[Federal Register Volume 78, Number 39 (Wednesday, February 27, 2013)]
[Rules and Regulations]
[Pages 13405-13442]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-04335]



[[Page 13405]]

Vol. 78

Wednesday,

No. 39

February 27, 2013

Part II





Department of Health and Human Services





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





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





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

Federal Register / Vol. 78 , No. 39 / Wednesday, February 27, 2013 / 
Rules and Regulations

[[Page 13406]]


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

DEPARTMENT OF HEALTH AND HUMAN SERVICES

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

[CMS-9972-F]
RIN 0938-AR40


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

AGENCY: Department of Health and Human Services.

ACTION: Final rule.

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

SUMMARY: This final rule implements provisions related to fair health 
insurance premiums, guaranteed availability, guaranteed renewability, 
single risk pools, and catastrophic plans, consistent with title I of 
the Patient Protection and Affordable Care Act, as amended by the 
Health Care and Education Reconciliation Act of 2010, referred to 
collectively as the Affordable Care Act. The final rule clarifies 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 final rule also 
amends the standards for health insurance issuers and states regarding 
reporting, utilization, and collection of data under the federal rate 
review program, and revises the timeline for states to propose state-
specific thresholds for review and approval by the Centers for Medicare 
& Medicaid Services (CMS).

DATES: Effective Date. This rule is effective on April 29, 2013, except 
45 CFR 147.103 and the amendments to 45 CFR part 154 are effective on 
March 29, 2013.
    Applicability Dates. The provisions of this final rule generally 
apply to health insurance coverage for plan or policy years beginning 
on or after January 1, 2014. The provisions of 45 CFR 147.103 apply on 
March 29, 2013. The amendments to 45 CFR part 154 apply on April 1, 
2013.

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

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Background
    A. Legislative Overview
    B. Structure of the Final Rule
II. Provisions of the Proposed Rule and Analysis and Responses to 
Comments
    A. Part 144--Requirements Relating to Health Insurance Coverage
    1. Subpart A--General Provisions
    B. Part 147--Health Insurance Reform Requirements for the Group 
and Individual Health Insurance Markets
    1. Fair Health Insurance Premiums
    2. State Reporting
    3. Guaranteed Availability of Coverage
    4. Guaranteed Renewability of Coverage
    C. Part 150--CMS Enforcement in Group and Individual Insurance 
Markets
    D. Part 154--Health Insurance Issuer Rate Increases: Disclosure 
and Review Requirements
    1. Subpart B--Disclosure and Review Provisions
    2. Subpart C--Effective Rate Review Programs
    E. Part 156--Health Insurance Issuer Standards Under the 
Affordable Care Act, Including Standards Related to Exchanges
    1. Subpart A--General Provisions
    2. Subpart B--Standards for Essential Health Benefits, Actuarial 
Value, and Cost Sharing
    F. Applicability to Special Plan Types
III. Modification of Effective Date of Certain Provisions
IV. Provisions of the Final Regulations
V. Collection of Information Requirements
    A. ICRs Regarding State Disclosures
    B. ICRs Regarding Rate Increase Disclosure and Review
VI. Regulatory Impact Analysis
    A. Summary
    B. Executive Orders
    1. Need for Regulatory Action
    2. Summary of Impacts
    3. Anticipated Benefits, Costs, and Transfers
    C. Regulatory Alternatives
    D. Regulatory Flexibility Act
    E. Unfunded Mandates
    F. Federalism
    G. Congressional Review Act

    Executive Summary: Beginning in 2014, health insurance issuers will 
be prohibited from denying coverage to any American because of a pre-
existing condition, and from charging individuals and small employers 
higher premiums based on health status or gender. In addition, health 
insurance issuers will no longer be able to segment enrollees into 
separate rating pools in order to charge high-risk individuals more 
than low-risk individuals. These reforms, combined with other 
provisions in the Affordable Care Act, will improve the functioning of 
both the individual and small group markets and make health insurance 
affordable and accessible to millions of individuals and families who 
currently lack affordable coverage options.
    The Department of Health and Human Services (HHS) published 
proposed standards to implement the 2014 market reform provisions of 
the Affordable Care Act and to amend the federal rate review program in 
a November 26, 2012 Federal Register proposed rule entitled ``Patient 
Protection and Affordable Care Act; Health Insurance Market Rules; Rate 
Review'' (77 FR 70584). These standards apply to health insurance 
issuers offering non-grandfathered health insurance coverage both 
inside and outside of the new competitive marketplaces called 
Affordable Insurance Exchanges, or ``Exchanges.''
    This final rule: (1) Provides that health insurance issuers may 
vary the premium rate for health insurance coverage in the individual 
and small group markets only based on family size, geography, and age 
and tobacco use within limits; (2) directs health insurance issuers to 
offer coverage to and accept every employer or individual who applies 
for coverage in the group and individual market, subject to certain 
exceptions; (3) directs health insurance issuers to renew or continue 
in force coverage in the group and individual market, subject to 
certain exceptions; (4) codifies the requirement that issuers maintain 
a single risk pool for the individual market and a single risk pool for 
the small group market (unless a state decides to merge the markets 
into a single risk pool); and (5) outlines standards for enrollment in 
catastrophic plans for young adults and people who cannot otherwise 
afford health insurance.
    Finally, this rule amends the standards under the rate review 
program in 45 CFR part 154. The amendments revise the timeline for 
states to propose state-specific thresholds for review and approval by 
CMS. The amendments also direct health insurance issuers to submit data 
relating to proposed rate increases in a standardized format specified 
by the Secretary of HHS (the Secretary), and modify criteria and 
factors for states to have an effective rate review program. These 
changes are necessary to reflect the new market reform provisions 
discussed above and 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. The provisions are also designed 
to streamline data collection for issuers, states, Exchanges, and HHS.
    The substantive authority for these final rules is generally 
sections 2701, 2702, 2703, 2723 and 2794 of the Public Health Service 
Act (PHS Act) and sections 1302(e), 1312(c), and 1560(c) of the 
Affordable Care Act. PHS Act section 2792 authorizes rulemaking as 
necessary or appropriate to carry out the provisions of title XXVII of 
the PHS Act, including sections 2701, 2702, 2703, 2723, and 2794. 
Section 1321(a) of the

[[Page 13407]]

Affordable Care Act authorizes rulemaking with respect to sections 
1302(e), 1312(c), and 1560(c).

I. Background

A. Legislative Overview

    The Patient Protection and Affordable Care Act (Pub. L. 111-148) 
was enacted on March 23, 2010. The Health Care and Education 
Reconciliation Act of 2010 (Pub. L. 111-152) was enacted on March 30, 
2010. We refer to the two statutes collectively as the ``Affordable 
Care Act'' in this final rule.
    Subtitles A and C of title I of the Affordable Care Act 
reorganized, amended, and added to the provisions of part A of title 
XXVII of the PHS Act relating to health insurance issuers in the group 
and individual markets and to group health plans that are non-federal 
governmental plans.\1\ As relevant here, these PHS Act provisions 
include section 2701 (fair health insurance premiums), section 2702 
(guaranteed availability of coverage), section 2703 (guaranteed 
renewability of coverage), and section 2794 (ensuring that consumers 
get value for their dollars). In addition, subtitle D of title I of the 
Affordable Care Act includes section 1302(e) (catastrophic plans) and 
section 1312(c) (single risk pool). These provisions will establish a 
federal floor that ensures individuals and employers in all states have 
certain basic protections with respect to the availability and 
affordability of health insurance coverage.
---------------------------------------------------------------------------

    \1\ The Affordable Care Act also added section 715(a)(1) to the 
Employee Retirement Income Security Act of 1974 (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 
reform provisions discussed in this final rule apply only to health 
insurance issuers offering health insurance coverage.
---------------------------------------------------------------------------

    Section 2701(a)(1) of the PHS Act regarding fair health insurance 
premiums provides that the premium rate charged by a health insurance 
issuer for health insurance coverage offered in the individual or small 
group market may vary with respect to a particular plan or coverage 
only based on the following factors: (1) Whether the plan or coverage 
covers an individual or family; (2) rating area; (3) age (within a 
ratio of 3:1 for adults); and (4) tobacco use (within a ratio of 
1.5:1). Section 2701(a)(2) directs each state to establish one or more 
rating areas and charges the Secretary with reviewing the adequacy of 
state-established rating areas. If the Secretary determines that a 
state's rating areas are not adequate, or that a state does not 
establish such areas, the statute authorizes the Secretary to establish 
rating areas for that state. Section 2701(a)(3) directs the Secretary, 
in consultation with the National Association of Insurance 
Commissioners (NAIC), to define permissible age bands for rating 
purposes. Section 2701(a)(4) provides that, for purposes of family 
coverage, any rating variation for age and tobacco use must be applied 
based on the portion of the premium attributable to each family member.
    Section 2702 of the PHS Act directs a health insurance issuer 
offering health insurance coverage in the group or individual market in 
a state to accept every employer and individual in the state that 
applies for the coverage, subject to certain exceptions. These 
exceptions allow issuers to restrict enrollment in coverage: (1) To 
open and special enrollment periods as described in section 2702(b); 
(2) to employers with eligible individuals who live, work, or reside in 
the service area of a network plan as described in section 
2702(c)(1)(A); and (3) in certain situations involving limited network 
capacity and limited financial capacity as described in section 
2702(c)(1)(B) and (d).
    Section 2703 of the PHS Act requires a health insurance issuer to 
renew or continue in force any coverage in the group or individual 
market at the option of the plan sponsor or the individual. Exceptions 
to this requirement described in section 2703(b) allow the issuer to 
nonrenew or discontinue coverage for nonpayment of premiums, fraud, or 
violation of participation or contribution rules under state law. The 
law also permits an issuer to cease to offer either a particular type 
of product or all coverage in a particular market, to refuse to renew 
coverage if all of the plan's enrollees leave the service area of a 
network plan, or if group health plan coverage is provided through a 
bona fide association and the employer's association membership ends. 
Finally, an exception outlined in section 2703(d) permits a health 
insurance issuer, at the time of coverage renewal, to modify the 
coverage offered to a group health plan in the large group market, or 
in the small group market if, for coverage that is available in such 
market other than through one or more bona fide associations, the 
modification is consistent with state law and effective on a uniform 
basis among group health plans with that product.\2\
---------------------------------------------------------------------------

    \2\ Section 2742 of the PHS Act provides a corresponding 
exception for the uniform modification of coverage in the individual 
market.
---------------------------------------------------------------------------

    Section 2701 applies to health insurance issuers offering health 
insurance coverage in the individual and small group markets, and in 
the large group market if a state, beginning in 2017, allows health 
insurance issuers in the large group market to offer qualified health 
plans (QHPs) in such market through an Exchange pursuant to section 
1312(f)(2)(B) of the Affordable Care Act.\3\ Sections 2702 and 2703 
apply to issuers in the individual and group (small and large) markets. 
These provisions apply to health insurance coverage in the respective 
markets regardless of whether the coverage is a QHP offered on 
Exchanges. Section 1255 of the Affordable Care Act provides that 
sections 2701, 2702, and 2703 of the PHS Act are effective for plan 
years (in the individual market, policy years) beginning on or after 
January 1, 2014.\4\ Section 1251(a)(2) of the Affordable Care Act 
provides that these PHS Act sections do not apply to grandfathered 
health insurance coverage.
---------------------------------------------------------------------------

    \3\ 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.
    \4\ See 45 CFR 144.103 for definitions of ``plan year'' and 
``policy year.'' These terms are defined differently from ``plan 
year'' and ``benefit year'' as defined in 45 CFR 155.20 with respect 
to QHPs.
---------------------------------------------------------------------------

    Section 1302 of the Affordable Care Act specifies levels of 
coverage or ``actuarial values'' that health plans in the individual 
and small group markets, both inside and outside of an Exchange, will 
meet as part of the requirement to cover an essential health benefits 
(EHB) package beginning in 2014. These plans will provide a bronze, 
silver, gold, or platinum level of coverage as described in section 
1302(d), or a catastrophic plan in the individual market as described 
in section 1302(e) for young adults and people who cannot otherwise 
afford health insurance.
    Section 1312(c)(1) and (2) of the Affordable Care Act directs a 
health insurance issuer to consider all enrollees in all health plans 
(other than grandfathered health plans) offered by such issuer to be 
members of a single risk pool for a market (the individual market or 
small group market). Section 1312(c)(3) gives states the option to 
merge the individual and small group markets within the state into a 
single risk pool. Section 1312(c) applies to health plans offered both 
inside and outside of an Exchange for plan years (in the individual 
market, policy years) beginning on or after January 1, 2014. It does 
not apply to grandfathered health plans, and explicitly preempts state 
law

[[Page 13408]]

requiring grandfathered health plans to be included in a single risk 
pool.
    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(b)(2) also 
specifies that in 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, by its own terms, apply 
to grandfathered health insurance coverage or to self-funded plans. 
Regulations at 45 CFR 154.101(b) further limit the scope of review to 
small group and individual market coverage.
    Section 1563 of the Affordable Care Act amended the Health 
Insurance Portability and Accountability Act of 1996 (HIPAA) 
enforcement provision that previously governed 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 section 2723 of the PHS Act.
    The preemption provisions of PHS Act section 2724(a)(1) apply so 
that the requirements of part A of title XXVII of the PHS 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 part A of title XXVII of the PHS Act. Section 1321(d) 
of the Affordable Care Act applies the same preemption principle to the 
requirements of title I of the Affordable Care Act.\5\
---------------------------------------------------------------------------

    \5\ In addition, section 1252 of the Affordable Care Act 
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) must 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.
---------------------------------------------------------------------------

B. Structure of the Final Rule

    The regulations outlined in this final rule are codified in 45 CFR 
parts 144, 147, 150, 154, and 156. Part 144 outlines standards 
regarding the basis, scope, and applicability of 45 CFR parts 144 
through 148. Part 147 outlines standards for health insurance issuers 
in the group and individuals markets related to health insurance 
reforms. Part 150 outlines standards regarding enforcement. Part 154 
outlines standards for health insurance issuers in the small group and 
individual markets with respect to rate increase disclosure and review. 
Part 156 outlines standards for issuers of QHPs, including with respect 
to participation in an Exchange.

II. Provisions of the Proposed Rule and Analysis and Responses to 
Comments

    HHS published standards under the statutory provisions discussed in 
section I.A. of the preamble in a November 26, 2012 Federal Register 
proposed rule entitled ``Patient Protection and Affordable Care Act; 
Health Insurance Market Rules; Rate Review'' (77 FR 70584). HHS 
received approximately 500 comment letters in response to the November 
26, 2012 proposed rule. Commenters represented a wide variety of 
stakeholders, including states, tribal organizations, consumers, health 
insurance issuers, health care providers, employers, members of the 
public, and others. Additionally, HHS consulted with the NAIC through 
its Health Care Reform Actuarial (B) Working Group to define 
permissible age bands and consulted with and requested formal, written 
comments from tribal leaders and representatives about the provisions 
of this rule that impact tribes.
    This section summarizes the provisions of the November 26, 2012 
proposed rule and discusses and provides responses to the comments.

A. Part 144--Requirements Relating to Health Insurance Coverage

1. Subpart A--General Provisions (Sec.  144.101 and Sec.  144.102)
    HHS proposed technical changes in Sec.  144.101 and Sec.  144.102 
to clarify enforcement of the health insurance reform requirements 
added by the Affordable Care Act and implemented in 45 CFR part 147. In 
Sec.  144.102(c), HHS also proposed to clarify how to determine whether 
insurance coverage sold through associations is group or individual 
coverage under the PHS Act.
    Comments received regarding HHS's enforcement processes and 
regarding bona fide associations are addressed in other sections of the 
preamble that we deemed to be more relevant to the substance of the 
comments.
    Comment: Several commenters supported the clarifications proposed 
in Part 144. In particular, commenters supported the clarifications 
concerning coverage sold through associations, noting that they would 
ensure such coverage complies with the market reform protections of the 
Affordable Care Act.
    Response: Based on the comments received, we are finalizing the 
proposed provisions in Sec.  144.101 and Sec.  144.102 of the proposed 
rule without modification.
    Comment: A few commenters asked for clarification about how to 
determine whether a group policy should be treated as large group or 
small group coverage for purposes of applying the PHS Act requirements 
when employer group size fluctuates between the definition of large 
employer and small employer.
    Response: We intend to issue future guidance on counting employees 
for determining market size of a group health plan.

B. Part 147--Health Insurance Reform Requirements for the Group and 
Individual Health Insurance Markets

1. Fair Health Insurance Premiums (Sec.  147.102)
    Section 147.102 of this final rule implements section 2701 the PHS 
Act, which specifies that the only rating factors that may be used to 
vary premium rates for health insurance coverage in the individual and 
small group markets are (1) Family size; (2) geographic rating area; 
(3) age (within a ratio of 3:1 for adults); and (4) tobacco use (within 
a ratio of 1.5:1).\6\ \7\
---------------------------------------------------------------------------

    \6\ All non-grandfathered health insurance coverage offered 
through associations and through multiple employer welfare 
arrangements (MEWAs) is subject to the premium 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).
    \7\ The age, tobacco use, and geographic rating factors are 
multiplicative. For example, the maximum variation for age and 
tobacco use is 4.5:1 (3 times 1.5:1). The family rate calculation 
could be additive or multiplicative, depending on whether a per-
member- or family-tier-rating methodology is used, as discussed 
later in this preamble.
---------------------------------------------------------------------------

    Comment: We received several comments requesting flexibility in the 
application of section 2701. For example, some commenters suggested 
that we allow states and issuers to phase in the premium rating rules, 
specifically the 3:1 age rating factor. One commenter recommended 
issuer flexibility to transition to the new per-member-rating 
methodology in states without community rating. Further, some 
commenters noted that small businesses in Massachusetts are permitted 
to form

[[Page 13409]]

group health insurance purchasing cooperatives and receive premium 
discounts based on other factors that, while permitted by state law, 
were not explicitly included in the proposed rule.
    Response: We do not have the legal authority to permit any rating 
factors in the final rule other than those explicitly permitted by 
section 2701 of the PHS Act. Further, we do not have the legal 
authority to provide for a phase-in of certain rating provisions such 
as the 3:1 age factor or the per-member-rating methodology.
a. Family Rating
    In Sec.  147.102(c)(1), we proposed that issuers develop premiums 
for family coverage by adding up the rate of each covered family 
member.\8\ Under this proposal, the rates of no more than the three 
oldest family members under age 21 would be taken into account in 
computing the family premium. There would be no cap on the number of 
family members age 21 and older whose per-member rates would be added 
into the family premium. We solicited comment on the number of family 
members that should be included in this rating cap, as well as the 
appropriate age limit for the cap.
---------------------------------------------------------------------------

    \8\ 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.
---------------------------------------------------------------------------

    We noted that rating based on specified family tiers, and other 
family rating practices that fail to apply the age and tobacco use 
factors proportionately to individual family members, would generally 
be impermissible pursuant to PHS Act section 2701(a)(4), which requires 
that any rating variation for age and tobacco use be apportioned to 
each family member's premium. However, in Sec.  147.102(c)(2), we 
proposed flexibility for community rated states that do not permit 
rating based on age or tobacco use to require issuers to use a standard 
family-tier methodology with corresponding multipliers. We solicited 
comment on whether instead of permitting such flexibility, states with 
pure community rating should also use the per-member approach that 
would be used in states that allow rating for age and tobacco use.
    We noted that health insurance issuers currently have 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. We solicited 
comment on whether to set standards governing the minimum categories of 
family members that issuers must include in setting rates for family 
policies or to defer to states and issuers to make this determination. 
We also solicited comment on the types of individuals who are typically 
included under family coverage, including types of covered individuals 
who would not meet the classification of tax dependents under the Code.
    Comment: Many commenters remarked on the proposed three-person 
rating cap for family members under age 21. Several commenters 
supported the cap, while some commenters expressed concern that it 
would increase rates for individuals and smaller families. Other 
commenters believed the cap would increase rates for larger families 
and requested that no more than two children under age 21 be rated for 
family coverage. Several commenters recommended clarifying that only 
the three oldest ``dependent children'' under age 21 would be taken 
into account in computing the family premium, so that policyholders and 
spousal dependents under age 21 would not be counted toward the three-
person cap. Other commenters suggested raising the age limit for the 
cap to age 26, to better align with the rules regarding extension of 
dependent coverage under section 2714 of the PHS Act.
    Response: The final rule maintains the cap at three persons, but 
clarifies that the cap applies only to the rates of no more than the 
three oldest ``covered children'' under age 21. This will mitigate 
premium increases for larger families accustomed to family tier rating 
structures and allow for more accurate rating of families with spouses 
under the age of 21. We maintain age 21 as the age limit for the cap 
given that the medical risk associated with individuals between age 21 
and 26 is higher than the risk associated with individuals under the 
age of 21. Further, this approach maintains consistency with our 
approach to child and adult rates for purposes of applying the age 
rating factor.
    Comment: Many commenters supported the proposed per-member-rating 
methodology and the flexibility for states with community rating to 
require health insurance issuers to use a standard family-tier 
methodology with corresponding multipliers. Some commenters suggested 
that all states should have the option to use a family-tier structure, 
while other commenters supported applying per-member rating uniformly 
across all states, including those with community rating. A few 
commenters requested clarification of whether there is a limit on the 
number of family-tier categories permitted in community rated states.
    Response: PHS Act section 2701(a)(4) compels per-member rating 
because the age and tobacco use factors must be attributable to 
individuals. Thus, only community rated states, which do not allow 
rating based on age or tobacco use, are able to implement family-tier-
rating structures consistent with PHS Act section 2701(a)(4). Those 
states may require all health insurance issuers in the individual and 
small group markets to use a standard family-tier methodology with 
corresponding multipliers and will have the discretion to set the 
number of tiers in the family-tier structure. If a state has community 
rating but does not adopt a uniform family-tier structure (with 
corresponding multipliers), per-member rating will apply in that state.
    Comment: Numerous commenters recommended that the final rule defer 
to the states (and to issuers if permitted by state law) on the 
categories of family members that must be included on a family policy, 
noting that state law typically provides the basis for defining 
familial status. Other commenters urged that HHS adopt a broad 
definition of family coverage that accounts for all family 
compositions, including opposite sex and same sex domestic partners; 
biological, adoptive, step, foster, and grandchildren (if under the 
care of a grandparent); children under guardianship arrangements; and 
any other child who would be considered a tax dependent under the Code.
    Response: The final rule does not specify the minimum categories of 
family members that must be rated together on a family policy. We 
recognize that state laws differ with respect to marriage, adoption, 
and custody and believe that states are best positioned to make 
decisions regarding family coverage practices. Accordingly, states have 
the flexibility to require issuers to include specific types of 
individuals on a family policy and nothing in these final rules 
precludes this ability. We note that if an individual is not eligible 
for family coverage, he or she will be able to purchase individual 
coverage on a guaranteed availability basis.
b. Small Group Rating
    In Sec.  147.102(c)(3), we proposed that issuers in the small group 
market calculate rates for employee and dependent coverage on a per-
member basis, and calculate the group premium by totaling the premiums 
attributable to each covered individual. States may require issuers to 
base small group

[[Page 13410]]

premiums on an average amount for each employee in the group, provided 
that the total group premium equals the premium that would be derived 
through the per-member-rating approach. Furthermore, employers would 
retain flexibility to decide how to allocate employer contributions to 
health coverage.
    Comments: Many commenters supported applying per-member rating in 
the small group market, especially in the Small Business Health Options 
Program (SHOP) where an ``employee choice'' model would make composite 
rating difficult to administer. However, some commenters recommended 
allowing composite rating in the small group market outside the SHOP, 
and for ``employer choice'' coverage inside the SHOP where permitted, 
to minimize disruption in current issuer rating practices. Other 
comments raised concern that moving to per-member rating may increase 
premiums for older workers.
    Response: The final rule directs that issuers use the per-member-
rating methodology in the small group market. As discussed in the 
November 26, 2012 proposed rule, per-member rating assures compliance 
with the requirement that age and tobacco rating only be apportioned to 
an individual family member's premium, enhances employee choice inside 
the SHOP, and promotes the accuracy of the risk adjustment methodology. 
Nothing in these final rules precludes a state from requiring issuers 
to offer (or a small employer from electing to offer) premiums based on 
average employee amounts where every employee in the group is charged 
the same premium. We note that the age bands, as implemented by the 
per-member-rating methodology, are only generally applicable to health 
insurance coverage in the individual and small group markets and are 
consistent with the Age Discrimination in Employment Act of 1967, 29 
U.S.C. 621.
c. Geographic Rating
    In Sec.  147.102(b), we proposed that each state establish rating 
areas, which would be presumed adequate if they meet one of the 
following options: one rating area for the entire state, or no more 
than seven rating areas based on counties, three-digit zip codes (that 
is, areas in which all zip codes share the same first three digits), or 
metropolitan statistical areas (MSAs) and non-MSA geographic 
divisions.\9\ We proposed that states would also be permitted to use 
other actuarially justified geographic divisions, or a number of rating 
areas greater than seven, with approval from HHS to ensure adequacy. In 
the event that states do not exercise the option to establish rating 
areas (or a state's rating areas were determined to be inadequate), we 
proposed that the default would be a single rating area for the entire 
state or one of the other proposed geographic standards as determined 
by HHS in consultation with the state, local issuers, and other 
interested stakeholders.
---------------------------------------------------------------------------

    \9\ 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.
---------------------------------------------------------------------------

    The November 26, 2012 proposed rule requested comment on various 
aspects concerning the proposed geographic rating area standards, 
namely comments concerning the use of other geographic divisions or 
factors; the maximum number of rating areas within a state that would 
be presumed adequate; whether states with existing rating areas would 
have to make changes to conform to the proposed standards; whether to 
establish minimum geographic size and population requirements; and the 
appropriate schedules and procedures for states to modify their rating 
areas in the future.
    Comment: While some commenters supported the proposed rating area 
standards, many expressed concern that HHS would not extend a 
presumption of adequacy if a state established more than seven rating 
areas. Commenters asserted that the threshold of seven rating areas may 
not be high enough to reflect actuarially justified differences in 
health care costs and utilization patterns, particularly in states with 
large and diverse health care markets, and noted that issuers today use 
more than seven rating areas in some states. These commenters 
recommended that states have flexibility to establish rating areas that 
reflect local market conditions and that minimize disruption. Others 
commenters were concerned about discrimination against rural, 
underserved, or high-cost populations.
    Response: Following review of the comments submitted on this issue, 
we have determined that it is appropriate to modify the standards in 
Sec.  147.102(b) to provide states with additional flexibility to 
establish rating areas under section 2701 of the PHS Act. The revised 
standards recognize that in many cases, states established rating areas 
after an open and transparent dialogue with stakeholders. Further, the 
revised standards are intended to provide sufficient flexibility to 
states to establish rating areas that are responsive to local market 
conditions, while protecting consumers from potentially discriminatory 
rating practices.
    Section 147.102(b)(3) of this final rule provides that a state's 
rating areas must be based on one the following geographic divisions: 
Counties, three-digit zip codes, or MSAs and non-MSAs, and will be 
presumed adequate if they meet either of the following conditions: (1) 
As of January 1, 2013, the state had established by law, rule, 
regulation, bulletin, or other executive action uniform geographic 
rating areas for the entire state; or (2) After January 1, 2013, the 
state establishes by law, rule, regulation, bulletin, or other 
executive action for the entire state no more geographic rating areas 
than the number of MSAs in the state plus one. Under these standards, 
geographic rating areas may be noncontiguous, but the area encompassed 
by a geographic rating area must be separate and distinct from areas 
encompassed by other geographic rating areas. As mentioned, rating 
areas must be based on counties, three-digit zip codes, or MSAs/non-
MSAs. While we proposed the possibility that HHS might approve rating 
areas based on other existing geographic divisions, we have determined 
that these are the only geographic boundaries that would be feasible 
for purposes of implementing the premium tax credit under Code section 
36B. We note that if a state had established geographic rating areas on 
or before January 1, 2013 that did not follow these geographic 
boundaries, the state would have an opportunity to adjust their 
proposed rating areas before the default rating area is applied.
    We recognize that a greater number of rating areas than the number 
of MSAs in the state plus one may in some cases be actuarially 
justified. Therefore, states have the option pursuant to Sec.  
147.102(b)(4) of this final rule to seek approval from HHS of a greater 
number of rating areas as long as the areas are based on counties, 
three-digit zip codes, or MSAs and non-MSAs. We will review such state 
proposals to ensure they are actuarially justified and non-
discriminatory as discussed below.
    Comment: A few commenters requested that HHS specify the criteria 
it will use to assess the adequacy of state rating area proposals.
    Response: As mentioned above, states may seek approval from HHS of 
a number of geographic rating areas that is greater than the number of 
MSAs in the state plus one, provided they are based on counties, three-
digit zip codes,

[[Page 13411]]

or MSAs/non-MSAs. HHS will review the state proposals pursuant to the 
criteria described in Sec.  147.102(b)(5) of this final rule. We will 
determine that a state's rating areas are adequate if they: (1) Are 
actuarially justified; (2) are not unfairly discriminatory; (3) reflect 
significant differences in health care unit costs by rating area; (4) 
lead to stability in rates over time; (5) apply uniformly to all health 
insurance issuers in a market; and (6) are based on one of the 
geographic boundaries described above. We believe these are the 
appropriate criteria to ensure state rating areas are adequate and not 
designed to isolate high-cost populations of the state.
    Comment: One commenter requested clarification as to whether PHS 
Act section 2701 prevents a state from setting limits on the 
permissible variation in a rating area factor.
    Response: Section 2701 of the PHS Act does not limit the amount by 
which rates may vary based on geography. Therefore, states and issuers 
may determine the appropriate variation for the geographic rating area 
factor. We note, however, that a rating area factor should be 
actuarially justified to ensure that individuals and employers are not 
charged excessively high premiums that render meaningless the 
guaranteed availability protections of section 2702 of the PHS Act.
    Comment: A few commenters requested clarification of whether states 
must apply geographic rating areas uniformly across the individual and 
small group markets in a state. Other commenters asked whether rating 
areas may vary by product, noting that provider contracting varies 
geographically between Preferred Provider Organization (PPO) and Health 
Maintenance Organization (HMO) plans, and also between broad and narrow 
networks.
    Response: PHS Act section 2701 does not prevent a state from 
establishing different rating areas for the individual or small group 
markets. However, to preserve the integrity of the single risk pool 
requirement, rating areas must apply uniformly within each market and 
may not vary by product. If a state merges its individual and small 
group markets pursuant to section 1312(c) of the Affordable Care Act, 
rating areas will apply uniformly to both the individual and small 
group markets in the state.
    Comment: Several commenters suggested that HHS should not establish 
minimum geographic size and population standards for rating areas. 
Commenters noted that geographic differences in health care costs are 
based on factors such as price, provider agreements, utilization 
patterns, and access to care and technology--not based on size or 
population. By contrast, a few commenters argued minimum geographic 
size and population requirements were necessary to ensure that rating 
areas are not excessive in small or sparsely populated states.
    Response: This final rule does not establish minimum geographic 
size or population requirements. We believe the geographic standards 
and criteria set forth in this final rule provide the appropriate basis 
for ensuring that state rating areas are actuarially justified and non-
discriminatory.
    Comment: A few commenters argued that states should have the 
flexibility to align rating areas with service areas to prevent issuer 
``cherry-picking'' of service areas. Commenters expressed concern that 
if issuers are able to choose to write business in only the lower cost 
areas within geographic rating areas, there could be reduced 
competition and consumer access issues.
    Response: While the final rule does not require that geographic 
rating areas be aligned with service areas, we recommend that states 
consider aligning both rating and service areas. As we noted in the 
March 27, 2012 Federal Register final rule entitled ``Patient 
Protection and Affordable Care Act; Establishment of Exchange and 
Qualified Health Plans; Exchange Standards for Employers'' (77 FR 
18309), herein referred to as the Exchange final rule, Exchanges have 
flexibility on several elements of the QHP certification process, 
including the contracting model, so that Exchanges can appropriately 
adjust to local market conditions and consumer needs. To the extent 
issuers operate within such uniform service areas or operate statewide, 
this policy would facilitate consumers' ability to compare health 
insurance premiums, promoting competition within the market. 
Furthermore, aligning rating areas with QHP service areas in the 
Exchange may simplify consumer understanding and Exchange 
administration of eligibility determinations for premium tax credits, 
which may be complex if QHP service areas are highly individualized.
    Comment: Many commenters expressed concern that applying a single 
statewide rating area as the default standard would not be appropriate 
in many states. Commenters suggested various alternatives, such as 
defaulting to county, three-digit zip code, or MSA boundaries; 
defaulting to existing state or issuer rating areas; or defaulting to 
the rating areas of the state's EHB base benchmark plan.
    Response: Although the November 26, 2012 proposed rule suggested 
flexibility in applying either a single statewide rating area or 
another geographic standard as the default, in response to comments, we 
are modifying Sec.  147.102(b)(2) to specify that if a state does not 
establish rating areas (or does not provide information to CMS about 
such rating areas in accordance with the state reporting requirements 
discussed in section II.B.2. of the preamble), or a state's rating 
areas are determined to be inadequate, the default will be one rating 
area for each MSA in the state and one rating area for all other non-
MSA portions of the state, as defined by the Office of Management and 
Budget (http://www.census.gov/population/metro/data/def.html). We 
believe MSA/non-MSA designations will sufficiently reflect actuarially 
justified differences in health care unit costs by geography and ensure 
rating areas are established timely, providing certainty to issuers. We 
encourage states to establish rating areas as soon as possible but not 
later than 30 days following publication of this final rule.
    Comment: With respect to the process for updating state-established 
rating areas, several commenters suggested that states have flexibility 
to periodically review and modify their geographic rating areas 
(including default rating areas) as necessary or appropriate. Some 
commenters suggested that rating areas be reviewed on a regular basis, 
such as annually or biannually, while other commenters suggested less 
frequent reviews, subject to the discretion of the states. Several 
commenters noted that insurance products and rates are often developed 
a year or more in advance and emphasized that issuers must be given 
adequate time to incorporate any changes to rating areas into their 
pricing.
    Response: As discussed in section II.B.2. of the preamble, Sec.  
147.103 of this final rule provides for the Secretary to issue guidance 
that will establish a process and timeline for states to update their 
rating areas (including default rating areas). HHS anticipates this 
process will provide sufficient notice to health insurance issuers in 
advance of state rate filing deadlines.
d. Age Rating
    In 147.102(a)(1)(iii), we proposed that the premium rate charged by 
a health insurance issuer for non-grandfathered health insurance 
coverage in the individual or small group market may vary by age, 
except that such rate may not vary by more than 3:1 for adults, as set 
forth by the statute. We proposed to

[[Page 13412]]

define adults as individuals age 21 and older for purposes of this 
provision. For individuals under age 21, we proposed that rates must be 
actuarially justified based on a standard population. Further, we 
proposed that an enrollee's age for rating purposes be determined at 
the time of policy issuance and renewal and requested comment on 
whether other measurement points, such as birthdays, were appropriate.
    After consulting with the NAIC, we proposed the following standard 
age bands for use in all states and markets subject to section 2701 of 
the PHS Act:
     Children: A single age band for children ages 0 through 
20.
     Adults: One-year age bands for adults ages 21 through 63.
     Older adults: A single age band for adults ages 64 and 
older.

We solicited comment on the proposed age bands, including comment on 
whether single or multiple age bands for children were appropriate.
    Finally, we proposed that health insurance issuers in a state and 
market use a uniform age rating curve established by the state, 
specifying the relative distribution of rates across all age bands. We 
proposed an HHS standard default age curve that would apply in both the 
individual and small group markets in states that do not exercise the 
option to establish their own age curve. We requested comment on the 
default age rating curve, including comment on the premium impact of 
the transition from the child age curve to the adult age curve.
    Comment: Many commenters supported applying the maximum 3:1 age 
rating factor to adults defined as individuals age 21 and older. Some 
commenters, however, recommended defining the adult age as beginning at 
age 19 to better align with the definition of ``pediatric services'' in 
the November 26, 2012 Federal Register proposed rule entitled ``Patient 
Protection and Affordable Care Act; Standards Related to Essential 
Health Benefits, Actuarial Value, and Accreditation'' (77 FR 70644), 
herein referred to as the EHB/AV/Accreditation proposed rule. Other 
commenters recommended that adult rating begin at age 26, consistent 
with the rules regarding dependent coverage of children to age 26 under 
section 2714 of the PHS Act.\10\ Several commenters suggested we allow 
issuers to develop rates for individuals age 65 and older outside of 
the 3:1 age rating factor due to the higher health care costs 
associated with this population.
---------------------------------------------------------------------------

    \10\ 45 CFR 147.120.
---------------------------------------------------------------------------

    Response: We are finalizing the proposed requirement that the 
maximum 3:1 ratio for age rating applies to adults age 21 and older. 
PHS Act section 2701(a)(1)(A)(iii) provides that age rating with 
respect to adults must be consistent with section 2707(c) relating to 
child-only plans available to individuals up to age 21. Accordingly, 
the 3:1 age rating factor applies to all individuals age 21 and older, 
including those who may be eligible for Medicare based on age. The 3:1 
age factor ratio does not apply to individuals under age 21.
    Comment: Nearly all commenters expressed support for the proposal 
to establish single-year age bands for adults age 21 through 63. 
However, some commenters suggested that multiple age bands for children 
were necessary to reflect the fact that claims costs for children vary 
by age, particularly children age 0 to 1, who have much higher health 
care costs than older children.
    Response: The final rule maintains a single age band for children 
to keep rates level between ages 0 through 1 and ages 2 through 20. 
This will avoid higher premiums for newborns and provide for easier 
price comparisons between different plans. A single band for children 
also simplifies and promotes efficiency of the risk adjustment 
methodology.
    Comment: Most commenters supported determining an enrollee's age 
for rating purposes once a year at the time of policy issuance or 
renewal. Commenters stated that such annual determination is generally 
consistent with current issuer rating practices, helps enrollees to 
understand and plan for rate increases, and promotes administrative 
efficiency for issuers. In instances where a family member is added to 
a family policy or an employee is added to a group health plan outside 
of policy issuance or renewal, a few commenters requested issuer 
flexibility to apply an age rating factor based on the new enrollee's 
age at the time of enrollment.
    Response: Based on the comments received, we are finalizing the 
provision that for rating purposes an enrollee's age be determined at 
the time of policy issuance or renewal. We clarify that for individuals 
who are added to the plan or coverage other than on the date of policy 
issuance or renewal, the enrollee's age may be determined as of the 
date such individuals are added or enrolled in the coverage.
    Comment: A few commenters requested state flexibility to use 
different age-band structures, such as five-year bands in the small 
group market. One commenter specifically recommended that states 
operating their own risk adjustment programs should have flexibility to 
establish age bands and to determine whether they must be standardized 
across a market. Other commenters urged HHS to apply the same age-band 
structure to both the individual and small group markets to align more 
closely with per-member rating, minimize rate disruption when 
individuals move between the two markets, and facilitate states' 
ability to merge the individual and small group markets into a single 
risk pool if they determine it appropriate.
    Response: The uniform age bands in this final rule apply in all 
states and markets subject to section 2701 of the PHS Act: the 
individual and small group markets in all states, and the large group 
market in states that, beginning in 2017, permit health insurance 
issuers in the large group market to offer QHPs in such market through 
an Exchange. Applying age bands consistently nationwide simplifies 
identification of the second lowest cost silver plan for calculation of 
the premium tax credit under Code section 36B. As indicated below, 
states are welcome to establish their own age rating curve provided the 
curve incorporates the uniform age bands. A state may establish 
separate age curves for the individual and small group markets.
    Comment: With respect to HHS's proposed default standard age curve, 
several commenters recommended smoothing the age curve to avoid a 
significant premium differential between the child age curve at age 20 
and the adult age curve at age 21, while another commenter recommended 
smoothing the age curve for older adults. One commenter suggested that 
issuers should have flexibility to set their own age curves. Another 
commenter supported the default age rating curve as proposed, 
suggesting that it will enhance the transparency, predictability, and 
accuracy of risk adjustment. A few commenters urged that HHS not make 
frequent changes to the default age curve and that issuers be provided 
sufficient time to respond to any updates.
    Response: As we stated in the November 26, 2012 proposed rule, the 
0.635 age rating factor for children age 0 through 20 is supported by 
HHS's analysis of data available through HealthCare.gov and an 
examination of the large group insurance market. Although the shift 
from the child age curve to the adult age curve could result in a 
premium differential that is not reflected in current issuer rating 
practices, we do not believe the differential will result in a 
significant financial burden on consumers, given

[[Page 13413]]

the low premiums for individuals in these age groups, as well as the 
relative premium stability from ages 21 through 30.
    HHS will establish in guidance a default age rating curve that will 
apply in both the individual and small group markets in states that do 
not exercise the option to establish their own age curve (or that do 
not provide information to CMS about their age curve in accordance with 
the state reporting requirements discussed in section II.B.2. of the 
preamble). We intend to adopt in guidance the default age curve as 
proposed in the November 26, 2012 proposed rule for states that allow a 
maximum 3:1 ratio for age rating. For states that adopt narrower ratios 
for age rating, the default age curve established by HHS would take 
into account the permissible rating variation for age under state law. 
We intend to revise the default age curve periodically, but no more 
frequently than annually, to reflect market patterns in the individual 
and small group markets following implementation of the 2014 market 
reforms.
    Comment: One commenter requested clarification of whether issuers 
may establish their own, actuarially justified child age factor based 
on a standard population, rather than using the 0.635 child age factor 
in the HHS default standard age curve.
    Response: Health insurance issuers within a market and state must 
use the uniform age rating curve established by each state or the HHS 
default standard age curve in instances where a state does not 
establish a uniform age curve, specifying the relative distribution of 
rates for all age bands, including the child age band. As discussed in 
the November 26, 2012 proposed rule, the age factor associated with the 
child age band must be actuarially justified based on a standard 
population.
    Comment: A few commenters asked HHS to clarify how age rating 
applies to child-only plans. For example, some commenters requested 
clarification that the child age band and age curve apply only to 
dependent children on family policies, not to children enrolled in 
child-only plans.
    Response: The child age band and child age curve apply to child-
only plans in the same manner that they apply to all other individual 
and small group market coverage. Thus, for example, a 10-year-old child 
would be charged the same rate based on age whether the child was a 
dependent on a family policy or enrolled in a child-only plan.
e. Tobacco Rating
    In Sec.  147.102(a)(1)(iv), we proposed that the premium rate 
charged by a health insurance issuer for non-grandfathered health 
insurance coverage offered in the individual or small group market may 
vary for tobacco use, except that such rate may not vary by more than 
1.5:1, as set forth by the statute. States or issuers would have 
flexibility within these limits to determine the appropriate tobacco 
rating factor for different age groups (for example, younger enrollees 
could be charged a lower tobacco use factor than older enrollees 
provided the tobacco use factor does not exceed 1.5:1 for any age 
group).
    Further, we proposed to coordinate application of the tobacco 
rating rules of PHS Act section 2701 with the nondiscrimination and 
wellness program rules of PHS Act section 2705. Specifically, we 
proposed 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 rating factor permitted under PHS Act 
section 2701 if he or she participates in a wellness program meeting 
the standards of section 2705 of the PHS Act and its implementing 
regulations.\11\ We solicited comment on this proposal and on whether 
and how the same wellness incentives promoting tobacco cessation could 
apply in the individual market.
---------------------------------------------------------------------------

    \11\ The Departments of HHS, Labor, and the Treasury published 
proposed rules under PHS Act section 2705 entitled ``Incentives for 
Nondiscriminatory Wellness Programs in Group Health Plans'' in the 
November 26, 2012 Federal Register (77 FR 70620). The rules proposed 
that the additional increase in the size of the reward for wellness 
programs designed to prevent or reduce 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.
---------------------------------------------------------------------------

    We proposed 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. We noted that a common definition of 
``tobacco use'' does not currently exist among the states, resulting in 
wide variation in how health insurance issuers define and assess 
tobacco use in insurance applications. We solicited comment on how to 
define ``tobacco use'' for purposes of both section 2701 and section 
2705 and suggested several possible approaches, such as reliance on 
self-reporting, a defined amount of tobacco use within a specified 
look-back period, regular tobacco use, or tobacco use of sufficient 
frequency so as to be addicted to nicotine. We also solicited comment 
on use of the single streamlined application under 45 CFR 155.405 to 
collect information on tobacco use.
    Comments: Numerous commenters supported establishing a clear 
definition and standard application questions to determine tobacco use. 
Commenters stated that in defining tobacco use, it would be important 
for HHS to specify the types of tobacco products that would be 
included, establish a minimum frequency of usage, define the 
appropriate look-back period, and clarify permissible assessment 
methods. For example, some commenters recommended a broad definition 
that includes any form of tobacco use in the past 12 months, while 
other commenters suggested considering only the most common types of 
tobacco products used within a 30-day look-back period. Additionally, 
some commenters recommended relying on self-reporting, while other 
commenters sought flexibility for issuers to use additional methods to 
verify accuracy and prevent fraud, such as cotinine testing, 
attestations, health assessments, and physician affidavits. Several 
commenters urged HHS to consult with experts and use planned consumer 
testing of the single streamlined application to develop precise and 
narrow language and questions about tobacco use. A few commenters 
representing tribal organizations suggested that a uniform definition 
of tobacco use include an express exemption for religious and 
ceremonial uses. One commenter suggested that states have flexibility 
to determine what constitutes tobacco use.
    Response: The National Health Interview Survey, administered by the 
Centers for Disease Control and Prevention, asks survey respondents if 
they use tobacco products ``every day, some days, or not at all?'' \12\ 
In this final rule, we establish a definition of ``tobacco use'' that 
is based on the National Health Interview Survey, while setting forth 
the meaning of ``some days'' to ensure clarity for issuers and 
consumers. Specifically, for purposes of this final rule, we define 
``tobacco use'' as use of tobacco on average of four or more times per 
week within no longer than the past six months. Further,

[[Page 13414]]

tobacco use must be defined in terms of when a tobacco product was last 
used. Tobacco includes all tobacco products. However, religious or 
ceremonial uses of tobacco (for example, by American Indians and Alaska 
Natives) are specifically exempt under this final rule. This approach 
establishes a minimum standard to assure consistency in the individual 
and small group health insurance markets and simplifies administration 
of the tobacco rating factor. For example, an individual could be asked 
the following two questions about tobacco use: (1) Within the past six 
months, have you used tobacco regularly (four or more times per week on 
average excluding religious or ceremonial uses)? (2) If yes, when was 
the last time you used tobacco regularly? Issuers will have flexibility 
within the federal definition and as permitted by applicable state law 
to shorten the applicable period of time from the last regular use of 
tobacco. Because ``four or more'' as well as ``six months'' are federal 
thresholds, states have the ability to define both the frequency of use 
per week and the look-back period in ways that are more consumer 
protective (that is, a frequency of more than four times per week and a 
look-back period of less than six months). This definition is 
transitional. We intend to consult with experts, use experience with 
the above definition, and study the interaction effects with the 
permanent risk adjustment program to develop a more evidenced-based 
definition of tobacco use through future rulemaking or guidance. We 
also intend to conduct consumer testing of language and questions about 
tobacco use.
---------------------------------------------------------------------------

    \12\ Centers for Disease Control and Prevention, Cigarette 
Smoking Among Adults--United States, 1992, and Changes in the 
Definition of Current Cigarette Smoking, MMWR Weekly 43(19); 342-
346, May 20, 1994.
---------------------------------------------------------------------------

    Comment: Several commenters requested additional consequences for 
individuals who fail to disclose tobacco use during the application 
process, such as allowing issuers to collect additional premiums or 
other penalties, to rescind the policy in the case of intentional 
misrepresentation or fraud, and to determine the individual to be 
ineligible for certain enrollment periods. In addition, commenters 
suggested there should be clear and prominent warnings to applicants 
about the consequences of failing to answer questions about tobacco use 
truthfully.
    Response: If an enrollee is found to have reported false or 
incorrect information about their tobacco use, the issuer may 
retroactively apply the appropriate tobacco use rating factor to the 
enrollee's premium as if the correct information had been accurately 
reported from the beginning of the plan year. However, an issuer must 
not rescind the coverage on this basis. Tobacco use is not a material 
fact for which an issuer may rescind coverage if there is a 
misrepresentation because these regulations already provide the remedy 
of recouping the tobacco premium surcharge that should have been paid 
since the beginning of the plan or policy year. Accordingly, it is the 
view of the Department of HHS, Labor, and the Treasury (which share 
interpretative jurisdiction over section 2712 of the PHS Act) that this 
remedy of recoupment renders any misrepresentation with regard to 
tobacco use no longer a ``material'' fact for purposes of rescission 
under PHS Act section 2712 and its implementing regulations.\13\ 
Additionally, under guaranteed availability of coverage rules, an 
issuer may not deny an enrollee or their covered dependents an 
enrollment period described in this final rule because an enrollee 
provided false or incorrect information about their tobacco use.
---------------------------------------------------------------------------

    \13\ 26 CFR 54.9815-2712T, 29 CFR 2590.715-2712, and 45 CFR 
147.128.
---------------------------------------------------------------------------

    Comments: Several commenters remarked on the proposed rules 
concerning tobacco rating and wellness programs in the small group 
market. Some commenters objected to the rules, arguing that 
participation in a tobacco cessation program does not necessarily 
result in an actual reduction in the specific financial risk associated 
with tobacco use, and that issuers need to be able to rate for the 
higher expected claims costs of tobacco users. Several other commenters 
supported the proposed link between tobacco rating and wellness 
programs, noting that tobacco cessation programs are more effective in 
addressing tobacco use than a premium surcharge, and suggesting that 
the rules should be expanded to include participation in a broader 
array of tobacco cessation programs offered outside of one's workplace, 
including in the individual market.
    Response: We finalize our proposal that a health insurance issuer 
in the small group market may impose the tobacco rating factor under 
section 2701 only in connection with a wellness program meeting the 
requirements under section 2705, allowing a tobacco user the 
opportunity to avoid paying the full amount of the tobacco rating 
factor by participating in a wellness program meeting the standards of 
section 2705(j) and its implementing regulations. We note that wellness 
rules already apply in the group market. Additionally, the use of 
tobacco cessation programs may help alleviate underreporting of tobacco 
use. Pursuant to section 2701(a)(5) of the PHS Act, these rules will 
apply to coverage offered in the large group market in a state that, 
beginning in 2017, allows health insurance issuers to offer QHPs in 
such market through an Exchange.
    Comment: Some commenters supported the proposal allowing issuers to 
vary tobacco rating by age. Other commenters suggested that tobacco 
rating should apply only with respect to individuals age 18 and older, 
the age at which people can begin to legally use tobacco products in 
most states. Other commenters expressed concern that tobacco rating 
would disproportionally impact low-income populations and recommended 
that HHS prohibit tobacco rating altogether.
    Response: PHS Act section 2701 permits rating for tobacco use 
within a ratio of 1.5:1. While we do not have authority to prohibit the 
imposition of the 1.5:1 tobacco rating factor, we agree that tobacco 
rating should be limited to legal use of tobacco products under federal 
and state law, which generally is limited to those 18 years and older. 
We clarify our interpretation in the final rule. Consistent with these 
rules and subject to applicable state law, issuers will have the 
flexibility to vary tobacco rating by age, provided the tobacco use 
factor does not exceed 1.5:1 for any age band.
    Comment: Several commenters sought clarification that states may 
require a narrower ratio than 1.5:1 for tobacco use or prohibit tobacco 
rating altogether.
    Response: Pursuant to section 2724(a)(1) of the PHS Act, a state 
law with respect to health insurance issuers is not preempted unless it 
prevents the application of a federal requirement. Section 2701 
provides that the premium rate charged by a health insurance issuer in 
the individual or small group market cannot vary for tobacco use by 
more than 1.5:1. Therefore, 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 law would not prevent the 
application of section 2701. Because states may generally impose 
requirements on health insurance issuers that are more consumer 
protective than those imposed by federal law, the language in proposed 
Sec.  147.102(a)(1)(iv) providing that states may use narrower tobacco 
rating factors is unnecessary, and we remove it from the final rule. 
(We make parallel revisions in proposed Sec.  147.102(a)(1)(iii) with 
respect to state laws that use narrower age rating factors).
2. State Reporting (Sec.  147.103)
    In various provisions throughout proposed Sec.  147.102, we 
proposed that

[[Page 13415]]

no later than 30 days after publication of the final rule, states 
submit certain rating information to CMS generally to support the 
accuracy of the risk adjustment methodology. This included information 
about the following, as applicable:
     The use of a narrower age rating ratio than 3:1 for adults 
age 21 and older.
     The use of a narrower tobacco rating ratio than 1.5:1 for 
individuals who use tobacco.
     State-established rating areas.
     State-established age rating curves.
     In states with community rating, the use of uniform family 
tiers and corresponding multipliers.
     A requirement that premiums be based on average enrollee 
amounts in the small group market.
    In addition, in Sec.  156.80(c), we proposed that a state inform 
CMS of its decision to merge the individual and small group markets in 
a state into a single risk pool.
    We received no comments about the proposed reporting process. 
Accordingly, we are finalizing the state reporting process as proposed. 
However, for organization and clarity, we are consolidating these 
reporting requirements in a new Sec.  147.103 of this final rule. 
Section 147.103(a) provides that for the 2014 plan or policy year, 
states will submit information no later than 30 days following 
publication of the final rule, in a form and manner specified by the 
Secretary. Section 147.103(b) provides for the Secretary to issue 
future guidance that would establish a process and timeline for states 
to submit information for plan or policy years after 2014 (or for 
updating a state standard that applies in 2014). As described in Sec.  
156.80(c), states will follow the same process with respect to a state 
decision to merge the individual and small group markets in a state 
into a single risk pool.
3. Guaranteed Availability of Coverage (Sec.  147.104)
    In Sec.  147.104, we proposed that a health insurance issuer 
offering health insurance coverage in the individual or group market in 
a state must offer to any individual or employer in the state all of 
the issuer's products that are approved for sale in the applicable 
market, and accept any individual or employer that applies for those 
products.\14\ Consistent with other consumer protection rules under the 
Affordable Care Act, we proposed that this requirement include non-
grandfathered closed blocks of business and solicited comment on our 
proposal.
---------------------------------------------------------------------------

    \14\ 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)).
---------------------------------------------------------------------------

    We also proposed that issuers establish enrollment periods during 
which they would allow individuals and employers to purchase health 
insurance coverage. We proposed to align the initial and annual open 
enrollment periods outside the Exchanges with those inside the 
Exchanges. Specifically, we proposed a continuous open enrollment 
period in the group market and a fixed open enrollment period in the 
individual market based on a calendar policy year, consistent with the 
Exchange and SHOP standards outlined in 45 CFR 155.410 and 155.725. 
Effective dates of coverage would also follow those in the Exchange and 
SHOP. We solicited comment on how to address the open enrollment needs 
of individual market enrollees whose coverage renews on a non-calendar 
year basis.
    We proposed that issuers in the individual and group markets 
establish special enrollment periods for individuals and plan 
participants and beneficiaries to enroll in coverage outside of the 
annual open enrollment period as a result of qualifying events 
triggering eligibility for COBRA continuation coverage under section 
603 of ERISA.\15\ These special enrollment periods are in addition to 
those in section 2704(f) of the PHS Act and other federal law.
---------------------------------------------------------------------------

    \15\ 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.
---------------------------------------------------------------------------

    We proposed that a participant, beneficiary, or enrollee would have 
30 calendar days from the date of a qualifying event (generally 
consistent with the HIPAA standard) to request special enrollment, but 
invited comment on whether to establish a longer election period, such 
as 60 calendar days (generally consistent with the Exchange standard). 
We proposed special enrollment period effective dates that followed the 
effective dates of coverage for QHP special enrollment periods in Sec.  
155.420(b). We noted that a notice of special enrollment rights is 
currently required to be provided to group health plan participants and 
beneficiaries under HIPAA and solicited comment on whether issuers in 
the individual market should provide a similar notice to individual 
market enrollees.
    Additionally, we proposed rules governing the circumstances under 
which issuers are permitted to deny coverage to individuals and 
employers. These rules would allow issuers to deny coverage to an 
employer whose eligible individuals do not live, work, or reside in the 
service area of a network plan (or to an individual who does not live 
or reside in the service area of a network plan) and in certain 
situations involving limited network capacity and limited financial 
capacity.
    We also proposed that issuers in the small group market would be 
permitted to require small employers to satisfy minimum contribution or 
group participation requirements, to the extent allowed by state law 
or, in the case of a QHP offered in the SHOP, as permitted by Sec.  
156.285(c), and to decline to offer coverage if these standards were 
not met. This policy was intended to prevent adverse selection. 
Specifically, we were concerned that a small employer could take 
advantage of the continuous open enrollment opportunity under the 
proposed rule to wait to purchase a group policy.
    We also addressed the issue of whether there could be an exception 
from the guaranteed availability requirements allowing coverage sold 
through bona fide associations to be limited to members of the 
association. We contrasted the existing provisions in section 2703(b) 
(which retained a guaranteed renewability exception permitting coverage 
to be limited to members of a bona fide association) with the 
provisions in section 2702 (where the exception had not been included 
in the statute), and proposed that there was no basis for an exception 
from the guaranteed availability requirement for coverage sold through 
bona fide associations. We invited comment, however, on whether and how 
a transition or exception process for bona fide association coverage 
could be structured to minimize disruption.
    To ensure consistency in the marketing of health plans inside and 
outside of the Exchange and to minimize adverse selection, we proposed 
to extend to the entire health insurance market the Exchange marketing 
standard applicable to QHPs under Sec.  156.225. This standard requires 
that an issuer comply with state marking standards and not employ

[[Page 13416]]

marketing practices or benefit designs that will have the effect of 
discouraging the enrollment of individuals with significant health 
needs in health insurance coverage.
    Finally, we solicited comment about how to prevent potential gaming 
of guaranteed availability rights and about strategies to minimize the 
risk of adverse selection.
    Comment: Several commenters asked that the term ``offer'' in 
section 2702 be interpreted to mean ``actively marketed,'' so that 
issuers would not be required to reopen closed blocks of business. 
Commenters expressed concern about having to develop enrollment 
materials for closed products. In addition, some commenters were 
concerned that this requirement would make it difficult for issuers to 
bring existing products into compliance with the Affordable Care Act in 
a manner that minimizes consumer confusion, and ultimately prompt some 
issuers to terminate closed products. Some commenters argued that the 
requirement is not necessary because starting in 2014, individuals will 
have choices beyond closed blocks, alleviating many of the concerns 
about closed blocks in today's market. Other commenters requested 
flexibility for states to determine the best policy for addressing 
closed blocks.
    Response: Section 2702 provides that each health insurance issuer 
that offers health insurance coverage in the group or individual market 
in a state must accept every employer or individual in the state that 
applies for such coverage. We have interpreted the term ``offer'' as 
used throughout the title XXVII requirements of the PHS Act as added by 
the Affordable Care Act (which apply to ``a health insurance issuer 
offering health insurance coverage'') to refer to an issuer offering 
both new as well as existing coverage. Accordingly, this final rule 
does not interpret the term ``offer'' in section 2702 to mean 
``actively marketing.'' We note that while this provision requires an 
issuer to accept any individual or employer that applies for coverage, 
it does not require closed blocks to be actively marketed. Furthermore, 
we clarify that only non-grandfathered plans are subject to guaranteed 
availability.
    Comment: Several commenters remarked on the application of the 
guaranteed availability requirements to coverage sold through bona fide 
associations.
    Response: We refer readers to section II.F.2. of the preamble for 
discussion of this issue.
    Comment: We received a few comments about the proposal that issuers 
would be allowed to decline to offer coverage to small employers for 
failure to satisfy minimum contribution or group participation 
requirements under state law or the SHOP standards. Several commenters 
expressed support for the policy and recommended extending it to the 
large group market. One commenter emphasized that minimum participation 
and contribution standards must be reasonable and not burdensome to the 
point that small employers are discouraged from offering coverage.
    Response: Upon further consideration of this issue, we have 
determined that small employers cannot be denied guaranteed 
availability of coverage for failure to satisfy minimum participation 
or contribution requirements. As in the case of the bona fide 
association exception discussed above, while Congress left in place an 
exception for failure to meet contribution or participation 
requirements under the guaranteed renewability requirement in section 
2703(b), it provided no such exception from the guaranteed availability 
requirement in section 2702. To the contrary, language in the 
guaranteed availability provision for group health plans that was in 
place before the Affordable Care Act was not included in section 2702. 
Accordingly, the proposed approach would conflict with the guaranteed 
availability provisions in section 2702 of the PHS Act. Moreover, 
permitting issuers to deny coverage altogether to a small employer with 
between 50 and 100 employees based on a failure to meet minimum 
participation or contribution requirements could subject such employer 
to a shared responsibility payment under section 4980H of the Code for 
a failure to offer coverage to its employees.
    While section 2702 contains no exception to guaranteed availability 
based on a failure to meet contribution or minimum participation 
requirements, section 2702(b)(1) permits an issuer to limit enrollment 
in coverage to open and special enrollment periods. Under our authority 
in section 2702(b)(3) to define ``open enrollment periods,'' we are 
providing in this final rule that, in the case of a small employer that 
fails to meet contribution or minimum participation requirements, an 
issuer may limit its offering of coverage to an annual open enrollment 
period, which we set forth in this final rule as the period beginning 
November 15 and extending through December 15 of each year. As such, 
the group market will have continuous open enrollment, except for small 
employers that fail to meet contribution or minimum participation 
requirements, for which the enrollment period may be limited to the 
annual enrollment period described above, from November 15 through 
December 15. This approach addresses concerns about adverse selection 
in a manner that is consistent with the statutory provisions. We do not 
extend this provision to the large group market because large employers 
generally do not present the same adverse selection risk as small 
employers.
    Comment: Several commenters voiced concerns about the potential for 
individuals with histories of non-payment to game guaranteed 
availability. Some commenters suggested that we take action to both 
prevent individuals with histories of non-payment from taking advantage 
of guaranteed availability and to prevent individuals from dropping in 
and out of coverage based on medical need. Other commenters, including 
the NAIC, recommended that states have the flexibility to develop an 
environment that will discourage adverse selection and suggested that 
there are a number of tools available to states to limit adverse 
selection. Some of the tools identified by commenters included: (1) 
Allowing issuers to require pre-payment of premiums each month; (2) 
allowing issuers to require payment of all outstanding premiums before 
enrollees can re-enroll in coverage after termination due to non-
payment of premiums; (3) allowing late enrollment penalties or 
surcharges (similar to those in Medicare Parts B and D); (4) allowing 
issuers to establish waiting periods or delayed effective dates of 
coverage; (5) allowing issuers to offset claims payments by the amount 
of any owed premiums; (6) allowing issuers to prohibit individuals who 
have canceled coverage or failed to renew from enrolling until the 
second open enrollment period after their coverage ceased (unless they 
replace coverage with other creditable coverage); (7) restricting 
product availability (for example, to a catastrophic, bronze, or silver 
level plan) outside of enrollment periods to prevent high-risk 
individuals from enrolling in more generous coverage when medical needs 
arise; and (8) allowing individuals to move up one metal level each 
year through the Exchange shopping portal.
    Response: We appreciate the various strategies suggested by 
commenters and agree that states have flexibility to implement policies 
to address adverse selection. We encourage states to consider 
approaches to discourage adverse selection while ensuring consumers' 
guaranteed availability rights are protected since state policies

[[Page 13417]]

that limit guaranteed availability are preempted by this law. We intend 
to address permissible strategies to limit adverse selection in future 
guidance.
    Comment: Several commenters suggested that the language in proposed 
Sec.  147.104(e), which prohibits marketing practices or benefit 
designs that will have the effect of discouraging the enrollment of 
individuals with significant health needs in health insurance coverage, 
be broadened to apply to all forms of discrimination prohibited by the 
March 27, 2012 Exchange final rule and section 1557 of the Affordable 
Care Act, such as discrimination based on age, disability, race, 
ethnicity, gender, and sexual orientation, not just discrimination 
against individuals with significant or high cost health care needs. 
One commenter urged HHS to provide guidance about marketing practices 
and benefit designs that would be considered discriminatory under this 
standard. Another commenter asked HHS to remind states of their 
responsibility to monitor issuer marketing practices.
    Response: As noted in the November 26, 2012 proposed rule, 
discriminatory marketing practices or benefit designs represent a 
failure by issuers to comply with the guaranteed availability 
requirements. In response to comments, we revise Sec.  147.104(e) of 
this final rule to make clear that a health insurance issuer and its 
officials, employees, agents and representatives must not employ 
marketing practices or benefit designs that will have the effect of 
discouraging the enrollment of individuals in health insurance coverage 
based on these factors. This standard will ensure consistency with the 
prohibition on discrimination with respect to EHB in Sec.  156.125, the 
non-discrimination standards applicable to QHPs under Sec.  156.200(e), 
and the marketing standards in Sec.  156.225.
    Comment: Numerous commenters expressed support for aligning open 
enrollment periods inside and outside of the Exchange to promote 
consistency between markets and minimize the potential for adverse 
selection. However, some commenters were concerned that establishing 
open enrollment periods and effective dates of coverage in the 
individual market based on a calendar policy year would not align with 
many individual policies, which are currently offered on a non-
calendar-year basis. Commenters suggested various approaches to 
resolving the transition, such as providing to individuals whose 
coverage renews mid-2014 a one-time special enrollment period to 
purchase coverage that complies with 2014 market reform provisions; 
requiring individuals whose coverage begins on a date other than 
January 1 to re-enroll during the next open enrollment period; and 
allowing a rating adjustment for individual health insurance policies 
covering less than a full year to reflect that fact that enrollees will 
have less than 12 months to reach the annual deductible. Other 
commenters recommended that states have flexibility to set their open 
enrollment periods and effective dates.
    Response: We maintain the proposed open enrollment periods in Sec.  
147.104(b)(1) of this final rule. We believe that consistent open 
enrollment periods will help minimize adverse selection between the 
Exchanges and the outside market, reduce consumer confusion, and allow 
issuer marketing to be focused on a single enrollment campaign. Rolling 
open enrollment periods with individual-specific dates, by contrast, 
would add complexity for families and increase risk selection. We agree 
with commenters that a one-time open enrollment period will allow 
individuals with non-calendar year plans to transition to a calendar-
year plan upon their renewal date in 2014 and provide for such 
enrollment opportunity as discussed below. States may wish to consider 
other strategies to ease the transition, such as directing issuers to 
pro-rate premiums for policies covering less than a full year, among 
other transitional measures.
    Comment: One commenter noted that his state currently allows 
individuals to purchase individual health insurance coverage on a 
guarantee-issue basis at any time during the year and requested 
clarification as to whether state standards would be preempted by the 
federal standards. Another commenter urged HHS to ensure that issuers 
apply consistent rules when offering coverage outside of open 
enrollment. The commenter expressed concern that some issuers would 
attempt to employ selective marketing practices designed to attract 
low-risk individuals (for example, for enrollment in catastrophic 
plans).
    Response: Section 2724(a)(1) of the PHS Act provides that nothing 
in part A or part C of title XXVII of the PHS Act should be construed 
to preempt any state law that does not prevent the application of a 
federal requirement. Therefore, these final rules do not preclude the 
application of stronger consumer protections provided by state law 
including, for example, open enrollment periods that allow individuals 
to purchase coverage more frequently than the federal standards. We 
note that if a health insurance issuer in the individual market allows 
for enrollment outside of an open or special enrollment period, the 
issuer must still comply with all of the individual market provisions 
of the PHS Act, including the prohibition against pre-existing 
condition exclusions and the prohibition against discrimination based 
on health status. An issuer cannot selectively offer enrollment in a 
plan to individuals outside of open or special enrollment periods in a 
manner that discriminates among individuals based on a pre-existing 
medical condition or health status.
    Comment: A number of commenters recommended providing additional 
special enrollment periods to those described in proposed Sec.  
147.104(b)(2), which incorporated the special enrollment periods for 
COBRA qualifying events under section 603 of ERISA. Specifically, 
several commenters recommended adding the guaranteed renewability 
exceptions in Sec.  147.106(b) through (d), for which an enrollee 
experiences a loss in coverage through no fault of their own, as 
explicit triggers permitting special enrollment. A few commenters 
recommended including special enrollment periods for pregnancy. One 
commenter suggested providing a special enrollment period when 
individuals permanently move into the issuer's service area, consistent 
with the Exchange standard.
    Response: We agree that it is appropriate to provide additional 
enrollment opportunities for individuals experiencing certain 
significant life changes, including several of those suggested by 
commenters. To provide consistency across the individual market, we 
believe these events should follow the special enrollment periods for 
individuals seeking coverage through the Exchanges, as described in the 
March 27, 2012 Exchange final rule. Because PHS Act section 2702 
provides for ``special'' enrollment periods for ``qualifying events'' 
under ERISA, we are providing for additional ``limited'' open 
enrollment periods in the individual market under our authority in PHS 
Act section 2702(b)(3) to promulgate regulations with respect to open 
enrollment periods. These limited open enrollment periods are 
equivalent to special enrollment periods in terms of the limited scope 
and nature of their applicability, and coverage obtained during such 
limited open enrollment period will become effective consistent with 
the dates described in Sec.  155.420(b).
    Accordingly, in Sec.  147.104(b)(2) of this final rule, we cross-
reference the enrollment periods in Sec.  155.420(d) of the March 27, 
2012 Exchange finale rule

[[Page 13418]]

(except as discussed below). Thus, under Sec.  147.104(b)(2), limited 
open enrollment periods are triggered in the individual market by the 
following events:
     An individual and any dependents losing minimum essential 
coverage.
     An individual gaining or becoming a dependent through 
marriage, birth, adoption, or placement for adoption.
     An individual experiencing an error in enrollment.
     An individual adequately demonstrating that the plan or 
issuer substantially violated a material provision of the contract in 
which he or she is enrolled.
     An individual becoming newly eligible or newly ineligible 
for advance payments of the premium tax credit or experiencing a change 
in eligibility for cost-sharing reductions.
     New coverage becoming available to an individual or 
enrollee as a result of a permanent move.
    Additionally, the final rule provides that an individual enrolled 
in a non-calendar year plan is entitled to a limited open enrollment 
period beginning 30 calendar days prior to the individual's policy 
renewal date outside the open enrollment period for 2014. This one-time 
limited open enrollment period will allow individuals with non-calendar 
year policies in the individual market to transition to a calendar year 
policy that complies with 2014 market reform requirements of the 
Affordable Care Act.
    We clarify that loss of minimum essential coverage triggering a 
limited open enrollment period does not include failure to pay premiums 
on a timely basis, including COBRA premiums prior to expiration of 
COBRA coverage, or situations allowing for a rescission as specified in 
45 CFR 147.128.
    We also note that these limited open enrollment periods do not 
include the events described in paragraphs (d)(3), (d)(8), or (d)(9) of 
Sec.  155.420 of the March 27, 2012 Exchange final rule (concerning 
citizenship status, Indians, and exceptional circumstances). The 
enrollment periods for events described in paragraphs (d)(3) and (d)(8) 
are related to specific Exchange eligibility criteria and therefore are 
not appropriate for the broader market. The enrollment periods in 
paragraph (d)(9) arising from exceptional circumstances are not similar 
enough to those discussed in the November 26, 2012 proposed rule for 
HHS to include in the final rule. We would initiate future rulemaking 
if we were to establish a limited open enrollment period based on the 
triggering event in paragraph (d)(9) of Sec.  155.420. With the 
exception of these triggering events, limited open enrollment periods 
are the same inside and outside the Exchange in the individual and the 
small group market. We note that states may create special enrollment 
periods or limited open enrollment periods in addition to those 
established by this final rule.
    Comment: Many commenters supported establishing 60-day special 
enrollment periods, consistent with those in the Exchange, to reduce 
consumer confusion, facilitate orderly enrollment, and ease the 
administrative burden on states and issuers. One commenter recommended 
30-day special enrollment periods, consistent with the HIPAA standard. 
A few commenters recommended a 63-day election period. Other commenters 
recommended that individuals be permitted to begin the special 
enrollment process 30 days prior to a known qualifying event.
    Response: We agree that 60-day enrollment periods will promote 
consistency with the Exchanges and will give consumers the time they 
need to explore coverage options following a change in life 
circumstances. Therefore, we provide a 60-day election period for the 
special and limited open enrollment periods in the individual market. 
However, to avoid inconsistency with the statutory requirement in PHS 
Act section 2704(f)(1) that individuals losing group health coverage 
must request special enrollment not later than 30 days after the loss 
of coverage, we maintain 30-day special enrollment periods for the 
group market. We note that the March 27, 2012 Exchange final rule 
(Sec.  155.725(a)(3)) currently provides for 60-day special enrollment 
periods with respect to the SHOP. We intend to revise the SHOP special 
enrollment periods to be consistent with the election period in group 
market under PHS Act section 2704(f)(1) and this final rule. We also 
note that we will monitor the effects the 60-day election period has on 
the individual market and whether or not is necessary to move to a 30-
day election period to be consistent with the group market.
    Comment: In response to our request for comment, many commenters 
supported a requirement that issuers in the individual market provide a 
notice of special enrollment rights to individual market enrollees, 
similar to what is provided to group health plan participants and 
beneficiaries under HIPAA.
    Response: Following review of the comments submitted on this issue 
and further consideration of the additional burden that would be 
imposed on QHP issuers, we do not in this final rule require a notice 
of special enrollment in the individual market. QHP issuers are already 
subject to various notice requirements through the Exchange which will 
allow enrollees to make timely and informed coverage decisions. 
Furthermore, to ensure consistency with Exchanges and to avoid 
confusion, we do not extend a notice requirement to the broader 
individual market.
    Comment: One commenter recommended that special enrollment periods 
not apply to individual family members who do not otherwise qualify for 
special enrollment. The commenter stated, for example, that an 
individual who loses minimum essential coverage should be allowed to 
obtain new coverage, but should not be allowed to obtain coverage for 
other dependents that were not covered on the previous policy.
    Response: If an individual experiences an event that triggers a 
limited open or special enrollment right pursuant to Sec.  
147.104(b)(2) or (b)(3) of this final rule, the individual has the 
option to choose any family coverage offered in the individual market 
to cover members of his or her family. Pursuant to existing HIPAA 
regulations at Sec.  146.117, this right already exists in the group 
market.
    Comment: Some commenters recommended that issuers offering 
individual health insurance coverage be required to offer family 
coverage, while one commenter recommended clarifying that offering 
family coverage is not required under the guaranteed availability 
provisions.
    Response: The final rule does not require an issuer to offer family 
coverage. While issuers are required to offer all products that are 
approved for sale in a market, an issuer is not required to offer a 
family coverage option with every policy form.
4. Guaranteed Renewability of Coverage (Sec.  147.106)
    In Sec.  147.106, we proposed to implement the guaranteed 
renewability provisions of section 2703 of the PHS Act. We proposed 
that an issuer offering health insurance coverage in the group or 
individual market must renew or continue in force such coverage at the 
option of the plan sponsor or individual. The exceptions to this 
requirement include: (1) Nonpayment of premiums; (2) fraud; (3) 
violation of minimum employer participation or contribution rules, as 
permitted under applicable state law; (4) termination of a particular 
type of product or all coverage in a market; (5) enrollees' movement 
outside the service area of a

[[Page 13419]]

network plan; and (6) for coverage provided through a bona fide 
association, an employer's loss of membership in the association.\16\ 
We noted that under the March 27, 2012 Exchange final rule at Sec.  
155.430, QHP issuers are permitted to terminate coverage in additional 
circumstances (for example, decertification of the QHP in the Exchange) 
and requested comment on whether issuers in such circumstances should 
be required to renew coverage on a non-QHP basis outside the Exchange.
---------------------------------------------------------------------------

    \16\ Section 2742(b)(5) of the PHS Act provides an exception to 
guaranteed renewability for an individual market enrollee's loss of 
membership in a bona fide association.
---------------------------------------------------------------------------

    We also proposed standards governing the discontinuance of a 
particular product or all health insurance coverage in the group or 
individual market, consistent with the statute.
    Finally, we proposed that issuers in the group market may uniformly 
modify coverage at the time of coverage renewal and noted that parallel 
provisions in section 2742 of the PHS Act allow for the uniform 
modification of coverage in the individual market. We stated that the 
uniform modification of coverage provisions would allow issuers to make 
cost-sharing adjustments and benefit design changes to come into 
compliance with the requirements of the Affordable Care Act that become 
effective in 2014 and requested comment on whether such interpretation 
should be incorporated explicitly into regulation text.
    Comment: Many commenters supported allowing enrollees in a QHP that 
terminates or is decertified in the Exchange to elect to renew coverage 
on a non-QHP basis outside the Exchange. Some commenters supported 
applying such standard with respect to all QHP termination events. 
Other commenters suggested enrollees should be notified in such 
instances that continuing coverage outside of the Exchange will affect 
their eligibility for advance payments of the premium tax credit and 
cost-sharing reductions. One commenter asserted that renewing coverage 
on a non-QHP basis may be unnecessary, since an enrollee's loss of 
coverage in a QHP will in most instances trigger a special enrollment 
right, and argued that decisions about coverage renewal are best left 
to the states.
    Response: As discussed above, if an individual loses minimum 
essential coverage because, for example, a QHP is decertified, 
individuals enrolled in the QHP will have a limited open enrollment 
right for any policy in the individual market, including any product 
being offered by the same issuer that offered the QHP.
    Comment: A few commenters recommended clarifying that coverage may 
be non-renewed for loss of eligibility. For example, commenters 
suggested that for consistency with Sec.  156.155 regarding 
catastrophic plans, a non-renewal provision would apply at the end of 
the policy year in which the person was no longer eligible for 
coverage.
    Response: Individuals may only qualify for enrollment in some plans 
(for example, catastrophic plans or QHPs in the Exchange) if they meet 
certain eligibility criteria. While we do not include this 
clarification explicitly in Sec.  147.106 of the final rule, we note 
that issuers are not required to renew coverage if an individual is not 
otherwise eligible for such coverage.
    Comment: One commenter recommended that issuers be permitted to 
non-renew coverage when an enrollee becomes covered by other minimum 
essential coverage to prevent individuals from over-insuring.
    Response: Consistent with PHS Act section 2703, the final rule does 
not include enrollment in other coverage as an exception for guaranteed 
renewability. We note that state coordination of benefit laws may apply 
in instances where individuals are enrolled in more than one type of 
coverage.
    Comment: With respect to the discontinuation of coverage provisions 
in Sec.  147.106(d)(1), one commenter suggested that HHS recognize the 
large group and small group segments of the group market so that an 
issuer is not required to exit both segments of the group market when 
exercising the option to discontinue all coverage in a market.
    Response: PHS Act section 2703(c)(2)(A) permits an issuer to non-
renew or discontinue coverage if the issuer discontinues offering all 
health insurance coverage in the ``group market.'' Thus, the issuer 
must withdraw from the entire group market in order to satisfy this 
exception to guaranteed renewability. The final rule implements the 
statute without modification.
    Comment: Several commenters noted that the guaranteed renewability 
laws in some states would prevent issuers from making plan design 
changes and cost-sharing adjustments necessary to bring existing, non-
grandfathered coverage into compliance with the requirements of the 
Affordable Care Act that become effective in 2014. Commenters urged HHS 
to incorporate language into regulation text explicitly permitting 
issuers to discontinue or uniformly modify coverage at renewal, even if 
such discontinuance or modification is not permitted under applicable 
state law.
    Response: State laws that prevent issuers from uniformly modifying 
coverage, as permitted by sections 2703 and 2742 of the PHS Act, to 
comply with federal standards in title XXVII of the PHS Act would, in 
effect, prevent the application of such standards and, therefore, be 
preempted under section 2724(a)(1) of the PHS Act.

C. Part 150--CMS Enforcement in Group and Individual Insurance Market

    We proposed technical changes in 45 CFR part 150 to reflect that 
the HIPAA enforcement standard, as originally codified in PHS Act 
section 2722 and redesignated as section 2723 by the Affordable Care 
Act, applies to the market reform provisions of the PHS Act created by 
the Affordable Care Act. Pursuant to section 2723, states have the 
primary enforcement authority with respect to health insurance issuers 
in the group and individual markets. HHS has secondary enforcement 
authority and will enforce a provision in a state only if the state 
advises us that it does not have authority to enforce the provision or 
if the state fails to substantially enforce a provision.
    Comment: Several commenters requested a safe harbor from 
enforcement, at least for the first year of implementation, as long as 
issuers are making good faith efforts to comply and implement the new 
requirements. Special concern was raised in the instance where state 
law conflicts with federal law.
    Response: As stated in previous Affordable Care Act guidance, our 
approach to implementation is marked by an emphasis on assisting 
(rather than imposing penalties on) issuers and others that are working 
diligently and in good faith to understand and comply with the law.\17\ 
While the final rule does not provide an enforcement safe harbor for 
the market reform provisions, HHS will continue to work closely with 
issuers and states in the implementation of these provisions.
---------------------------------------------------------------------------

    \17\ See, for example, Affordable Care Act Implementation FAQs--
Set 1 Q1, available at  http://cciio.cms.gov/resources/factsheets/aca_implementation_faqs.html.
---------------------------------------------------------------------------

    Comment: One commenter questioned HHS's authority to extend this 
enforcement standard to the provisions of the Affordable Care Act 
including the market reform provisions.
    Response: Title I of the Affordable Care Act amends title XXVII of 
the PHS

[[Page 13420]]

Act. Specifically, the market reform provisions are enumerated in 
sections 2701, 2702, and 2703 of title XXVII of the PHS Act, which are 
subject to the enforcement provisions of PHS Act section 2723.
    Comment: One commenter requested clarification regarding the 
process HHS uses to determine that a state is not substantially 
enforcing a provision of title XXVII of the PHS Act.
    Response: We refer readers to 45 CFR 150.203, et. seq. for 
regulations describing HHS's enforcement processes.

D. Part 154--Health Insurance Issuer Rate Increases: Disclosure and 
Review

1. Subpart B--Disclosure and Review Provisions
a. State-specific Thresholds (Sec.  154.200)
    In Sec.  154.200(a)(2) and (b), we proposed that states seeking 
state-specific thresholds submit proposals to CMS by August 1 of each 
year. The Secretary would publish a Federal Register notice not later 
than September 1 of each year concerning whether a state-specific 
threshold applies in a state. If approved, a state-specific threshold 
would become effective on January 1 of the year following the 
Secretary's notice.
    Comment: A few commenters were concerned that proposed timeline 
would not give issuers sufficient time to file rates before January 1.
    Response: We are finalizing the revised timeline in Sec.  
154.200(a)(2) and (b) as proposed because the new dates increase 
consistency inside and outside of the Exchange. We are working to align 
the market with the QHP submission schedule and with the 2014 market 
reforms. Since QHP filings are due April 30 of each year, moving the 
state-specific threshold application date to August 1 will give states 
the appropriate amount of time to analyze the QHP information they 
receive and to request a state-specific threshold if they believe one 
is necessary. We will be moving the state-specific threshold 
determination deadline from June 1 to September 1, with any potential 
state-specific threshold going into effect January 1 of the following 
year. Under the May 23, 2011 rate review final rule (76 FR 29964), the 
Secretary was to publish a notice about state-specific thresholds by 
June 1, and the effective date of any state-specific threshold was 
September 1 of the same year. Under this final rule, issuers will still 
have three months to prepare to file rates under any potential state-
specific threshold. Therefore, we are shifting the entire timeline 
forward three months to enable states to have enough information to 
assess their markets appropriately. We note that the January 1 
effective date for state-specific thresholds only means that rate 
filings submitted on or after January 1 will be subject to any 
potential state-specific threshold and not necessarily rate increases 
that are effective January 1.
b. Submission of Rate Filing Justification (Sec.  154.215)
    Section 2794(b)(2(A) of the PHS Act directs that beginning in 2014, 
the Secretary, in conjunction with the states, shall monitor premium 
increases of health insurance coverage offered through an Exchange and 
outside an Exchange. To enable the Secretary to carry out this new 
monitoring function and to streamline data collection for programs 
beginning in 2014, we proposed revisions in Sec.  154.215 that would 
direct health insurance issuers to submit data and documentation 
regarding rate increases on a standardized form determined by the 
Secretary. We also proposed that the rate review standards be modified 
by extending the requirement that health insurance issuers report 
information about rate increases to all rate increases, not just those 
above the review threshold. States would continue to have the authority 
to collect additional information above this baseline to conduct more 
thorough reviews or rate monitoring. Furthermore, the review threshold 
in Sec.  154.200 would continue to be used to determine which rates 
must be reviewed rather than just reported.
    Under the Paperwork Reduction Act of 1995 (PRA) process (44 U.S.C. 
chapter 35), we proposed a ``unified rate review'' template for health 
insurance issuers to use for submitting data for rate increases. In 
this final rule, we have revised the text of Sec.  154.215 to reflect 
the ``unified rate review'' terminology. We also have added language 
explicitly reflecting the fact that the premium rates subject to rate 
review reporting are shaped by the premium rating standards implemented 
under the single risk pool requirement and the applicability of the 
guaranteed availability and renewability requirements. We clarify that 
states are not specifically required to use the unified rate review 
template in order to have an effective rate review program.
    Comment: Several commenters remarked on the proposal to expand 
reporting of all rate increases using the unified rate review template. 
Some commenters supported the expanded reporting requirement, while 
other commenters were concerned about the administrative burden on 
issuers. One commenter suggested that the proposal would allow both CMS 
and states to monitor rate trends and identify patterns that could 
indicate market disruption.
    Response: Section 2794(b)(2)(A) of the PHS Act, as added by the 
Affordable Care Act, requires the Secretary to monitor premium 
increases of health insurance coverage offered both inside and outside 
an Exchange, for plan years beginning in 2014. Accordingly, we proposed 
that issuers offering health insurance coverage in the small group or 
individual markets report information about all rate increases. We 
believe that standardizing the reporting process will reduce 
administrative burden and duplication over time and enable both states 
and CMS to evaluate information about the single risk pool, actuarial 
value, essential health benefits, and other market reforms beginning in 
2014. This reporting will also assist states and CMS in monitoring the 
market inside and outside the Exchange for adverse selection. 
Therefore, we are finalizing the requirement to report all rate 
increases in Sec.  154.215 as proposed. We note that when new business 
is included in the unified rate review template, the issuer must 
demonstrate all premium and claims projections for the new products and 
plans as provided in guidance. Historical experience is only required 
for existing product/plan combinations represented on the unified rate 
review template. We also note that, in response to comments received 
through the PRA process, we have made changes to the uniform rate 
review template to both remove data elements and to make some optional 
in the first two years of applicability. As discussed in more detail in 
section V. of the preamble, we estimate that these changes reduce the 
number of required data elements by approximately 45 percent.
    Comment: Several commenters remarked on the content of the proposed 
unified rate review template.
    Response: We address these comments in section V. of the preamble 
regarding collection of information requirements. As mentioned above, 
we have made changes to the template in response to comments to ensure 
streamlined and efficient data collection.
2. Subpart C--Effective Rate Review Programs
a. Determination of Effective Rate Review Programs (Sec.  154.301)
    To account for the market reform changes in 2014, we proposed to 
modify the standards in Sec.  154.301(a)(3) for

[[Page 13421]]

states to have an effective rate review program with respect to rate 
filings subject to review. Specifically, we proposed that a state with 
an effective rate review program review the following additional 
elements as part of its rate review process: (1) the reasonableness of 
assumptions used by an issuer to estimate the rate impact of the 
reinsurance and risk adjustment programs; and (2) issuer data related 
to implementation and ongoing utilization of a market-wide single risk 
pool, essential health benefits, actuarial values, and other market 
reform provisions of the Affordable Care Act. We did not propose to 
modify the 10 percent subject to review threshold as finalized in Sec.  
154.200.
    We also proposed to revise Sec.  154.301(a)(4) by adding additional 
factors that states would take into consideration when conducting their 
examinations, including (1) in reviewing the impact of cost-sharing 
changes, the impact on the actuarial value of the health plan in light 
of the requirement under section 1302(d) of the Affordable Care Act 
that a plan meet one of the AV levels; and (2) in reviewing benefit 
changes to a plan, the impact of the changes on the plan's essential 
health benefits and non-essential health benefits.
    Additionally, we proposed that states take into account, to the 
extent possible, the following additional factors 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 impact 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 reinsurance and risk adjustment payments and 
charges.
    Finally, we proposed revisions in Sec.  154.301(b) to ensure that a 
state with an effective rate review program make available on its Web 
site, at a minimum, the same amount of information in Parts I, II, and 
III of each Rate Filing Justification that CMS makes available on its 
Web site. We proposed that a state may, instead of providing access to 
the information contained in Parts I, II, and III or each Rate Filing 
Justification, provide a link to CMS's Web site where consumers can 
find such information.
    Comment: Several commenters remarked on the proposed additional 
criteria for states to have an effective rate review program. Some 
commenters supported the additional criteria, while others suggested 
that states with effective rate review programs should have flexibility 
to use either the unified rate review template or their own templates 
and formats for collecting information from issuers. One commenter 
suggested that CMS should accept state regulators' attestations that 
they are reviewing the required information, but not necessarily 
require that states incorporate the unified rate review template into 
their review process.
    Response: We finalize the proposed amendments in Sec.  154.301 
except that, in order to limit additional factors to only those that 
reflect the 2014 market reforms, we do not require states to consider 
``other standardized ratio tests recommended or required by statute, 
regulation, or best practices'' to have an effective rate review 
program. Although states will likely consider these ratio tests as part 
of their review processes, we intend to minimize the criteria and 
factors for states to have an effective rate review program in order to 
give states the maximum flexibility to conduct reviews. Further, this 
final rule does not require states to incorporate the unified rate 
review template into their review process. States will retain the 
flexibility to use other collection tools, provided they collect the 
information necessary to conduct effective reviews. States cannot rely 
on issuer attestation alone in conducting these reviews. Issuers in all 
states, including those with effective rate review programs, must still 
under this final rule submit information to CMS using the unified rate 
review template. We note that states and issuers will have an incentive 
to use the collection tools provided by CMS to ensure streamlined and 
efficient data collection.
    This approach strikes the appropriate balance between maintaining 
state flexibility and allowing CMS to carry out functions related to: 
(1) The monitoring of premium increases of health insurance coverage 
offered through an Exchange and outside an Exchange as required by 
section 2794(b)(2)(A) of the PHS Act; (2) Exchanges such as QHP 
certification and premium tax credit and cost-sharing reduction 
verification; and (3) the risk adjustment and reinsurance programs. We 
note that even without the administrative efficiencies associated with 
using the information collected through rate review authority for the 
second and third functions listed above, the same data would be needed 
and collected to carry out the first function by itself. We also 
clarify that we will use the information collected only for these 
specified purposes and will initiate future rulemaking if we intend to 
use the data for any other purpose.
    Comment: Some commenters expressed concern about the public release 
of information. Commenters recommended disclosing only a minimal amount 
of information and that such disclosure not include confidential or 
proprietary information.
    Response: As mentioned in the preamble of the November 26, 2012 
proposed rule, we will release only information collected that is 
determined not to include trade secrets and is approved for release 
under the Freedom of Information Act (FOIA). In general, all 
information collected by HHS is subject to FOIA. In accordance with the 
HHS's FOIA implementing regulations at 45 CFR 5.65(c), health insurance 
issuers may designate part or all of the information submitted as 
exempt from disclosure under Exemption 4 of the FOIA if the issuer 
believes the information is commercial or financial information that is 
confidential or privileged. If there is a FOIA request, we will follow 
the pre-disclosure notification procedures found at 45 CFR 5.65(d) 
through (e) to seek issuer input on the applicability of Exemption 4 
before disclosure is made. If the information has previously been 
published or made generally available to the public, it will not be 
considered confidential or privileged for purposes of Exemption 4. In 
addition, as discussed in section II.E.1.a. of the preamble, issuers 
will set their index rates and plan-specific pricing once per year upon 
filing their rates with state insurance departments, and information 
would only be released after the QHP submission process is concluded. 
Accordingly, we believe that public disclosure of certain rate review 
information will not undermine competitive market dynamics.
b. Rate Filing Justification (Sec.  154.225 and Sec.  154.330)
    We proposed to amend Sec.  154.225 and Sec.  154.330 by replacing 
the term ``Preliminary Justification'' with the term ``Rate Filing 
Justification,'' to reflect more appropriately the rate filing 
information that would be reported. We received no comments regarding 
this proposed change. Accordingly, we are finalizing proposed Sec.  
154.225 and Sec.  154.330 without modification.

[[Page 13422]]

E. Part 156--Health Insurance Issuer Standards Under the Affordable 
Care Act, Including Standards Related to Exchanges

1. Subpart A--General Provisions
a. Single Risk Pool (Sec.  156.80)
    In Sec.  156.80, we proposed standards to implement the requirement 
in section 1312(c) of the Affordable Care Act that an issuer use a 
single risk pool for a market (the individual market, small group 
market, or merged market) when developing rates and premiums for 
coverage effective beginning in 2014.
    We proposed that an issuer develop a market-wide index rate 
(average rate) based on the total combined EHB claims experience of all 
enrollees in all non-grandfathered plans in the risk pool. After 
setting the index rate, the issuer would make a market-wide adjustment 
based on the expected aggregated 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 adjusted market-wide 
index rate, except for the following factors: The actuarial value and 
cost-sharing structure of the plan; the plan's provider network, 
delivery system characteristics, and utilization management practices; 
plan benefits in addition to EHB; and with respect to catastrophic 
plans, the expected impact of specific eligibility categories for those 
plans. The index rate, the market-wide adjustment to the index rate, 
and the plan-specific adjustments would have to be actuarially 
justified and implemented transparently, consistent with federal and 
state rate review processes.
    We invited comment on the set of allowable plan-specific 
adjustments and whether to allow flexibility in product pricing in 2016 
after issuers had gained sufficient experience with the reformed 
market. Additionally, in the ``HHS Notice of Benefit and Payment 
Parameters for 2014'' proposed rule (77 FR 73118), we solicited comment 
on whether Exchange user fees or other administrative costs should be 
spread across all plans in a market as a market-wide adjustment to the 
index rate.
    Comment: Several commenters suggested that issuers should be 
allowed to reflect distribution costs and other administrative costs 
associated with different products in their premiums to promote 
administrative efficiency. One commenter recommended allowing a market-
wide adjustment to the index rate for Exchange user fees, as well as 
distribution costs, agent and broker commissions, and all 
administrative costs, to spread these costs evenly across the market 
and protect against adverse selection. Other commenters urged that any 
flexibility in product pricing not result in de facto experience rating 
based on health status. A few commenters opposed our proposal to pool 
Exchange user fees across all plans in a market within a state because 
they believed that this would unfairly increase costs for members that 
are not enrolled in the Exchange. Other commenters supported the 
proposal to pool Exchange user fees across all of an issuer's plans in 
a relevant market within a state.
    Response: We agree with commenters urging the pooling of Exchange 
user fees across the market as these costs are not related to the 
unique efficiencies or designs of a particular plan. Accordingly, the 
final rule directs issuers to make a market-wide adjustment to the 
index rate for Exchange user fees. This will ensure that Exchange user 
fees are spread evenly across the market, creating a level playing 
field inside and outside the Exchange, and further protecting against 
adverse selection. Further, this policy is consistent with the 
treatment of Exchange user fees for medical loss ratio (MLR) and rebate 
calculations under 45 CFR 158.161(a).\18\
---------------------------------------------------------------------------

    \18\ CCIIO Technical Guidance (CCIIO 2012-002): Questions and 
Answers Regarding the Medical Loss Ratio Regulation, Q&A 34 
(Apr. 20, 2012), available at http://cciio.cms.gov/resources/files/mlr-qna-04202012.pdf.
---------------------------------------------------------------------------

    As for distribution costs and other administrative costs (other 
than Exchange user fees), we believe that issuers should be allowed to 
make actuarially justified adjustments to the market-wide index rate at 
the individual plan level for those costs. This will allow pricing to 
vary among individual plans by administrative costs reasonably 
allocable to those plans, ensuring that administrative efficiencies are 
priced accurately and promoting market competition. The final rule 
therefore includes administrative costs (other than Exchange user fees) 
as an additional factor that issuers may use to modify the market-wide 
index rate at the individual plan level.
    Comment: Several commenters requested issuer flexibility in product 
pricing to adequately adjust for the risk of their enrollees. 
Commenters opposed any restriction to making actuarially justified 
adjustments to the index rate for new and renewing businesses during 
the course of the year. Other commenters suggested issuers adjust the 
index rate on a consistent, annual basis.
    Response: Issuers in the individual or combined markets (in states 
that have merged the individual and small group markets) should set 
their index rates and plan-specific pricing once per year, upon filing 
their rates with the state's department of insurance. Permitting 
changes in these markets to the index rate throughout the year could 
effectively lead to premium pricing in violation of the rules described 
above. We believe that these rates should apply to new and renewing 
enrollees during the course of the year.
    Comment: Several commenters requested clarification on whether 
adjustments to the index rate could reflect differences in health 
status. Some commenters also requested that issuers be permitted to 
make an adjustment to the index rate to account for induced 
utilization. Other commenters requested that HHS enforce the single 
risk pool requirement so that the index rate and plan-specific rates 
set by issuers do not reflect differences in enrollee health status.
    Response: As indicated in the preamble of the November 26, 2012 
proposed rule, we believe that the purpose of the single risk pool is 
to prevent issuers from segregating enrollees into separate rating 
pools based on health status. In this final rule, we confirm that plan-
specific adjustments to the market-wide index rate must not reflect 
differences in health status or risk selection. In addition, we exclude 
induced demand from the index rate adjustments because of the actuarial 
difficulty of measuring whether differences in total plan expenditures 
are due to risk selection or induced demand.
    Comment: Several commenters requested clarification on whether the 
term ``actuarial value'' for the purpose of the individual plan 
adjustment to the index rate has the same meaning as the term 
``actuarial value'' in the Actuarial Value (AV) calculator in the 
November 26, 2012 EHB/AV/Accreditation proposed rule. Several 
commenters also requested clarification on the method for applying 
plan-specific premium factors, particularly whether issuers may adjust 
the index rate for anticipated difference in utilization, risk 
adjustment payments and reinsurance payments through plan design, and 
the allowable adjustment for catastrophic plans.
    Response: The calculation of the actuarial value through the AV 
calculator is based on data sets provided by HHS reflecting a standard 
population, utilization, and unit prices. For the purpose of developing 
an adjustment to the market-wide index rate for individual plans, we 
would expect health insurance issuers to utilize pooled allowable 
claims data as a basis for calculating the plan-specific

[[Page 13423]]

actuarial value. By using the claims data of their pooled population, 
issuers can develop more accurate adjustments to the index rate for 
individual plans. In the absence of data, issuers of new plans would 
have the option of calculating pooled allowable claims using 
actuarially reasonable projections.
    Additionally, we would expect issuers to proportionally allocate 
anticipated reinsurance and risk adjustment payments and charges based 
on plan premium by applying the risk adjustment/reinsurance adjustment 
factor as a constant multiplicative factor across plans. We believe 
that this modification would prevent issuers from differentially 
allocating risk adjustment and reinsurance payments and charges across 
plans in a manner that would reintroduce risk selection differences 
into plan premiums.
    Finally, with respect to catastrophic plans, we clarify that 
issuers may make a plan-specific adjustment to the market-wide index 
rate that accounts for differences between catastrophic and non-
catastrophic plans in expected average enrollee gross spending and 
expected average risk adjustment payment transfers. This plan-specific 
adjustment would be uniform across all of an issuer's catastrophic 
plans (that is, risk across all catastrophic plans must be pooled). 
This adjustment for catastrophic plans should not include plan 
liability differences due to actuarial value, because actuarial value 
differences should be accounted for in the actuarial value adjustment.
    Comment: A few commenters requested flexibility in the claims data 
that could be used to determine the index rate for the initial years of 
Exchange operation. One commenter specifically recommended that issuers 
be permitted to use the claims experience from grandfathered books of 
business when developing initial rates.
    Response: We recognize that lack of robust EHB claims experience 
may create challenges for issuers in setting rates in the initial years 
of implementation. We clarify that in the absence of applicable claims 
data, an issuer may use any reasonable source of claims data, including 
claims experience from grandfathered books of business or claims data 
from actuarial rate manuals (to the extent available), to establish its 
index rate, as long as those data are used to actuarially estimate the 
portion of claims data associated with providing coverage for EHB as 
required to establish the index rate.
    Comment: A few commenters expressed concern that merging the 
individual and small group markets could cause market disruption and 
affect the rating methodology. Other commenters requested clarification 
about how the single risk pool would apply if a state elected to merge 
its individual and small group markets.
    Response: If a state exercises the option to merge its individual 
and small group markets, an issuer must, in accordance with Sec.  
156.80(d) of this final rule, calculate the market-wide index rate and 
plan-specific adjustments based on the merged market. As only non-
grandfathered individual market plans are eligible for payments under 
the transitional reinsurance program, in a merged market, the pooled 
reinsurance adjustment should be based only on the portion of the 
issuer's individual market business eligible for reinsurance payments.
    Comment: Numerous commenters requested clarification of whether the 
single risk pool is to be maintained at the holding company level or at 
the individual licensee level.
    Response: Section 1312(c) of the Affordable Care Act requires a 
health insurance issuer to maintain a single risk pool in the 
individual market and a single risk pool in the small group market 
(unless a state requires both pools to be merged). Section 1301(b)(2) 
of the Affordable Care Act provides that the term ``health insurance 
issuer'' has the meaning given the term in section 2791(b) of the PHS 
Act, which defines a health insurance issuer as an entity that is 
licensed to conduct the business of insurance in a state. Accordingly, 
the single risk pool is to be maintained at the licensed entity level.
2. Subpart B--Standards for Essential Health Benefits, Actuarial Value, 
and Cost Sharing
a. Enrollment in Catastrophic Plans (Sec.  156.155)
    In Sec.  156.155, we proposed standards for catastrophic plans 
offered in the individual market, consistent with section 1302(e) of 
the Affordable Care Act. Specifically, we proposed that a health plan 
is a catastrophic plan if it: (1) Meets all applicable requirements for 
health insurance coverage in the individual market; (2) does not offer 
coverage at the bronze, silver, gold, or platinum levels of coverage 
described in section 1302(d) of the Affordable Care Act; (3) 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; and (4) covers at least three 
primary care visits per year before reaching the deductible. Further, 
we proposed that a catastrophic plan may not impose any cost-sharing 
requirements for preventive services identified in section 2713 of the 
PHS Act.
    We also proposed to codify the statutory criteria identified in 
section 1302(e)(2) of the Affordable Care Act listing the two 
categories of individuals eligible to enroll in a catastrophic plan. 
The first category includes individuals who are younger than age 30 
before the beginning of the plan year. The second category includes 
individuals who have been certified as exempt from the individual 
responsibility payment because they cannot afford minimum essential 
coverage or because they are eligible for a hardship exemption. 
Finally, we proposed that if a catastrophic plan covers more than one 
person (such as a catastrophic family plan), each individual enrolled 
must satisfy at least one of these two eligibility criteria.
    Comment: A few commenters requested clarification as to whether the 
provisions regarding catastrophic plans apply only to coverage offered 
through an Exchange.
    Response: Section 1301(a)(1)(B) of the Affordable Care Act directs 
a QHP to provide the EHB package described in section 1302(a) that, 
subject to section 1302(e), meets the actuarial value (AV) levels 
described in section 1302(d) (bronze, silver, gold, or platinum levels 
of coverage). Section 1302(e) describes an exception to the AV 
requirements for catastrophic plans. These provisions are incorporated 
by reference in section 2707(a) of the PHS Act, which extends coverage 
of the EHB package required under section 1302(a) to health insurance 
issuers offering non-grandfathered coverage in the individual and small 
group markets. Accordingly, the provisions regarding catastrophic plans 
apply to coverage offered both inside and outside of an Exchange.
    Comment: One commenter recommended clarifying that individuals are 
eligible for enrollment in a catastrophic plan (offered through or 
outside the Exchange) if they have obtained from the Exchange a 
hardship exemption based on inability to afford or obtain coverage.
    Response: As discussed in the February 1, 2013 Federal Register 
proposed rule entitled ``Patient Protection and Affordable Care Act; 
Exchange Functions: Eligibility for Exemptions; Miscellaneous Minimum 
Essential Coverage Provisions'' (78 FR 7348), herein referred to as the 
Minimum Essential Coverage proposed rule, only the Exchange may issue 
certificates of exemption based on hardship. Under the Minimum 
Essential

[[Page 13424]]

Coverage proposed rule, there are several situations where an Exchange 
would grant a certificate of exemption for hardship based on an 
inability to afford or obtain coverage. One category of the hardship 
exemption is based on the Exchange determining that an applicant, or 
another individual in the applicant's family, is unable to afford 
coverage for a calendar year based on the applicant's projected 
household income. This specific category would allow individuals to 
receive a hardship exemption in lieu of the statutory unaffordability 
exemption based on the individual's actual household income. We agree 
that, consistent with the above discussion of section 2707(a) of the 
PHS Act, individuals granted a certificate of exemption from the 
Exchange based on hardship may use such exemption determination to 
establish eligibility to purchase a catastrophic plan outside of the 
Exchange.
    Comment: One commenter stated that with respect to a catastrophic 
family plan, only one member of a family should have to meet the 
eligibility criteria rather than all family members.
    Response: Section 1302(e)(1)(A) of the Affordable Care Act provides 
that the only individuals who are eligible to enroll in a catastrophic 
plan are those individuals who meet specific eligibility criteria 
described in section 1302(e)(2). Therefore, we do not accept the 
commenter's suggestion that all members of a family may enroll in a 
catastrophic plan if only one family member is eligible to enroll.
    Comment: We received several comments about the requirement that 
catastrophic plans must provide coverage for at least three primary 
care visits before reaching the annual deductible. Some commenters 
recommended clarifying that issuers must cover at least three primary 
care visits in addition to the preventive services required to be 
covered without cost sharing under section 2713 of the PHS Act, and 
that issuers may not impose any cost-sharing requirements for these 
visits. Other commenters recommended clarifying that primary care 
visits include visits to obstetrical or gynecological providers.
    Response: Health insurance issuers providing catastrophic coverage 
must fully comply with PHS Act section 2713 and its implementing 
regulations in addition to providing coverage for at least three 
primary care visits. The classification of who is a primary care 
provider for the purpose of the primary care visits is determined by 
the terms of the health plan or by state law.

F. Applicability to Special Plan Types

1. Student Health Insurance Coverage (Sec.  147.145)
    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.'' HHS has interpreted section 1560(c) to mean that if 
particular requirements of 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, these requirements would be inapplicable 
pursuant to section 1560(c).
    HHS published a final rule in the March 21, 2012 Federal Register 
entitled ``Student Health Insurance Coverage'' (77 FR 16453), which 
clarified that for purposes of federal law, student health insurance 
coverage is defined as a type of individual health insurance coverage 
and therefore generally subject to the individual market requirements 
of title XXVII of the PHS Act and title I of the Affordable Care Act. 
However, pursuant to section 1560(c) of the Affordable Care Act, the 
March 21, 2012 final rule exempted student health insurance coverage 
from the guaranteed availability and guaranteed renewability 
requirements of PHS Act sections 2741(e)(1) and 2742(b)(5) added by 
HIPAA.
    Consistent with that policy, the November 26, 2012 proposed rule 
outlined similar exemptions for student health insurance coverage from 
the guaranteed availability and guaranteed renewability requirements of 
PHS Act sections 2702 and 2703 added by the Affordable Care Act to 
ensure that enrollment in student health insurance plans may be limited 
only to students and their dependents. Further, we solicited comment on 
whether issuers should be permitted to maintain a separate risk pool 
for student health insurance coverage and whether different premium 
rating rules should apply.
    Comment: While some commenters recommended including student health 
insurance coverage in the general individual market risk pool, many 
commenters urged HHS to recognize the unique characteristics of student 
health insurance plans by allowing separate risk pooling of such 
coverage. Commenters expressed concern that pooling the risk of student 
enrollees with other individual market enrollees could increase student 
health insurance premiums and potentially discourage some universities 
from offering student health insurance plans. Commenters also noted 
that student health insurance issuers typically do not underwrite 
students on an individual basis, but rather offer coverage to 
institutions of higher education at a group community rate. These 
commenters requested flexibility with respect to the premium rating 
rules of PHS Act section 2701 so that issuers may continue to consider 
characteristics such as the educational institution's claims 
experience, enrollment method, demographics, and availability of on-
campus services when developing rates and premiums for student health 
insurance coverage.
    Response: We recognize that student health insurance coverage 
generally is rated and administered differently than other forms of 
individual health insurance coverage. Issuers of student health 
insurance coverage typically contract with a college or university to 
issue a ``blanket'' health insurance policy, from which students can 
buy coverage, and the policy is generally rated on a group basis based 
on the total expected claims experience of the college's or 
university's students enrolled in the plan. Accordingly, under HHS's 
authority in section 1560(c) of the Affordable Care Act to ensure that 
the law's requirements would not effectively prohibit the offering of a 
student health insurance plan otherwise permitted under federal, state, 
or local law, and to minimize market disruption in the initial 
transition to the reformed market, this final rule provides that non-
grandfathered student health insurance coverage is not subject to the 
single risk pool requirement of section 1312(c) of the Affordable Care 
Act.
    Student health insurance is subject under these final rules to the 
premium rating requirements of section 2701 of the PHS Act. We note, 
however, that given the exemption from single risk pool requirement, 
the premium rate charged by an issuer offering student health insurance 
coverage may be based on a school-specific group community rate if, 
consistent with section 2701, the issuer offers the coverage without 
rating for age or tobacco use. This provides flexibility to student 
health insurance issuers with respect to the per-member-rating 
provisions of PHS Act section 2701(a)(4) and Sec.  147.102(c)(1), while 
ensuring that student enrollees and their dependents are not charge 
more based on their health status or gender.

[[Page 13425]]

    The treatment of student health insurance coverage under these 
final rules will serve as a transitional policy. We intend to monitor 
student health insurance coverage as the insurance market transitions 
to the 2014 market reforms and revisit this policy in the future.
    Comment: Several commenters supported the proposal to exempt 
student health insurance coverage from the guaranteed availability and 
renewability requirements of the Affordable Care Act. One commenter 
specifically recommended with respect to the guaranteed availability 
provisions of the November 26, 2012 proposed rule that open enrollment 
periods for student health insurance plans be permitted to coincide 
with college and university enrollment periods.
    Response: In this final rule, we finalize our proposal to exempt 
student health insurance coverage from the guaranteed availability 
requirements under PHS Act section 2702 and the guaranteed renewability 
requirements under PHS Act section 2703. Therefore, the special and 
open enrollment periods under section 2702 do not apply to issuers of 
student health insurance coverage. Student health insurance issuers may 
work with colleges and universities to determine appropriate enrollment 
periods for student enrollees and their dependents.
2. Bona Fide Association Coverage
    As mentioned above, we proposed, consistent with PHS Act section 
2702, that non-grandfathered health insurance coverage made available 
in the individual or group market through a bona fide association must 
be guaranteed available to all individuals or employers in a state and 
market. These proposed rules represented a change from existing law 
permitting coverage sold through bona fide associations to be limited 
only to association members; therefore, we invited comment on whether 
and how a transition or exception process for bona fide association 
coverage could be structured to minimize disruption.
    Comment: Several commenters noted that the Affordable Care Act 
preserved an exception for coverage sold through bona fide associations 
from the guaranteed renewability provisions of sections 2703 and 2742 
of the PHS Act and urged HHS to recognize a similar exception for bona 
fide associations from the guaranteed availability provisions of 
section 2702. Some commenters recommended providing a transition period 
during which issuers could close association coverage to new 
enrollment, while other commenters cautioned that as long as issuers 
offering coverage through bona fide associations are able to limit 
coverage to association members, they effectively will be able to 
select healthy applicants and refuse applicants with high health care 
costs.
    Response: Section 1563 of the Affordable Care Act deleted the 
exception contained in section 2711(f) of the PHS Act that existed 
prior to the amendments made by the Affordable Act, which exempted 
small group coverage sold through bona fide associations from having to 
guarantee issue policies to anyone other than members of the 
association. Therefore, the final rule implements the Affordable Care 
Act, which does not recognize an exception from guaranteed availability 
for bona fide association coverage. We note that while starting in 
2014, health insurance issuers may not limit coverage sold through 
associations only to association members, nothing prevents an issuer 
from renewing existing association coverage. Furthermore, as discussed 
in the November 26, 2012 proposed rule, the exception for limited 
network capacity could provide a basis for limiting enrollment in 
certain products to bona fide association members.
3. Expatriate Plans
    Comment: A few commenters urged HHS to exempt expatriate coverage 
from the market reform provisions of the Affordable Care Act, including 
the guaranteed availability, guaranteed renewability, premium rating, 
and rate review provisions, arguing that expatriate plans face special 
circumstances and considerations in complying with these provisions of 
federal law. For example, commenters stated that expatriate policies 
are designed to meet the unique coverage needs of employees while 
working outside of the United States (and their dependents). Commenters 
also noted that the rates for expatriate policies must accommodate the 
regulatory requirements and health care costs of other countries; 
reflect benefits that are particularly important to expatriates (such 
as medical evacuation coverage, war risk coverage, and currency 
fluctuation); and maintain global competitiveness with non-U.S. issuers 
offering expatriate coverage. Accordingly, commenters recommended that 
enrollment in expatriate policies be limited to expatriate employees 
and their dependents, and that the rules reflect the unique rating 
requirements faced by expatriate plans.
    Response: We plan to issue future guidance on the applicability of 
the market reform provisions of the Affordable Care Act, including 
these final rules, to expatriate policies.
4. State High Risk Pools
    Comment: We received several comments as to whether states may 
continue their high risk pools beyond 2014. Many commenters supported 
state flexibility to transition high risk pools as a means of 
minimizing premium disruption and promoting continuity of care. A few 
commenters noted that high risk pool enrollees will have a right to 
guaranteed availability and stated such individuals must not be 
prohibited from enrolling in other coverage offered in the individual 
market, particularly through the Exchange. Some commenters suggested 
that enrollees who maintain high risk pool coverage should be eligible 
for premium tax credits and cost-sharing reductions and notified about 
new coverage options. Other commenters requested clarification about 
whether state high risk pools are subject to the market reform 
provisions of the Affordable Care Act.
    Response: Many states currently have high risk insurance pools as 
their state alternative mechanism to provide insurance coverage for 
individuals who meet enrollment criteria and who do not otherwise have 
access to group or individual health insurance coverage. Since state 
high risk pool coverage is not provided through insurance and is not 
group health plan coverage, state high risk pool coverage is not 
subject to title XXVII of the PHS Act. However, some states, as their 
state alternative mechanism, require issuers (or certain issuers of 
last resort) to guarantee the availability of a product or specific 
benefit design. If the state alternative mechanism is individual market 
insurance coverage, it is subject to title XXVII of the PHS Act. 
Individuals enrolled in state high risk pools will have the same rights 
as others to guaranteed availability for any products offered inside 
and outside of the state Exchange, and states may not prevent 
individuals from moving to other products or to a state's Exchange. 
States will continue to have the discretion to determine whether each 
state continues to have a high risk pool in order to ease the 
transition of enrollees to other products, consistent with the February 
1, 2013 Minimum Essential Coverage proposed rule, which proposed to 
designate state high risk pools as minimum essential coverage for a 
period of time to be determined by the Secretary.\19\
---------------------------------------------------------------------------

    \19\ 78 FR 7348.

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

[[Page 13426]]

III. Modification of Effective Date for Certain Provisions

    The Congressional Review Act, 5 U.S.C. 801(a)(3), ordinarily 
requires that the effective date of a ``major rule'' such as this final 
rule be at least 60 days from the date of publication. However, 5 
U.S.C. 808(2) permits the federal agency promulgating the rule to 
determine an effective date, notwithstanding this otherwise applicable 
60-day requirement, when an agency ``for good cause finds (and 
incorporates the finding and a brief statement of reasons therefore in 
the rule issued) that notice and public procedure thereon are 
impracticable, unnecessary, or contrary to the public interest.'' While 
this final rule is generally effective 60 days from the date of 
publication, we have determined for 45 CFR 147.103, which specifies the 
timing for state reporting of rating factors, and the amendments to 45 
CFR part 154 governing rate review, an effective date 30 days from the 
date of publication of this rule.
    Section 147.103 directs states to report to HHS within 30 days 
after publication of this rule certain rating factors required by Sec.  
147.102, including but not limited to: the age rating ratio if a state 
adopts a ratio narrower than 3:1 for adults; the tobacco rating ratio 
if a state adopts a ratio narrower than 1.5 to 1; a uniform age rating 
curve if a state adopts any; and geographical rating areas if the state 
establishes any. It is imperative that HHS receive these data from the 
states within 30 days of publication of this final rule in order to 
implement timely the risk adjustment methodology set forth in section 
1343 of the Affordable Care Act and its implementing regulations. 
Should these data not be received within 30 days of publication of this 
final rule, HHS's risk adjustment scores for use on January 1, 2014 
would have to be calculated using assumed rating factors based on the 
limitations set forth in this final rule, which could result in 
inaccurate risk adjustment payments to health insurance issuers in 
states that have developed different rating factors. This may in turn 
lead to imbalance in the insurance markets in those states with 
different rating factors. Furthermore, health insurance issuers are 
required to submit their applications by April 30, 2013 to the 
Exchanges to be certified as QHPs in 2014. In order to submit accurate 
information on their applications, the issuers will need to know what 
rating factors in a state will be effective starting January 1, 2014.
    The amendments to 45 CFR part 154 revise the timeline for states to 
propose state-specific thresholds for review and approval by HHS. The 
amendments also direct health insurance issuers to submit data relating 
to proposed rate increases in a standardized format specified by the 
Secretary of HHS, and modify criteria and factors for states to have an 
effective rate review program. These changes are necessary to reflect 
the new market reform provisions and 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. The provisions 
are also designed to streamline data collection for issuers, states, 
Exchanges, and HHS. Since health insurance issuers will be submitting 
their 2014 rate filings in states starting April 1, 2013, these 
amendments must be effective at that point for consumers to experience 
the full benefits in 2014 of the rate review process both inside and 
outside the Exchanges.
    Furthermore, HHS and the states must have the ability to collect, 
beginning April 1, 2013, rate data from health insurance issuers 
relating to the 2014 market reforms to ensure effective implementation 
of the market reforms starting January 1, 2014. For example, if the 
data submission requirement for all rate increases is not in place by 
April 1, 2013, states and HHS will have very little ability to gauge 
whether issuers have combined all of their products into a single risk 
pool in either the individual or small group markets. Issuers could, 
therefore, implement different index rates and allowable modifiers 
without fear of being observed by a regulator for some time, which 
would have the potential effect of issuers continuing to rate for 
health status in 2014.
    Accordingly, for the reasons stated above, 45 CFR 147.103 of this 
final rule and the amendments to 45 CFR part 154 are effective 30 days 
after publication of this final rule.

IV. Provisions of the Final Regulations

    For the most part, this final rule incorporates the provisions of 
the proposed rule. Those provisions of this final rule that differ from 
the proposed rule are as follows:

Changes to Sec.  147.102 (Fair health insurance premiums)

     Clarifies that tobacco use means use of tobacco on average 
four or more times per week within no longer than the past six months, 
including all tobacco products but excluding religious and ceremonial 
uses of tobacco. Further, tobacco use must be defined in terms of when 
a tobacco product was last used. Additionally, clarifies that issuers 
may vary rates for tobacco use only with respect to individuals who may 
legally use tobacco under federal and state law.
     Gives states additional flexibility to establish 
geographic rating areas that would be presumed adequate.
     Modifies the default rating area standard such that there 
would be one rating area for each metropolitan statistical area and one 
rating area comprising all non-metropolitan statistical areas in the 
state.
     Clarifies the criteria that HHS will use to determine 
whether proposed state rating areas are adequate.
     Clarifies that the cap on the number of individuals under 
age 21 taken into account when computing the family premium applies to 
the three oldest ``covered children'' under age 21.
     Deletes language in paragraphs (a)(1)(iii) and (a)(1)(iv) 
providing that states may use narrower age and tobacco use factors to 
avoid confusion.
     Consolidates state reporting requirements in a new Sec.  
147.103.

Changes to Sec.  147.104 (Guaranteed availability of coverage)

     Adds events triggering limited open enrollment periods in 
the individual market, consistent with Exchange special enrollment 
periods, as well as a one-time limited open enrollment period for the 
2014 calendar year for individuals with non-calendar year individual 
policies.
     Establishes 60-day special and limited open enrollment 
periods in the individual market; maintains 30-day special enrollment 
periods in the group market.
     Ensures consistency of the prohibition against employing 
discriminatory marketing practices and benefit designs with the 
prohibition on discrimination with respect to EHB in Sec.  156.125 and 
the non-discrimination standards applicable to QHPs under Sec.  
156.200(e).

Changes to Sec.  147.145 (Student health insurance coverage)

     Exempts student health insurance coverage from the single 
risk pool requirements of Affordable Care Act section 1312(c).

Changes to Sec.  154.215 (Submission of Rate Filing Justification)

     Clarifies that if any product is subject to a rate 
increase, an issuer must submit a Rate Filing Justification for all 
products in the single risk pool, including new or discontinuing 
products.
     Replaces the term ``standardized data template'' with 
``unified rate review template'' each place it appears.

[[Page 13427]]

Changes to Sec.  156.80 (Single risk pool)

     Clarifies that the index rate for the single risk pool 
must be adjusted on a market-wide basis for Exchange user fees and may 
be adjusted at the plan-level for distribution costs and other 
administrative costs.

Changes to Sec.  156.155 (Enrollment in catastrophic plans)

     Makes a technical correction in paragraph (c) of this 
section that each enrolled individual in the case of a catastrophic 
plan covering multiple individuals must meet the eligibility criteria 
outlined in paragraph ``(a)(5)'' of this section.

V. Collection of Information Requirements

    In the November 26, 2012 proposed rule (77 FR 70584), we solicited 
public comments on each of the sections identified as containing 
information collection requirements (ICRs). In this final rule, we are 
restating our summary of the information collection requirements and 
providing summaries of the comments received and our responses to those 
comments. Regarding wage data, we generally used data from the Bureau 
of Labor Statistics to derive average labor costs (including fringe 
benefits) for estimating the burden associated with the ICRs.

A. ICRs Regarding State Disclosures (Sec.  147.102(b), Sec.  
147.102(e), Sec.  147.103, Sec.  156.80(c))

    The final rule directs states to submit to CMS certain information 
as applicable about their rating and risk pooling requirements. A state 
will inform CMS if it adopts a narrower age rating ratio than 3:1 or 
adopts a narrower rating ratio for tobacco use than 1.5:1. A state will 
also submit information to CMS regarding state-established geographic 
rating areas and state-established uniform age rating curves. A state 
with pure community rating will submit information to CMS about its 
uniform family tiers and corresponding multipliers, if any. A state 
will also inform CMS if it requires premiums to be based on average 
enrollee amounts in the small group market (Sec.  147.103). Finally, a 
state will inform CMS if it elects to merge its individual and small 
group market risk pools (Sec.  156.80(c)). Because we do not know how 
many states will choose to establish 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.
    The burden associated with this requirement is the time involved 
for states to provide to CMS information on the rating factors and 
requirements 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.
    This final rule provides that a state's rating areas must be based 
on the geographic divisions of counties, three-digit zip codes, or MSAs 
and non-MSAs and will be presumed adequate if either of the following 
conditions are met: (1) As of January 1, 2013, the state had 
established by law, rule, regulation, bulletin, or other executive 
action uniform geographic rating areas for the entire state; or (2) 
After January 1, 2013, the state establishes by law, rule, regulation, 
bulletin, or other executive action for the entire state no more 
geographic rating areas than the number of MSAs in the state plus one. 
We anticipate that states that currently have geographical rating areas 
will retain them. For states that establish rating areas, 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 HHS's default 
standard age rating curve will apply in most states. Only one state 
commented that it would establish its own age rating 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 $93.
    If a state is community rated and designates a uniform family tier 
structure with corresponding multipliers, 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.
    We assume that each report will be prepared by clerical staff (at a 
cost of approximately $31 per hour) and will be reviewed by a senior 
manager (using 1 hour of labor at approximately $65 per hour) prior to 
submission to CMS. The total burden for all disclosures is eight hours 
(seven by clerical staff and one by a senior manager) and approximately 
$279 per state, if a state needs to prepare and submit a report in all 
of these areas.
    We expect that states that already have established a narrower age 
or tobacco rating ratio, family tier structure and requirements for 
small group market premiums to be based on average enrollee amounts, 
will retain them and simply incur the burden of reporting them. Based 
on our interactions with state officials and review of publicly 
available studies prepared by actuarial firms on the impact of the 
Affordable Care Act on the health insurance market in various states, 
we believe that many states have already studied the issue of merging 
their individual and small group market risk pools and would only incur 
the burden of reporting. We anticipate that few states will choose to 
establish their own age rating curve or establish new geographical 
rating areas and incur related administrative costs. If a state chooses 
to establish its own age rating curve (Sec.  147.102(e)), it is likely 
to engage an actuarial consultant. We estimate that it will require 
approximately 100 hours of effort by an actuary (at a cost of $225 per 
hour) and 23 hours of combined labor by state actuaries (10 hours at a 
cost of approximately $50 per hour) and senior management (13 hours at 
a cost of approximately $65 an hour) to establish an age curve. The 
total burden will be 123 hours and approximately $24,000. If a state 
chooses to establish geographical rating areas (Sec.  147.102(b)), if 
they haven't already done so, staff actuaries are likely to conduct an 
analysis and prepare a report for management (30 hours at a cost of 
approximately $50 per hour) and senior management will review the 
reports and make a decision (2 hours at a cost of approximately $65 an 
hour). The total burden would be 32 hours and approximately $1,600.

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

    This final rule directs that health insurance issuers use a unified 
rate review template, as specified by the

[[Page 13428]]

Secretary, to report information about a proposed rate increase to CMS. 
States with effective rate review programs have the option to 
incorporate this template into their rate review process. The existing 
information collection requirement (OMB Control Number 0938-1141) 
includes a standardized template that is currently used by issuers 
seeking rate increases to submit data to CMS. CMS published an updated 
rate review template for public comment, in accordance with the 
Paperwork Reduction Act of 1995 (44 U.S.C. chapter 35).
    Health insurance issuers seeking rate increases will submit data 
using the unified rate review template and will 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, including territories) 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 
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 subject to review threshold and the remaining 6,450 
submissions will be for rate increases below the review threshold. We 
assume that each submission will require 11 hours of work by an actuary 
(at a cost of $225 per hour), including minimal time required for 
recordkeeping. The total cost for all submissions will be approximately 
$19 million. Therefore, the increase in administrative costs for all 
issuers seeking rate increases below the review threshold will 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 all 
issuers offering health insurance coverage in the small group or 
individual markets 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.
    A few commenters remarked that the costs related to rate review 
template submission have been underestimated. An industry group also 
provided estimates of the number of submissions and related costs. 
According to industry feedback received by CMS, the current rate review 
template being used requires only one to four hours of actuarial labor 
to complete. The unified rate review template includes more data and we 
estimate that it would take an actuary 11 hours, on average, to 
complete. Issuers will have to submit only one consolidated report for 
all their products in a market, unlike the current template in use 
which requires a separate submission for each product.
    Additionally, issuers seeking rate increases may need to adjust 
their systems to provide the data required in the unified rate review 
template and incur one-time costs. One commenter provided a range of 
anticipated costs obtained from an industry survey. However, we do not 
expect many issuers to undertake major systems changes to prepare the 
rate review submissions. Most of the data elements specified in the new 
template are currently captured by issuers and most of the changes will 
involve categorizing the data into new categories and aggregating the 
information to the market level. We estimate that an issuer would need, 
on average, 40 hours of work by a programmer (at a cost of 
approximately $50 per hour) to develop a program that will extract the 
necessary data from its systems. The total one-time cost to all issuers 
for developing a program to extract the necessary data will be 
approximately $4.6 million, with an average cost of approximately 
$2,000 per issuer.
    For filings subject to review, states with effective rate review 
programs may use the data submissions in their reviews; however, this 
is not expected to increase review costs.
    Based on comments received and discussions with issuers and states, 
we have made changes to the proposed template to address concerns that 
have been raised. We have both removed data elements from the uniform 
rate review template and identified information that will be optional 
in the first two years of applicability. We estimate that through these 
changes we have reduced the number of required data elements by 
approximately 45 percent. States may collect additional information 
above this baseline. We expect that the unified rate review template 
will not significantly increase the burden on states or industry; 
rather, the data requested in the template will assist states and 
industry in complying with the market rules.
    In addition, the final rule gives states with effective rate review 
programs the discretion to choose whether to incorporate the unified 
rate review template in their rate review processes or whether to use 
their own rate review templates. Issuers in states with effective rate 
review programs that do not require the federal template will still be 
required to submit information about all rate increases to CMS on the 
template.

                                            Table V.1--Annual Reporting, Recordkeeping and Disclosure Burden*
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                Hourly
                                                                      Burden per    Total     labor cost    Total labor   Total capital/
         Regulation Section(s)             Number of     Responses     response     annual        of          cost of       maintenance     Total cost
                                          respondents                  (hours)      burden    reporting    reporting ($)    costs  ($)          ($)
                                                                                   (hours)       ($)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Age Ratio, Tobacco Ratio, Rating                     1            8            1          8           35             279               0             279
 areas, Family Tier, Small Group
 Market Premium, Age rating curve:
 Sec.   147.103; Risk Pool Merger:
 Sec.   156.80 (c)....................
Age curve (Sec.   147.102(e)).........               1            1          123        123          194          24,000               0          24,000

[[Page 13429]]

 
Geographical Rating Area (Sec.                       1            1           32         32           51           1,600               0           1,600
 147.102(b))..........................
Rate Increase Disclosure and Review              2,294        7,650           11     84,150          225      19,000,000               0      19,000,000
 (Sec.   154.215, Sec.   154.301) **..
                                       -----------------------------------------------------------------------------------------------------------------
    Total.............................  ..............  ...........  ...........     84,313  ...........      19,025,879  ..............      19,025,879
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Not included in this table is a 4.6 million upfront burden related to rate increase disclosures.
** Of the $19 million labor cost of reporting, only $16.3 million is attributable to this rule.

    We have submitted an information collection request to OMB for 
review and approval of the ICRs contained in this final rule. The 
requirements are not effective until approved by OMB and assigned a 
valid OMB control number.

VI. Regulatory Impact Analysis

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

A. Summary

    As stated earlier in this preamble, this final rule implements 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 final rule amends the 
standards for health insurance issuers and states regarding reporting, 
utilization, and collection of data under the rate review program.
    CMS has crafted this final rule to implement the protections 
intended by Congress in an economically efficient manner. We have 
examined the effects of this final 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 final 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 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 final 
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 (for example, $100 million or more in 
any 1 year), and a ``significant'' regulatory action is subject to 
review by the OMB. OMB has designated this final rule as a 
``significant regulatory action.'' Even though 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 final 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 final 
regulations 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 final 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 final rule would amend the existing rate review 
standards to reflect the new market conditions in 2014.

[[Page 13430]]

2. Summary of Impacts
    In accordance with OMB Circular A-4, Table VI.1 below depicts an 
accounting statement summarizing CMS's assessment of the benefits, 
costs, and transfers associated with this regulatory action. The period 
covered by the RIA is 2013-2017.
    CMS anticipates that the provisions of these final 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, health status, gender, or age will be 
able to obtain such coverage under these final rules, 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 
will submit data and documentation about the rate increase using a 
unified rate review template, which will provide CMS the data necessary 
for monitoring rate increases. In accordance with Executive Order 
12866, CMS expects that the benefits of this final regulatory action 
justify the costs.

                                          Table VI.1--Accounting Table
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
                                                  Qualitative:
                                                    Benefits:
----------------------------------------------------------------------------------------------------------------
* Increase in enrollment in the individual and small group 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
* 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 unified rate review
 template for all issuers offering health insurance coverage in the small group or individual markets.
* 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 unified rate review template.
* Extend the availability and affordability of student health coverage as a transitional policy.
----------------------------------------------------------------------------------------------------------------
Costs..............................  Estimate.............       Year dollar     Discount rate    Period covered
----------------------------------------------------------------------------------------------------------------
Annualized Monetized ($/year)......  $ 17.3 million.......              2012                7%         2013-2017
                                     $17.3 million........              2012                3%         2013-2017
----------------------------------------------------------------------------------------------------------------
Administrative costs related to submission of data by issuers seeking rate increases below the rate review
 threshold, one-time fixed costs to issuers related to rate review data extraction, disclosure of state rating
 requirements and costs incurred by states choosing to establish rating areas and age rating curves.
----------------------------------------------------------------------------------------------------------------
Qualitative:
* Additional costs incurred by issuers to comply with provisions in the final rule.
* 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 essential
 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 may be more than offset by an increase in premium revenue.
----------------------------------------------------------------------------------------------------------------

3. Anticipated Benefits, Costs and Transfers
    In developing this final rule, CMS carefully considered its 
potential effects including both costs and benefits. One commenter 
suggested providing additional quantitative estimates of benefits, 
costs and transfers. Because of data limitations, CMS did not attempt 
to quantify all of the benefits, costs, and transfers resulting from 
this final rule. Nonetheless, CMS was able to identify several 
potential impacts which are discussed qualitatively below.
    There are diverse state laws and industry practices currently in 
place that result in 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 availability 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.\20\ 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 prohibit 
rating based on age, and five states prohibit rating based on tobacco 
use in the individual market.\21\ 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

[[Page 13431]]

charged higher premiums than men: Only 14 states prohibit gender rating 
in the individual market while 15 states do not allow gender rating in 
the small group market. Of the states that prohibit 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.
---------------------------------------------------------------------------

    \20\ GAO, Private Health Insurance: Estimates of Individuals 
with Preexisting Conditions Range from 36 Million to 122 Million, 
GAO-12-439, March 2012.
    \21\ Kaiser Family Foundation, Focus on Health Reform: Health 
Insurance Market Reforms: Rate Restrictions, June 2012.
---------------------------------------------------------------------------

    Currently, only five states have guaranteed availability in the 
individual market. Studies show that 48 states require guaranteed 
renewability in the 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, subject to certain exceptions, 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 non-
grandfathered plans in the applicable market (the single risk pool 
requirement).
    The provisions of the final rule will affect the characteristics of 
enrollees, enrollment, and premium rates in the individual and small 
group markets. In addition, several other related provisions of the 
Affordable Care Act that will be effective in 2014, such as 
establishment of the Exchanges, premium tax credits, and the minimum 
essential coverage provision, will improve access to and affordability 
of health insurance coverage. The Congressional Budget Office (CBO) 
estimates that, by 2017, the number of uninsured will be reduced by 27 
million.\22\ 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 final rule. It should be noted that 
the impact of these provisions may vary between states, because of the 
differences in current regulatory frameworks.
---------------------------------------------------------------------------

    \22\ ``CBO's February 2013 Estimate of the Effects of the 
Affordable Care Act on Health Insurance,'' Congressional Budget 
Office, February 2013.
---------------------------------------------------------------------------

    A few commenters referred to actuarial studies that include 
estimates of premium changes in different states and markets.\23\ 
Actuarial studies that conclude that premiums will increase for certain 
markets or age groups generally do not take into account all the 
provisions of the Affordable Care Act and factors that would affect 
premiums and also assume that the risk pool will worsen as a result of 
these provisions. However, we, along with CBO, anticipate that the risk 
pool will improve. Different provisions of the Affordable Care Act can 
have opposing effects on premiums. Some of the other provisions, in 
addition to the ones mentioned above, that will also affect premiums 
are essential health benefits, medical loss ratio requirements, risk 
adjustment, temporary risk corridors and the transitional reinsurance 
programs. There are also factors such as benefit improvements; 
competition among issuers in the Exchanges to be the second lowest cost 
silver plan; migration of current membership to more efficient, lower 
premium plans due to increased transparency; new plan design offerings 
such as Accountable Care Organizations and issuers re-contracting with 
providers to obtain lower unit prices due to reduction in uncompensated 
or charity care. In addition, studies that focus on premiums do not 
take into account the decrease in out-of-pocket costs for consumers. 
According to a study, in 2010, 49 million working-age adults spent at 
least 10 percent of their income on health insurance premiums and out-
of-pocket costs and 20 million working-age adults' out-of-pocket costs 
were so high compared to their income that they were effectively 
underinsured.\24\ Increased access will lead to a decrease in out-of-
pocket costs for these individuals.
---------------------------------------------------------------------------

    \23\ For example, studies on the Alaska Individual Market by 
Lewis & Ellis, Indiana Individual Market by Milliman, Maine Small 
Group Market by Jonathan Gruber & Gorman Actuarial, LLC and 
Wisconsin Small Group Market by Jonathan Gruber & Gorman Actuarial, 
LLC.
    \24\ 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.
---------------------------------------------------------------------------

    This final rule directs that health insurance issuers use a unified 
rate review template, as specified by the Secretary, to report 
information about a proposed rate increase to CMS. States will continue 
to have the authority to collect additional information above this 
baseline to conduct more thorough reviews or rate monitoring.
a. Benefits
    In 2011, 48.6 million people in the United States were 
uninsured.\25\ In addition, an estimated 29 million adults were 
underinsured in 2010.\26\ 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.\27\ 
Uninsured and underinsured people are also more likely to be unable to 
pay their medical bills, have medical debt, and experience financial 
difficulties.
---------------------------------------------------------------------------

    \25\ 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.
    \26\ Cathy Schoen, Michelle M. Doty, Ruth H. Robertson and Sara 
R. Collins, Affordable Care Act Reforms Could Reduce The Number Of 
Underinsured US Adults by 70 Percent, Health Affairs, 30, no.9 
(2011):1762-1771.
    \27\ 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 US Adults by 70 Percent, Health 
Affairs, 30, no.9 (2011):1762-1771.
---------------------------------------------------------------------------

    The provisions of this final rule and other changes implemented by 
the Affordable Care Act will increase enrollment in the individual and 
small group markets. According to CBO, there will be approximately 26 
million enrollees in Exchange coverage by 2017. CBO estimates that, by 
2017, the number of uninsured will be reduced by 27 million.\28\ Access 
to catastrophic plans is likely to further increase the number of 
insured. The provisions of this final rule will also preserve 
affordability and availability of student health insurance coverage. 
Newly insured individuals and individuals with expanded coverage will 
have

[[Page 13432]]

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.\29\ 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.\30\ This has resulted in increased access to health care, 
including preventive care and fewer individuals with high out-of-pocket 
spending.\31\
---------------------------------------------------------------------------

    \28\ ``CBO's February 2013 Estimate of the Effects of the 
Affordable Care Act on Health Insurance Coverage,'' Congressional 
Budget Office, February 2013.
    \29\ 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 US 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.
    \30\ 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.
    \31\ 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 U.S. 
Government Accountability Office (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.\32\ Of 
these, an estimated 88 to 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.\33\ A 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.\34\ The Affordable Care Act's provision on guaranteed 
availability will prohibit 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 final 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.
---------------------------------------------------------------------------

    \32\ GAO, Private Health Insurance: Estimates of Individuals 
with Preexisting Conditions Range from 36 Million to 122 Million, 
GAO-12-439, March 2012.
    \33\ ASPE, At Risk: Preexisting Conditions Could Affect 1 in 2 
Americans: 129 Million People Could Be Denied Affordable Coverage 
Without Health Reform, November 2011.
    \34\ 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 final rule and other changes implemented by 
the Affordable Care Act will increase enrollment in the individual 
market. An analysis by CBO and the staff of the Joint Committee on 
Taxation (JCT) \35\ 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 compared to what they would have been in the 
absence of the Affordable Care Act, all else held constant. According 
to CBO and JCT, the characteristics of people in the small group market 
would change slightly, and projected premium rate changes could 
decrease up to 1 percent.
---------------------------------------------------------------------------

    \35\ 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 
for relatively unhealthy participants 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,\36\ adverse selection 
will be mitigated principally by the minimum essential 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 a transitional reinsurance program, a temporary risk 
corridor program, 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

[[Page 13433]]

group market, in the case of the permanent risk adjustment program.
---------------------------------------------------------------------------

    \36\ 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 the ban on coverage exclusions. 
Costs should decrease for processing new applications for coverage and 
implementing the coverage exclusions in the individual and small group 
markets. This, in turn, could contribute to lower premium rates.
    The final rule also requires 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 will also ensure consistency in 
market oversight, increase competition, and reduce search costs for 
consumers.\37\
---------------------------------------------------------------------------

    \37\ 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 amendments to the rate review standards will help avoid 
significant issuer duplication of effort for filings subject to review 
by using the same standardized template for all issuers offering health 
insurance coverage in the small group or individual markets. 
Additionally, the use of the unified rate review template will provide 
the necessary 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 final rule, issuers will likely incur some one-time, 
fixed costs in order to comply with the provisions of this 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. We 
do not anticipate that many states will establish their own age curve: 
Only one state has indicated that it would establish its own age rating 
curve. As discussed in section V. of the preamble, we estimate that a 
state would incur approximately $24,000 in costs to establish its own 
age curve. The final rule provides that a state's rating areas must be 
based on the geographic divisions of counties, three-digit zip codes, 
or MSAs and non-MSAs and will be presumed adequate if either of the 
following conditions are met: (1) As of January 1, 2013, the state had 
established by law, rule, regulation, bulletin, or other executive 
action uniform geographic rating areas for the entire state; or (2) 
After January 1, 2013, the state establishes by law, rule, regulation, 
bulletin, or other executive action for the entire state no more 
geographic rating areas than the number of MSAs in the state plus one. 
States have the option to seek approval from CMS of a greater number of 
rating areas as long as the areas are based on counties, three-digit 
zip codes, or MSAs and non-MSAs. We anticipate that few states will 
incur costs related to establishing rating areas and estimate that 
related costs will be approximately $1,600 each for those that do.
    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.\38\ \39\
---------------------------------------------------------------------------

    \38\ 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.
    \39\ 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.
---------------------------------------------------------------------------

    The final rule also directs 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 section V. of the preamble, we 
estimate a total burden of approximately $279 for a state to submit 
information in all seven areas. This estimate does not include the 
costs of establishing age curves and geographical rating areas, which 
are discussed above.
    Health insurance issuers seeking rate increases below the subject 
to review threshold will submit data using the unified rate review 
template and incur administrative costs to prepare and submit the data. 
As discussed in section V. of the preamble, we estimate that the 
increase in administrative costs for all issuers seeking rate increases 
below the review threshold will be approximately $16 million, with an 
average of $7,000 per issuer. It should be noted that the vast majority 
of states currently require all rate increases to be filed and that 
administrative efficiencies can be gained by avoiding significant 
issuer duplication of effort for filings subject to review by using the 
same standardized template for all issuers offering health insurance 
coverage in the small group or individual markets 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, issuers seeking rate increases may need to adjust 
their systems to provide the data required in the standardized template 
format. The total one-time cost to all issuers for developing a program 
to extract the necessary data from their systems is estimated at 
approximately $4.6 million, with an average cost of approximately 
$2,000 per issuer.
    For filings subject to review, states with effective rate review 
programs may 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 
methodologies 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.\40\ 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.\41\ 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

[[Page 13434]]

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 essential coverage provision.
---------------------------------------------------------------------------

    \40\ 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.
    \41\ 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 collections. 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.\42\ 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, all else held equal, to a decrease in private health insurance 
rates.
---------------------------------------------------------------------------

    \42\ 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 final rule, all issuers in a state and market will 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 final 
rule. A uniform age rating curve, however, improves the accuracy of 
risk adjustment, provides for easier price comparisons between 
different plans, and simplifies identification of the second lowest 
cost silver plan for purposes of determining premium 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 
final rule, a health insurance issuer in the small group market may 
implement the tobacco use surcharge 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 
provision will help to alleviate underreporting of tobacco use and 
promote tobacco cessation strategies that improve health and reduce 
health care costs.
    CMS believes that the provisions of this final 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 final 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 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).\43\
---------------------------------------------------------------------------

    \43\ 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 (MLR) 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 final regulation. These small entities account for less than 
five percent of the estimated 466 companies offering health insurance 
coverage in the individual or group markets in different states that 
would be affected by the provisions of this rule. Thirty six percent of 
these small entities belong to holding groups, and many if not all of 
these small entities are likely to have other lines of business that 
would result in their revenues exceeding $7 million. For these reasons, 
CMS expects that this final rule will not affect small issuers.
    The requirements in this final rule 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. CMS will monitor premium 
changes in the small group market through the rate review program.

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 final rule that includes a federal mandate that could 
result in any expenditure in any one year by state, local or tribal 
governments, in the

[[Page 13435]]

aggregate, or by the private sector, of $100 million in 1995 dollars, 
updated annually for inflation. In early 2013, that threshold level is 
approximately $139 million.
    UMRA does not address the total cost of a final 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 final rule gives 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 will establish the rating areas and uniform age rating 
curve in that state. State governments will also incur administrative 
costs related to disclosure of rating and pooling requirements to CMS, 
which are estimated to be $279 per state. The private sector (for 
example, health insurance issuers) will incur administrative costs 
related to the implementation of the provisions in this final rule. 
This final rule does not impose an unfunded mandate on local or tribal 
governments. However, consistent with policy embodied in UMRA, this 
final rule has been designed to be low-burden 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 final 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 will 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 will review a rate increase subject to 
review to determine whether it is unreasonable. If a state does meet 
the criteria, then CMS will adopt that state's determination of whether 
a rate increase is unreasonable. States will 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 final 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 final 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 final rule in a 
meaningful and timely manner.

G. Congressional Review Act

    This final rule is subject to the Congressional Review Act 
provisions of the Small Business Regulatory Enforcement Fairness Act of 
1996 (5 U.S.C. 801, et seq.), 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.

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 amends 45 CFR parts 144, 147, 150, 154, and 156 as 
set forth below:

PART 144--REQUIREMENTS RELATING TO HEALTH INSURANCE COVERAGE

0
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).

0
2. Amend Sec.  144.101 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.
* * * * *

0
3. Revise Sec.  144.102 to read as follows:

[[Page 13436]]

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

0
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.

0
5. A new Sec.  147.102 is added to part 147 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 may 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 under paragraph (d) of 
this section applicable to a specific enrollee, the enrollee's age as 
of the date of policy issuance or renewal must be used.
    (iv) Subject to section 2705 of the Public Health Service Act and 
its implementing regulations (related to prohibiting discrimination 
based on health status and programs of health promotion or disease 
prevention) as applicable, tobacco use, except that such rate may not 
vary by more than 1.5:1 and may only be applied with respect to 
individuals who may legally use tobacco under federal and state law. 
For purposes of this section, tobacco use means use of tobacco on 
average four or more times per week within no longer than the past 6 
months. This includes all tobacco products, except that tobacco use 
does not include religious or ceremonial use of tobacco. Further, 
tobacco use must be defined in terms of when a tobacco product was last 
used.
    (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 one or more rating areas 
within that state, as provided in paragraphs (b)(3) and (b)(4) of this 
section, 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.
    (2) If a state does not establish rating areas as provided in 
paragraphs (b)(3) and (b)(4) of this section or provide information on 
such rating areas in accordance with Sec.  147.103, or CMS determines 
in accordance with paragraph (b)(5) of this section that a state's 
rating areas under paragraph (b)(4) of this section are not adequate, 
the default will be one rating area for each metropolitan statistical 
area in the state and one rating area comprising all non-metropolitan 
statistical areas in the state, as defined by the Office of Management 
and Budget.
    (3) A state's rating areas must be based on the following 
geographic boundaries: Counties, three-digit zip codes, or metropolitan 
statistical areas and non-metropolitan statistical areas, as defined by 
the Office of Management and Budget, and will be presumed adequate if 
either of the following conditions are satisfied:
    (i) The state established by law, rule, regulation, bulletin, or 
other executive action uniform rating areas for the entire state as of 
January 1, 2013.
    (ii) The state establishes by law, rule, regulation, bulletin, or 
other executive action after January 1, 2013 uniform rating areas for 
the entire state that are no greater in number than the number of 
metropolitan statistical areas in the state plus one.
    (4) Notwithstanding paragraph (b)(3) of this section, a state may 
propose to CMS for approval a number of rating areas that is greater 
than the number described in paragraph (b)(3)(ii) of this section, 
provided such rating areas are based on the geographic boundaries 
specified in paragraph (b)(3) of this section.
    (5) In determining whether the rating areas established by each 
state under paragraph (b)(4) of this section are adequate, CMS will 
consider whether the state's rating areas are actuarially justified, 
are not unfairly discriminatory, reflect significant differences in 
health care unit costs, lead to stability in rates over time, apply 
uniformly to all issuers in a market, and are based on the geographic 
boundaries of counties, three-digit zip codes, or metropolitan 
statistical areas and non-metropolitan statistical areas.
    (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. With respect to family members under the age of 21, the 
premiums for no more than the three oldest covered children must be 
taken into account in determining the total family premium.
    (2) Family tiers under community rating. If a state does not permit 
any rating variation for the factors described in paragraphs 
(a)(1)(iii) and (a)(1)(iv) of this section, the state may require that

[[Page 13437]]

premiums for family coverage be determined by using uniform family 
tiers and the corresponding multipliers established by the state. 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 is 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 precludes 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.
    (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 
through 20.
    (2) Adult age bands. One-year age bands for individuals age 21 
through 63.
    (3) Older adult age bands. A single age band for individuals age 64 
and older.
    (e) Uniform age rating curves. Each state may establish a uniform 
age rating curve in the individual or small group market, or both 
markets, for rating purposes under paragraph (a)(1)(iii) of this 
section. If a state does not establish a uniform age rating curve or 
provide information on such age curve in accordance with Sec.  147.103, 
a default uniform age rating curve specified in guidance by the 
Secretary will 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 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, policy years) beginning on or 
after January 1, 2014.
    (h) Grandfathered health plans. This section does not apply to 
grandfathered health plans in accordance with Sec.  147.140.

0
6. A new Sec.  147.103 is added to part 147 to read as follows:


Sec.  147.103  State reporting.

    (a) 2014. If a state has adopted or intends to adopt for the 2014 
plan or policy year a standard or requirement described in this 
paragraph, the state must submit to CMS information about such standard 
or requirement in a form and manner specified in guidance by the 
Secretary no later than March 29, 2013. A state standard or requirement 
is described in this paragraph if it includes any of the following:
    (1) A ratio narrower than 3:1 in connection with establishing rates 
for individuals who are age 21 and older, pursuant to Sec.  
147.102(a)(1)(iii).
    (2) A ratio narrower than 1.5:1 in connection with establishing 
rates for individuals who use tobacco legally, pursuant to Sec.  
147.102(a)(1)(iv).
    (3) Geographic rating areas, pursuant to Sec.  147.102(b).
    (4) In states that do not permit rating based on age or tobacco 
use, uniform family tiers and corresponding multipliers, pursuant to 
Sec.  147.102(c)(2).
    (5) A requirement that that issuers in the small group market offer 
to a group premiums that are based on average enrollee amounts, 
pursuant to paragraph Sec.  147.102(c)(3).
    (6) A uniform age rating curve, pursuant to Sec.  147.102(e).
    (b) Updates. If a state adopts a standard or requirement described 
in paragraph (a) of this section for any plan or policy year beginning 
after the 2014 plan or policy year (or updates a standard or 
requirement that applies for the 2014 plan or policy year), the state 
must submit to CMS information about such standard in a form and manner 
specified in guidance by the Secretary.
    (c) Applicability date. The provisions of this section apply on 
March 29, 2013.

0
7. A new Sec.  147.104 is added to part 147 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 allow 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 limit the availability of 
coverage to an annual enrollment period that begins November 15 and 
extends through December 15 of each year in the case of 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 must 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 allow 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. Coverage must become 
effective consistent with the dates described in Sec.  155.410(c) and 
(f) of this subchapter.
    (2) Limited open enrollment periods. A health insurance issuer in 
the individual market must provide a limited open enrollment period for 
the events described in Sec.  155.420(d) of this subchapter, excluding 
paragraphs (d)(3) (concerning citizenship status), (d)(8) (concerning 
Indians), and (d)(9) (concerning exceptional circumstances). In 
addition, a health insurance issuer in the individual market must 
provide, with respect to individuals enrolled in non-calendar year 
individual health insurance policies, a limited open enrollment period 
beginning on the date that is 30 calendar days prior to the date the 
policy year ends in 2014.
    (3) Special enrollment periods. A health insurance issuer in the 
group and individual market must establish special enrollment periods 
for qualifying events as defined under section 603 of the Employee 
Retirement Income Security Act of 1974, as amended. These special 
enrollment periods are in addition to any other special enrollment 
periods that are required under federal and state law.
    (4) Length of enrollment periods. With respect to the group market, 
enrollees must be provided 30 calendar days after

[[Page 13438]]

the date of the qualifying event described in paragraph (b)(3) of this 
section to elect coverage. With respect to the individual market, 
enrollees must be provided 60 calendar days after the date of an event 
described in paragraph (b)(2) and (b)(3) of this section to elect 
coverage.
    (5) Effective date of coverage for limited open and special 
enrollment periods. With respect to an election made under paragraph 
(b)(2) or (b)(3) of this section, coverage must become effective 
consistent with the dates described in Sec.  155.420(b) of this 
subchapter.
    (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 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 offer 
additional coverage.
    (ii) It 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 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 or discriminate 
based on an individual's race, color, national origin, present or 
predicted disability, age, sex, gender identity, sexual orientation, 
expected length of life, degree of medical dependency, quality of life, 
or other health conditions.
    (f) Applicability date. The provisions of this section apply for 
plan years (in the individual market, policy years) beginning on or 
after January 1, 2014.
    (g) Grandfathered health plans. This section does not apply to 
grandfathered health plans in accordance with Sec.  147.140.

0
8. A new Sec.  147.106 is added to part 147 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 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

[[Page 13439]]

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 availability basis, to purchase all (or, in the case of the 
large group market, any) other health 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--
    (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; and
    (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, policy years) beginning on or 
after January 1, 2014.
    (h) Grandfathered health plans. This section does not apply to 
grandfathered health plans in accordance with Sec.  147.140.

0
9. Amend Sec.  147.145 by revising paragraph (b)(1) and adding 
paragraph (b)(3) to read as follows:


Sec.  147.145  Student health insurance coverage.

* * * * *
    (b) Exemptions from the Public Health Service Act and the 
Affordable Care 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 is not required to accept individuals 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 is not required to renew or continue in force coverage for 
individuals who are no longer students or dependents of students.
* * * * *
    (3) Single risk pool. Student health insurance coverage is not 
subject to the requirements of section 1312(c) of the Affordable Care 
Act.
* * * * *

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

0
10. 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.

0
11. Amend Sec.  150.101 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.

0
12. Amend Sec.  150.103 as follows:
0
a. Remove the definition of ``HIPAA requirements;''
0
b. Revise the definition of ``Individual health insurance policy or 
individual policy;'' and
0
c. Add the definition of ``PHS Act requirements'' in alphabetical 
order.
    The revision and addition read as follows:


Sec.  150.103  Definitions.

* * * * *

[[Page 13440]]

    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.
* * * * *

0
13. In 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:
0
a. Section 150.103, in the definition of ``Complaint''.
0
b. In the heading of subpart B of part 150.
0
c. Section 150.201.
0
d. Section 150.203, in the introductory text and paragraphs (a) and 
(b).
0
e. Section 150.205(d) and (e)(1).
0
f. Section 150.207, in the section heading and text.
0
g. Section 150.209.
0
h. Section 150.211, in the introductory text.
0
i. Section 150.213(b) and (c).
0
j. Section 150.217, in the introductory text.
0
k. Section 150.219(a).
0
l. Section 150.221(a).
0
m. Section 150.301.
0
n. Section 150.303(a) introductory text, (a)(3), and (b).
0
o. Section 150.305(a)(1), (b)(2), and (c)(2).
0
p. Section 150.309.
0
q. Section 150.311, in the introductory text and paragraphs (d), (f) 
introductory text, (f)(3), and (g).
0
r. Section 150.313(a) and (e)(3)(iv).
0
s. Section 150.317(a)(1) and (a)(3).
0
t. Section 150.319(b)(1) introductory text, (b)(1)(ii), and 
(b)(1)(iii).
0
u. Section 150.343(a).
0
v. Section 150.465(c).

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

0
14. 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).

0
15. In Sec.  154.200, revise the third sentence and add a fourth 
sentence to paragraph (a)(2) and paragraph (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.
* * * * *
0
16. Revise Sec.  154.215 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 in the single risk pool, including new or discontinuing 
products, on a form and in a manner prescribed by the Secretary.
    (b) The Rate Filing Justification must consist of the following 
Parts:
    (1) Unified rate review 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. 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 unified rate review template (Part I): The unified 
rate review 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

[[Page 13441]]

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 HHS'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.
    (4) CMS will include information on its Web site concerning how the 
public can submit comments on the proposed rate increases that CMS 
reviews.

0
17. Revise Sec.  154.220 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 Justification prior to the 
implementation of the rate increase.


Sec.  154.225  [Amended]

0
18a. In Sec.  154.225(a), introductory text, remove the words 
``Preliminary Justification'' and add in their place ``Rate Filing 
Justification.''


Sec.  154.230  [Amended]

0
18b. In Sec.  154.230(b) and (c)(1), remove the words ``Preliminary 
Justification'' and add in their place ``Rate Filing Justification.''

0
19. Amend Sec.  154.301 as follows:
0
a. Amend paragraphs (a)(3)(i) and (a)(3)(xi) by removing ``; and'' and 
adding in its place a period.
0
b. Amend paragraphs (a)(4)(i), (a)(4)(ii), and (a)(4)(vi) through 
(a)(4)(x) by removing the semicolons and replacing them with periods.
0
c. Revise paragraphs (a)(4)(iii) through (a)(4)(v), and (b).
0
d. Add new paragraphs (a)(3)(iii), (a)(3)(iv), and (a)(4)(xiii) through 
(a)(4)(xv). 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 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 reform 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.
* * * * *
    (xiii) The impacts of geographic factors and variations.
    (xiv) The impact of changes within a single risk pool to all 
products or plans within the risk pool.
    (xv) The impact of 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

0
20. 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).

0
21. A new Sec.  156.80 is added to subpart A to read as follows:


Sec.  156.80  Single risk pool.

    (a) Individual market. A health insurance issuer must 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 must 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 must submit to CMS 
information on its election in accordance with the procedures described 
in Sec.  147.103 of this subchapter.
    (d) Index rate--(1) In general. Each plan year or policy year, as 
applicable, a health insurance issuer must establish an index rate for 
a state market described in paragraphs (a) through (c) of this section 
based on the total combined claims costs for providing essential health 
benefits within the single risk pool of that state market. The index 
rate must 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 and Exchange user fees. The premium 
rate for all of the health insurance issuer's plans in the relevant 
state market must use the applicable market-wide adjusted index rate, 
subject only to the plan-level

[[Page 13442]]

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 
market-wide 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) Administrative costs, excluding Exchange user fees.
    (v) 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 described in 
Sec.  147.140 of this subchapter to be included in a single risk pool 
described in paragraphs (a) through (c) of this section does 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 individual market, 
beginning on or after January 1, 2014.

0
22. A new Sec.  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 or policy 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)(5) of this section.

    Dated: February 15, 2013.
Marilyn Tavenner,
Acting Administrator, Centers for Medicare & Medicaid Services.
    Approved: February 20, 2013.
Kathleen Sebelius,
Secretary, Department of Health and Human Services.
[FR Doc. 2013-04335 Filed 2-22-13; 11:15 am]
BILLING CODE 4120-01-P