the entire age curve. Doing so will also promote 
the accuracy of the risk adjustment program established under section 
1343 of the Affordable Care Act, which is essential to ensuring market 
stability in the reformed marketplace, and reduce the potential for 
adverse selection.\38\ A standardized rating methodology for all plans 
within a state would also enhance the transparency, predictability, and 
accuracy of the risk adjustment program because the risk adjustment 
methodology could account for age rating as it is applied by issuers.
---------------------------------------------------------------------------

    \38\ We have developed our proposed age curve based on our 
assumptions of the distribution of claims costs by age in the post-
2103 market. Although it is difficult to exactly predict the 
composition of the post-2013 market and the actual claims costs that 
will be incurred, we developed our proposed age curve using 
assumptions that are consistent with those utilized for the risk 
adjustment program, as described in our Premium Stabilization Rule 
(77 FR 17220).
---------------------------------------------------------------------------

    We are proposing to apply the same default age rating curve to both 
the individual and small group markets. Our proposed uniform age curve 
assumes that issuers will vary premiums to the greatest extent 
permissible within the 3:1 age rating constraint for adults (or 
narrower ratios as provided under state law). We have constructed our 
proposed age curve based on gross premium amounts, which includes 
administrative, overhead, and marketing costs in addition to the amount 
attributable to enrollee claims costs, without accounting for any tax 
credits that may offset a consumer's premium costs. Because our 
analysis of premiums found evidence that issuers do not vary their age 
curves across much of the 21-64 age band in significant amounts across 
geography or product types, we do not believe that applying a uniform 
rating curve to individual and small group markets would disadvantage 
issuers according to the geographic region they are licensed in, or the 
value of the coverage that the product/plan type offers.\39\
---------------------------------------------------------------------------

    \39\ We measured the value of plan coverage by approximating 
plan actuarial value (AV) on the same scale that we use to separate 
plans into four metal tiers. For the purposes of our analysis, we 
designated plans with AVs of 0.55-0.75 as ``low value'' plan 
designs, 0.75-0.85 as ``medium value'' plan designs, and 0.85-0.95 
for ``high value'' plan designs.
---------------------------------------------------------------------------

    Our review of base premium rates for 60,000 covered lives (based on 
data reported on HealthCare.gov by a sample of regional issuers 
operating in different regions of the country) has shown that base 
premium rates vary according to age at a mostly consistent rate, and 
are largely unaffected by product type/plan design or geographic 
region.\40\ Furthermore, an examination of the large group insurance 
market demonstrates clear evidence that issuers generally utilize an 
underlying cost curve that varies by age in a manner that is 
independent of the value of the plan coverage.\41\ The analysis of the 
large group market is particularly relevant as a predictor of post-2014 
individual and small group market rating practices because the large 
group market is characterized by coverage for most essential benefits, 
has guaranteed availability of coverage, and does not use person-
specific underwriting; these types of rates will likely be more 
characteristic of those of the reformed 2014 individual and small group 
market. Consequently, we do not believe that issuers need the 
flexibility to vary age curves across product/plan designs or 
geographic regions after taking into account the requirement for a 3:1 
rating restriction, or that applying a uniform age curve to issuers in 
the individual and small group markets will lead to any significant 
disturbance in issuer pricing practices across different geographic 
regions or plan designs. Therefore, we are proposing that CMS's uniform 
age curve would apply by default in a state, unless a state adopted a 
different uniform age curve. We request comment on the application of a 
single, default age curve to the individual and small group market 
based on the above assumptions and the methodology for doing so.
---------------------------------------------------------------------------

    \40\ Reporting of base premium rates for the individual market 
to HealthCare.gov does not take into account any additional premium 
due to health status, which is commonly added in the individual 
market. These rates, therefore, are not necessarily the actual 
premiums paid by the 60,000 enrollees in those plans.
    \41\ For the purposes of this analysis, we analyzed two separate 
employer databases with data from a combination of large and small 
employers. One database consisted of 303,000 individuals with 12 
continuous months of coverage (to account for seasonal variation in 
claims costs) that were employed at firms with 50-250 employees. The 
second database of large employer coverages (including self-insured 
employers) was composed of 33 million individuals with 12 months of 
continuous coverage.
---------------------------------------------------------------------------

    We propose that we would fit our uniform age curve to the 3:1 adult 
age rating limit by ``flattening'' the ends of the age curve derived 
from expected claim cost patterns in a manner that accommodates the 3:1 
premium ratio limit for the highest and the lowest adult ages. Under 
this approach, when other factors (for example, mix of gender, tobacco 
use, geographic region, and plan type) are held constant among ages, 
the rate of premium change from one age to the next will closely mirror 
the rate of expected claims costs, except for those ages closest to age 
21 and age 64.\42\ As compared to an approach that would proportionally 
compress the curve (that is, the relationship between premiums by age) 
for all ages, this proposed approach would ensure that the fewest 
number of individuals (or employees, in the small group market) would 
be affected by the 3:1 premium ratio constraint, thereby mitigating 
premium disruption for the largest number of consumers, and reducing 
the need for significant risk adjustment across age bands. We propose 
that we would revise our default curve periodically to reflect our most 
current knowledge of the individual and small group market (for 
example, enrollment, population distribution, and cost patterns) 
following implementation of 2014 reforms. We request comment on our 
proposed approach for fitting the proposed adult age curve to the 
statutorily specified 3:1 premium ratio.
---------------------------------------------------------------------------

    \42\ For younger ages near age 21 and older ages closer to 64, 
the change of premium rates from one age to the next higher age 
would be lower than the change in expected claims costs for those 
ages.
---------------------------------------------------------------------------

    With respect to the age curve for children's ages, we have 
constructed a proposed default curve using a single age band for ages 
0-20, using the same data sources that we used to derive our proposed 
adult age curve, as described above. The value of our proposed default 
age curve for ages 0-20 was supported by the actual experience for 
those ages. The shift from the child age curve at age 20 to the adult 
age curve at age 21 could result in a premium differential for these 
ages that is not reflected in issuers' current rating practices. 
However, given the low premiums for individuals in these age groups, as 
well as the relative premium stability from age 21 through early 30s 
under the standardized age curve, we do not anticipate that this 
differential would result in a significant financial burden on 
consumers. While we do not

[[Page 70595]]

believe that this discontinuity undermines the accuracy of the 
methodology we used to develop our proposed child and adult age curves, 
we request comment on potential implications that the transition from 
the proposed child curve to the proposed adult curve may have for 
issuers and consumers. We also seek comment on the proposed rating 
curve, including whether it is generally consistent with current 
insurer rating practices and minimally disruptive to the current market 
within the confines of the rating restrictions and reforms under the 
Affordable Care Act.

                                         CMS Proposed Standard Age Curve
----------------------------------------------------------------------------------------------------------------
       Age           Premium ratio           Age           Premium ratio           Age           Premium ratio
----------------------------------------------------------------------------------------------------------------
            0-20              0.635                 35              1.222                 50              1.786
              21              1.000                 36              1.230                 51              1.865
              22              1.000                 37              1.238                 52              1.952
              23              1.000                 38              1.246                 53              2.040
              24              1.000                 39              1.262                 54              2.135
              25              1.004                 40              1.278                 55              2.230
              26              1.024                 41              1.302                 56              2.333
              27              1.048                 42              1.325                 57              2.437
              28              1.087                 43              1.357                 58              2.548
              29              1.119                 44              1.397                 59              2.603
              30              1.135                 45              1.444                 60              2.714
              31              1.159                 46              1.500                 61              2.810
              32              1.183                 47              1.563                 62              2.873
              33              1.198                 48              1.635                 63              2.952
              34              1.214                 49              1.706       64 and Older              3.000
----------------------------------------------------------------------------------------------------------------

    Although we are proposing a uniform age rating curve for the 
reasons described above, our proposed approach would maintain 
flexibility for states and issuers regarding certain aspects of age 
rating. In most states, premium rates for health insurance coverage are 
permitted to vary by age to the extent that issuers can actuarially 
justify such rates; this practice could continue within the boundaries 
of the proposed policy. A state law that prescribed a narrower ratio 
for adults (for example, 2:1) or prohibited different adult rates 
altogether would not be preempted under PHS Act section 2724(a)(1) 
since such state law would not ``prevent the application'' of section 
2701.\43\ To support the accuracy of the risk adjustment methodology, 
we propose that states using narrower ratios submit relevant 
information on their ratios to CMS no later than 30 days after the 
publication of the final rule. We also seek input on the consequences 
of these choices in terms of the likely percentage premium increases 
that consumers will face when aging from one age band to another, the 
impact on the administration and accuracy of risk adjustment, the 
administration of premium tax credits, and consumer convenience. We 
propose that states would have the option to designate a uniform age 
curve other than the CMS age curve. If a state anticipates using its 
own age curve, we propose the state submit relevant information on its 
proposed curve to CMS no later than 30 days after the publication of 
the final rule to support the accuracy of the risk adjustment 
methodology.
---------------------------------------------------------------------------

    \43\ In addition, section 1334(c)(5) of the Affordable Care Act, 
pertaining to multi-state plans, indicates that states may require 
``more protective'' age rating requirements that are lower than 3:1 
in their individual and small group markets.
---------------------------------------------------------------------------

7. Rating for Tobacco Use
    PHS Act section 2701(a)(1)(A)(iv) provides that health insurance 
issuers in the individual and small group markets cannot vary rates 
based on tobacco use by more than 1.5:1.\44\ As mentioned, PHS Act 
section 2701(a)(4) provides that the rating variation for tobacco use 
applies based on the portion of premium that is attributable to each 
family member covered under the plan. A state law that prescribes a 
narrower ratio (for example, 1.25:1) or prohibits varying rates for 
tobacco use altogether would not be preempted since such state law 
would not impose a standard or requirement that conflicts, or makes it 
impossible to comply, with permissible rating practices under federal 
law, and thus would not prevent the application of PHS Act section 
2701.\45\ If a state anticipates adopting narrower ratios for tobacco 
use, we propose that the state submit relevant information on their 
ratios to CMS no later than 30 days after the publication of the final 
rule.
---------------------------------------------------------------------------

    \44\ The interaction of PHS Act section 2701 with the wellness 
program rules under PHS Act section 2705(j) is discussed later in 
this section.
    \45\ Although not the subject of this NPRM, we note that the 
tobacco use rating factor is not taken into account in determining 
the amount of the premium tax credit under Code section 36(b)(3)(C).
---------------------------------------------------------------------------

    Currently, many states allow health insurance issuers in the 
individual and small group markets to vary premiums based on tobacco 
use. In addition, many states limit the amount by which premiums can 
vary due to tobacco use by allowing use of that factor only within 
their overall health status limits. For example, the NAIC's Small 
Employer Health Insurance Availability Model Act (1993 Version) does 
not specifically identify tobacco use as a permissible rating factor, 
but allows its use within the overall 1.67:1 ratio for the health 
status of the employees or dependents of the small employer.
    There is not a clear and consistent definition of tobacco use among 
the states for rating purposes. Numerous states such as Louisiana, 
Maine, Massachusetts, Minnesota, and New Mexico allow tobacco use to be 
considered as a rating factor in both the individual and small group 
markets. While these states provide a definition of what constitutes a 
tobacco product, they do not specifically define ``tobacco use.''
    We understand that issuers typically rely on self-reported data, 
such as information from applications and health risk assessments, to 
determine tobacco usage. Since applications and health risk assessments 
vary from issuer to issuer, there is wide variation in how issuers 
define tobacco use.
    One possible approach for purposes of implementing this provision 
upon which we invite comment would be to include one or more questions 
on tobacco use in the single streamlined application under Sec.  
155.405, or in connection with other enrollment-related processes for 
an Exchange. We

[[Page 70596]]

specifically invite comment on the possible use of the single 
streamlined application to collect information concerning tobacco use 
in connection with a premium surcharge, as well as alternative options 
for identifying tobacco use, as well as how the information should be 
collected with respect to health insurance coverage offered outside an 
Exchange.
    The proposed rule does not prohibit issuers from varying the 
tobacco use factor used for a particular age band, as long as any 
variation is not greater than 1.5:1, the maximum variation for tobacco 
use under PHS Act section 2701(a)(1)(A)(iv), and is consistent with 
other applicable law, including the HIPAA nondiscrimination provisions. 
In other words, an issuer could use a lower tobacco use factor for a 
younger individual (for example, 1.3:1) compared to an older individual 
(for example, 1.4:1), as long as the factor does not exceed 1.5:1 for 
any age group. In contrast to the age rating factor, where we are 
proposing that issuers utilize a standard age curve, we are proposing 
that states or issuers have the flexibility to determine the 
appropriate tobacco rating factor within a range of 1:1 to 1:1.5, 
consistent with the wellness requirements discussed below. We seek 
comments on this approach.
    We also considered how the requirements under PHS Act section 
2701(a)(1)(A)(iv) would interact with rewards for tobacco cessation 
offered as part of employer wellness programs. Tobacco cessation 
programs are a common aspect of employers' wellness programs. Prior to 
the enactment of the Affordable Care Act, the Departments of HHS, 
Labor, and the Treasury (jointly, the Departments) published final 
rules regarding the nondiscrimination and wellness program provisions 
under HIPAA (71 FR 75014, Dec. 13, 2006, referred to as the 2006 
regulations).\46\ The HIPAA wellness requirements implemented in these 
2006 regulations were set forth in section 2702 of the PHS Act (with 
parallel provisions contained in ERISA section 702 and Code section 
9802). While PHS Act section 2702 did not specifically impose any limit 
on rewards that could be offered under wellness programs, the 2006 
regulations provided that plans and issuers could offer a reward that 
does not exceed 20 percent of the total cost of coverage in a health-
contingent wellness program, provided specified consumer-protection 
conditions were met.\47\
---------------------------------------------------------------------------

    \46\ See 26 CFR 54.9802-1; 29 CFR 2590.702; 45 CFR 146.121. 
Prior to the issuance of the final 2006 regulations, the Departments 
published interim final regulations with request for comment 
implementing the HIPAA nondiscrimination provisions on April 8, 1997 
at 62 FR 16894, followed by proposed regulations regarding wellness 
programs on January 8, 2001 at 66 FR 1421.
    \47\ The 2006 regulations also required that a wellness program 
be reasonably designed to promote health or prevent disease; give 
eligible individuals an opportunity to qualify for the reward at 
least once per year; make the reward available to all similarly 
situated individuals (and offer a reasonable alternative standard to 
any individual for whom it is unreasonably difficult due to a 
medical condition to satisfy the otherwise applicable standard 
during that period (or for whom it is medically inadvisable to 
attempt to satisfy the otherwise applicable standard)), and, in all 
plan materials describing the terms of the program, disclose the 
availability of a reasonable alternative standard.
---------------------------------------------------------------------------

    The Affordable Care Act added a new PHS Act section 2705(j), 
effective for plan years beginning on or after January 1, 2014. Section 
2705(j) largely reflects the wellness provisions from the 2006 
regulations, with a few clarifications and modifications. Under PHS Act 
section 2705(j), plans and issuers generally can offer a reward of up 
to 30 percent of the cost of coverage\48\ for participation in a 
wellness program that is based on an individual satisfying a standard 
that is related to a health status-related factor (``health factor''), 
subject to certain conditions. PHS Act section 2705(j) also authorizes 
the Departments to increase the maximum reward to as much as 50 percent 
of the total cost of coverage if they determine such an increase to be 
appropriate.
---------------------------------------------------------------------------

    \48\ While this new 30 percent limit is set forth in PHS Act 
section 2705(j), because the existing 20 percent limits were 
established by regulation, in the case of grandfathered health plans 
governed by the old version of section 2702, the 20 percent limit is 
proposed to be increased by the Departments in proposed regulations 
published contemporaneously with the publication of this proposed 
rule.
---------------------------------------------------------------------------

    Contemporaneously with the publication of this proposed rule, the 
Departments are publishing a notice of proposed rulemaking (NPRM) under 
section 2705(j), which proposes to increase the maximum reward under a 
wellness program in group health coverage from 20 percent to 30 percent 
of the cost of coverage. The rule further proposes an increase of an 
additional 20 percentage points (to 50 percent) to the extent that the 
additional percentage is in connection with a program designed to 
prevent or reduce tobacco use.
    We propose in this rule that the definition of ``tobacco use'' for 
purposes of section 2701 be consistent with the approach taken with 
respect to health-contingent programs designed to prevent or reduce 
tobacco use under section 2705(j). That is, by proposing to raise the 
maximum permissible reward for participating in a tobacco cessation 
program in the wellness rule, we are proposing that a health insurance 
issuer in the small group market would be required to offer a tobacco 
user the opportunity to avoid paying the full amount of the tobacco use 
surcharge permitted under PHS Act section 2701 if he or she 
participates in a wellness program meeting the standards of PHS Act 
section 2705(j) and its implementing regulations.\49\
---------------------------------------------------------------------------

    \49\ The wellness program NPRM proposes that the additional 
increase in the size of the reward for wellness programs designed to 
prevent tobacco use would not be limited to the small group market, 
to provide consistency across markets and to provide large group, 
self-insured, and grandfathered employment-based plans the same 
additional flexibility to promote tobacco-free workforces as small, 
insured, non-grandfathered health plans.
---------------------------------------------------------------------------

    There are several positive aspects to implementing PHS Act sections 
2701 and 2705(j) in a coordinated manner with respect to tobacco use in 
the small group market. Rather than have the tobacco use surcharge 
under PHS Act section 2701 be strictly a negative financial incentive, 
this approach would encourage tobacco users to pursue tobacco cessation 
remedies offered under their employers' wellness programs, enhancing 
their long-term health and potentially reducing health care costs. It 
also would alleviate underreporting for tobacco use since tobacco users 
who disclose their tobacco use would not automatically have to pay the 
premium surcharge, but could instead participate in the employer's 
cessation program. Finally, group health plans and health insurance 
issuers with wellness programs may find it administratively more 
efficient to implement the two provisions concurrently given that 
employers are familiar with the requirements of wellness programs 
associated with increased premiums related to a health factor. We 
welcome comments on this proposal and other ideas for coordinating the 
implementation of the tobacco surcharge under PHS Act section 2701 and 
the wellness provisions under PHS Act section 2705(j).
    We also invite comment on possible definitions of ``tobacco use'' 
that could be applied for purposes of sections 2701 and 2705(j). One 
possible definition would rely on self-reporting as to whether the 
individual would be considered a tobacco user. Another possibility may 
be what some issuers use today: a defined amount of tobacco use within 
a specified look-back period. A third possibility may be to define 
``tobacco use'' as regular, and not infrequent or sporadic, tobacco use 
(perhaps including some standard of frequency). Another option would

[[Page 70597]]

define a tobacco user as one who uses tobacco with sufficient frequency 
so as to be addicted to nicotine. Regardless of how tobacco use is 
defined, we are proposing that the definition of ``tobacco use'' for 
purposes of section 2701 be consistent with the approach taken with 
respect to health-contingent wellness programs designed to prevent or 
reduce tobacco use under section 2705(j).
    PHS Act section 2705(b) also prohibits issuers from charging 
enrollees in the individual market higher premiums based on health 
factors. However, PHS Act section 2705(j) does not apply to the 
individual health insurance market. To the extent there is any conflict 
between PHS Act sections 2701 and 2705 as applied to the individual 
market, we think the more specific language of PHS Act section 2701 
allowing tobacco use surcharges prevails over the more general language 
of PHS Act section 2705 prohibiting premium differences based on health 
factors. In other words, issuers could implement the tobacco use 
surcharge in the individual market without having to offer wellness 
programs. However, we solicit comments on whether and how, consistent 
with PHS Act sections 2701 and 2705, the tobacco surcharge in the 
individual market could be combined with the same type of incentive to 
promote tobacco cessation that is available in the group market.

B. Guaranteed Availability of Coverage (Proposed Sec.  147.104)

    PHS Act section 2702 provides that health insurance issuers that 
offer health insurance coverage in the individual or group market in a 
state must accept every individual and employer in the state that 
applies for coverage, subject to certain exceptions. These exceptions 
allow issuers to limit enrollment: (1) To certain open and special 
enrollment periods; (2) to an employer's eligible individuals who live, 
work, or reside in the service area of a network plan; and (3) in 
certain situations involving network capacity and financial capacity.
    PHS Act section 2702 generally is based on the HIPAA provision for 
guaranteed availability in the small group market. Compared to HIPAA, 
however, the Affordable Care Act: (1) Expands guaranteed availability 
beyond the small group market to include the individual and large group 
markets as well; (2) requires the establishment of open enrollment 
periods; (3) establishes new special enrollment periods in addition to 
those in HIPAA; and (4) eliminates the guaranteed availability 
exception for coverage offered only to bona fide association members in 
the small group market. Accordingly, this proposed rule generally is 
based on the HIPAA rule for guaranteed availability in the small group 
market (Sec.  146.150). In addition, the proposed rule would add a new 
marketing standard pursuant to PHS Act section 2702 that is identical 
to that applicable to QHPs established under 45 CFR 156.225.
    The proposed rule would direct that issuers offer coverage to and 
accept any individual or employer in the state that applies for such 
coverage--regardless of health status, risk, or medical claims and 
costs--with limited exceptions.\50\ Issuers would be required to offer 
all products that are approved for sale in the applicable market. We 
believe that the protections of the Affordable Care Act apply to all 
non-grandfathered health insurance coverage in an applicable state 
market. Accordingly, beginning in 2014, even non-grandfathered ``closed 
blocks'' of business would be available to new enrollees, subject to 
the limited exceptions discussed below. We welcome comments on this 
proposal.
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    \50\ Other federal laws may restrict the health insurance 
coverage products available to certain individuals. For example, 
individuals must meet certain requirements related to residency, 
citizenship/immigration status, and non-incarceration in order to 
buy QHPs through an Exchange (45 CFR 155.305(a)).
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    We propose that issuers offering health insurance coverage in the 
group market would maintain a year-round open enrollment period for 
employers to purchase such coverage, while issuers offering coverage in 
the individual market would offer plans during open enrollment periods 
(including the initial open enrollment period) consistent with those 
required by Exchanges for individual market QHPs. The effective dates 
of such coverage would align with the Exchange standards for the 
appropriate market (if any, in the case of the large group market). 
These standards are intended to minimize adverse selection by setting 
consistent open enrollment periods for the insurance marketplace, 
regardless of whether individuals or employers choose to purchase 
outside or through an Exchange. We solicit comments on whether this 
proposal sufficiently addresses the open enrollment needs of individual 
market customers whose coverage renews on dates other than January 1 
and whether aligning open enrollment periods with policy years (based 
on a calendar year) in the individual market is more desirable. Given 
that employer groups generally pose less of an adverse selection risk 
than individuals and issuers currently are willing to offer them 
coverage at any point in the year, we believe that a year-round 
enrollment period for large and small employers will not be burdensome 
on issuers nor change the status quo in most states.
    Prior to the Affordable Care Act, the HIPAA provision for 
guaranteed availability in the small group market had allowed issuers 
to establish employer contribution rules and group participation rules 
that small employers must meet in order to qualify for guaranteed 
availability, as allowed under applicable state law. PHS Act section 
2702 does not include the contribution and participation exception to 
guaranteed availability; however, PHS Act section 2703 does include 
such an exception for guaranteed renewability. We are concerned that 
failing to provide a small employer contribution and participation 
exception to guaranteed availability by regulation would trigger 
adverse selection against the small group market, given its year-round 
open enrollment period, vis-[agrave]-vis the individual market, which 
has a time-limited open enrollment period. In other words, some 
individuals could use the open-ended enrollment period for small 
employers to buy insurance only as medical needs arise, thereby 
creating instability in the small group market and increasing premiums 
for other small employers. Thus, the proposed rule would allow issuers 
to condition year-round open enrollment in the small group market on a 
small employer being able to satisfy the same contribution and 
participation requirements at issuance that the issuer is permitted to 
consider at renewal, either as allowed by state law or, in the case of 
a QHP offered in the SHOP, as permitted by Sec.  156.285(c). 
Establishing this requirement by rule effectively would preserve the 
status quo under HIPAA. If the final rule includes this requirement, we 
would also adopt corresponding changes in Sec.  155.725, which 
establishes the enrollment periods in the SHOP.
    The proposed rule sets forth that issuers make available special 
enrollment periods in both the individual and group markets for 
individuals and plan participants and beneficiaries in connection with 
the events that would trigger eligibility for COBRA coverage under 
ERISA section 603.\51\ This set of special enrollment

[[Page 70598]]

events is in addition to the special enrollment events provided under 
PHS Act section 2704(f) for loss of eligibility for other coverage or 
dependent special enrollment (that is, the special enrollment rights 
originally created under HIPAA for group health insurance coverage and 
group health plans \52\) and Sec.  155.420(d) and Sec.  155.725(a)(3) 
(the special enrollment rights for QHPs). The proposed rule directs 
that the election period would be 30 calendar days, which is generally 
consistent with the HIPAA standard. However, we request comment as to 
whether another standard, such as 60 calendar days, generally 
consistent with the Exchange standard, is more appropriate.\53\ The 
proposed rule also would include standards regarding the effective 
dates of coverage modeled upon the effective dates of coverage provided 
for the QHP special enrollment events under Sec.  155.420(b). We also 
request comments on whether health insurance issuers in the individual 
market should provide to enrollees in their products a notice of 
special enrollment rights similar to what is currently provided to 
enrollees in group health plans (Sec.  146.117(c)).
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    \51\ For employees, COBRA events include a loss of coverage due 
to voluntary or involuntary termination of employment for reasons 
other than gross misconduct and reduction in the number of hours of 
employment. For spouses of covered employees, these events include a 
loss of coverage due to reasons that would make the employee 
eligible for COBRA, the employee's becoming entitled to Medicare, 
divorce or legal separation of the covered employee, and death of 
the covered employee. For children of covered employees, these 
events include a loss of coverage due to reasons that would make the 
employee eligible for COBRA, the employee's becoming entitled to 
Medicare, divorce or legal separation of the covered employee, death 
of the covered employee, and loss of dependent child status under 
plan rules.
    \52\ The special enrollment framework originally created under 
HIPAA for special enrollment due to loss of eligibility for other 
coverage and dependent special enrollment is 30 days. The Children's 
Health Insurance Program (CHIP) Reauthorization Act of 2009 also 
added special enrollment rights to ERISA, the PHS Act, and the Code 
that allow employees to enroll in a group health plan or group 
health insurance coverage upon termination of Medicaid or CHIP 
coverage or eligibility for a premium assistance program under 
Medicaid or CHIP. Under these circumstances, an employee must 
request special enrollment within 60 days.
    \53\ See 26 CFR 54.9801-6, 29 CFR 2590.701-6, and 45 CFR 146.117 
(HIPAA); and 45 CFR 155.420 (Exchange).
---------------------------------------------------------------------------

    In addition, the proposed rule would include provisions allowing 
issuers with network plans to limit guaranteed availability to 
employers with eligible individuals who live, work, or reside in the 
plans' service areas. While PHS Act section 2702(c)(1)(A) does not 
explicitly include a corresponding exception allowing issuers to limit 
the sale of individual market coverage to individuals who live or 
reside in the individual market plan's service area, failing to 
recognize such an exception would eliminate an issuer's ability to 
define a service area for its individual market business within a 
state. Moreover, references to persons with individual market coverage 
in paragraph (c)(1) and subparagraph (c)(1)(B) of PHS Act section 2702 
suggest that such persons with individual market coverage also were 
intended to be described in paragraph (c)(1)(A). Accordingly, the 
proposed rule would clarify that individual market coverage also may 
limit enrollment to those individuals who live or reside in a service 
area.
    Issuers with network plans also would not have to offer coverage to 
employers and individuals if they demonstrated to the appropriate state 
authority that they lacked the capacity to deliver services adequately 
to additional groups or individuals due to their existing contractual 
obligations to current group contract holders and enrollees. Issuers 
would need to apply the denial of guaranteed availability uniformly to 
all employers and individuals, without regard to the enrollees' claims 
experience or health status-related factors. Issuers invoking this 
exception generally would be barred from offering new coverage for at 
least 180 calendar days after coverage is denied, as directed by PHS 
Act section 2702(c)(2).
    As noted, PHS Act section 2702 does not include an explicit 
guaranteed availability exception allowing issuers to limit the 
offering of certain products to members of bona fide associations. 
However, in the appropriate circumstances, we think that the network 
capacity exception to guaranteed availability could be used to provide 
a basis for limiting enrollment in certain products to bona fide 
association members. Additionally, while the guaranteed availability 
exception for bona fide association coverage is not allowed under the 
statute, we are interested in whether and how a transition or exception 
process for bona fide association coverage could be structured to 
minimize disruption while maintaining consumer protections. We seek 
comment on this issue.
    Similarly, issuers would not have to offer coverage to employers 
and individuals, uniformly and without regard to claims experience, if 
they demonstrate to their applicable state authority (if required) that 
they lack the financial capacity to sell additional coverage. Issuers 
invoking this exception also would be barred from offering new coverage 
for at least 180 calendar days, as directed by PHS Act section 
2702(d)(2).
    Lastly, the proposed rule would include as a minimum standard a 
more detailed marketing standard in connection with guaranteed 
availability that had not been included in the earlier HIPAA rule. 
Nonetheless, it is similar to the guidance we provided in Health Care 
Financing Administration Bulletin No. 98-01 that interpreted the HIPAA 
provisions related to guaranteed availability in the individual and 
small group markets. Bulletin No. 98-01 stated that the PHS Act 
prohibited issuers from setting agent commissions for sales to HIPAA-
eligible individuals and small groups so low that they were discouraged 
from marketing policies to such individuals and groups.\54\ Pursuant to 
section 1311(c)(1)(A) of the Affordable Care Act, QHP issuers are 
required to comply with applicable state laws and regulations regarding 
marketing by health insurance issuers and not employ marketing 
practices or benefit designs that will have the effect of discouraging 
the enrollment of individuals with significant health needs in QHPs 
(Sec.  156.225). The proposed rule would adopt this standard and apply 
it to the entire marketplace in order to ensure consistency in the 
marketing of plans inside and outside of the Exchanges and leverage 
existing state oversight mechanisms.
---------------------------------------------------------------------------

    \54\ Available at: http://cciio.cms.gov/resources/files/Files2/10112011/hipaa_98_01_508.pdf.pdf.
---------------------------------------------------------------------------

    The intent of this policy is for states to continue their 
traditional role of regulating marketing activities of issuers, 
consistent with Sec.  156.225. We reiterated this point in guidance 
issued on November 29, 2011, where we indicated that we will apply 
existing state standards on marketing materials in states where a 
federally-facilitated Exchange operates.\55\ We note that the NAIC's 
Model Unfair Trade Practices Act 880-1 has been adopted in a 
``substantially similar manner'' by 46 states, and the NAIC's 
Advertisements of Accident and Sickness Insurance Model Regulation 40-1 
has been adopted in a ``substantially similar manner'' by 44 states. 
Both the Model Act and Regulation include comprehensive marketing 
standards for issuers.\56\
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    \55\ CMS, ``State Exchange Implementation Questions and Answers. 
Available at: http://cciio.cms.gov/resources/files/Files2/11282011/exchange_q_and_a.pdf.pdf.
    \56\ Section 4 of the NAIC Model Act prohibits ``an 
advertisement, announcement or statement containing any assertion, 
representation or statement with respect to the business of 
insurance or with respect to any insurer in the conduct of its 
insurance business, which is untrue, deceptive or misleading.'' 
Section 5 of the NAIC Model Regulation provides that the format and 
content of advertisements of accident and sickness insurance must 
``be sufficiently complete and clear to avoid deception or the 
capacity or tendency to mislead or deceive.''

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[[Page 70599]]

    We propose these marketing standards to minimize the potential for 
the adverse selection that could result if plans sold through Exchanges 
were subject to different marketing standards from plans sold outside 
of the Exchanges. A common standard covering the entire insurance 
market can protect the efficient operation of all markets and reduce 
confusion for consumers. As stated in Bulletin No. 98-01, which 
interpreted the HIPAA guaranteed availability requirement, marketing 
practices that fall below these standards represent a failure by 
issuers to offer required coverage. We propose that all issuers comply 
with state laws regulating the marketing of insurance unless the state 
has no laws regulating marketing or has laws which are below the 
federal minimum standard, in which case the federal minimum standard 
would govern. We solicit comment on this federal minimum standard.
    Concerns have been raised about the ability of individuals to 
manipulate guaranteed availability each year. While PHS Act section 
2703 allows an issuer to nonrenew coverage for an individual who has 
not paid premiums, PHS Act section 2702 does not include an exception 
allowing issuers to refuse to cover individuals with histories of non-
payment under other policies either with the same issuer or other 
issuers. Nonetheless, we recognize the concerns that such potential 
gaming raises in relation to adverse selection, fairness to consumers 
maintaining continuous coverage, and the financial stability of issuers 
participating in the individual market. We solicit comments on possible 
ways to discourage consumers from abusing guaranteed availability 
rights (for example, by ensuring enrollees cannot use open and special 
enrollment periods to facilitate such abuses) while ensuring consumers 
are guaranteed the protections afforded to them under the law.

C. Guaranteed Renewability of Coverage (Proposed Sec.  147.106)

    PHS Act section 2703 directs that any health insurance issuer 
offering health insurance coverage in the individual or group market 
must renew coverage at the option of the plan sponsor or individual, 
with certain exceptions, which are more fully discussed below in 
connection with the proposed rule text. PHS Act section 2703 is based 
largely on the HIPAA provision for group market guaranteed 
renewability, but generally expands its scope to include both the group 
and individual markets.\57\ While section 2703 does not include the 
individual market in its guaranteed renewability exceptions for uniform 
modifications of coverage and loss of bona fide association membership, 
nonetheless, we believe PHS Act section 2742 continues to provide a 
basis for those exceptions. This proposed rule generally is based on 
the corresponding HIPAA rule (Sec.  146.152).
---------------------------------------------------------------------------

    \57\ Prior to being amended and renumbered as PHS Act section 
2703 by the Affordable Care Act, the HIPAA guaranteed renewability 
requirements for the group market were found at PHS Act section 
2712. The HIPAA guaranteed renewability requirements continue to 
apply with respect to grandfathered group market coverage in 2014 
and beyond (and with respect to all group market coverage before 
2014). Section 1251 of the Affordable Care Act specifically excludes 
grandfathered health plans from the effect of the amendments in the 
Affordable Care Act. The Affordable Care Act did not modify PHS Act 
section 2742, which continues to require guaranteed renewability in 
the individual market, including with respect to grandfathered 
health plans in the individual market.
---------------------------------------------------------------------------

    The proposed rule would direct health insurance issuers offering 
health insurance coverage in the individual or group market to renew or 
continue in force the coverage at the option of the plan sponsor or 
individual, as applicable, with certain exceptions. These exceptions 
include: (1) Nonpayment of premiums by the plan sponsor, or individual, 
as applicable; (2) an act or practice that constitutes fraud or an 
intentional misrepresentation of material fact under the terms of 
coverage performed by the plan sponsor or individual, as applicable; 
(3) in the case of group health insurance coverage, the plan sponsor 
has failed to comply with a material plan provision relating to 
employer contribution or group participation rules pursuant to 
applicable state law; (4) the issuer is ceasing to offer coverage of 
this type, acting uniformly without regard to claims experience or 
health status-related factor (an issuer may also modify the health 
insurance coverage for a plan offered to a group health plan at 
renewal); (5) for network plans, there is no longer any enrollee under 
the plan who lives, resides, or works in the service area of the issuer 
(or in the area for which the issuer is authorized to do business); and 
in the case of the small group market, the issuer could limit the 
employers that may apply for coverage to those with eligible 
individuals who live, work, or reside in the service area for such 
network plan; and (6) for coverage made available in the small or large 
group market only through one or more bona fide associations, if the 
employer's membership in the association ceases, but only if the 
coverage terminated uniformly without regard to any health status-
related factor relating to any covered individual. In the case of 
health insurance coverage that is made available by a health insurance 
issuer in the small or large group market to employers only through one 
or more associations, the reference to ``plan sponsor'' is deemed, with 
respect to coverage provided to an employer member of the association, 
to include a reference to such employer.
    In addition, the proposed rule would set requirements for issuers 
closing blocks of business. In any case where an issuer decides to 
discontinue offering a particular plan offered in the group or 
individual market, that plan may be discontinued by the issuer in 
accordance with applicable state law in the particular market under 
certain circumstances. An issuer who elects to discontinue offering all 
health insurance coverage in a market (or markets) in a state may not 
issue coverage in the state's market (or markets) involved during the 
5-year period beginning on the date of discontinuation of the last 
coverage not renewed, as directed by PHS Act section 2703(c)(2)(B).
    Only at the time of renewal may issuers modify the health insurance 
coverage for a plan offered to a group health plan in the large group 
market, and small group market if, for coverage available in this 
market (other than only through one or more bona fide associations), 
the modification is consistent with state law and is effective 
uniformly among group health plans with that plan.\58\
---------------------------------------------------------------------------

    \58\ Although PHS Act section 2703 does not contain a 
corresponding exception for uniform modification of coverage in the 
individual market, PHS Act section 2742 continues to provide a basis 
for such an exception in the individual market.
---------------------------------------------------------------------------

    PHS Act section 2703(b)(6) retains a guaranteed renewability 
exception for an employer's loss of membership in a bona fide 
association. Although not the subject of this proposed rule, PHS Act 
section 2742(b)(5) continues to provide a guaranteed renewability 
exception for an individual's loss of membership in a bona fide 
association.
    Under Sec.  155.430(b), an Exchange may terminate an enrollee's 
coverage, and permit a QHP issuer to terminate such coverage, under 
certain circumstances. These circumstances are: (1) The enrollee is no 
longer eligible for coverage in a QHP; (2) payments of premiums for 
coverage of the enrollee cease and any grace period(s) have been 
exhausted; (3) the enrollee's coverage is rescinded due to fraud or 
misrepresentation; (4) a QHP terminates or is decertified; or (5) the 
enrollee changes from one QHP to another

[[Page 70600]]

during an annual open enrollment period or special enrollment period. 
Although some QHP termination of coverage events correspond to PHS Act 
non-renewal events (for example, nonpayment of premiums), other events 
do not (for example, a QHP's loss of certification). With respect to 
those instances, we request comments on whether an issuer would have to 
renew that coverage on a non-QHP basis, outside the Exchange, if 
applicable, to affected enrollees.
    We are aware that issuers may need to make some plan design changes 
for non-grandfathered coverage issued between March 23, 2010 and 
January 1, 2014 in order to comply with the standards of the Affordable 
Care Act that are effective for the 2014 plan and policy years. In 
addition, on an ongoing basis, issuers may need to make some cost-
sharing adjustments at renewal to ensure that policyholders' plans 
remain at the same actuarial value level from year to year. We believe 
that issuers can make these types of policy changes consistent with the 
uniform modification of coverage requirements under PHS Act sections 
2703 and 2742, and solicit comments on whether our interpretation 
should be explicitly incorporated into text of the final rule.

D. Applicability of the Proposed Rules Under PHS Sections 2701, 2702, 
and 2703 and Section 1312(c) of the Affordable Care Act to Student 
Health Insurance Coverage

    Section 1560(c) of the Affordable Care Act provides that nothing in 
title I of the Affordable Care Act, or an amendment made by title I, 
``shall be construed to prohibit an institution of higher education (as 
such term is defined for purposes of the Higher Education Act of 1965) 
from offering a student health insurance plan, to the extent that such 
requirement is otherwise permitted under applicable federal, state, or 
local law.'' Title I of the Affordable Care Act includes the rating, 
guaranteed availability, guaranteed renewability, and single risk pool 
provisions that are discussed in this proposed rule.
    We have interpreted section 1560(c) to mean that if particular 
requirements in the Affordable Care Act would have, as a practical 
matter, the effect of prohibiting an institution of higher education 
from offering a student health plan otherwise permitted under federal, 
state or local law, such requirements would be inapplicable pursuant to 
the rule of construction in section 1560(c).
    We previously provided student health insurance coverage with 
exceptions from the HIPAA guaranteed availability and renewability 
requirements applicable to the individual market (Sec.  147.145(b)(1)). 
Consistent with that policy, this proposed rule would provide student 
health insurance coverage with exceptions from the Affordable Care 
Act's guaranteed availability and renewability requirements to ensure 
that enrollment in these policies is limited to students and their 
dependents.
    Under this proposed rule, student health insurance coverage would 
be included in an issuer's individual market single risk pool, as 
described below. Nonetheless, given the differences between the student 
health insurance market and other forms of individual market coverage, 
we solicit comment on whether the final rule should allow issuers to 
maintain a separate risk pool for student health insurance coverage. We 
also seek comment on whether the final rule should provide any 
modifications with respect to the generally applicable individual 
market rating rules in connection with student health insurance 
coverage.

E. Single Risk Pool (Proposed Sec.  156.80)

    Section 1312(c)(1) and (2) of the Affordable Care Act states that a 
health insurance issuer must consider all of its enrollees in all 
health plans (other than grandfathered health plans) offered by the 
issuer to be members of a single risk pool in the individual market and 
small group market, respectively.\59\ This requirement applies to 
health plans both inside and outside of an Exchange for both markets. 
Section 1312(c)(3) of the Affordable Care Act provides a state with an 
option to merge its individual and small group markets, in which case 
all non-grandfathered plans' risk would be merged. To support the 
accuracy of the risk adjustment methodology, we propose that states 
that intend to merge their individual and small group market pools in 
2014 inform us no later than 30 days after the publication of the final 
rule. Lastly, section 1312(c)(4) of the Affordable Care Act renders 
inapplicable any state law requiring grandfathered health plans to be 
included in the single risk pool(s).
---------------------------------------------------------------------------

    \59\ By law, issuers are required to transition all non-
grandfathered small group and individual market coverage issued 
prior to January 1, 2014, to the appropriate single risk pool in the 
first plan year (small group market) or the first policy year 
(individual market) beginning on or after January 1, 2014.
---------------------------------------------------------------------------

    The proposed rule would largely codify the statutory language and 
clarify that the single risk pool requirement applies on a state-by-
state basis and only to forms of non-grandfathered individual and small 
group market coverage subject to PHS Act section 2701. Thus, excepted 
benefit and short-term limited duration policies, for example, would 
not be subject to the single risk pool requirement. Also, this 
requirement would not be enforced against health insurance coverage 
issued to plans with fewer than two participants who are current 
employees (for example, retiree-only plans) (see 75 FR 34538, 34539-40 
(June 17, 2010)).
    Section 1312(c) of the Affordable Care Act represents a change from 
current market practice. Today, issuers often maintain several separate 
risk pools within their individual and small group market business, 
often as a way to segment risk and further underwrite premiums. For 
example, the NAIC's Small Employer Health Insurance Availability Model 
Act (1993 Version), adopted by a majority of states, allows issuers to 
maintain up to nine blocks of business in the small group market, 
subject to a limitation that the index rates between the blocks not 
vary by more than 20 percent. A 2004 study by the American Academy of 
Actuaries noted that the current regulatory climate in most states 
allows issuers to open and close books of business in the individual 
market at will, effectively causing many long-term policyholders in 
closed blocks to face very high premium increases at renewal because 
issuers can refuse to pool their claims experience with that of the 
newer or healthier policyholders.\60\
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    \60\ American Academy of Actuaries' Rate Filing Task Force, 
Report to the NAIC's A&H Working Group of the Life & Health 
Actuarial Task Force, at 3-4. See also NAIC, White Paper: An 
Exploration of Potential Regulatory Measures Intended to Prevent 
Individuals at Later Durations of Non-Group Major Medical Products 
from Receiving Higher Rate Increases than Those at Early Durations 
(2008).
---------------------------------------------------------------------------

    Beginning in 2014, issuers are no longer able to deny coverage 
based on applicants' health status and are limited in the types of 
rating factors they can apply in setting premiums in the individual and 
small group markets. Without a single risk pool rule, these 
prohibitions against traditional underwriting could incentivize issuers 
to find ways to segment the market into separate risk pools and charge 
differential premiums based on segmented risk, a de facto mechanism for 
underwriting. As a result, this statutory requirement that an issuer 
consider all of its enrollees in all plans (other than grandfathered 
plans) offered by the issuer to be members of a single risk pool in the 
individual market or small group market, respectively, prevents issuers 
from creating separate pools in order to segment high risk and

[[Page 70601]]

low risk enrollees. While risk adjustment will address some risk 
segmentation, the single risk pool requirement provides another layer 
of protection against adverse selection among plans and protects 
consumers by requiring issuers to consider the risk of all enrollees 
when developing and pricing unique plans.
    To implement the single risk pool protection, we propose that the 
claims experience of the enrollees in all non-grandfathered plans of an 
health insurance issuer in the individual or small group market within 
a state (or both, if the risk pools of the individual and small group 
market are merged within a state) be combined so that the premium rate 
of a particular plan is not adversely impacted by the health status or 
claims experience of its enrollees. For rates effective starting 
January 1, 2014, a health insurance issuer would use the estimated 
total combined claims experience of all non-grandfathered plans 
deriving from providing essential health benefits within a state market 
to establish an index rate (average rate) for the relevant market. The 
index rate would be utilized to set the rates for all non-grandfathered 
plans of the issuer in the market. After setting the index rate, an 
issuer would make a market-wide adjustment to the index rate based on 
the total expected market-wide payments and charges under the risk 
adjustment and reinsurance programs in a state.
    The premium rate for any given plan could not vary from the 
resulting index rate, except for the following factors: \61\
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    \61\ However, as described in Sec.  147.102 of this proposed 
rule, the specific premiums charged for particular enrollees would 
be permitted to vary based on family size, geographic rating area, 
and age and tobacco use, within limits.
---------------------------------------------------------------------------

     The actuarial value and cost-sharing design of the plan;
     The plan's provider network and delivery system 
characteristics, as well as utilization management practices. This 
factor is intended to pass savings onto consumers where issuers are 
able to negotiate better discounts, construct efficient networks, or 
manage care more efficiently;
     Plan benefits in addition to the essential health 
benefits. The additional benefits must be pooled with similar benefits 
provided in other plans to determine the allowable rate variation for 
plans that offer these benefits; and
     With respect to catastrophic plans, the expected impact of 
the specific eligibility categories for those plans.

The index rate, the market-wide adjustment based on total expected 
payments and charges for the risk adjustment and reinsurance programs, 
and the variations for individual plans would have to be actuarially 
justified. Furthermore, all such actuarially justified adjustments 
would have to be implemented by issuers in a transparent fashion, 
consistent with state and federal rate review processes. We seek 
comment on the approach described above, and on the proposed plan-
specific adjustments to the index rate. This proposed rule would apply 
both when rates are initially established for a plan and at renewal. We 
expect that percentage renewal increases generally would be similar 
across all plans in the same risk pool, but might differ somewhat due 
to the permitted product differences described above. We are 
considering allowing additional flexibility in product pricing in 2016 
after issuers have accumulated sufficient claims data. We request 
comments on this approach.

F. CMS Enforcement in Group and Individual Insurance Market (Various 
Provisions in Parts 144 and 150)

    Part 150 of title 45 of the CFR sets forth our enforcement 
processes for all of the requirements of title XXVII of the PHS Act 
with respect to health insurance issuers and non-federal governmental 
group health plans. The scope of part 150 includes our processes for 
enforcing the requirements of title XXVII of the PHS Act added by the 
Affordable Care Act, given that the statutory enforcement provisions 
that part 150 implements, PHS Act sections 2723 and 2761, apply to all 
of parts A and B of title XXVII.
    This proposed rule would make a number of conforming changes in 
various sections of parts 144 and 150 intended to clarify the 
applicability of enforcement procedures to the PHS Act requirements 
added by the Affordable Care Act. For example, we are proposing to 
replace the term ``HIPAA requirements'' with ``PHS Act requirements'' 
throughout part 150 to make clear that the part 150 processes would be 
used for enforcing not only the requirements emanating from HIPAA, but 
also the Affordable Care Act and other legislation enacted subsequent 
to HIPAA. Similarly, the proposed rule would add, where appropriate, 
references to part 147 (that is, the Affordable Care Act's group and 
individual market requirements) alongside references to parts 146 and 
148 (the group and individual market requirements pre-dating the 
Affordable Care Act).
    While these proposed changes should clarify to stakeholders our 
interpretation concerning part 150, the lack of these revisions in part 
150 currently in no way prejudices our continued use of part 150 in 
connection with enforcing the requirements of part 147 prior to the 
issuance of a final rule.

G. Enrollment in Catastrophic Plans (Proposed Sec.  156.155)

    Section 1302(e) of the Affordable Care Act outlines standards for 
offering catastrophic plans, which we propose to codify in Sec.  
156.155. In paragraph (a)(1), we propose that a plan is a catastrophic 
plan if it meets all applicable requirements for health insurance 
coverage in the individual market (including but not limited to those 
requirements described in 45 CFR parts 147 and 148) and is offered only 
in the individual market. In proposed paragraph (a)(2), we specify that 
a catastrophic plan does not offer coverage at the bronze, silver, 
gold, or platinum coverage levels described in section 1302(d) of the 
Affordable Care Act and in proposed paragraph (a)(3), we clarify that a 
catastrophic plan does not provide coverage of essential health 
benefits until the enrolled individual reaches the annual limitation in 
cost sharing in section 1302(c)(1) of the Affordable Care Act. Proposed 
paragraph (a)(4) codifies the statutory requirement that a catastrophic 
plan must cover at least three primary care visits per year before 
reaching the deductible. We do not propose here to prohibit an issuer 
from imposing cost sharing in connection with these primary care visits 
so long as other applicable law (for example, PHS Act section 2713) 
permits.
    In paragraph (a)(5), we propose codifying the statutory criteria 
identified in section 1302(e)(2) of the Affordable Care Act that lists 
the individuals who are permitted to enroll in a catastrophic plan. In 
paragraph (a)(5)(i), we propose that individuals younger than age 30 
before the beginning of the plan year are eligible to enroll in 
catastrophic plans. If an individual enrolled in a catastrophic plan 
reaches age 30 during a plan year, we propose that the individual can 
remain enrolled in the catastrophic plan for the remainder of the plan 
year. In paragraph (a)(5)(ii), we propose that the second group of 
individuals eligible to enroll in a catastrophic plan are those who 
have been certified as exempt from the individual responsibility 
payment because they cannot afford minimum essential coverage, or they 
are eligible for a hardship exemption.
    In paragraph (b), we propose to codify the exception found in 
section 1302(e)(1)(B)(i) of the Affordable Care Act by proposing that a 
health plan may

[[Page 70602]]

not impose cost-sharing requirements (such as a copayment, coinsurance, 
or deductible) for preventive services identified in PHS Act section 
2713. We note that a catastrophic plan must provide coverage for such 
services without regard to whether the enrollee accessing the service 
has reached the cost-sharing maximum.
    In paragraph (c), we propose that if more than one person is 
covered by a single catastrophic plan, such as a non-self only plan, 
then each individual enrolled must meet at least one of the two 
eligibility criteria in proposed paragraph (a)(5). For example, a 
couple could enroll in a catastrophic family plan if one of them was 
under age 30 and the other had received a certificate of exemption in 
accordance with section 1302(e)(2)(B) of the Affordable Care Act.

H. Rate Increase Disclosure and Review (Part 154)

    To account for the market changes in 2014, many of which are 
detailed in this proposed rule; to fulfill the statutory requirement 
beginning in 2014 that the Secretary, in conjunction with the states, 
monitor premium increases of health insurance coverage offered through 
an Exchange and outside of an Exchange; and in an effort to streamline 
data collection for issuers and states, we propose three changes to the 
existing rate review program under 45 CFR part 154.
    First, we propose to amend Sec.  154.200(a)(2) and (b), so that 
states seeking state-specific thresholds submit proposals to CMS by 
August 1 of each year; that the Secretary publish a notice no later 
than September 1 of each year concerning whether a state-specific 
threshold applies in a state; and that any state-specific threshold be 
effective on January 1 of each year following the Secretary's notice. 
We are proposing these changes in order to align with the timing of 
rate submissions of QHPs in the Exchanges, as well as market-wide 
rating rules created by the Affordable Care Act, which are effective 
January 1, 2014. We welcome comments on these proposed changes in the 
submission date and the effective date of state-specific thresholds.
    Second, we propose to amend Sec.  154.215 to direct health 
insurance issuers to submit data and documentation regarding rate 
increases on a standardized form in a manner determined by the 
Secretary. Beginning in 2014, section 2794(b)(2)(A) of the Affordable 
Care Act directs that the Secretary, in conjunction with states, 
``monitor premium increases of health insurance coverage offered 
through an Exchange and outside of an Exchange.'' The purpose of this 
policy is to identify patterns that could indicate market disruption, 
which could occur given the additional standards that apply to 
qualified health plans, and to oversee the new, market-wide reforms. To 
assist the Secretary in carrying out this new monitoring function, we 
propose modifying the rate review standards by extending the 
requirement that health insurance issuers report information about rate 
increases above the review threshold to all rate increases, as is 
already the policy in the vast majority of states. Under this proposal, 
each issuer would submit the same set of files for all of their 
products in the same market, pursuant to work conducted in partnership 
with the NAIC to ensure consistency between the NAIC's System for 
Electronic Rate and Form Filing (SERFF) and HHS's Health Insurance 
Oversight System (HIOS) and to promote efficiency in data collection 
for states and issuers. The same type of information is currently 
collected by most states today, but in a variety of non-standardized 
formats. States would continue to have the authority to collect 
additional information, above this baseline, to conduct more thorough 
reviews or rate monitoring. The review threshold, described in Sec.  
154.200, would continue to be used to determine which rates must be 
reviewed rather than just reported.
    Under the current rate review program, CMS collects rate filing 
information from issuers proposing increases of 10 percent or greater, 
including in states with Effective Rate Review Programs. This data 
collection allows the Secretary to ensure the public disclosure of 
information on such increases as required by the statute. Collecting 
rate filing information on all rate increases in applicable markets 
would provide CMS, in partnership with states, the necessary data to 
gauge how 2014 market changes are affecting rate changes for consumers 
both inside and outside the Exchange and to fulfill its obligation 
under section 2794(b)(2)(A) of the PHS Act. Additionally, the improved 
data collection would allow states and CMS, where applicable, to adapt 
their rate review processes to include the changes to the individual 
and small group markets that begin in 2014. Primary among these changes 
to the individual and small group market is the single risk pool 
requirement. Beginning with rates effective in 2014, pursuant to 
section 1312(c) of the Affordable Care Act, all rates must be based on 
claims experience calculated from all claims of all products an issuer 
has within a state in either the individual or small group market (or 
both if the state merges the individual and small group markets into a 
combined risk pool). This means that products can no longer be reviewed 
as completely unique, but rather must include experience of the entire 
market (single risk pool). Accordingly, when any product has a rate 
increase, all other products with enrollment or projected enrollment 
would be reported to assure the single risk pool requirement was 
appropriately implemented to promote fair market competition.
    Additionally, collecting rate filing data in a standardized format, 
as proposed, would reduce the burden on issuers because the data would 
be used for purposes beyond rate review, including Exchange functions 
like QHP certification and premium tax credit and cost-sharing 
reduction verification. Rather than requiring multiple data submissions 
to conduct these various reviews, this proposal would provide state and 
federal regulators the information they need in one place. CMS 
incorporated feedback from state regulators facilitated through the 
NAIC and health plans in developing this proposal.
    CMS will propose for comment through the Paperwork Reduction Act of 
1995 (PRA) process a standardized data template form for health 
insurance issuers to use for submitting the data for rate increases. 
The template was developed with input from the NAIC and other 
stakeholders. The goal of a standardized data template is to provide 
state regulators with a baseline of information necessary to conduct 
the review and approval of products sold inside and outside an Exchange 
as new market rules go into effect in 2014. In order to help assure a 
competitive health insurance market, CMS anticipates releasing only 
information collected that is determined to not include trade secrets 
and is approved for release under the Freedom of Information Act.
    This data collection is intended to create greater uniformity for 
effective rate review information, creating efficiencies and also 
providing issuers with a standardized, electronic format for submitting 
this uniform data. Issuers would no longer be required to submit the 
same type of data in different formats to different regulators. We 
request comments through the corresponding PRA comment process on the 
proposed information collection authorized under Sec.  154.215, as 
proposed to be amended, and the additional burden, if any, it would 
impose on health insurance issuers and the states. The improved rate 
review data and

[[Page 70603]]

information collection outlined in the PRA would allow issuers to 
submit a baseline set of rate review data in a standardized form and 
format, which should, on net, reduce the burden of providing similar 
data in multiple formats to each state and the federal government. We 
also welcome comments on the need for and impact of the extension of 
the reporting requirement below the review threshold and whether 
alternative approaches to monitoring and oversight should be considered 
(e.g., auditing).
    Third, we propose to modify the standards for an Effective Rate 
Review Program in response to the market changes in 2014 for rate 
filings subject to review. We propose revisions in Sec.  154.301(a)(3) 
so that a state with an Effective Rate Review Program would review the 
following additional elements as part of its rate review process: (1) 
The reasonableness of assumptions used by the health insurance issuer 
to estimate the rate impact of the federal reinsurance and risk 
adjustment programs; and (2) The health insurance issuer's data related 
to implementation and ongoing utilization of a market-wide single risk 
pool, essential health benefits, actuarial values, and other market 
reforms rules as required by the Affordable Care Act. The 10 percent 
review threshold, as finalized in Sec.  154.200 (76 FR 29964), will 
remain unchanged. Thus, only proposed rate increases of 10 percent or 
more will be subject to a determination of whether they are 
unreasonable, unless the Secretary changes the threshold in a time and 
manner specified in 76 FR 29964, or a state requests (and the Secretary 
approves) a different threshold under Sec.  154.200.
    Additionally, we propose to revise Sec.  154.301(a)(4) by adding 
additional factors that states must take into consideration when 
conducting their examinations. Specifically, we propose that, in 
reviewing the impact of cost-sharing changes, the impact on the 
actuarial value of the health plan must be considered in light of the 
requirement under section 1302(d) of the Affordable Care Act that a 
plan meet one of the metal levels in terms of actuarial value. We also 
propose that, in reviewing benefit changes to a plan, a state must 
consider the impact of the changes on the plan's essential health 
benefits and non-essential health benefits. The impact of the changes 
on pricing, including the rating limitations on age and tobacco use 
under PHS Act section 2701, must also be considered.
    We also propose to add new paragraphs (xii), (xiv), (xv), and (xvi) 
to Sec.  154.301(a)(4), to ensure that states take into account, to the 
extent possible, the following additional factors (which are necessary 
to carry out some of the market reforms going into effect in 2014) when 
conducting an examination of a rate review filing:
     Other standardized ratio tests (in addition to the medical 
loss ratio) recommended or required by statute, regulation, or best 
practices;
     The impacts of geographic factors and variations;
     The impact of changes within a single risk pool to all 
products or plans within the risk pool; and
     The impact of federal reinsurance and risk adjustment 
payments and charges.

The above proposed revisions and additions to Sec.  154.301(a)(4) are 
driven by provisions of the Affordable Care Act that are effective in 
2014. CMS intends to work with states to ensure states continue to have 
Effective Rate Review Programs. Comments are solicited on the impact on 
states created by these proposed changes and whether there are 
additional factors that should be considered in reviewing rate 
increases starting in 2014.
    In Sec.  154.301(b), we propose revisions to ensure that a state 
with an Effective Rate Review Program makes available on its Web site, 
at a minimum, the same information in Parts I, II, and III of each Rate 
Filing Justification that CMS makes available on its Web site. We 
propose that a state may, instead of providing access to the 
information contained in Parts I, II, and III of each Rate Filing 
Justification, provide a link to CMS's Web site where consumers can 
find such information.
    Finally, in Sec.  154.225 and Sec.  154.330, we propose to replace 
the term ``Preliminary Justification'' with the term ``Rate Filing 
Justification,'' to reflect more appropriately the rate filing 
information that would be reported under this proposed rule.

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. This 
proposed rule contains information collection requirements (ICRs) that 
are subject to review by OMB. A description of these provisions is 
given in the following paragraphs with an estimate of the annual 
burden, summarized in Table IV.1. In order to fairly evaluate whether 
an information collection should be approved by OMB, section 
3506(c)(2)(A) of the Paperwork Reduction Act of 1995 requires that we 
solicit comment on the following issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    We are soliciting public comment on each of these issues for the 
following sections of this proposed rule that contain information 
collection requirements (ICRs).

A. ICRs Regarding State Disclosures [Sec.  147.102(a)(1)(iii), Sec.  
147.102(a)(1)(iv), Sec.  147.102(b)(1), Sec.  147.102(c)(2), Sec.  
147.102(c)(3), Sec.  147.102(e), Sec.  156.80 (c)]

    The proposed rule would direct states to submit to CMS information 
on their rating and risk pooling requirements if different than the 
federal standards. In Sec.  147.102(a)(1)(iii), we propose that a state 
inform CMS if it adopts a narrower age rating ratio than 3:1, and in 
Sec.  147.102(a)(1)(iv), we propose that a state inform CMS if it 
adopts a narrower rating ratio for tobacco use than 1.5:1. In Sec.  
147.102(b)(1), we propose that a state submit information to CMS 
regarding its geographic rating areas. In Sec.  147.102(c)(2), we 
propose that a state with pure community rating submit information to 
CMS about its uniform family tiers and corresponding multipliers, if 
any. In Sec.  147.102(c)(3), we propose that a state inform CMS if it 
requires premiums to be based on average enrollee amounts in the small 
group market. In Sec.  147.102(e), we propose that a state submit 
information on its uniform age rating curve to CMS. Finally, in Sec.  
156.80(c), we propose that a state inform CMS if it elects to merge its 
individual and small group market risk pools. Because we do not know 
how many states will choose to determine their own geographical rating 
areas, age rating curves, and family tier structures; adopt narrower 
age or tobacco rating factors; require premiums to be based on average 
enrollee amounts in the small group market; or merge their individual 
and small group market risk pools, we have estimated the burden for one 
state. We seek comments on how many states are likely to submit their 
own rating and risk pooling rules.
    The burden associated with this requirement is the time involved 
for states to provide to CMS information on the rating factors and 
requirements

[[Page 70604]]

applicable to their small group and individual markets. If a state 
adopts narrower rating ratios for age or tobacco use, or chooses to 
merge their individual and small group market risk pools, the state 
will inform CMS. We estimate that it will take 20 minutes for a state 
to prepare and submit a report to CMS for each of these disclosures, 
for a total burden of one hour and a cost of approximately $31 for all 
three reports combined. If a state develops geographical rating areas 
(some states will default to one rating area for the entire state), it 
will provide a report on the rating areas to CMS. We estimate that it 
will take one hour for a state to prepare and submit a report to CMS on 
its geographical rating areas, for a burden of one hour and a cost of 
approximately $31. If a state develops an age rating curve, the state 
will report the state's age rating curve to CMS. We anticipate that 
most states will default to national age curve. For states that 
designate their own curve, we estimate that it will take three hours 
for each state to prepare and submit a report on its age rating curve, 
for a burden of three hours and a cost of $92. If a state is community 
rated and designates a uniform family tier structure, the state will 
report family tier structure information to CMS. We estimate that very 
few states will designate family tier structures and that it will take 
one hour to prepare and submit a report to CMS. The burden for 
reporting family tier structure information is estimated to be one 
hour, and a cost of approximately $31. If a state requires premiums in 
the small group market to be based on average enrollee amounts, it will 
submit that information to CMS. We estimate that it will take one hour 
for a state to prepare and submit the report on small group market 
premiums to CMS, for a burden of one hour and a cost of approximately 
$31. The total burden for all disclosures is seven hours and 
approximately $215 per state, if a state needs to disclose all seven 
rating requirements.

                                            Table IV.1--Annual Reporting, Recordkeeping and Disclosure Burden
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                         Hourly
                                                                             Burden per     Total      labor cost  Total labor     Total
      Regulation section(s)         OMB Control    Number of    Responses     response      annual         of        cost of      capital/    Total cost
                                        No.       respondents                 (hours)       burden     reporting    reporting   maintenance      ($)
                                                                                           (hours)        ($)          ($)       costs  ($)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Age Ratio: Sec.                    N.A..........           1            7            1            7        30.67       214.69            0       214.69
 147.102(a)(1)(iii); Tobacco
 Ratio: 147.102(a)(1)(iv); Rating
 areas: Sec.   147.102(b)(1);
 Family Tier: Sec.
 147.102(c)(2); Small Group
 Market Premium: Sec.
 147.102(c)(3); Age rating curve:
 Sec.   147.102(e); Risk Pool
 Merger: Sec.   156.80(c).
--------------------------------------------------------------------------------------------------------------------------------------------------------

B. ICRs Regarding Rate Increase Disclosure and Review (Sec.  154.215, 
Sec.  154.301)

    This proposed rule would require that health insurance issuers use 
a standardized data form, as specified by the Secretary, to report 
information about a proposed rate increase. In addition, this proposed 
rule would direct states with Effective Rate Review Programs to 
consider additional information (as a baseline) in their rate review 
processes. The existing information collection requirement (OMB Control 
Number 0938-1141) includes a data template that is currently used by 
issuers seeking rate increases to submit data to CMS. CMS is publishing 
an updated data template for public comment, in accordance with the 
Paperwork Reduction Act of 1995 (44 U.S.C. chapter 35).
    To obtain copies of the supporting statement and any related forms 
for the proposed paperwork collections referenced above, access CMS's 
Web Site at http://www.cms.gov/PaperworkReductionActof1995/PRAL/list.asp#TopOfPage or email your request, including your address, phone 
number, OMB number, and CMS document identifier, to 
Paperwork@cms.hhs.gov, or call the Reports Clearance Office at 410-786-
1326.
    If you comment on these information collection requirements, please 
do either of the following:
    1. Submit your comments electronically as specified in the 
ADDRESSES section of this proposed rule; or
    2. Submit your comments to the Office of Information and Regulatory 
Affairs, Office of Management and Budget, Attention: CMS Desk Officer, 
CMS-9972-P. Fax: (202) 395-5806; or Email: OIRA_submission@omb.eop.gov.

V. Regulatory Impact Analysis

    In accordance with the provisions of Executive Order 12866, this 
proposed rule was reviewed by the Office of Management and Budget.

A. Summary

    As stated earlier in this preamble, this proposed rule would 
implement the Affordable Care Act's requirements on health insurance 
coverage related to fair health insurance premiums, guaranteed 
availability, guaranteed renewability, single risk pools, and 
catastrophic plans. These provisions are generally effective for plan 
or policy years beginning on or after January 1, 2014. In addition, 
this proposed rule would amend the standards for health insurance 
issuers and states regarding reporting, utilization, and collection of 
data under the rate review program.
    CMS has crafted this proposed rule to implement the protections 
intended by Congress in the most economically efficient manner 
possible. We have examined the effects of this proposed rule as 
required by Executive Order 13563 (76 FR 3821, January 21, 2011), 
Executive Order 12866 (58 FR 51735, September 1993, Regulatory Planning 
and Review), the Regulatory Flexibility Act (RFA) (September 19, 1980, 
Pub. L. 96-354), 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 the benefits, costs and 
transfers that may stem from this proposed rule.

B. Executive Orders 13563 and 12866

    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

[[Page 70605]]

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 proposed 
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 rules with 
economically significant effects (e.g., $100 million or more in any 1 
year), and a ``significant'' regulatory action is subject to review by 
the OMB. OMB has designated this proposed rule as a ``significant 
regulatory action.'' Even though at this time it is uncertain whether 
it is likely to have economic impacts of $100 million or more in any 
one year, CMS has provided an assessment of the potential costs, 
benefits, and transfers associated with this proposed regulation.
1. Need for Regulatory Action
    Sections 1302(e) and 1312(c) of the Patient Protection and 
Affordable Care Act (Affordable Care Act), and sections 2701, 2702, and 
2703 of the Public Health Service Act (PHS Act), as added and amended 
by the Affordable Care Act, create certain standards related to fair 
health insurance premiums, guaranteed availability, guaranteed 
renewability, risk pools, and catastrophic plans applicable to non-
grandfathered health insurance coverage starting in 2014. These 
proposed regulations would provide the necessary guidance to implement 
these important consumer protections. The current individual and small 
group health insurance markets generally are viewed as dysfunctional, 
placing consumers at a disadvantage due to the high cost of health 
insurance coverage, resulting from factors such as lack of competition, 
adverse selection, and limited transparency. In addition to 
affordability concerns, many people have difficulty finding and 
enrolling in coverage options. If employer-based coverage is not 
available, a person may find that affordable individual market coverage 
is not available due to medical underwriting. The provisions of this 
proposed rule, combined with other provisions in the Affordable Care 
Act, will improve the functioning of both the individual and the small 
group markets and make insurance affordable and accessible to millions 
of Americans who currently do not have affordable options available to 
them. In addition, this proposed rule would amend the existing rate 
review standards under section 2794 of the PHS Act to reflect the new 
market conditions in 2014.
2. Summary of Impacts
    In accordance with OMB Circular A-4, Table V.1 below depicts an 
accounting statement summarizing CMS's assessment of the benefits, 
costs, and transfers associated with this regulatory action. The period 
covered by the regulatory impact analysis (RIA) is 2013-2017.
    CMS anticipates that the provisions of these proposed regulations 
would ensure increased access and improve affordability of health 
insurance coverage in the individual and small group markets. 
Individuals who are currently unable to obtain affordable coverage 
because of their medical history, their health status, gender or age 
will be able to obtain such coverage once the proposed rules are in 
effect along with other provisions of the Affordable Care Act, leading 
to an increase in the number of people with health insurance. Newly 
insured individuals and individuals with expanded coverage will have 
increased access to health care, improving utilization of preventive 
care and health outcomes and protection from the risk of catastrophic 
medical expenditures, leading to financial security. In addition, an 
issuer seeking a rate increase would submit data and documentation 
about the rate increase using a standardized format, which would 
provide CMS the data necessary for monitoring rate increases, enable 
consistent reporting between CMS and the states and eliminate issuer 
burden arising from having to use different formats for submitting the 
data to states and to CMS. In accordance with Executive Order 12866, 
CMS expects that the benefits of this proposed regulatory action would 
justify the costs.

                                           Table V.1--Accounting Table
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Benefits:
----------------------------------------------------------------------------------------------------------------
Qualitative:
    * Increase in enrollment in the individual market leading to improved access to health care for the
     previously uninsured, especially individuals with medical conditions, which will result in improved health
     and protection from the risk of catastrophic medical expenditures.
    * Lower premium rates in the individual market due to the improved risk profile of the insured, competition,
     and pooling.
    * A common marketing standard covering the entire insurance market, reducing adverse selection, improving
     market oversight and competition and reducing search costs for consumers.
    * Decrease in administrative costs for issuers due to elimination of medical underwriting and coverage
     exclusions.
    * Prevent duplication of effort for rate review filings subject to review by setting forth a standardized
     template for both non-QHPs and QHPs.
    * Provide state departments of insurance with more capacity to conduct meaningful rate review and approval
     of products sold inside and outside an Exchange by using a standardized data template.
----------------------------------------------------------------------------------------------------------------
Costs............................  Estimate \62\            Year dollar       Discount rate      Period covered
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($/year)....  $16 million.........               2012                 7%          2013-2017
                                  ------------------------------------------------------------------------------
                                   $16 million.........               2012                 3%          2013-2017
----------------------------------------------------------------------------------------------------------------
Administrative costs related to submission of data by issuers seeking rate increases below the rate review
 threshold
----------------------------------------------------------------------------------------------------------------

[[Page 70606]]

 
Qualitative:
    * Costs incurred by issuers to comply with provisions in the proposed rule..................................
    * Costs incurred by states choosing to establish rating areas and age rating curves.........................
    * Costs related to possible increases in utilization of health care for the newly insured...................
    * Costs incurred by states for disclosure of rate increases, if applicable..................................
----------------------------------------------------------------------------------------------------------------
Transfers:
----------------------------------------------------------------------------------------------------------------
Qualitative:
    * Lower rates for individuals in the individual and small group market who are older and/or in relatively
     poor health, and women; and potentially higher rates for some young men which will be mitigated by
     provisions such as premium tax credits, risk stabilization programs, access to catastrophic plans, and the
     minimum coverage provision..
    * Reduction in uncompensated care for providers who treat the uninsured and increase in payments from
     issuers..
    * Decrease in out-of-pocket expenditures by the newly insured and increase in health care spending by
     issuers, which will be more than offset by an increase in premium revenue..
----------------------------------------------------------------------------------------------------------------

     
---------------------------------------------------------------------------

    \62\ These estimates are exclusive of each other. Therefore, the 
total cost is estimated to be no higher than $16 million.
---------------------------------------------------------------------------

3. Anticipated Benefits, Costs and Transfers
    In developing this proposed 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, costs 
and transfers resulting from this proposed rule. Nonetheless, CMS was 
able to identify several potential qualitative impacts which are 
discussed below.
    There are diverse state laws and industry practices currently in 
place that result in a wide variation in premium rates (henceforth 
referred to as ``rates'') and coverage for individual and group health 
insurance markets. Regarding the individual market, only five states 
have both guaranteed issue for at least some products and modified or 
pure community rating requirements, while in other states, issuers can 
deny health insurance coverage or charge higher premiums to people with 
medical conditions.\63\ Currently, 11 states and the District of 
Columbia have rate bands, which allow issuers to vary rates only within 
a certain range of the average rate, two states bar rating based on 
age, and five states bar rating based on tobacco use in the individual 
market.\64\ In the small group market, 36 states and the District of 
Columbia have rate bands, 12 states have community rating requirements, 
two states do not allow rating based on age and 16 do not allow rating 
based on tobacco use. In many states, women are charged higher premiums 
than men--only 14 states bar gender rating in the individual market 
while 15 states do not allow gender rating in the small group market. 
Of the states that bar gender rating in the individual market, only 
three of those states require maternity coverage in all policies, 
meaning that women in the other states can be charged additional 
premiums for maternity coverage.
---------------------------------------------------------------------------

    \63\ GAO, Private Health Insurance: Estimates of Individuals 
with Preexisting Conditions Range from 36 Million to 122 Million, 
GAO-12-439, March 2012.
    \64\ Kaiser Family Foundation, Focus on Health Reform: Health 
Insurance Market Reforms: Rate Restrictions, June 2012.
---------------------------------------------------------------------------

    Currently, only five states have guaranteed issue in the individual 
market. Studies show that 48 states require guaranteed renewability in 
small group market while all 50 states provide some level of guaranteed 
renewability in the individual market. In addition, HIPAA already 
provides guaranteed renewability of coverage to individuals and 
employers, irrespective of state law. Therefore, this provision is not 
expected to have any significant effect in that regard.
    Starting in 2014, issuers in the individual and small group markets 
will only be allowed to vary rates based on age and tobacco use within 
specified ranges, family size, and geography (the fair health insurance 
premium requirement). Issuers generally will accept every individual 
and employer that applies for health insurance coverage (the guaranteed 
availability requirement), and must also renew or continue health 
insurance coverage at the option of the plan sponsor or individual (the 
guaranteed renewability requirement). In addition, issuers must have 
single risk pools for each of the individual and small group markets, 
or a single merged risk pool, if a state so elects, which will include 
all individuals enrolled in all non-grandfathered plans in the 
applicable market (the single risk pool requirement).
    The provisions of the proposed rule will affect the characteristics 
of enrollees, enrollment and premium rates in the individual and small 
group markets. In addition, there are other provisions of the 
Affordable Care Act that will be effective by 2014, such as 
establishment of the Exchanges, premium tax credits, and the minimum 
coverage provision, that relate to the provisions in this proposed 
rule. These provisions will improve access to and affordability of 
health insurance coverage. Therefore, it is appropriate to take into 
consideration the effect of all these provisions in this analysis, even 
though not all of them are the focus of this proposed rule. It should 
be noted that the impact of these provisions may vary between states, 
because of the differences in current regulatory frameworks.
    We solicit information and data on any industry practices and 
procedures that would be affected by the implementation of these 
provisions and any related costs and savings, including administrative, 
operating, and information technology related costs, and anticipated 
effects on premium rates and financial performance.
    The provisions of this proposed rule would also modify the existing 
Effective Rate Review Program to take into account market rule changes 
in 2014. Specifically, a state must include additional elements in its 
rate review process, like a review of the reasonableness of assumptions 
used by the health insurance issuer to estimate the rate impact of the 
federal reinsurance and risk adjustment programs and review of the 
health insurance issuer's data related to implementation and ongoing 
utilization of a market-wide single risk pool, essential health 
benefits, actuarial values, and other market reforms rules as required 
by the law.
a. Benefits
    In 2011, 48.6 million people in the United States were 
uninsured.\65\ In

[[Page 70607]]

addition, an estimated 29 million adults were underinsured in 2010.\66\ 
Studies have shown that people without health insurance have reduced 
access to health care, higher out-of-pocket costs, higher mortality 
rates and receive less preventive care.\67\ Uninsured and underinsured 
people are also more likely to be unable to pay their medical bills, 
have medical debt, and experience financial difficulties.
---------------------------------------------------------------------------

    \65\ Source: U.S. Census Bureau, Current Population Survey, 2012 
Annual Social and Economic Supplement, Table HI01. Health Insurance 
Coverage Status and Type of Coverage by Selected Characteristics: 
2011.
    \66\ Cathy Schoen Michelle M. Doty, Ruth H. Robertson and Sara 
R. Collins, Affordable Care Act Reforms Could Reduce The Number Of 
Underinsured U.S. Adults by 70 Percent, Health Affairs, 30, no.9 
(2011):1762-1771.
    \67\ The Henry J. Kaiser Family Foundation, The Uninsured: A 
Primer, Key Facts About Americans Without Health Insurance, 
Washington, DC, 2011, citing a number of studies on the effects of 
being uninsured; ASPE, The Value of Health Insurance: Few of the 
Uninsured Have Adequate Resources to Pay Potential Hospital Bills, 
2011 (http://aspe.hhs.gov/health/reports/2011/valueofinsurance/rb.shtml ); Sara R. Collins, Ruth Robertson, Tracy Garber, and 
Michelle M. Doty, The Income Divide in Health Care: How the 
Affordable Care Act Will Help Restore Fairness to the U.S. Health 
System, The Commonwealth Fund, February 2012; J. Doyle, Health 
Insurance, Treatment and Outcomes: Using Auto Accidents as Health 
Shocks, Review of Economics and Statistics, 87(2): 256-270, 2005; S. 
Dorn, Uninsured and Dying Because of It: Updating the Institute of 
Medicine Analysis on the Impact of Uninsurance on Mortality, Urban 
Institute, 2008; Cathy Schoen, Michelle M. Doty, Ruth H. Robertson 
and Sara R. Collins, Affordable Care Act Reforms Could Reduce The 
Number Of Underinsured U.S. Adults by 70 Percent, Health Affairs, 
30, no.9 (2011):1762-1771.
---------------------------------------------------------------------------

    The provisions of this proposed rule and other changes implemented 
by the Affordable Care Act will increase enrollment in the individual 
and small group markets. According to the Congressional Budget Office 
(CBO), there will be approximately 23 million enrollees in Exchange 
coverage by 2016. CBO estimates that, by 2016, the number of uninsured 
will be reduced to up to 30 million.\68\ Access to catastrophic plans 
is likely to further increase the number of insured. Newly insured 
individuals and individuals with expanded coverage will have access to 
better health care and experience a reduction in out-of-pocket costs. 
Ample research demonstrates that access to insurance coverage improves 
utilization of preventive care, improves health outcomes, and creates 
less financial debt, which would lead to better financial security.\69\ 
The State of Massachusetts passed similar health reforms in 2006, and 
now has the lowest uninsured rate in the country. In 2011, only 3.4 
percent of Massachusetts residents were uninsured.\70\ This has 
resulted in increased access to health care, including preventive care 
and fewer individuals with high out-of-pocket spending.\71\
---------------------------------------------------------------------------

    \68\ ``Estimates for the Insurance Coverage Provisions of the 
Affordable Care Act Updated for the Recent Supreme Court Decision,'' 
Congressional Budget Office, July 2012.
    \69\ T. Gross and Notowidigdo, Health Insurance and the Consumer 
Bankruptcy Decision: Evidence from Expansions of Medicaid, Journal 
of Public Economics, 95(7-8):767-778, 2011; J. Doyle, Health 
Insurance, Treatment and Outcomes: Using Auto Accidents as Health 
Shocks, Review of Economics and Statistics, 87(2): 256-270, 2005; 
Amy Finkelstein, et al., The Oregon Health Insurance Experiment: 
Evidence from the First Year, National Bureau of Economic Research 
Working Paper No. 17190, July 2011; Institute of Medicine, Care 
without coverage: too little, too late, National Academies Press, 
2002; J. Ayanian et al., Unmet Health Needs of Uninsured Adults in 
the United States, JAMA 284(16):2061-9, 2000; Andrew P. Wilper, et 
al., Health Insurance and Mortality in U.S. Adults. American Journal 
of Public Health, 99(12) 2289-2295, 2009; S. Dorn, Uninsured and 
Dying Because of It: Updating the Institute of Medicine Analysis on 
the Impact of Uninsurance on Mortality, Urban Institute, 2008; Jack 
Hadley, Insurance Coverage, Medical Care Use, and Short-term Health 
Changes Following an Unintentional Injury or the Onset of a Chronic 
Condition, JAMA. 2007;297(10):1073-1084. doi: 10.1001/
jama.297.10.1073; K. Cook et al., Does major illness cause financial 
catastrophe?, Health Services Research 45, no. 2, 2010.
    \70\ Source: U.S. Census Bureau, Current Population Survey, 2012 
Annual Social and Economic Supplement, Table HI06. Health Insurance 
Coverage Status by State for All People: 2011.
    \71\ Kaiser Family Foundation, Focus on Health Reform: 
Massachusetts Health Care Reform: Six Years Later, June 2012.
---------------------------------------------------------------------------

    Research shows that individuals in relatively poor health 
experience difficulty obtaining health insurance coverage. This results 
in lack of adequate access to health care and higher out-of-pocket 
expenses for these individuals. According to a recent study by GAO, 
between 36 million and 122 million adults age 19 to 64 years old (or 
between 20 and 66 percent of the adult population) have medical 
conditions that could result in issuers denying them coverage or 
charging higher premiums.\72\ Of these, an estimated 88-89 percent live 
in states that do not have insurance protections provided by the fair 
health insurance premium and guaranteed availability provisions of the 
Affordable Care Act. The GAO study estimated that health care 
expenditures for adults with medical conditions are, on average, 
between $1,504 and $4,844 more per year than for other adults. 
Similarly, a study by HHS found that there are between 50 million and 
129 million non-elderly individuals with a medical condition, including 
between 4 and 17 million children under age 18, and up to 25 million of 
these adults and children are uninsured.\73\ A 2007 study by the 
Commonwealth Fund found that 36 percent of adults ages 19 to 64 were 
denied coverage or charged a higher price because of their medical 
conditions.\74\ Another study found that, in 2010, 35 percent of 
nonelderly adults who shopped for health insurance coverage in the 
individual market were denied coverage or received coverage exclusions 
for medical conditions.\75\ The Affordable Care Act's provision on 
guaranteed availability will bar issuers from denying coverage to 
individuals based on their health status or any other factor, and the 
provision on fair insurance premiums will prevent issuers from charging 
a higher premium to individuals based on health status. The proposed 
rule will ensure that individuals who would have been denied coverage 
or charged excessively high premium rates, for reasons such as medical 
conditions or high expected medical costs, will now be able to obtain 
health insurance at an affordable cost. In addition, young adults and 
people for whom coverage would otherwise be unaffordable will have 
access to a catastrophic plan that will have a lower premium, protect 
against high out-of-pocket costs, and cover recommended preventive 
services without cost sharing.
---------------------------------------------------------------------------

    \72\ GAO, Private Health Insurance: Estimates of Individuals 
with Preexisting Conditions Range from 36 Million to 122 Million, 
GAO-12-439, March 2012.
    \73\ ASPE, At Risk: Preexisting Conditions Could Affect 1 in 2 
Americans: 129 Million People Could Be Denied Affordable Coverage 
Without Health Reform, November 2011.
    \74\ Michelle M. Doty et al., Failure to Protect: Why the 
Individual Insurance Market Is Not a Viable Option for Most U.S. 
Families: Findings from the Commonwealth Fund Biennial Health 
Insurance Survey, 2007, The Commonwealth Fund, July 2009.
    \75\ Sara R. Collins, Invited Testimony: Premium Tax Credits 
Under The Affordable Care Act: How They Will Help Millions Of 
Uninsured And Underinsured Americans Gain Affordable, Comprehensive 
Health Insurance, The Commonwealth Fund, October 27, 2011.
---------------------------------------------------------------------------

    The provisions of this proposed rule and other changes implemented 
by the Affordable Care Act will increase enrollment in the individual 
market. An analysis by the Congressional Budget Office (CBO) and the 
staff of the Joint Committee on Taxation (JCT) \76\ estimated that the 
characteristics of enrollees in the individual market will be 
significantly different, especially due to the addition of people who 
would have been uninsured in the absence of the Affordable Care Act. 
CBO and JCT estimated that relatively more new enrollees in the 
individual market would be younger and healthier and likely to use less 
medical care, and the addition of new enrollees would result in average 
premium rates in the market being 7 to 10 percent lower in 2016 all

[[Page 70608]]

else held constant. According to CBO and JCT, the characteristics of 
people in the large and small group markets would change slightly, and 
projected premium rate changes would range from a 1 percent decrease to 
a 2 percent increase.
---------------------------------------------------------------------------

    \76\ Congressional Budget Office, Letter to Honorable Evan Bayh, 
providing an Analysis of Health Insurance Premiums Under the Patient 
Protection and Affordable Care Act, November 30, 2009.
---------------------------------------------------------------------------

    Currently, health insurance issuers may maintain several blocks of 
business, or ``pools,'' for their individual and small group market 
business. Most states place some restrictions on the number of small 
group blocks of business. However, the individual market generally has 
not been subject to similar restrictions. In the past, some issuers 
used separate pools to segment risks, resulting in large rate increases 
for less-healthy enrollees. A single risk pool will tend to lower rates 
in the individual market by including younger, healthier individuals in 
the pool and ensuring that newer and more long-term policyholders are 
pooled together. In the small group market, a single risk pool will 
stabilize rates.
    The guaranteed availability provision may result in some adverse 
selection--individuals with poor health who would have been denied 
coverage before in some states will now be able to obtain health 
insurance. However, according to CBO and JCT,\77\ adverse selection 
will be mitigated principally by the minimum coverage provision and the 
availability of premium tax credits, which will make insurance 
affordable for millions of Americans for whom it is currently 
unaffordable. Other factors such as fixed open enrollment periods will 
also help to mitigate adverse selection. The Affordable Care Act also 
establishes transitional reinsurance and temporary risk corridor 
programs and a permanent risk adjustment program, which will provide 
payments to issuers providing coverage to high-risk individuals, to 
mitigate the potential effects of adverse selection. These programs 
will provide payment stability to issuers and reduce uncertainty in 
insurance risk in the individual market and in the small group market, 
in the case of the permanent risk adjustment program.
---------------------------------------------------------------------------

    \77\ Congressional Budget Office, Letter to Honorable Evan Bayh 
providing An Analysis of Health Insurance Premiums Under the Patient 
Protection and Affordable Care Act, November 30, 2009.
---------------------------------------------------------------------------

    Administrative costs for issuers will be lowered because of the 
elimination of medical underwriting and banning coverage exclusions. 
Costs should decrease for processing new applications for coverage and 
implementing the ban on coverage exclusions in the individual and small 
group markets. This, in turn, could contribute to lower premium rates.
    The proposed rule also would require all health insurance issuers 
marketing group or individual health insurance coverage to comply with 
the same marketing standards as issuers offering QHPs within the 
Exchanges. This minimizes the potential for the adverse selection that 
could result if plans sold through Exchanges were subject to different 
marketing standards from plans sold outside of the Exchanges. A common 
standard covering the entire insurance market would also ensure 
consistency in market oversight, increase competition and reduce search 
costs for consumers.\78\
---------------------------------------------------------------------------

    \78\ R. Cebul et al., Unhealthy Insurance Markets: Search 
Frictions and the Cost and Quality of Health Insurance, American 
Economic Review 101(5): 1842-1847, 2011.
---------------------------------------------------------------------------

    The proposed amendments to the Effective Rate Review Program would 
help issuers to avoid significant duplication of effort for filings 
subject to review by using the same standardized template for both non-
QHPs and QHPs. Issuers would also no longer be required to submit the 
same type of data in different formats to different regulators. 
Additionally, the use of a standardized data template would provide 
state departments of insurance and CMS as applicable with more 
information to conduct the review and approval of products sold inside 
and outside an Exchange, monitor rates to detect patterns that could 
signal market disruption, and oversee the market-wide rules.
b. Costs
    Under the proposed rule, issuers will likely incur some one-time, 
fixed costs in order to comply with the provisions of the final rule, 
including administrative expenditures for systems and software updates 
and changes in marketing. In addition, states may incur costs in order 
to establish geographic rating areas and uniform age rating curves.
    In addition to these administrative costs, insurance coverage can 
lead to increased utilization of health services for individuals who 
become newly insured. While a portion of this increased utilization may 
be economically inefficient, studies that estimated the effects of 
Medicare found that the cost of this inefficiency is likely more than 
offset by the benefit of risk reduction.79 80
---------------------------------------------------------------------------

    \79\ Finkelstein, A, McKnight R: ``What Did Medicare Do? The 
Initial Impact of Medicare on Mortality and Out Of Pocket Medical 
Spending '' Journal of Public Economics 2008, 92:1644-1668.
    \80\ Finkelstein, A., ``The Aggregate Effects of Health 
Insurance: Evidence from the Introduction of Medicare,'' National 
Bureau of Economic Research. Working Paper No. 11619, Sept, 2005.
---------------------------------------------------------------------------

    We solicit data on the timing, nature and magnitude of these 
potential administrative and other costs and savings associated with 
the proposed rules relative to current practices, including merging the 
individual and small group markets into a single risk pool in a state, 
if the state chooses to do so. We also request information on whether 
the changes in rating rules would require issuers to undertake any 
systems and operational changes, and we solicit data on any related 
costs and potential savings as well as potential effects on premiums 
and financial performance. We are also soliciting information on how 
standardizing rating areas could affect rates. In addition, we are 
requesting information on any potential costs incurred by states to 
establish rating areas and uniform age rating curves if they choose to 
do so.
    The proposed rule would also direct states to provide information 
to CMS about their rating and risk pooling practices in several key 
areas, as applicable. They include: age and tobacco rating factors, age 
rating curves, family tier structure, composite rating in the small 
group market, geographical rating areas, and combined individual and 
small group market risk pools. As discussed in the Collection of 
Information Requirements section, we estimate a total burden of 
approximately $215 for a state to submit information in all seven 
areas.
    Health insurance issuers seeking rate increases below the rate 
review threshold would submit data using the standardized data template 
and would incur administrative costs to prepare and submit the data. 
Based on CMS's experience with the 2011 MLR reporting year, there are 
2,010 health insurance issuers (company/state combinations) offering 
coverage in the individual market in all states and 1,050 issuers 
offering coverage in the small group market in all states, while there 
are 2,294 unique issuers offering products in one or both markets. Most 
issuers would already have to provide this information to their 
respective states. We anticipate a total of 7,650 submissions for rate 
review increases annually in both markets. Based on past experience, we 
anticipate that approximately 1,200 of these submissions will be for 
rate increases at or above the threshold and the remaining 6,450 
submissions will be for rate increases below the threshold. We assume 
that each submission will require 11 hours of work by an actuary (at a 
cost of $225 per hour), including

[[Page 70609]]

minimal time required for recordkeeping. Therefore, the increase in 
administrative costs for all issuers seeking rate increases below the 
threshold would be approximately $16 million, with an average of $7,000 
per issuer. It should be noted that there are administrative 
efficiencies gained by helping issuers to avoid significant duplication 
of effort for filings subject to review by using the same standardized 
template for both non-QHPs and QHPs across all states, and because the 
vast majority of states currently require all rate increases to be 
filed; these efficiencies are not quantified in this rule.
    Additionally, all issuers seeking rate increases would need to 
adjust their systems to provide the data required in the standardized 
data template. We seek comments on the extent of these costs and plan 
to incorporate an estimate in the final rule.
    For filings subject to review, states with Effective Rate Review 
Programs would be expected to use the data submissions in their 
reviews; however, it is not expected to increase review costs.
c. Transfers
    As discussed elsewhere in the preamble, most aspects of rating 
methodology today are left to the discretion of health insurance 
issuers, subject to oversight by the states. In most states, issuers 
may vary premium rates based on a number of factors such as age, health 
status, and gender. In 2010, 60 percent of non-elderly adults who 
shopped for insurance coverage in the individual market had difficulty 
finding affordable coverage.\81\ Also, as a result of current gender 
rating, premium rates for women are significantly higher than those for 
men. According to a study by the National Women's Law Center, 92 
percent of best-selling plans currently practice gender rating.\82\ The 
provision of fair premiums will allow issuers to vary rates based on 
only a limited number of factors and within specified ranges. Since 
rating based on gender and health will no longer be allowed, rates for 
some older, less healthy adults and women may decrease. While these 
rules could increase rates for younger, healthier adults and for some 
men, other factors will mitigate the effects of reformed rating 
practices, such as choices of and competition among plans on Exchanges, 
greater pooling of risks through the Exchanges, premium tax credits, 
the risk stabilization programs, access to catastrophic plans, and the 
minimum coverage provision.
---------------------------------------------------------------------------

    \81\ Sara R. Collins, Invited Testimony: Premium Tax Credits 
Under The Affordable Care Act: How They Will Help Millions Of 
Uninsured And Underinsured Americans Gain Affordable, Comprehensive 
Health Insurance, The Commonwealth Fund, October 27, 2011.
    \82\ National Women's Law Center, Turning to Fairness: Insurance 
discrimination against women today and the Affordable Care Act, 
Washington, DC, March 2012.
---------------------------------------------------------------------------

    As people who were previously uninsured obtain coverage, their out-
of-pocket expenses are expected to decrease while the issuers' spending 
will increase, which is expected to be mitigated by an increase in 
premium revenues. Expansion in health insurance coverage will also 
reduce the amount of uncompensated care for providers that treat the 
uninsured. Millions of people without health insurance now use health 
care services for which they do not fully pay, shifting the 
uncompensated cost of their care to health care providers, people who 
do have insurance (in the form of higher premiums), and state and local 
governments.\83\ Providers of uncompensated care try to recover the 
money by increasing the amounts charged to insurance companies, which 
results in higher premiums for individuals with private insurance. The 
cost of uncompensated care for the previously uninsured will be 
transferred from the providers (for example, hospitals and physicians), 
governmental programs and charitable organizations to the individuals 
and issuers of their health insurance coverage. Reduction in the number 
of uninsured would reduce the amount of uncompensated care and could 
lead to a decrease in private health insurance rates.
---------------------------------------------------------------------------

    \83\ Families USA, Hidden Health Tax: Americans Pay a Premium 
(Washington, DC: Families USA, 2009) (http://familiesusa2.org/assets/pdfs/hidden-health-tax.pdf).
---------------------------------------------------------------------------

C. Regulatory Alternatives

    Under Executive Order 12866, CMS is required to consider 
alternatives to issuing rules and alternative regulatory approaches.
    Under the proposed rule, all issuers in a state would use a uniform 
age rating curve. CMS considered the alternative of allowing issuers to 
set their own rating curve. Under the alternative, issuers would have 
more flexibility and might incur lower upfront, fixed costs (for 
example, systems and software updates) to comply with the proposed 
rule. A uniform age rating curve, however, would improve the accuracy 
of risk adjustment, increase consumer transparency when comparing 
prices across plans, and make it simpler to identify the second lowest 
cost silver plan for purposes of obtaining tax credits.
    CMS also considered the alternatives of including a tobacco 
component for the rating curve and keeping the rating factor for 
tobacco use separate from the wellness program rules. These 
alternatives would reduce flexibility for the issuers with respect to 
rating for tobacco use and would provide no alternative to the tobacco 
surcharge, which could discourage disclosure of tobacco use. Under the 
proposed rule, a health insurance issuer in the small group market 
would be able to implement the tobacco use surcharge to employees only 
in connection with a wellness program that effectively allows tobacco 
users to reduce their premiums to the level of non-tobacco users by 
participating in a tobacco cessation program or satisfying another 
reasonable alternative. This proposal is designed to discourage 
underreporting of tobacco use and encourage tobacco users to enter 
cessation programs and improve their health and reduce health care 
costs.
    CMS believes that the provisions of this proposed rule strike the 
best balance of extending protections of the Affordable Care Act to 
consumers while preserving the availability of such coverage and 
minimizing market disruptions to the extent possible.

D. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) requires agencies that issue a 
rule 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''). CMS uses as its measure of significant 
economic impact on a substantial number of small entities a change in 
revenues of more than 3 to 5 percent.
    As discussed in the Web Portal final rule published on May 5, 2010 
(75 FR 24481), CMS 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 it was determined that there were few, if any, 
insurance firms underwriting comprehensive health insurance policies 
(in contrast, for

[[Page 70610]]

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).\84\
---------------------------------------------------------------------------

    \84\ Table of Small Business Size Standards Matched to North 
American Industry Classification System Codes, effective March 26, 
2012, U.S. Small Business Administration, available at www.sba.gov.
---------------------------------------------------------------------------

    In addition, CMS used the data from Medical Loss Ratio annual 
report submissions for the 2011 MLR reporting year to develop an 
estimate of the number of small entities that offer comprehensive major 
medical coverage. 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. It 
is estimated that there are 22 small entities each with less than $7 
million in earned premiums that offer individual or group health 
insurance coverage and would therefore be subject to the requirements 
of this proposed regulation. These small entities account for less than 
five percent of the estimated 466 issuers that would be affected by the 
provisions of this rule. Thirty six percent of these small issuers 
belong to holding groups, and many if not all of these small issuers 
are likely to have other lines of business that would result in their 
revenues exceeding $7 million. For these reasons, CMS expects that this 
proposed rule will not affect small issuers.
    This rule proposes requirements that may affect health insurance 
premiums in the small group market. We expect that many employers that 
purchase health insurance coverage in the small group market would meet 
the SBA standard for small entities. As mentioned earlier in the impact 
analysis, the impact on premiums is likely to be small and may even 
lead to lower rates in the small group market.

E. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act (UMRA) of 1995 
requires that agencies assess anticipated costs and benefits before 
issuing any proposed rule that includes a Federal mandate that could 
result in any 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 2012, that 
threshold level is approximately $139 million.
    UMRA does not address the total cost of a proposed 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.
    This proposed rule would give state governments the option to 
establish rating areas within the state and uniform age rating curves. 
There are no mandates on local or tribal governments. State governments 
may incur administrative cost related to the option of establishing 
rating areas and uniform age rating curves. However, if the state 
government does not act, CMS may establish the rating areas and uniform 
age rating curve in that state. State governments would also incur 
administrative costs related to disclosure of rating and pooling 
requirements to CMS, which are estimated to be $215 per state. The 
private sector (for example, health insurance issuers) will incur 
administrative costs related to the implementation of the provisions in 
this proposed rule. This proposed rule would not impose an unfunded 
mandate on local or tribal governments. However, consistent with policy 
embodied in UMRA, this proposed rule 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.

F. Federalism

    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule that imposes 
substantial direct requirement costs on state and local governments, 
preempts state law, or otherwise has Federalism implications.
    As discussed earlier in the preamble, states are the primary 
regulators of health insurance coverage. States would continue to apply 
state laws regarding health insurance coverage. However, if any state 
law or requirement prevents the application of a Federal standard, then 
that particular state law or requirement would be preempted. If CMS 
determines that a state does not meet the criteria for an Effective 
Rate Review Program, then CMS would review a rate increase subject to 
review to determine whether it is unreasonable. If a state does meet 
the criteria, then CMS would adopt that state's determination of 
whether a rate increase is unreasonable. States would continue to apply 
state law requirements regarding rate and policy filings. State 
requirements that are more stringent than the Federal requirements 
would be not be preempted by this proposed rule. Accordingly, states 
have significant latitude to impose requirements with respect to health 
insurance coverage that are more restrictive than the Federal law.
    In compliance with the requirement of Executive Order 13132 that 
agencies examine closely any policies that may have Federalism 
implications or limit the policymaking discretion of the states, CMS 
has engaged in efforts to consult with and work cooperatively with 
affected states, including consulting with National Association of 
Insurance Commissioners.
    Throughout the process of developing this proposed rule, CMS has 
attempted to balance the states' interests in regulating health 
insurance issuers and Congress's intent to provide uniform protections 
to consumers in every state. By doing so, it is CMS's view that it has 
complied with the requirements of Executive Order 13132. Under the 
requirements set forth in section 8(a) of Executive Order 13132, and by 
the signatures affixed to this rule, HHS certifies that the CMS Center 
for Consumer Information and Insurance Oversight has complied with the 
requirements of Executive Order 13132 for the attached proposed rule in 
a meaningful and timely manner.

G. Congressional Review Act

    This proposed rule is subject to the Congressional Review Act 
provisions of the Small Business Regulatory Enforcement Fairness Act of 
1996 (5 U.S.C. 801 et seq.), which specifies that before a rule can 
take effect, the Federal agency promulgating the rule shall submit to 
each House of the Congress and to the Comptroller General a report 
containing a copy of the rule along with other specified information, 
and has been transmitted to Congress and the Comptroller General for 
review.

List of Subjects

45 CFR Part 144

    Health care, Health insurance, Reporting and recordkeeping 
requirements.

45 CFR Part 147

    Health care, Health insurance, Reporting and recordkeeping 
requirements, and state regulation of health insurance.

45 CFR Part 150

    Administrative practice and procedure, Health care, Health 
insurance, Penalties, Reporting and recordkeeping requirements.

[[Page 70611]]

45 CFR Part 154

    Administrative practice and procedure, Claims, Health care, Health 
insurance, Health plans, Penalties, Reporting and recordkeeping 
requirements.

45 CFR Part 156

    Administrative practice and procedure, Advertising, Advisory 
committees, Brokers, Conflict of interest, Consumer protection, Grant 
programs-health, Grants administration, Health care, Health insurance, 
Health maintenance organization (HMO), Health records, Hospitals, 
Indians, Individuals with disabilities, Loan programs-health, 
Organization and functions (Government agencies), Medicaid, Public 
assistance programs, Reporting and recordkeeping requirements, Safety, 
State and local governments, Sunshine Act, Technical Assistance, Women, 
and Youth.

    For the reasons set forth in the preamble, the Department of Health 
and Human Services proposes to amend 45 CFR parts 144, 147, 150, 154, 
and 156 as set forth below:

PART 144--REQUIREMENTS RELATING TO HEALTH INSURANCE COVERAGE

    1. The authority citation for part 144 continues to read as 
follows:

    Authority:  Secs. 2701 through 2763, 2791, and 2792 of the 
Public Health Service Act (42 U.S.C. 300gg through 300gg-63, 300gg-
91, and 300gg-92).

    2. Section 144.101 is amended by revising paragraphs (d)(1) and 
(d)(2) to read as follows:


Sec.  144.101  Basis and purpose.

* * * * *
    (d) * * *
    (1) States that fail to substantially enforce one or more 
provisions of part 146 concerning group health insurance, one or more 
provisions of part 147 concerning group or individual health insurance, 
or the requirements of part 148 of this subchapter concerning 
individual health insurance.
    (2) Insurance issuers in States described in paragraph (d)(1) of 
this section.
* * * * *
    3. Section 144.102 is revised to read as follows:


Sec.  144.102  Scope and applicability.

    (a) For purposes of 45 CFR parts 144 through 148, all health 
insurance coverage is generally divided into two markets--the group 
market and the individual market. The group market is further divided 
into the large group market and the small group market.
    (b) The protections afforded under 45 CFR parts 144 through 148 to 
individuals and employers (and other sponsors of health insurance 
offered in connection with a group health plan) are determined by 
whether the coverage involved is obtained in the small group market, 
the large group market, or the individual market.
    (c) Coverage that is provided to associations, but not related to 
employment, and sold to individuals is not considered group coverage 
under 45 CFR parts 144 through 148. If the coverage is offered to an 
association member other than in connection with a group health plan, 
or is offered to an association's employer-member that is maintaining a 
group health plan that has fewer than two participants who are current 
employees on the first day of the plan year, the coverage is considered 
individual health insurance coverage for purposes of 45 CFR parts 144 
through 148. The coverage is considered coverage in the individual 
market, regardless of whether it is considered group coverage under 
state law. If the health insurance coverage is offered in connection 
with a group health plan as defined at 45 CFR 144.103, it is considered 
group health insurance coverage for purposes of 45 CFR parts 144 
through 148.
    (d) Provisions relating to CMS enforcement of parts 146, 147, and 
148 are contained in part 150 of this subchapter.

PART 147--HEALTH INSURANCE REFORM REQUIREMENTS FOR THE GROUP AND 
INDIVIDUAL HEALTH INSURANCE MARKETS

    4. The authority citation for part 147 continues to read as 
follows:

    Authority:  Secs. 2701 through 2763, 2791, and 2792 of the 
Public Health Service Act (42 U.S.C. 300gg through 300gg-63, 300gg-
91, and 300gg-92), as amended.

    5. Section 147.102 is added to read as follows:


Sec.  147.102  Fair health insurance premiums.

    (a) In general. With respect to the premium rate charged by a 
health insurance issuer for health insurance coverage offered in the 
individual or small group market--
    (1) The rate may vary with respect to the particular plan or 
coverage involved only by determining the following:
    (i) Whether the plan or coverage covers an individual or family.
    (ii) Rating area, as established in accordance with paragraph (b) 
of this section.
    (iii) Age, except that the rate must not vary by more than 3:1 for 
like individuals of different age who are age 21 and older and that the 
variation in rate must be actuarially justified for individuals under 
age 21, consistent with the uniform age rating curve under paragraph 
(e) of this section. For purposes of identifying the appropriate age 
adjustment under this paragraph and the age band in paragraph (d) of 
this section applicable to a specific enrollee, the enrollee's age as 
of the date of policy issuance or renewal shall be used. Nothing in 
this paragraph prevents a state from requiring the use of a ratio 
narrower than 3:1 in connection with establishing rates for individuals 
who are age 21 and older. A state that uses a narrower ratio shall 
submit to CMS information on its ratio in accordance with the date and 
format specified by CMS.
    (iv) Tobacco use, except that such rate shall not vary by more than 
1.5:1 for like individuals who vary in tobacco usage. (See Sec.  
147.110, related to prohibiting discrimination based on health status 
and programs of health promotion or disease prevention.) Nothing in 
this paragraph prevents a state from requiring the use of a ratio 
narrower than 1.5:1 in connection with establishing rates for 
individuals who vary in tobacco usage. A state that uses a narrower 
ratio shall submit to CMS information on its ratio in accordance with 
the date and format specified by CMS.
    (2) The rate must not vary with respect to the particular plan or 
coverage involved by any other factor not described in paragraph (a)(1) 
of this section.
    (b) Rating area. (1) A state may establish rating areas within that 
state for purposes of applying this section and the requirements of 
title XXVII the Public Health Service Act and title I of the Patient 
Protection and Affordable Care Act. A state that establishes rating 
areas shall submit to CMS information on its rating areas in accordance 
with the date and format specified by CMS.
    (2) If a state's rating areas are not consistent with paragraph 
(b)(3) of this section, or if a state does not establish rating areas, 
the standard under paragraph (b)(3)(i) of this section shall apply 
unless CMS establishes rating areas within the state applying one of 
the standards under paragraph (b)(3)(ii) of this section.
    (3) A state's rating areas will be presumed adequate if one of the 
following requirements are met:
    (i) There is only one rating area within the state.

[[Page 70612]]

    (ii) There are no more than seven rating areas based on the one of 
the following geographic divisions: counties, three-digit zip codes, or 
metropolitan statistical areas/non-metropolitan statistical areas.
    (4) Notwithstanding paragraph (b)(3) of this section, a state may 
propose to CMS for approval other existing geographic divisions on 
which to base rating areas or a number of rating areas greater than 
seven.
    (c) Application of variations based on age or tobacco use. With 
respect to family coverage under health insurance coverage, the rating 
variations permitted under paragraphs (a)(1)(iii) and (a)(1)(iv) of 
this section must be applied based on the portion of the premium 
attributable to each family member covered under the coverage.
    (1) Per-member rating. The total premium for family coverage must 
be determined by summing the premiums for each individual family 
member. In determining the total premium for family members, premiums 
for no more than the three oldest family members who are under age 21 
must be taken into account.
    (2) Family tiers under community rating. If a state does not permit 
any rating variation for factors that otherwise would be permitted 
under paragraphs (a)(1)(iii) and (a)(1)(iv) of this section, the state 
may elect to require that premiums for family coverage be determined by 
using uniform family tiers and the corresponding multipliers 
established by the state. A state that establishes uniform family tiers 
and corresponding multipliers shall submit to CMS information on its 
uniform family tiers and corresponding multipliers in accordance with 
the date and format specified by CMS. If a state does not establish 
uniform family tiers and the corresponding multipliers, the per-member 
rating methodology under paragraph (c)(1) of this section will apply in 
that state.
    (3) Application to small group market. In the case of the small 
group market, the total premium charged to the group shall be 
determined by summing the premiums of covered participants and 
beneficiaries in accordance with paragraph (c)(1) or (c)(2) of this 
section, as applicable. Nothing in this section shall preclude a state 
from requiring issuers to offer, or an issuer from voluntarily 
offering, to a group premiums that are based on average enrollee 
amounts, provided that the total group premium is the same total amount 
derived in accordance with paragraph (c)(1) or (c)(2) of this section, 
as applicable. A state that requires premiums based on average enrollee 
amounts shall submit to CMS information on its election in accordance 
with the date and format specified by CMS.
    (d) Uniform age bands. The following uniform age bands apply for 
rating purposes under paragraph (a)(1)(iii) of this section:
    (1) Child age bands. A single age band for individuals age 0 to 20.
    (2) Adult age bands. One-year age bands starting at age 21 and 
ending at age 63.
    (3) Older adult age bands. A single age band for individuals age 64 
and older.
    (e) Uniform age rating curves. Each state must establish a uniform 
age rating curve for rating purposes under paragraph (a)(1)(iii) of 
this section and submit to CMS information on its uniform age rating 
curve in accordance with the date and format specified by CMS. If a 
state does not establish a uniform age rating curve by a date specified 
by CMS, a default uniform age rating curve established by CMS shall 
apply in that state which takes into account the rating variation 
permitted for age under state law.
    (f) Special rule for large group market. If a state permits health 
insurance issuers that offer coverage in the large group market in the 
state to offer such coverage through an Exchange starting in 2017, the 
provisions of this section applicable to coverage in the small group 
market shall apply to all coverage offered in the large group market in 
the state.
    (g) Applicability date. The provisions of this section apply for 
plan years (in the individual market, for policy years) beginning on or 
after January 1, 2014.
    (h) Grandfathered health plans. This section does not apply to 
grandfathered health plans.
    6. Section 147.104 is added to read as follows:


Sec.  147.104  Guaranteed availability of coverage.

    (a) Guaranteed availability of coverage in the individual and group 
market. Subject to paragraphs (b) through (d) of this section, a health 
insurance issuer that offers health insurance coverage in the 
individual or group market in a state must offer to any individual or 
employer in the state all products that are approved for sale in the 
applicable market, and must accept any individual or employer that 
applies for any of those products.
    (b) Enrollment periods. A health insurance issuer may restrict 
enrollment in health insurance coverage to open or special enrollment 
periods.
    (1) Open enrollment periods--(i) Group market. A health insurance 
issuer in the group market must permit an employer to purchase health 
insurance coverage for a group health plan at any point during the 
year. In the case of health insurance coverage offered in the small 
group market, a health insurance issuer may decline to offer coverage 
to a plan sponsor that is unable to comply with a material plan 
provision relating to employer contribution or group participation 
rules, as defined in Sec.  147.106(b)(3), pursuant to applicable state 
law and, in the case of a QHP offered in the SHOP, as permitted by 
Sec.  156.285(c) of this subchapter. With respect to coverage in the 
small group market, and in the large group market if such coverage is 
offered in a Small Business Health Options Program (SHOP) in a state, 
coverage shall become effective consistent with the dates described in 
Sec.  155.725(h) of this subchapter.
    (ii) Individual market. A health insurance issuer in the individual 
market must permit an individual to purchase health insurance coverage 
during the initial and annual open enrollment periods described in 
Sec.  155.410(b) and (e) of this subchapter, with such coverage 
becoming effective consistent with the dates described in Sec.  
155.410(c) and (f) of this subchapter.
    (2) Special enrollment periods. A health insurance issuer in the 
group market and individual market shall establish special enrollment 
periods for qualifying events as defined under section 603 of the 
Employee Retirement Income Security Act of 1974, as amended. Enrollees 
shall be provided 30 calendar days after the date of the qualifying 
event to elect coverage, with such coverage becoming effective 
consistent with the dates described in Sec.  155.420(b) of this 
subchapter. These special enrollment periods are in addition to any 
other special enrollment periods that are required under federal and 
state law.
    (c) Special rules for network plans. (1) In the case of a health 
insurance issuer that offers health insurance coverage in the group and 
individual market through a network plan, the issuer may do the 
following:
    (i) Limit the employers that may apply for the coverage to those 
with eligible individuals in the group market who live, work, or reside 
in the service area for the network plan, and limit the individuals who 
may apply for the coverage in the individual market to those who live 
or reside in the service area for the network plan.
    (ii) Within the service area of the plan, deny coverage to 
employers and

[[Page 70613]]

individuals if the issuer has demonstrated to the applicable state 
authority (if required by the state authority) the following:
    (A) It will not have the capacity to deliver services adequately to 
enrollees of any additional groups or any additional individuals 
because of its obligations to existing group contract holders and 
enrollees.
    (B) It is applying paragraph (c)(1) of this section uniformly to 
all employers and individuals without regard to the claims experience 
of those individuals, employers and their employees (and their 
dependents) or any health status-related factor relating to such 
individuals, employees, and dependents.
    (2) An issuer that denies health insurance coverage to an 
individual or an employer in any service area, in accordance with 
paragraph (c)(1)(ii) of this section, may not offer coverage in the 
individual or group market, as applicable, within the service area to 
any individual or employer, as applicable, for a period of 180 calendar 
days after the date the coverage is denied. This paragraph (c)(2) does 
not limit the issuer's ability to renew coverage already in force or 
relieve the issuer of the responsibility to renew that coverage.
    (3) Coverage offered within a service area after the 180-day period 
specified in paragraph (c)(2) of this section is subject to the 
requirements of this section.
    (d) Application of financial capacity limits. (1) A health 
insurance issuer may deny health insurance coverage in the group or 
individual market if the issuer has demonstrated to the applicable 
state authority (if required by the state authority) the following:
    (i) It does not have the financial reserves necessary to underwrite 
additional coverage.
    (ii) Is applying this paragraph (d)(1) uniformly to all employers 
or individuals in the group or individual market, as applicable, in the 
state consistent with applicable state law and without regard to the 
claims experience of those individuals, employers and their employees 
(and their dependents) or any health status-related factor relating to 
such individuals, employees, and dependents.
    (2) An issuer that denies group health insurance coverage to any 
employer or individual in a state under paragraph (d)(1) of this 
section may not offer coverage in the group or individual market, as 
applicable, in the state before the later of either of the following 
dates:
    (i) The 181st day after the date the issuer denies coverage.
    (ii) The date the issuer demonstrates to the applicable state 
authority, if required under applicable state law, that the issuer has 
sufficient financial reserves to underwrite additional coverage.
    (3) Paragraph (d)(2) of this section does not limit the issuer's 
ability to renew coverage already in force or relieve the issuer of the 
responsibility to renew that coverage.
    (4) Coverage offered after the 180-day period specified in 
paragraph (d)(2) of this section is subject to the requirements of this 
section.
    (5) An applicable state authority may provide for the application 
of this paragraph (d) on a service-area-specific basis.
    (e) Marketing. A health insurance issuer and its officials, 
employees, agents and representatives must comply with any applicable 
state laws and regulations regarding marketing by health insurance 
issuers and cannot employ marketing practices or benefit designs that 
will have the effect of discouraging the enrollment of individuals with 
significant health needs in health insurance coverage.
    (f) Applicability date. The provisions of this section apply for 
plan years (in the individual market, for policy years) beginning on or 
after January 1, 2014.
    (g) Grandfathered health plans. This section does not apply to 
grandfathered health plans.
    7. Section 147.106 is added to read as follows:


Sec.  147.106  Guaranteed renewability of coverage.

    (a) General rule. Subject to paragraphs (b) through (d) of this 
section, a health insurance issuer offering health insurance coverage 
in the individual or group market is required to renew or continue in 
force the coverage at the option of the plan sponsor or the individual, 
as applicable.
    (b) Exceptions. An issuer may nonrenew or discontinue health 
insurance coverage offered in the group or individual market based only 
on one or more of the following:
    (1) Nonpayment of premiums. The plan sponsor or individual, as 
applicable, has failed to pay premiums or contributions in accordance 
with the terms of the health insurance coverage, including any 
timeliness requirements.
    (2) Fraud. The plan sponsor or individual, as applicable, has 
performed an act or practice that constitutes fraud or made an 
intentional misrepresentation of material fact in connection with the 
coverage.
    (3) Violation of participation or contribution rules. In the case 
of group health insurance coverage, the plan sponsor has failed to 
comply with a material plan provision relating to employer contribution 
or group participation rules, pursuant to applicable state law. For 
purposes of this paragraph (b) the following apply:
    (i) The term ``employer contribution rule'' means a requirement 
relating to the minimum level or amount of employer contribution toward 
the premium for enrollment of participants and beneficiaries.
    (ii) The term ``group participation rule'' means a requirement 
relating to the minimum number of participants or beneficiaries that 
must be enrolled in relation to a specified percentage or number of 
eligible individuals or employees of an employer.
    (4) Termination of plan. The issuer is ceasing to offer coverage in 
the market in accordance with paragraph (c) or (d) of this section and 
applicable state law.
    (5) Enrollees' movement outside service area. For network plans, 
there is no longer any enrollee under the plan who lives, resides, or 
works in the service area of the issuer (or in the area for which the 
issuer is authorized to do business); and in the case of the small 
group market, the issuer applies the same criteria it would apply in 
denying enrollment in the plan under Sec.  147.104(c)(1)(i).
    (6) Association membership ceases. For coverage made available in 
the small or large group market only through one or more bona fide 
associations, if the employer's membership in the bona fide association 
ceases, but only if the coverage is terminated uniformly without regard 
to any health status-related factor relating to any covered individual.
    (c) Discontinuing a particular product. In any case in which an 
issuer decides to discontinue offering a particular product offered in 
the group or individual market, that product may be discontinued by the 
issuer in accordance with applicable state law in the applicable market 
only if the following occurs:
    (1) The issuer provides notice in writing to each plan sponsor or 
individual, as applicable, provided that particular product in that 
market (and to all participants and beneficiaries covered under such 
coverage) of the discontinuation at least 90 calendar days before the 
date the coverage will be discontinued.
    (2) The issuer offers to each plan sponsor or individual, as 
applicable, provided that particular product the option, on a 
guaranteed issue basis, to purchase all (or, in the case of the large 
group market, any) other health

[[Page 70614]]

insurance coverage currently being offered by the issuer to a group 
health plan or individual health insurance coverage in that market.
    (3) In exercising the option to discontinue that product and in 
offering the option of coverage under paragraph (c)(2) of this section, 
the issuer acts uniformly without regard to the claims experience of 
those sponsors or individuals, as applicable, or any health status-
related factor relating to any participants or beneficiaries covered or 
new participants or beneficiaries who may become eligible for such 
coverage.
    (d) Discontinuing all coverage. (1) An issuer may elect to 
discontinue offering all health insurance coverage in the individual or 
group market, or all markets, in a state in accordance with applicable 
state law only if the issuer meets all of the following conditions:
    (i) The issuer provides notice in writing to the applicable state 
authority and to each plan sponsor or individual, as applicable, (and 
all participants and beneficiaries covered under the coverage) of the 
discontinuation at least 180 calendar days prior to the date the 
coverage will be discontinued.
    (ii) All health insurance policies issued or delivered for issuance 
in the state in the applicable market (or markets) are discontinued and 
not renewed.
    (2) An issuer that elects to discontinue offering all health 
insurance coverage in a market (or markets) in a state as described in 
this paragraph (d) may not issue coverage in the applicable market (or 
markets) and state involved during the 5-year period beginning on the 
date of discontinuation of the last coverage not renewed.
    (e) Exception for uniform modification of coverage. Only at the 
time of coverage renewal may issuers modify the health insurance 
coverage for a product offered to a group health plan in the following:
    (1) Large group market.
    (2) Small group market if, for coverage available in this market 
(other than only through one or more bona fide associations), the 
modification is consistent with state law and is effective uniformly 
among group health plans with that product.
    (f) Application to coverage offered only through associations. In 
the case of health insurance coverage that is made available by a 
health insurance issuer in the small or large group market to employers 
only through one or more associations, the reference to ``plan 
sponsor'' is deemed, with respect to coverage provided to an employer 
member of the association, to include a reference to the employer.
    (g) Applicability date. The provisions of this section apply for 
plan years (in the individual market, for policy years) beginning on or 
after January 1, 2014.
    (h) Grandfathered health plans. This section does not apply to 
grandfathered health plans.
    8. Section 147.145 is amended by revising paragraph (b)(1) to read 
as follows:


Sec.  147.145  Student health insurance coverage.

* * * * *
    (b) Exemptions from the Public Health Service Act-- (1) Guaranteed 
availability and guaranteed renewability. (i) For purposes of sections 
2741(e)(1) and 2742(b)(5) of the Public Health Service Act, student 
health insurance coverage is deemed to be available only through a bona 
fide association.
    (ii) For purposes of section 2702(a) of the Public Health Service 
Act, a health insurance issuer that offers student health insurance 
coverage shall not be required to accept persons who are not students 
or dependents of students in such coverage.
    (iii) For purposes of section 2703(a) of the Public Health Service 
Act, a health insurance issuer that offers student health insurance 
coverage shall not be required to renew or continue coverage for 
individuals who are no longer students or dependents of students.
* * * * *

PART 150--CMS ENFORCEMENT IN GROUP AND INDIVIDUAL INSURANCE MARKETS

    9. The authority citation for part 150 continues to read as 
follows:

    Authority:  Secs. 2701 through 2763, 2791, and 2792 of the 
Public Health Service Act (42 U.S.C. 300gg through 300gg-63, 300gg-
91, and 300gg-92), as amended.

    10. Section 150.101 is amended by revising paragraphs (a) and 
(b)(2) to read as follows:


Sec.  150.101  Basis and scope.

    (a) Basis. CMS's enforcement authority under sections 2723 and 2761 
of the PHS Act and its rulemaking authority under section 2792 of the 
PHS Act provide the basis for issuing regulations under this part 150.
    (b) * * *
    (2) Enforcement with respect to health insurance issuers. The 
states have primary enforcement authority with respect to the 
requirements of title XXVII of the PHS Act that apply to health 
insurance issuers offering coverage in the group or individual health 
insurance market. If CMS determines under subpart B of this part that a 
state is not substantially enforcing title XXVII of the PHS Act, 
including the implementing regulations in parts 146, 147, and 148 of 
this subchapter, CMS enforces them under subpart C of this part.
    11. Section 150.103 is amended by--
    a. Removing the definition of ``HIPAA requirements;''
    b. Revising the definition of ``Individual health insurance policy 
or individual policy;'' and
    c. Adding the definition of ``PHS Act requirements'' in 
alphabetical order.
    The revision and addition read as follows:


Sec.  150.103  Definitions.

* * * * *
    Individual health insurance policy or individual policy means the 
legal document or contract issued by the issuer to an individual that 
contains the conditions and terms of the insurance. Any association or 
trust arrangement that is not a group health plan as defined in Sec.  
144.103 of this subchapter or does not provide coverage in connection 
with one or more group health plans is individual coverage subject to 
the requirements of parts 147 and 148 of this subchapter. The term 
``individual health insurance policy'' includes a policy that is -
    (1) Issued to an association that makes coverage available to 
individuals other than in connection with one or more group health 
plans; or
    (2) Administered, or placed in a trust, and is not sold in 
connection with a group health plan subject to the provisions of parts 
146 and 147 of this subchapter.
    PHS Act requirements means the requirements of title XXVII of the 
PHS Act and its implementing regulations in parts 146, 147, and 148 of 
this subchapter.
* * * * *
    12. In 45 CFR part 150, remove the words ``HIPAA requirement'' or 
``HIPAA requirements,'' and add in their place ``PHS Act requirement'' 
or ``PHS Act requirements,'' respectively, wherever they appear in the 
following places.
    a. Section 150.103, in the definition of ``Complaint''.
    b. In the heading of subpart B of part 150.
    c. Section 150.201.
    d. Section 150.203, in the introductory text and paragraphs (a) and 
(b).
    e. Section 150.205(d) and (e)(1).
    f. Section 150.207, in the section heading and text.
    g. Section 150.209.

[[Page 70615]]

    h. Section 150.211, in the introductory text.
    i. Section 150.213(b) and (c).
    j. Section 150.217, in the introductory text.
    k. Section 150.219(a).
    l. Section 150.221(a).
    m. Section 150.301.
    n. Section 150.303(a) introductory text, (a)(3), and (b).
    o. Section 150.305(a)(1), (b)(2), and (c)(2).
    p. Section 150.309.
    q. Section 150.311, in the introductory text and paragraphs (d), 
(f) introductory text, (f)(3), and (g).
    r. Section 150.313(a) and (e)(3)(iv).
    s. Section 150.317(a)(1) and (a)(3).
    t. Section 150.319(b)(1) introductory text, (b)(1)(ii), and 
(b)(1)(iii).
    u. Section 150.343(a).
    v. Section 150.465(c).

PART 154--HEALTH INSURANCE ISSUER RATE INCREASES: DISCLOSURE AND 
REVIEW REQUIREMENTS

    13. The authority citation for part 154 continues to read as 
follows:

    Authority:  Section 2794 of the Public Health Service Act (42 
U.S.C. 300gg-94).

    14. Section 154.200 is amended by revising paragraphs (a)(2) and 
(b) to read as follows:


Sec.  154.200  Rate increases subject to review.

    (a) * * *
    (2) * * * A State-specific threshold shall be based on factors 
impacting rate increases in a State to the extent that the data 
relating to such State-specific factors is available by August 1. 
States interested in proposing a State-specific threshold for approval 
are required to submit a proposal to the Secretary by August 1.
    (b) The Secretary will publish a notice no later than September 1 
of each year, to be effective on January 1 of the following year, 
concerning whether a threshold under paragraph (a)(1) or (a)(2) of this 
section applies to the State; except that, with respect to the 12-month 
period that begins on September 1, 2011, the threshold under paragraph 
(a)(1) of this section applies.
* * * * *
    15. Section 154.215 is revised to read as follows:


Sec.  154.215  Submission of rate filing justification.

    (a) If any product is subject to a rate increase, a health 
insurance issuer must submit a Rate Filing Justification for all 
products on a form and in a manner prescribed by the Secretary.
    (b) The Rate Filing Justification must consist of the following 
Parts:
    (1) Standardized data template (Part I), as described in paragraph 
(d) of this section.
    (2) Written description justifying the rate increase (Part II), as 
described in paragraph (e) of this section.
    (3) Rating filing documentation (Part III), as described in 
paragraph (f) of this section.
    (c) A health insurance issuer must complete and submit Parts I and 
III of the Rate Filing Justification described in paragraphs (b)(1) and 
(b)(3) of this section to CMS and, as long as the applicable State 
accepts such submissions, to the applicable State for any rate 
increase. If a rate increase is subject to review, then the health 
insurance issuer must also complete and submit to CMS and, if 
applicable, the State Part II of the Rate Filing Justification 
described in paragraph (b)(2) of this section.
    (d) Content of standardized data template (Part I): The 
standardized data template must include the following as determined 
appropriate by the Secretary:
    (1) Historical and projected claims experience.
    (2) Trend projections related to utilization, and service or unit 
cost.
    (3) Any claims assumptions related to benefit changes.
    (4) Allocation of the overall rate increase to claims and non-
claims costs.
    (5) Per enrollee per month allocation of current and projected 
premium.
    (6) Three year history of rate increases for the product associated 
with the rate increase.
    (e) Content of written description justifying the rate increase 
(Part II): The written description of the rate increase must include a 
simple and brief narrative describing the data and assumptions that 
were used to develop the rate increase and including the following:
    (1) Explanation of the most significant factors causing the rate 
increase, including a brief description of the relevant claims and non-
claims expense increases reported in the rate increase summary.
    (2) Brief description of the overall experience of the policy, 
including historical and projected expenses, and loss ratios.
    (f) Content of rate filing documentation (Part III): The rate 
filing documentation must include an actuarial memorandum that contains 
the reasoning and assumptions supporting the data contained in Part I 
of the Rate Filing Justification. Parts I and III must be sufficient to 
conduct an examination satisfying the requirements of Sec.  
154.301(a)(3) and (4) and determine whether the rate increase is an 
unreasonable increase. Instructions concerning the requirements for the 
rate filing documentation will be provided in guidance issued by CMS.
    (g) If the level of detail provided by the issuer for the 
information under paragraphs (d) and (f) of this section does not 
provide sufficient basis for CMS to determine whether the rate increase 
is an unreasonable rate increase when CMS reviews a rate increase 
subject to review under Sec.  154.210(a), CMS will request the 
additional information necessary to make its determination. The health 
insurance issuer must provide the requested information to CMS within 
10 business days following its receipt of the request.
    (h) Posting of the disclosure on the CMS Web site:
    (1) CMS promptly will make available to the public on its Web site 
the information contained in Part II of each Rate Filing Justification.
    (2) CMS will make available to the public on its Web site the 
information contained in Parts I and III of each Rate Filing 
Justification that is not a trade secret or confidential commercial or 
financial information as defined in CMS's Freedom of Information Act 
regulations, 45 CFR 5.65.
    (3) CMS will include a disclaimer on its Web site with the 
information made available to the public that explains the purpose and 
role of the Rate Filing Justification.
    (i) CMS will include information on its Web site concerning how the 
public can submit comments on the proposed rate increases that CMS 
reviews.
    16. Section 154.220 is revised to read as follows:


Sec.  154.220  Timing of providing the rate filing justification.

    A health insurance issuer must submit a Rate Filing Justification 
for all rate increases that are filed in a State on or after April 1, 
2013, or effective on or after January 1, 2014 in a State that does not 
require the rate increase to be filed, as follows:
    (a) If a State requires that a proposed rate increase be filed with 
the State prior to the implementation of the rate, the health insurance 
issuer must submit to CMS and the applicable State the Rate Filing 
Justification on the date on which the health insurance issuer submits 
the proposed rate increase to the State.
    (b) For all other States, the health insurance issuer must submit 
to CMS and the State the Rate Filing

[[Page 70616]]

Justification prior to the implementation of the rate increase.


Sec.  154.225  [Amended]

    17a. In Sec.  154.225(a),introductory text, remove the words 
``Preliminary Justification'' and add in their place ``Rate Filing 
Justification.''


Sec.  154.230  [Amended]

    17b. In Sec.  154.230(b) and (c)(1), remove the words ``Preliminary 
Justification'' and add in their place ``Rate Filing Justification.''
    18. Section 154.301 is amended as follows:
    a. Amending paragraph (a)(3)(i) by removing ``; and'' and adding in 
its place a period.
    b. Amending paragraphs (a)(4)(i), (a)(4)(ii), and (a)(4)(vi) 
through (a)(4)(x) by removing the semicolons and replacing them with 
periods.
    c. Amending paragraph (a)(3)(xi) by removing ``: and'' and adding 
in its place a period.
    d. Revising paragraphs (a)(4)(iii) through (a)(4)(v), and (b).
    e. Redesignating paragraph (a)(4)(xii) as paragraph (a)(4)(xiii) 
and adding new paragraphs (a)(3)(iii), (a)(3)(iv), (a)(4)(xii), and 
(a)(4)(xiv) through (a)(4)(xvi).
    The revisions and additions read as follows:


Sec.  154.301  CMS's determinations of effective rate review programs.

    (a) * * *
    (3) * * *
    (iii) The reasonableness of assumptions used by the health 
insurance issuer to estimate the rate impact of the Federal reinsurance 
and risk adjustment programs under sections 1341 and 1343 of the 
Affordable Care Act.
    (iv) The health insurance issuer's data related to implementation 
and ongoing utilization of a market-wide single risk pool, essential 
health benefits, actuarial values and other market reforms rules as 
required by the Affordable Care Act.
    (4) * * *
    (iii) The impact of cost-sharing changes by major service 
categories, including actuarial values.
    (iv) The impact of benefit changes, including essential health 
benefits and non-essential health benefits.
    (v) The impact of changes in enrollee risk profile and pricing, 
including rating limitations for age and tobacco use under section 2701 
of the Public Health Service Act.
* * * * *
    (xii) Other standardized ratio tests recommended or required by 
statute, regulation, or best practices.
* * * * *
    (xiv) The impacts of geographic factors and variations.
    (xv) The impact of changes within a single risk pool to all 
products or plans within the risk pool.
    (xvi) The impact of Federal reinsurance and risk adjustment 
payments and charges under sections 1341 and 1343 of the Affordable 
Care Act.
* * * * *
    (b) Public disclosure and input. In addition to satisfying the 
provisions in paragraph (a) of this section, a State with an Effective 
Rate Review Program must provide, for the rate increases it reviews, 
access from its Web site to at least the information contained in Parts 
I, II, and III of the Rate Filing Justification that CMS makes 
available on its Web site (or provide CMS's Web address for such 
information) and have a mechanism for receiving public comments on 
those proposed rate increases.
* * * * *

PART 156--HEALTH INSURANCE ISSUER STANDARDS UNDER THE AFFORDABLE 
CARE ACT, INCLUDING STANDARDS RELATED TO EXCHANGES

    19. The authority citation for part 156 continues to read as 
follows:

    Authority:  Title I of the Affordable Care Act, sections 1301-
1304, 1311-1312, 1321, 1322, 1324, 1334, 1342-1343, and 1401-1402, 
Pub. L. 111-148, 124 Stat. 119 (42 U.S.C. 18042).

    20. Section 156.80 is added to subpart A to read as follows:


Sec.  156.80  Single risk pool.

    (a) Individual market. A health insurance issuer shall consider the 
claims experience of all enrollees in all health plans (other than 
grandfathered health plans) subject to section 2701 of the Public 
Health Service Act and offered by such issuer in the individual market 
in a state, including those enrollees who do not enroll in such plans 
through the Exchange, to be members of a single risk pool.
    (b) Small group market. A health insurance issuer shall consider 
the claims experience of all enrollees in all health plans (other than 
grandfathered health plans) subject to section 2701 of the Public 
Health Service Act and offered by such issuer in the small group market 
in a state, including those enrollees who do not enroll in such plans 
through the Exchange, to be members of a single risk pool.
    (c) Merger of the individual and small group markets. A state may 
require the individual and small group insurance markets within a state 
to be merged into a single risk pool if the state determines 
appropriate. A state that requires such merger of risk pools shall 
submit to CMS information on its election in accordance with the date 
and format specified by CMS.
    (d) Index rate--(1) In general. Each plan year or policy year, as 
applicable, a health insurance issuer shall establish an index rate for 
a state market based on the total combined claims costs for providing 
essential health benefits within the single risk pool of that state 
market. The index rate shall be adjusted on a market-wide basis based 
on the total expected market-wide payments and charges under the risk 
adjustment and reinsurance programs in the state. The premium rate for 
all of the health insurance issuer's plans in the relevant state market 
must use the applicable index rate, as adjusted for total expected 
market-wide payments and charges under the risk adjustment and 
reinsurance programs, subject only to the adjustments permitted in 
paragraph (d)(2) of this section.
    (2) Permitted plan-level adjustments to the index rate. For plan 
years or policy years beginning on or after January 1, 2014, a health 
insurance issuer may vary premium rates for a particular plan from its 
index rate for a relevant state market based only on the following 
actuarially justified plan-specific factors:
    (i) The actuarial value and cost-sharing design of the plan.
    (ii) The plan's provider network, delivery system characteristics, 
and utilization management practices.
    (iii) The benefits provided under the plan that are in addition to 
the essential health benefits. These additional benefits must be pooled 
with similar benefits within the single risk pool and the claims 
experience from those benefits must be utilized to determine rate 
variations for plans that offer those benefits in addition to essential 
health benefits.
    (iv) With respect to catastrophic plans, the expected impact of the 
specific eligibility categories for those plans.
    (e) Grandfathered health plans in the individual and small group 
market. A state law requiring grandfathered health plans to be included 
in a single risk pool described in paragraph (a) or (b) of this section 
shall not apply.
    (f) Applicability date. The provisions of this section apply for 
plan years (as that term is defined in Sec.  144.103 of this 
subchapter) in the group market, and for policy years (as that term is 
defined in Sec.  144.103 of this subchapter) in the

[[Page 70617]]

individual market, beginning on or after January 1, 2014.
    21. Section 156.155 is added to subpart B to read as follows:


Sec.  156.155  Enrollment in catastrophic plans.

    (a) General rule. A health plan is a catastrophic plan if it meets 
the following conditions:
    (1) Meets all applicable requirements for health insurance coverage 
in the individual market (including but not limited to those 
requirements described in parts 147 and 148 of this subchapter), and is 
offered only in the individual market.
    (2) Does not provide a bronze, silver, gold, or platinum level of 
coverage described in section 1302(d) of the Affordable Care Act.
    (3) Provides coverage of the essential health benefits under 
section 1302(b) of the Affordable Care Act once the annual limitation 
on cost sharing in section 1302(c)(1) of the Affordable Care Act is 
reached.
    (4) Provides coverage for at least three primary care visits per 
year before reaching the deductible.
    (5) Covers only individuals who meet either of the following 
conditions:
    (i) Have not attained the age of 30 prior to the first day of the 
plan year.
    (ii) Have received a certificate of exemption for the reasons 
identified in section 1302(e)(2)(B)(i) or (ii) of the Affordable Care 
Act.
    (b) Coverage of preventive health services. A catastrophic plan may 
not impose any cost-sharing requirements (such as a copayment, 
coinsurance, or deductible) for preventive services, in accordance with 
section 2713 of the Public Health Service Act.
    (c) Application for family coverage. For other than self-only 
coverage, each individual enrolled must meet the requirements of 
paragraph (a)(4) of this section.

    Dated: May 15, 2012.
Marilyn Tavenner,
Acting Administrator, Centers for Medicare & Medicaid Services.
    Approved: August 6, 2012.
Kathleen Sebelius,
Secretary, Department of Health and Human Services.
[FR Doc. 2012-28428 Filed 11-20-12; 11:15 am]
BILLING CODE 4120-01-P